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New Jersey Higher Education Assistance Authority v. Pennell

April 8, 2005


On appeal from a Final Order of Judgment of the Superior Court, Law Division, Ocean County, Docket No. OCN-L-162-96.

Before Judges Kestin, Alley and Fuentes.

The opinion of the court was delivered by: Alley, J.A.D.


Submitted January 19, 2005

The principal question presented in this appeal, and one that appears to be of first impression in this State, is whether a bankruptcy court order confirming a Chapter 13 bankruptcy plan that purports to discharge a student loan pursuant to a so called"discharge by declaration"*fn1 is valid in the absence of a factual determination by the court and appropriate notice to the creditor that"[e]xcepting such debt from discharge will impose an undue hardship on the debtor and the debtor's dependents," 11 U.S.C.A. § 523(a)(8)(B).

The trial court denied defendant's motion seeking an Order Directing Cancellation and Discharge of Judgment, N.J.S.A. 2A:16-49.1. If granted, the order would have given effect to a discharge of defendant's obligation to repay student loans that had been provided for in his Chapter 13 Bankruptcy Plan as confirmed by the United States Bankruptcy Court. We affirm.

The facts essentially are these. Plaintiff, the New Jersey Higher Education Assistance Authority (NJHEAA), obtained a judgment against defendant, Patrick Pennell, on October 25, 1996, in the amount of $15,764.74, plus $40 in costs, for defaulting on his student loan obligations. Almost two years later, on June 22, 1998, defendant filed a Chapter 13 Bankruptcy Petition in the United States Bankruptcy Court for the District of New Jersey. NJHEAA was served a Notice of Commencement of Case Under Chapter 13 of the Bankruptcy Code, Meeting of Creditors, and Fixing of Dates on June 24, 1998. The Notice listed NJHEAA on"Schedule F - Creditors Holding Unsecured Non-priority Claims," with the amount of the claim listed as $26,551. It further stated that any"objection to confirmation of the plan shall be filed and served [ten] days before confirmation," with the deadline to file a proof of claim set at October 15, 1998.

Defendant also filed a Chapter 13 Plan of Repayment in which he certified his plan to pay to a trustee $160 per month for 60 months, and stated that Class Three claims, of which NJHEAA's claim was a part, would be paid a pro rata share of what remained after the trustee satisfied defendant's Class One and Class Two claims. Defendant further stated that

[a]fter payment of the pro rata share of these claims, the balance of such claims shall be discharged. Pursuant to 11 U.S.C. § 523(a)(8), excepting the aforementioned educational loans from discharge will impose an undue hardship on the Debtor. Confirmation of Debtor's Plan shall constitute a finding to that effect and that said debt is dischargeable.

The Summary Plan, issued by the bankruptcy court on July 14, 1998, was based on the"Plan of Debtor" submitted to that court on June 23, 1998, and stated that

[t]he judgments held by NJHEAA... shall be discharged of record upon completion of the Plan. The government guaranteed loans held by the NJHEAA... shall be paid a pro rata share under the Plan and after payment of such amounts the balance of the loans and claims shall be discharged.

NJHEAA filed a Proof of Claim in the bankruptcy proceeding on July 31, 1998, in the amount of $14,880.10. On December 8, 1998, the bankruptcy court entered an Order Confirming the Chapter 13 Plan. Through defendant's payments pursuant to the Plan, he was credited with $4,559.26 of the $14,880.10 owed, leaving a balance of $10,320.84 due NJHEAA. On April 8, 2003, the bankruptcy court issued an order granting defendant a discharge. Provisions on the back of the order explained that"[m]ost, but not all types of debts are discharged if the debt is provided for by the chapter 13 plan or is disallowed by the court pursuant to section 502 of the Bankruptcy Code." The summary states that"[d]ebts for most student loans" are among the categories of debt commonly"not discharged in a chapter 13 bankruptcy case[.]"

The present case arose when defendant thereafter, over the opposition of NJHEAA, sought an Order Directing Cancellation and Discharge of Judgment, pursuant to N.J.S.A. 2A:16-49.1, which provides that

[a]t any time after [one] year has elapsed, since a bankrupt was discharged from his debts, pursuant to the acts of Congress relating to bankruptcy, he may apply, upon proof of his discharge, to the court in which a judgment was rendered against him, or to the court of which it has become a judgment by docketing it, or filing a transcript thereof, for an order directing the judgment to be canceled and discharged of record. If it appears upon the hearing that he has been discharged from the payment of that judgment or the debt upon which such judgment was recovered, an order shall cancel and discharge the same by entering on the record or in the margin of the record of judgment, that the same is canceled and discharged by order of the court, giving the date of entry of the order of discharge.

Judge Thomas E. O'Brien denied defendant's motion in an order filed May 14, 2004. He specifically concluded that"a student loan is not dischargeable in bankruptcy," that these debts survived the discharge issued by the bankruptcy court, and that the court could not honor defendant's request for cancellation. Defendant appeals this determination.

In considering the bankruptcy court's order discharging defendant's debt, we note the following provisions of 11 U.S.C.A. § 523(a)(8), referred to by the trial judge and expressly cited in the relevant portion of defendant's Summary Plan:

(a) A discharge under Section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt (8) For an education loan, insured or guaranteed by a governmental unit, or made under any program funded in whole or in ...

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