FRANK R. ALLEY, III, United States Bankruptcy Judge.
Defendant urges the court to dismiss this adversary proceeding on the grounds that there is no controversy. The court finds that the motion is well taken, and that it should be granted.
I. BACKGROUND
Plaintiff is the Debtor in the underlying chapter 13 case, filed in 1995. His plan of reorganization was confirmed and completed, and a discharge order was entered pursuant to 11 U.S.C. § 1328 on July 26, 2000.
At the time he filed his petition for relief Debtor was indebted to Defendant on account of one or more student loans. Such loans are excepted from discharge unless the debtor can show that excepting the debtor from discharge would impose an undue hardship on the debtor or his dependents. 11 U.S.C. § 523(a)(8). Debtor's compliant filed on August 15, 2000, alleges that "The student loan payments required, at this point, creates [sic] an undue hardship on the Debtor in that his [chiropractic] practice is not generating sufficient funds to make even nominal payments on the student loans".
In a second claim the Debtor claims that the loans are over 10 years old, and that it would be "unconscionable for Debtor to be responsible to repay" the loans. The standard for discharge of student loans is the "undue hardship" principle set out in 11 U.S.C. § 523(a)(8), and there is no separate equitable discharge as the pleading suggests. The age of the loans is immaterial under the present statute.
In 1999, prior to entry of the discharge, the United States charged off the loan, writing off just over $100,000. The effect of the decision is to end, permanently, all collection efforts. 31 C.F.R. § 903.5(a). The Government now asserts that, because the effect of the charge off is irreversible, there is no longer any debt to discharge. If this is correct, there is no controversy for this court to determine.
The effective date of this section was December 22, 2000. Presumably it applies to collection of claims written off prior to the effective date.
Procedurally, the Government has moved to dismiss the case pursuant to Fed.R.Bankr.P. 7012(b)(6), which incorporates Fed.R.Civ.P. 12(b)(6) (allowing dismissal for failure to state a claim). The motion was supported by the declaration of an employee of the Department of Education.
Plaintiff responds that the Government's "charge off" is no more than an accounting device, and cannot be used to deny Debtor his right to a judgment discharging the claim under the Bankruptcy Code, and that writing off the loan was "inappropriate" as long as the bankruptcy case remained open.
II. ANALYSIS
The paramount issue in this case is whether the Government can, by unilaterally abandoning a claim, effectively prevent the discharge of the claim through bankruptcy. The distinction between discharge and write off is by no means academic. Generally, when a debt is forgiven or charged off the value of the debt is reportable as ordinary income to the debtor. 26 U.S.C. § 61(a). Gross income does not include income attributable to discharged debts if the discharge occurs in a title 11 case, or if it occurs while the taxpayer is insolvent. 26 U.S.C. § 108(a)(1). Regulations governing the charge off of debts owed to federal agencies require that the charge off be reported to the IRS.
According to the declaration submitted with the Government's motion, the student loan debt was found to be uncollectible in 1999, after considerable effort to collect. As a result of this determination the debt was written off, and a report to that effect filed with the IRS on form 1099-C.
The effect of the charge off is set out in the Code of Federal Regulations, at 31 C.F.R. § 903.5(a):
(a) before discharging a delinquent debt (also referred to as a close out of the debt), agencies shall take all appropriate steps to collect the debt in accordance with
31 U.S.C. § 3711(g), including, as applicable, administrative offset, tax refund offset, Federal salary offset, referral to Treasury, Treasury-designated debt collection centers or private collection contractors, credit bureau reporting, wage garnishment, litigation, and foreclosure. Discharge of indebtedness is distinct from termination or suspension of collection activity under part 903 of this title and is governed by the Internal Revenue Code. When collection action on a debt is suspended or terminated, the debt remains delinquent and further collection action may be pursued at a later date in accordance with the standards set forth in this chapter. When an agency discharges a debt in full or in part, further collection action is prohibited.
Therefore, agencies should make the determination that collection action is no longer warranted before discharging a debt. Before discharging a debt, agencies must terminate debt collection action. [Emphasis added].
The Bankruptcy Code defines "debt" as "liability on a claim"; a "claim" is defined as "a right to payment" 11 U.S.C. § 101(5),(12). Once the Government has charged off the debt as uncollectible, and reported that a taxable event has occurred, the obligor is entitled to rely on the regulation's prohibition of further enforcement efforts. For all intents and purposes the debt is permanently extinguished. This is distinguished by the regulations from suspension of collection activities, and is more than a mere bookkeeping entry — the claim has not been held in abeyance, but erased altogether. Any resulting tax liability is not, as Debtor suggests, a remnant of the student loan claim. It is an independently arising liability based on a pecuniary benefit received by virtue of the extinguished liability. If the charged off claim were held by an entity other than the Government, the tax impact would be the same. Moreover, Debtor points to no provision which earmarks any tax payable by the Debtor on account of the charge of to the agency that authorized it.
Debtor claims that the charge off was "inappropriate", but does not elaborate. It is not clear what standard or rule has been violated, and the Court will not search the law or the record to find flaws in the Government's position. It may be that the Government's action impairs a debtor's ability to make a fresh start. However, there is nothing in the Bankruptcy Code which constrains the Government's exercise of its discretion to charge off debts owed to it, or to render permanent the effect of that decision. Nor can it be said that the Government's action is entirely inequitable: while its action may give rise to tax liability the Debtor cannot discharge, it has given up its right to contest discharge of any of the student loan liability. Given the heavy burden on a debtor to discharge such claims, and the fact that any tax liability is only a percentage of the original claim, the trade off is not insubstantial.
It may be that claims most likely to be charged off under 31 C.F.R. § 903.5(a) are also the most likely to be discharged as constituting an undue hardship under 11 U.S.C. § 523(a)(8). However, the Debtor will not incur any tax liability if he was insolvent at the time the Government charged off the debt. 26 U.S.C. § 108(a)(1)(B). In any event, any conflict between the fresh start policy inherent in the Bankruptcy Code, and the Government's duty to protect the interest of its taxpayers, is a policy issue which must be addressed by Congress. The Court cannot strike the balance by declaring the Government's approach to be "inappropriate".
26 U.S.C. § 108(d)(3) provides:
For the purposes of this section, the term "insolvent" means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayers assets and liabilities immediately before the discharge"
Debtor's complaint seeks a judgement to the effect that his student loan debt was discharged by the discharge order of July 26, 2000. At that time there was no longer any claim to discharge. It follows that there is nothing for the Court to determine, and that the complaint must be dismissed.
The foregoing opinion constitutes the Court's findings of fact and conclusions of law. An order consistent with this opinion has been entered.