Kielisch v. Educational Credit Management Corp.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: KURT CARL KIELISCH; In Re: 
JEAN RENEE KIELISCH,
Debtors.
KURT CARL KIELISCH; JEAN RENEE
KIELISCH,
Plaintiffs-Appellees,  No. 00-2187
v.
EDUCATIONAL CREDIT MANAGEMENT
CORPORATION,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Amicus Curiae.

In Re: DAVID RUFUS LAWRENCE; 
ELIZABETH LAWRENCE,
Debtors.
DAVID RUFUS LAWRENCE; ELIZABETH
LAWRENCE,
Plaintiffs-Appellees,  No. 00-2188
v.
EDUCATIONAL CREDIT MANAGEMENT
CORPORATION,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Amicus Curiae.

2 IN RE KIELISCH
Appeals from the United States District Court
for the Eastern District of Virginia, at Norfolk.
Raymond A. Jackson, District Judge;
Robert G. Doumar, Senior District Judge.
(CA-00-148-2, BK-91-26981-DHA, AP-99-2122, CA-00-401-2,
BK-93-22290-DHA, AP-99-2187)
Argued: May 7, 2001
Decided: July 26, 2001
Before WILKINSON, Chief Judge, and WILLIAMS and
MOTZ, Circuit Judges.
Reversed by published opinion. Judge Williams wrote the opinion, in
which Chief Judge Wilkinson and Judge Motz joined.
COUNSEL
ARGUED: Rand Lewis Gelber, Rockville, Maryland, for Appellant.
Mark Simon Davies, Appellate Staff, Civil Division, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Amicus Curiae. Tom Cain Smith, Jr., Virginia Beach, Virginia; James
Lawrence Pedigo, Jr., Norfolk, Virginia, for Appellees. ON BRIEF:
Stuart E. Schiffer, Acting Assistant Attorney General, Helen F.
Fahey, United States Attorney, Robert M. Loeb, Civil Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Amicus Curiae.
OPINION
WILLIAMS, Circuit Judge:
This consolidated appeal, which involves the cases of Kurt and
Jean Kielisch and David and Elizabeth Lawrence (collectively, the
IN RE KIELISCH 3
Debtors), requires us to resolve whether their creditor, Educational
Credit Management Corporation (ECMC), is precluded from applying
Chapter 13 plan payments from the Debtors’ bankruptcy estates to
postpetition interest on their nondischargeable student loan debts. The
bankruptcy courts in the Debtors’ cases each held that ECMC violated
11 U.S.C.A. § 502(b)(2) (West 1993) by applying the Debtors’ Chap-
ter 13 plan payments to post-petition interest, and the district courts
each affirmed. Because we conclude that creditors are not precluded
from applying bankruptcy estate payments to accrued postpetition
interest on nondischargeable student loan debts, we reverse.
I.
A. The Kielisches
On December 9, 1991, Kurt and Jean Kielisch submitted a Chapter
13 petition for relief pursuant to the United States Bankruptcy Code.
On February 21, 1992, Great Lakes Higher Education Guaranty Cor-
poration (Great Lakes) filed proofs of claim for the Kielisches’ stu-
dent loans, one in the amount of $10,743.15 for Kurt Kielisch and one
in the amount of $12,204.42 for Jean Kielisch. The proofs of claim
included only principal and prepetition interest. On March, 30, 1992,
the Kielisches filed an amended Chapter 13 plan, replacing the
December 1991 plan. The amended plan, which was confirmed on
June 12, 1992, provided that "the accepted unsecured claims of Great
Lakes Higher Education, in the amounts of $12,095.35 and
$10,629.00, will be paid in full through the Trustee." (J.A. at 46.) Pur-
suant to the amended plan, the trustee paid Great Lakes $10,887.63
for Kurt Kielisch and $12,956.43 for Jean Kielisch, and on June 6,
1997, the bankruptcy court entered an order discharging the Kielisches.1
1
The order of discharge, of course, did not encompass nondischarge-
able debts. When a debtor satisfies its payments under a confirmed plan,
"the bankruptcy court discharges all debts provided for by the plan,
except those specified by § 523(a) as nondischargeable," such as the
Kielisches’ student loan debts. In re Cousins, 209 F.3d 38, 40 (1st Cir.
2000). "The debtor remains personally responsible for any debt not dis-
charged in bankruptcy." Id.4 IN RE KIELISCH
After the discharge, ECMC, the assignee of the Kielisches’ student
loans, pursued collection efforts against them. ECMC asserted that,
notwithstanding the payments made under the amended plan and the
discharge order, its claims were never fully paid because postpetition
interest continued to accrue during the pendency of the Chapter 13
proceedings. ECMC also argued that it was proper to apply plan pay-
ments first to accrued postpetition interest before principal and that,
as a result, the Kielisches still owed a substantial amount on their
loans. The Kielisches, in response to ECMC’s claims, filed a com-
plaint in bankruptcy court to determine the dischargeability of their
student loan debt and the proper application of plan payments to that
debt.
After a hearing, the bankruptcy court held that although ECMC
was entitled to postpetition interest on the nondischargeable student
loans, it was improper to apply any of the plan payments to postpeti-
tion interest. Accordingly, the bankruptcy court required ECMC to
recalculate and reapply the payments received by Great Lakes from
the estate to determine what amount of postpetition interest on the
loans, if any, remained unpaid. The bankruptcy court left it to the par-
ties to determine the extent to which ECMC’s claim has been satis-
fied.
On January 31, 2000, ECMC filed a notice of appeal to the district
court. The district court, after reviewing the briefs and the record and
without oral argument, affirmed the bankruptcy court’s decision.
B. The Lawrences
On May 4, 1993, David and Elizabeth Lawrence filed a Chapter 13
bankruptcy petition. Listed in their schedules was student loan debt
consisting of two promissory notes. These notes were held by Ameri-
can Student Loan Assistance (ASLA) and Consumers Bank and were
subsequently transferred to the guarantor, ECMC, which now holds
the notes. In their Chapter 13 plan, which was confirmed July 13,
1993, the Lawrences provided for their student loans as follows:
The debtors shall pay 100% of the following student loans
inside their Chapter 13 Plan, as they are nondischargeable
IN RE KIELISCH 5
in Chapter 7; American Student Loan Assistance =
$2,851.00. Consumer’s Bank = $2,818.00.
(J.A. at 187.) These amounts included only principal and prepetition
interest. The Lawrences’ Chapter 13 trustee thereafter began making
payments to ASLA according to the plan.2 The trustee paid the entire
$2,851.00 to ASLA as provided in the plan and proof of claim, and,
on October 16, 1998, the bankruptcy court discharged the Lawrences.
The case was closed on October 23, 1998, but the bankruptcy court
reopened the case on November 16, 1999, at the request of the Law-
rences, to determine the dischargeability of their debt to ECMC as
assignee of the ASLA and Consumers Bank notes.
After a hearing, the bankruptcy court held that although ECMC
was entitled to recover from the Lawrences accrued post-petition
interest on its claims, 11 U.S.C.A. § 502 barred it from applying pay-
ments made under the Chapter 13 plan to postpetition interest. The
bankruptcy court left it to the parties to determine to what extent
ECMC’s claim had been satisfied, based upon the court’s ruling. On
March 27, 2000, ECMC appealed to the district court, which affirmed
the bankruptcy court’s decision. After ECMC appealed the orders
relating to both the Kielisches and Lawrences, we consolidated both
cases for appeal.3
II.
The sole issue on appeal is whether the lower courts properly deter-
mined that ECMC was precluded from applying the Debtors’ Chapter
13 plan payments to post-petition interest on the Debtors’ nondischar-
geable student loans. "We review the district court’s decision by
applying the same standard of review that it applied to the bankruptcy
2
Because of an incorrect address, the trustee’s payment to Consumers
Bank was returned to the trustee, and the trustee made no further pay-
ments to Consumers Bank. It is undisputed that the Lawrences did not
pay any portion of the Consumer’s Bank debt. Thus, this case centers
solely around the remaining debt on the ASLA loan.
3
In addition to the briefing and argument we received from the parties,
we also accepted an amicus curiae brief and heard argument from the
United States. We thank the United States for its participation.
6 IN RE KIELISCH
court’s decision. That is, we review findings of fact for clear error and
conclusions of law de novo." In re Deutchman, 192 F.3d 457, 459
(4th Cir. 1999) (internal citations omitted). Whether the application
of plan payments to postpetition interest on nondischargeable student
loans violates § 502 is a question of law that we review de novo.
We begin our analysis with a review of the relevant statutory provi-
sions. "Under the Guaranteed Student Loan Program the federal gov-
ernment serves as guarantor of unsecured student loans and subsidizes
interest payments on those loans." Student Loan Mktg. Assoc. v. Riley,
104 F.3d 397, 400 (D.C. Cir. 1997). Pursuant to 11 U.S.C.A.
§ 523(a)(8) (West 1993 & Supp. 2001), government-guaranteed stu-
dent loans are nondischargeable in bankruptcy proceedings absent a
showing of undue hardship.4 Section 523(a)(8) provides,
4
The Debtors did not request an undue hardship determination.
Although § 523(a)(8) provides that undue hardship is an exception to the
nondischargeability of student loan debt, the Bankruptcy Code does not
define the term, nor does it set forth standards for its application. See In
re Rifino, 245 F.3d 1083, 1087 (9th Cir. 2001) (stating that "undue hard-
ship" is not defined in the Bankruptcy Code). Some courts, however,
have held that a discharge based on undue hardship requires a debtor to
show the following:
(1) that the debtor cannot maintain, based on current income and
expenses, a "minimal" standard of living for herself and her
dependents if forced to repay the loans; (2) that additional cir-
cumstances exist indicating that this state of affairs is likely to
persist for a significant portion of the repayment period of the
student loans; and (3) that the debtor has made good faith efforts
to repay the loans.
Id. (quoting In re Brunner, 46 B.R. 752, 753 (Bank. S.D.N.Y. 1985)); see
also In re Hornsby, 144 F.3d 433, 437 (6th Cir. 1998) (considering the
same factors, along with the amount of debt, the rate of interest, and the
debtor’s claimed expenses and current standard of living). Because the
Debtors did not seek to establish undue hardship in the proceedings
below, we do not address whether the Debtors qualify for an undue hard-
ship discharge based upon their reliance on ECMC’s proofs of claim,
which included only principal and prepetition interest, in planning their
finances based upon the assumption that the principal on their student
loan debts would be fully paid by their estates.
IN RE KIELISCH 7
(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 educational benefit overpayment or loan
made, insured or guaranteed by a governmental
unit, or made under any program funded in whole
or in part by a governmental unit or nonprofit
institution, or for an obligation to repay funds
received as an educational benefit, scholarship or
stipend, unless excepting such debt from discharge
under this paragraph will impose an undue hard-
ship on the debtor and the debtor’s dependents
....
11 U.S.C.A. § 523(a)(8). Thus, under § 523(a)(8), the Debtors "re-
main[ ] personally responsible" for their nondischargeable student
loan debts, and those debts "pass or ride through the bankruptcy unaf-
fected and are a postbankruptcy liability of the former debtor." In re
Cousins, 209 F.3d 38, 40 (1st Cir. 2000) (internal quotation marks
omitted).
Section 523(a)(8) "was enacted to prevent indebted college or grad-
uate students from filing for bankruptcy immediately upon gradua-
tion, thereby absolving themselves of the obligation to repay their
student loans." In re Hornsby, 144 F.3d 433, 436-37 (6th Cir. 1998).
The nondischargeability of student loans originally applied only to
Chapter 7 bankruptcies and not Chapter 13 bankruptcies. This pro-
vided debtors seeking to discharge student loan debt an incentive to
file Chapter 13 plans because courts permitted borrowers to discharge
their student loan debts under Chapter 13 without a showing of undue
hardship. See In re Klein, 57 B.R. 818, 820 (9th Cir. B.A.P. 1985)
(permitting discharge of student loan under Chapter 13 because "a
reasonable construction of the statute requires reading Chapter 13 dis-
charge provisions separately from Chapter 7 and that Congress
intended student loans to be dischargeable under Chapter 13" (internal
citations omitted)). In 1990, Congress responded by extending the
nondischargeability of student loans to Chapter 13 filings. See In re
Andersen, 179 F.3d 1253, 1260 n.12 (10th Cir. 1999) (stating that
"prior to 1990, student loan obligations were dischargeable in chapter
8 IN RE KIELISCH
13 after completion of plan payments" but that "[i]n 1990, Congress
amended § 1328(a)(2), adding § 523(a)(8) as an exception to dis-
charge" (citing Student Loan Default Prevention Initiative Act of
1990, Pub. L. 101-508, §§ 3001, 3007, 104 Stat. 1388, 1388-25,
1388-28 (1990)).
Section 682.404(f) of Title 34 of the Code of Federal Regulations
addresses the manner in which a creditor must apply payments from
a student loan debtor such as the Debtors; it provides,
(f) Application of borrower payments. A payment made to
a guaranty agency by a borrower on a defaulted loan must
be applied first to the collection costs incurred to collect that
amount and then to other incidental charges, such as late
charges, then to accrued interest and then to principal.
34 C.F.R. § 682.404(f) (2000). Based on 11 U.S.C.A. § 523(a)(8) and
34 C.F.R. § 682.404(f), Congress has determined that absent proven
undue hardship, student loans are nondischargeable and, thus, pass
unaffected through the bankruptcy estate for purposes of the debtor’s
liability, and Congress has approved that the creditor, in applying a
debtor’s defaulted student loan payments, generally must apply those
payments first to accrued interest before principal. This, of course, is
how ECMC treated the Debtors’ student loans; it deemed that the
Debtors’ student loan debts were unaffected by their bankruptcies,
and it applied the payments from their bankruptcy estates to postpeti-
tion interest before principal. The question, then, is whether Congress
intended another provision, § 502, to preclude ECMC from treating
the Debtors in the same manner, with respect to their nondischarge-
able student loan debts, as it does other debtors who have not declared
bankruptcy.
Section 502 provides,
(b) Except as provided in subsections (e)(2), (f), (g), (h) and
(i) of this section, if such objection to a claim is made, the
court, after notice and a hearing, shall determine the amount
of such claim in lawful currency of the United States as of
the date of the filing of the petition, and shall allow such
claim in such amount, except to the extent that—
IN RE KIELISCH 9
(2) such claim is for unmatured interest . . . .
11 U.S.C.A. § 502(b)(2) (emphasis added). It is undisputed, based on
§ 502, that ECMC could file claims with the Debtors’ estates only for
prepetition interest and principal and not for unmatured, postpetition
interest. The purpose of this provision is to protect other creditors, as
well as to avoid administrative inconvenience, by ensuring that it is
"possible to calculate the amount of claims easily and . . . that credi-
tors at the bottom rungs of the priority ladder are not prejudiced by
the delays inherent in liquidation and distribution of the estate." In re
Hanna, 872 F.2d 829, 830 (8th Cir. 1989). Section 502 does not
"freeze" the debt of the student loan debtor; interest continues to
accrue during the pendency of the bankruptcy proceedings and, as
noted above, the debtor remains personally liable for the full amount
of the student loan debt. See Cousins, 209 F.3d at 40.
A.
The lower courts in each case reasoned that although the Debtors’
postpetition interest remained nondischargeable and could be recov-
ered from the debtors personally upon completion of the Chapter 13
plans, ECMC could not apply payments to postpetition interest from
the bankruptcy estates because § 502 prohibits the application of
bankruptcy estate funds to unmatured, postpetition interest.5 In other
5
Although the district courts in both cases each imply that unmatured
interest can never be paid from the bankruptcy estate, it is well-
established that § 502 does not prohibit the application of bankruptcy
estate funds to unmatured interest in all circumstances:
For example, if a creditor is oversecured — the value of his
security is sufficient not only to satisfy the principal amount of
the claim, but also to satisfy postpetition interest, then such inter-
est is "allowed." Postpetition interest is also payable out of the
assets of the bankruptcy estate — if the debtor ultimately proves
to be solvent — before any sums are returned to the debtor.
In re Hanna, 872 F.2d 829, 830-31 (8th Cir. 1989) (internal citations
omitted); see also In re Pardee, 218 B.R. 916, 921 n.6 (9th Cir. B.A.P.
1998) (similar), aff’d, 193 F.3d 1083 (9th Cir. 1999). This supports the
proposition that the goal of § 502 is the protection of other creditors, not
debtors.
10 IN RE KIELISCH
words, these courts concluded that because § 502 barred ECMC from
claiming postpetition interest from the bankruptcy estates, it also
barred ECMC from applying the estates’ payments to postpetition
interest.
The lower courts and the Debtors rely on Bruning v. United States,
376 U.S. 358 (1964), and Leeper v. Pennsylvania Higher Educ. Assis-
tance Agency, 49 F.3d 98, 100-01 (3d Cir. 1995), for the proposition
that "under § 502(b) [postpetition] interest cannot be . . . recovered
from the bankruptcy estate." Lawrence v. Educ. Credit Mgmt. Corp.,
251 B.R. 467, 471 (E.D. Va. 2000); see also In re Pardee, 218 B.R.
916, 922 (9th Cir. B.A.P. 1998) (stating that § 502 "precludes the pay-
ment of postpetition interest from the bankruptcy estate"); In re Wag-
ner, 200 B.R. 160, 163 (Bank. N.D. Ohio 1996) (same).
In Bruning, the Supreme Court addressed "whether the United
States is entitled to recover, out of assets acquired by a debtor after
his adjudication of bankruptcy, post-petition interest on a tax assess-
ment which (under § 17 of the Federal Bankruptcy Act, 30 Stat. 544,
550, as amended, 11 U.S.C. § 35) was not discharged in the bank-
ruptcy proceedings." Bruning, 376 U.S. at 358. The Court stated that
Initially, one would assume that Congress, in providing that
a certain type of debt should survive bankruptcy proceed-
ings as a personal liability of the debtor, intended personal
liability to continue as to the interest on that debt as well as
to its principal amount. Thus, it has never been seriously
suggested that a creditor whose claim is not provable against
the trustee in bankruptcy loses his right to interest in a post-
bankruptcy action brought against the debtor personally. In
most situations, interest is considered to be the cost of the
use of the amounts owing a creditor and an incentive to
prompt repayment and, thus, an integral part of a continuing
debt. Interest on a tax debt would seem to fit that descrip-
tion. Thus, logic and reason indicate that post-petition inter-
est on a tax claim excepted from discharge by § 17 of the
Act should be recoverable in a later action against the debtor
personally, and there is no evidence of any congressional
intent to the contrary.
IN RE KIELISCH 11
Id. at 360. The Court also stated,
We find no indication in the wording or history of § 6873(a)
that the section was meant to limit the Government’s right
to continuing interest on an undischarged and unpaid tax lia-
bility. Nor is petitioner aided by the now-familiar principle
that one main purpose of the Bankruptcy Act is to let the
honest debtor begin his financial life anew. As the Court of
Appeals noted, § 17 is not a compassionate section for debt-
ors. Rather, it demonstrates congressional judgment that cer-
tain problems — e.g., those of financing government —
override the value of giving the debtor a wholly fresh start.
Congress clearly intended that personal liability for unpaid
tax debts survive bankruptcy. The general humanitarian pur-
pose of the Bankruptcy Act provides no reason to believe
that Congress had a different intention with regard to per-
sonal liability for the interest on such debts.
Id. at 361 (internal footnote omitted).
The Debtors argue that Bruning clearly distinguishes between per-
sonal liability and liability of the estate for purposes of postpetition
interest on nondischargeable debts and, therefore, that Bruning sup-
ports their argument that ECMC cannot apply estate payments to
postpetition interest even though they remain personally liable for the
postpetition interest. Bruning, however, only addressed whether Bru-
ning could be personally liable for postpetition interest that was not
paid out of the estate; it did not address the propriety of applying
estate payments to postpetition interest.
In Leeper, the Third Circuit concluded that Bruning applied to the
Chapter 13 context and that postpetition interest did accrue on nondis-
chargeable student loan debt during the pendency of Chapter 13 pro-
ceedings. Leeper, 49 F.3d at 104. Leeper, however, addressed only
whether postpetiton interest could accrue on a nondischargeable stu-
dent loan after the filing of a Chapter 13 bankruptcy petition and not
whether the creditor could apply estate payments to postpetition inter-
est. Moreover, the Leeper court explicitly recognized that the creditor
did not argue that plan payments made by the debtors could be
applied beyond its bankruptcy claims, which only included outstand-
12 IN RE KIELISCH
ing principal and prepetition interest. Id. at 100 (noting that in its
answer, the creditor "conceded that all plan payments made by the
debtors should be applied only to their bankruptcy claims, which
include the outstanding principal balances of the loans and all pre-
petition interest"). Thus, Leeper did not address the issue before us,
which is whether § 502 prohibits the application of estate payments
to postpetition interest on nondischargeable student loan debt that was
not included in the bankruptcy claims, but for which the Debtors
remain personally liable.
B.
Section 502 bars creditors from making claims from the bank-
ruptcy estate for unmatured interest; it is undisputed, therefore, that
ECMC could not have included the Debtors’ postpetition interest in
its proofs of claim to their bankruptcy estates. Section 101(5) of the
bankruptcy code defines a "claim" as follows:
(5) "claim" means—
(A) right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured;
or
(B) right to an equitable remedy for breach of per-
formance if such breach gives rise to a right to
payment, whether or not such right to an equitable
remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed,
secured, or unsecured . . . .
11 U.S.C.A. § 101(5) (West 1993 & Supp. 2001). Notably, however,
a "claim" is defined differently under the Bankruptcy Code than a
"debt," which is "liability on a claim." 11 U.S.C.A. § 101(12). Thus,
although § 502 limits ECMC’s ability to file "claims" for postpetition
interest with the Debtors’ bankruptcy estates, it does not purport to
limit the liability on those claims, i.e., "debts."
IN RE KIELISCH 13
We believe that the lower courts conflated these two concepts by
effectively treating a "claim" as the equivalent of a "debt" for pur-
poses of § 502 such that, under the lower courts’ reasoning, ECMC’s
inability to file a proof of claim for postpetition interest also rendered
ECMC unable to apply estate payments to debts that included postpe-
tition interest. Section 502, however, does not mention "debts," nor
does it address how a creditor may apply payments that it receives
from the estate; it simply addresses which claims are allowed from a
debtor’s estate, without speaking to ECMC’s ability to use the estate
payments to pay off the postpetition interest on the Debtors’ nondis-
chargeable debts. Section 502, in other words, does not provide a
basis for departing to any extent from § 523(a)(8)’s mandate that stu-
dent loan debts are nondischargeable, nor does it demonstrate that
ECMC may not apply the Debtors’ payments first to postpetition
interest before principal, as required by 34 C.F.R. § 682.404(f).
We believe that adopting the Debtors’ position would, in essence,
permit them partially to discharge the interest on their nondischarge-
able student loan debts without a showing of undue hardship, as
required by § 523(a)(8), because allowing their estates to pay off loan
principal without first permitting the application of the payment by
the estate to satisfy postpetition interest would reduce the overall
amount that the Debtors would have to pay as a result of their debts
and would also prevent the accumulation of interest that would have
accrued but for their bankruptcies. This would place the Debtors in
a far more favorable position than other student loan debtors solely
by virtue of their Chapter 13 bankruptcies, thus allowing the Debtors
to accomplish indirectly what they could not accomplish directly
under the plain language of § 523(a)(8), i.e., a partial discharge of the
interest on their student loan debts without a showing of undue hardship.6
6
The lower courts, although not directly saying so, appear to have
assumed that the Debtors’ student loan debts are subject only to simple
interest, which is calculated only on the outstanding principal balance
and not on the unpaid postpetition interest. (See J.A. at 163 (bankruptcy
court opinion in Kielisch case, stating that ECMC is "entitled to accrued
interest on unpaid principal, at the contract rate of 9% per annum"
(emphasis added)); Lawrence v. Educ. Credit Management Corp., 251
B.R. 467, 471-72 (E.D. Va. 2000) ("Postpetition interest would continue
to accrue on the diminishing principal balance as Debtors made their
14 IN RE KIELISCH
Because § 523(a)(8) explicitly precludes the discharge of the Debtors’
student loan debts absent a showing of undue hardship, because § 502
does not address ECMC’s ability to apply estate payments to postpeti-
tion interest debts, and because ECMC’s application of payments is
consistent with the standard accounting practices set forth in 34
C.F.R. § 682.404(f), we cannot agree that ECMC was barred from
applying the Debtor’s estate payments to postpetition interest on their
student loans.
Our conclusion is bolstered by the fact that the Court in Bruning
recognized that "the basic reasons for the rule denying post-petition
payments according to the Chapter 13 plan." (emphasis added)); see also
J.A. at 192 (promissory note for Lawrences, describing the Lawrences’
agreement to "pay an amount equivalent to simple interest on the unpaid
principal balance" but noting that "[t]he lender or other holder of the note
may add accrued unpaid interest to the unpaid principal balance (capital-
ization) of th[e] loan in accordance with the policies of MHEAC").) We
note that if, as amicus urges, capitalization of accruing unpaid interest
applies rather than simple interest, interest would compound upon inter-
est and not just upon outstanding principal. Under such circumstances,
we are not aware that ECMC’s method of applying estate payments
would make any difference as to the Debtors’ overall remaining debts
because, regardless of whether estate payments are applied first to post-
petition interest or solely to principal, interest would continue to accrue
at the same rate on the outstanding debt, and, in the end, the Debtors
would owe the same amount. If so, then the issue before us would be one
of mere labeling because, regardless of how ECMC applies the estate
payments, the Debtors would still have the same outstanding debt. We
believe that it is likely that compound interest applies and, therefore, it
is unlikely that ECMC’s method of applying estate payments would
make any difference in calculating the amount of the Debtor’s outstand-
ing student loan debts. Cf. 34 C.F.R. § 682.202(b)(2)(iv) (2000) (provid-
ing that a lender may capitalize interest that has accrued during a period
of authorized forbearance). However, in light of our conclusion that
ECMC may apply estate payments to postpetition interest, and in light
of the fact that the parties have not briefed the issue or disputed the lower
courts’ assumption that simple interest applies, we will proceed with our
analysis under the assumption, but without deciding, that the lower
courts were correct that simple interest applies to the Debtors’ student
loan obligations.
IN RE KIELISCH 15
interest as a claim against the bankruptcy estate are the avoidance of
unfairness as between competing creditors and the avoidance of
administrative inconvenience" and that "[t]hese reasons are inapplica-
ble to an action brought against the debtor personally." Id. at 362-63.
The Court stated that "[i]n [Bruning], collection of postpetition inter-
est cannot inconvenience administration of the bankruptcy estate, can-
not delay payment from the estate unduly, and cannot diminish the
estate in favor of high interest creditors at the expense of other credi-
tors." Id. at 363. Thus, the Court found "the reasons — and thus the
rule — inapplicable," and held "that post-petition interest on an
unpaid tax debt not discharged by § 17 remains, after bankruptcy, a
personal liability of the debtor." Id.
Here, as in Bruning, the "reasons — and thus the rule" are inappli-
cable to ECMC’s application of estate payments to postpetition inter-
est. No matter how long the proceedings take, ECMC still receives
only the amount that it sought in its proofs of claim for principal and
prepetition interest, even if that amount is later applied to postpetition
interest; because the amount claimed from the estate remains the same
no matter how ECMC applies the payments, ECMC’s method of
application simply has no effect on the rights of other creditors.
Because the purpose of § 502 is to ensure the fair allocation of assets
between creditors, we fail to see how the manner in which ECMC
applies estate payments, once allocated, creates any unfairness to
other creditors or complicates the administration of the bankruptcy
estate so as to implicate the policies underlying § 502 that were artic-
ulated by the Court in Bruning. Cf. Hanna, 872 F.2d at 830-31 (8th
Cir. 1989) (stating, in Chapter 7 context, that the general rule "‘disal-
lowing’ the payment of postpetition interest out of the bankruptcy
estate is a rule of administrative convenience and fairness to all credi-
tors," and "when concerns for administrative convenience and fairness
are not present, postpetition interest will be ‘allowed’").7 We therefore
7
We recognize that the Tenth Circuit has stated that "[s]ection 502(b)
does not simply prohibit certain creditors from filing a proof of claim for
post-petition interest; it prohibits those creditors from collecting the
interest from the bankruptcy estate." United States v. Victor, 121 F.3d
1383, 1387 (10th Cir. 1997). Likewise, the Eighth Circuit, in In re
Hanna, 872 F.2d 829 (8th Cir. 1989), has referred to § 502 as setting
forth a "general rule ‘disallowing’ the payment of unmatured interest out
16 IN RE KIELISCH
conclude that § 502 does not prohibit ECMC from applying the Debt-
ors’ estate payments to the postpetition interest on their student loan
debts.
III.
In conclusion, 11 U.S.C.A. §§ 523(a)(8) and 502 provide that
absent a finding of undue hardship, student loan debt is nondischarge-
able and that a creditor in ECMC’s position may file its claim with
the bankruptcy estate only for prepetition interest and principal bal-
ance. Further, under 34 C.F.R. § 682.404(f), a creditor generally must
apply student loan payments first to payment of interest before loan
principal. Because § 502 only addresses ECMC’s ability to file proofs
of claim for postpetition interest and not its ability to apply estate pay-
ments to accrued interest (including postpetition interest) once those
claims are paid by the estate, § 502 does not provide a basis for con-
cluding that ECMC may not apply the Debtors’ estate payments to the
postpetition interest on their nondischargeable student loan debts.
REVERSED
of the assets of the bankruptcy estate." Id. at 830. We note, however, that
both of these cases simply assume, with little analysis, that § 502’s prohi-
bition on the allowance of claims for postpetition interest from the estate
also bars the application of estate payments to postpetition interest. As
discussed above, we do not read § 502 as addressing the creditor’s ability
to apply estate payments to postpetition interest.