A Fresh Start Through Bankruptcy: Fact or Frustration for the Student Loan Debtor?

• Publication year: 1979

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 2, No.2SPRING 1979

A Fresh Start Through Bankruptcy: Fact Or Frustration For The Student Loan Debtor?

Barbara Linde

For student loan debtors, a discharge of repayment obligations through bankruptcy does not always afford the economic clean slate intended by the Federal Bankruptcy Act.(fn1) Although one of the Act's primary purposes is to furnish a debtor an economic "fresh start" in life,(fn2) some colleges may withhold transcripts from bankrupt student loan debtors. Lack of transcript certification for a bankrupt former student significantly diminishes the education's economic value and forecloses certain career opportunities, thus frustrating the Bankruptcy Act's "fresh start" objective. Because of a paralyzing misinterpretation of the Act's 1970 amendments,(fn3) courts have upheld several creditor schemes that frustrate the bankrupt's fresh start. Although only two courts have addressed a bankrupt former student's ability to obtain transcripts after discharge of a student loan, the Eighth Circuit adhered to this narrow construction and permitted a private college to withhold transcripts.(fn4) A New Jersey federal district court, however, held that a state college, bound by the Constitution's supremacy clause,(fn5) cannot withhold a bankrupt former student's transcript.(fn6) In 1978, Congress enacted bankruptcy reform legislation(fn7) that, properly construed, will resolve the inconsistency of these decisions by prohibiting any creditor college, state or private, from denying transcripts to bankrupt former students.

The rapidly increasing number of student loans maturing under the relatively new guaranteed student loan program have spawned a dramatic increase in the number of educational loans discharged in bankruptcy.(fn8) This comment will examine former students' ability to obtain college transcripts after discharge of their student loans through bankruptcy. It will discuss the two cases holding that a private college can deny transcripts to bankrupts,(fn9) but a state college cannot.(fn10) Furthermore, it will inquire into the purposes of the Bankruptcy Act, the correctness of the restrictive judicial interpretation of the 1970 amendments,(fn11) and alternative judicial approaches that better reflect the amendments' purpose.(fn12) Finally, it will examine the 1978 bankruptcy reform legislation and its potential effect on bankrupt students seeking transcripts.(fn13)

I. The 1970 Amendments

Congress intended the 1970 amendments to remedy problems encountered under the original Bankruptcy Act. Under the original 1898 Act,(fn14) a bankrupt generally faced two forms of harassment. First, creditors often subjected a bankrupt to state court litigation following a general discharge in bankruptcy.(fn15) By legislative design the Bankruptcy Court adjudicated only a debtor's right to a general discharge, leaving state courts to determine the discharge's effect upon particular debts.(fn16) Bankrupts frequently failed to appear in court to plead the discharge although it was a viable affirmative defense in most cases. Because a discharge destroyed only the remedy and not the debt's existence,(fn17) shrewd creditors often sued, hoping the unwary bankrupt would mistakenly rely on the discharge and fail to appear.(fn18) Similarly, newly adjudicated bankrupts, too poor to seek legal gounsel, often ignored notice of a pending suit.(fn19) In both situations, the resulting default judgment against the bankrupt revived the obligation to pay the debt,(fn20) and the recent discharge in bankruptcy precluded another discharge for the statutory six year period.(fn21) Congress in 1970 enacted section 14(f)(1)(fn22) to prevent this method of frustrating the bankrupt's fresh start. This section vests the Bankruptcy Court with exclusive jurisdiction both to issue a general discharge and to determine its effect upon all of a bankrupt's debts and invalidates any prior or subsequent judicial determination of a bankrupt's liabilities.(fn23)

The second form of harassment under the original Act encompassed a wide range of informal, coercive means of debt collection. In Kesler v. Department of Public Safety,(fn24) the Supreme Court adhered to the theory that, although bankruptcy bars the remedy, the debt continues to exist.(fn25) Upholding a statute that suspended a bankrupt's driver's license for failure to pay a previously discharged judgment arising out of an automobile accident, the Court held that, although a state may not intentionally circumvent the Bankruptcy Act's objectives by imposing sanctions specifically designed to enforce payment of discharged debts, it may attach any consequences whatsoever to the discharged debts.(fn26) The Court stated that the statute's purpose was to promote motorist financial responsibility and refused to inquire into the law's concomitant effect of frustrating a bankrupt's fresh start.(fn27) Other examples of informal creditor harassment included revoking a bankrupt's professional license,(fn28) evicting him from his residence,(fn29) and imposing a set-off against his inheritance.(fn30) Congress in 1970 enacted section 14(f)(2)(fn31) to reach a wide range of activity that operated to frustrate bankruptcy's fresh start objectives.(fn32) This section enjoins creditors from "maintaining any action or employing any process" to collect a discharged debt.(fn33)

Although section 14(f)(2) seems to prohibit any processes that coerce payment, courts have misinterpreted legislative history and construed "any process" narrowly to mean only formal legal processes.(fn34) Bankrupt former students have claimed a college's refusal to release their transcripts was a "process" enjoined by section 14(f)(2).(fn35) Although withholding transcripts tends to coerce payment of discharged student loans,(fn36) both courts passing on the issue adhered to the narrow construction of "process," holding that the language does not encompass transcript denial.(fn37) In every case reviewing coercive creditor schemes, the courts' rationale for restricting "process" in section 14(f)(2) to formal legal action focused on two passages in the amendment's legislative history.(fn38) The first was the House Judiciary Committee's statement that harassment lawsuits were an evil it intended the amendments to remedy.(fn39) The second was the. House record's statement that the amendment shall have no effect on a bankrupt's ability to revive his obligations by a promise to pay subsequent to discharge.(fn40) In concluding that "process" means only formal legal action, courts misinterpreted this legislative history in three respects. First, the provisions of section 14(f)(1) directly address the harassment lawsuit problem and nullify any judgment resulting therefrom.(fn41) Therefore, legislative history emphasizing harassment lawsuits explains the intended meaning of section 14(f)(1) and not the meaning of "process" in section 14(f)(2). Second, section 14(f)(2) enjoins creditors from maintaining an "action" as well as employing "any process" to collect a discharged debt.(fn42) Courts should give every statutory word distinct meaning rather than presuming mere surplusage(fn43) and, thus, should view "any process" as something other than formal legal actions. Furthermore, although process bears a technical legal definition as a formal means to compel a party's appearance in court,(fn44) it also bears a general, popular meaning that must control when necessary to serve the statute's purpose and to make the language operative.(fn45) Congress had no need to enjoin abusive creditors from employing "process" in its technical, legal sense, because creditors did not coerce repayment by gaining a bankrupt's presence in court, but did so by his nonappearance and the resulting default judgment.(fn46) Third, the courts misconstrued the language in the legislative history concerning the continued viability of reaffirming debts by a subsequent promise to pay.(fn47) Section 14(f)(2) regulates creditor activity and would not, under any construction, affect a bankrupt's volitional act of reviving his debts by a subsequent promise to pay. Thus, although Congress stated its intent to enhance the effectiveness of a discharge in bankruptcy by curtailing creditor abuse,(fn48) judicial construction of the "any process" language has effectively vitiated the intended import of section 14(f)(2).

Despite adherence to the narrow construction of "process" as formal legal activity, one court required the defendant college to release a bankrupt's transcript. The New Jersey federal district court in Handsome v. Rutgers University(fn49) held that, although the 1970 amendments to the Bankruptcy Act do not require a college to release transcripts, the United States Constitution's supremacy(fn50) and equal protection(fn51) clauses do require release.(fn52) The Handsome court held that a state college's refusal to release transcripts to bankrupt former students violated the supremacy clause if the refusal interferes with the Bankruptcy Act's fresh start objectives.(fn53) The court held that withholding transcripts frustrated those objectives by making higher education and its fruits and, thus, a fresh start, inaccessible to the bankrupt.(fn54)

The Handsome court relied primarily on the Supreme Court's supremacy clause analysis in Perez v. Campbell,(fn55) where the Court examined a state law that suspended a bankrupt's driver's...