Court Opinion

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Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

2-27-1995

Leeper & Webster v PHEAA
Precedential or Non-Precedential:

Docket 94-3372

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Recommended Citation
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      UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

                       Nos. 94-3372 & 94-3373

                 LISA LEEPER; WILLIAM LEEPER;
               DWIGHT WEBSTER and DELLA WEBSTER,
                                                    Appellants

                                  v.

        PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY,
              (PHEAA), STUDENT LOAN SERVICE CENTER;

                         GARY J. GAERTNER,
                                          Trustee

         On Appeal from the United States District Court
            For the Western District of Pennsylvania
            D.C. Civ. Nos. 93-cv-01905 & 93-cv-01906

              Submitted Under 3rd Cir. LAR 34.1(a)
                        January 23, 1995

                Before: SLOVITER, Chief Judge,
                LEWIS and ROSENN, Circuit Judges

               (Opinion Filed February 27, 1995)

Edward A. Olds
Olds & Innamorato
Pittsburgh, PA 15223

          Attorney for Appellants

K. Kevin Murphy
Pennsylvania Higher Education
  Assistance Agency
Harrisburg, PA 17102

          Attorney for Appellee
                         OPINION OF THE COURT

SLOVITER, Chief Judge.

          This appeal presents an issue of law: whether interest

can accrue after the filing of a Chapter 13 bankruptcy petition

on a nondischargeable student loan.    The bankruptcy court held

that debtors would remain liable for the amount of the post-

petition interest that accrued on the unpaid principal of the

student loan.    The district court affirmed.   This appeal presents

what appears to be an issue of first impression for the courts of

appeals as to which, unfortunately, we have found no helpful

legislative history.
                                  I.

                    FACTS AND PROCEDURAL HISTORY

          Appellants Della and Dwight Webster ("the Websters")

filed a Chapter 13 bankruptcy petition on March 25, 1992.1    Lisa

and William Leeper ("the Leepers") filed a bankruptcy petition on
July 28, 1992.   Their Chapter 13 plans have been confirmed and

are currently in place.

    1 Chapter 13 of the Bankruptcy Code sets forth the method by
which individuals with regular income may adjust their debts
through bankruptcy. See 11 U.S.C. §§ 1301-1330 (1988 & Supp. II
1990). A debtor is required to file a plan providing for the
submission to the trustee of whatever amount of the debtor's
income is necessary to execute the plan, and to provide for the
payment of various secured and unsecured claims existing at the
time of the filing. See 11 U.S.C. §§ 1321-1322. The plan
submitted by the debtor must be presented for confirmation to the
bankruptcy court. See 11 U.S.C. § 1325.
           The Pennsylvania Higher Education Assistance Authority

("PHEAA") is an unsecured creditor of both the Websters and the

Leepers.   Both the Websters and the Leepers borrowed money from

PHEAA to attend college under the guaranteed student loan

program.   When the Leepers and the Websters filed for bankruptcy,

PHEAA filed claims with the bankruptcy court for the principal

amounts owing on the respective loans at the time of the

bankruptcy petitions plus all pre-petition interest.   Portions of

the amounts paid pursuant to their two Chapter 13 plans are being

applied to the PHEAA claims.

           Neither the Websters nor the Leepers will be able to

repay their student loan debts in full during the course of their

Chapter 13 plans.   Pursuant to 11 U.S.C. § 1328 (1988 & Supp. II

1990), which references 11 U.S.C. § 523(a)(8) (1988 & Supp. II

1990), debts for student loans such as those guaranteed by PHEAA

are excepted from discharge in Chapter 13 bankruptcy proceedings

unless they fall within a hardship exception or unless they

matured seven years before the commencement of the bankruptcy

case.2   The parties agree that unless one of the two exceptions

    2
      In 1990, Congress amended § 1328 to except debts arising
under 11 U.S.C. § 523(a)(8) from discharge in a Chapter 13
bankruptcy. Section 523(a)(8) includes:

           [A]ny debt . . . for an educational benefit overpayment
           of 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--

                (A) such loan, benefit, scholarship, or stipend
                overpayment first became due more than 7 years
applies, PHEAA will be able to collect the balance of the amount

owing on its bankruptcy claims at the end of the sixty-month

bankruptcy period for each of the debtors.

          In addition, PHEAA intends to accrue interest on the

unpaid principal balance of the loans while the two Chapter 13

bankruptcy cases are pending and intends to collect that interest

after the plans are completed.    Thus, after their plans were

confirmed both the Leepers and the Websters (hereafter "the

debtors") initiated adversary proceedings in the bankruptcy court

against PHEAA, invoking the bankruptcy court's core jurisdiction

under 28 U.S.C. § 157 (1988).    Each complaint sought an order

from the bankruptcy court declaring (1) that PHEAA is not

entitled to accrue post-petition interest during the pendency of

the Chapter 13 proceedings, and (2) that payments made to PHEAA

under the Chapter 13 plans be applied only to the principal

balances of the loans.

          In its answers to the complaints, PHEAA 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.    PHEAA

               (exclusive of any applicable suspension of the
               repayment period) before the date of the filing of
               the petition; or

               (B) excepting such debt from discharge under this
               paragraph will impose an undue hardship on the
               debtor and the debtor's dependents;

          11 U.S.C. § 523(a)(8) (1988 & Supp. II 1990).
maintained, however, that it is entitled to accrue post-petition

interest on the unpaid principal balance of the student loan

debts during the pendency of the Chapter 13 plans.

          After the two cases were consolidated and the parties

filed cross-motions for summary judgment, the bankruptcy court

granted summary judgment in favor of PHEAA.      The bankruptcy court

relied primarily upon Bruning v. United States, 376 U.S. 358

(1964), in concluding that post-petition interest may accrue on a

nondischargeable student loan debt during the pendency of a

Chapter 13 bankruptcy proceeding, although it ordered that all of

the debtors' payments during the course of the plan should be

applied to the principal balances and the pre-petition interest.

The court declined to address the debtors' claim that the accrual

of post-petition interest would impose an undue hardship on the

debtors under 11 U.S.C. § 523(a)(8)(B).   The court determined

that the hardship claim would not be ripe for review until the

debtors have completed all payments under the Chapter 13 plan.

That determination is not before us in this appeal.

          The district court entered an order affirming the

bankruptcy court's decision, essentially adopting the reasoning

of the bankruptcy court.   The debtors appeal.

          We have jurisdiction over the debtors' appeal pursuant

to 28 U.S.C. § 158(d) (1988).   Because the only issues presented

in this appeal involve the proper interpretation of the

Bankruptcy Code, our review is plenary.   See In re Roth American,
Inc., 975 F.2d 949, 952 (3d Cir. 1992); see also In re Abbotts

Dairies, 788 F.2d 143, 147 (3d Cir. 1986).
                                 II.

                              DISCUSSION

                                  A.

          Under the Bankruptcy Code, creditors are not entitled

to include unmatured (or "post-petition") interest as part of

their claims in the bankruptcy proceedings.    See 11 U.S.C. §

502(b)(2) (1988); see also Sexton v. Dreyfus, 219 U.S. 339, 344

(1911) (noting that this rule is derived from a fundamental

principle of the English bankruptcy system).    This longstanding

rule is designed to assure that no creditor gains an advantage or

suffers a loss due to the delays inherent in liquidation and

distribution of the estate.    American Iron & Steel Mfg. Co. v.

Seaboard Air Line Ry., 233 U.S. 261, 266 (1914); see also In re

Hanna, 872 F.2d 829, 830-31 (8th Cir. 1989).    The prohibition

against claims for post-petition interest generally applies even

in instances where the claims are based upon underlying debts

that are not dischargeable.    See, e.g., City of New York v.

Saper, 336 U.S. 328, 337-38 (1949); see also In re JAS

Enterprises, Inc., 143 B.R. 718, 719 (Bankr. D. Neb. 1992).

          In Bruning v. United States, 376 U.S. 358 (1964), the
precedent of most significance for the issue before us, the

Supreme Court distinguished between denial of post-petition

interest against the bankruptcy estate on a nondischargeable debt

and the accrual of interest on a nondischargeable debt during the

pendency of the bankruptcy to be collected from the debtor after

the bankruptcy proceeding is completed.    Id. at 362-63.   In

Bruning, a taxpayer who had been discharged from bankruptcy
challenged the IRS's contention that it was entitled to collect

post-petition interest on a nondischargeable tax debt after the

conclusion of the taxpayer's bankruptcy.    The taxpayer based his

argument on the traditional rule barring creditors from claiming

post-petition interest from the bankruptcy estate, a rule now

codified in 11 U.S.C. § 502(b)(2).    The Bruning Court, in a

unanimous opinion authored by Chief Justice Warren, upheld the

IRS's position.

           The Court's reasoning is directly applicable to the

issue before us.    Because Congress made the tax debt

nondischargeable, it "clearly intended that personal liability

for unpaid tax debts survive bankruptcy."    Bruning, 376 U.S. at

361.   The Court then stated that it did not have any "reason to

believe that Congress had a different intention with regard to

personal liability for the interest on such debts."      Id.   The

Court reasoned that "[i]n 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."   Id. at 360.   Thus, the Court concluded, if a

tax debt was nondischargeable, post-petition interest on that

debt would also be nondischargeable.    Id. at 363.   The Court held

that the policy reasons for denying post-petition interest from

the bankruptcy estate, which it described as "the avoidance of

unfairness as between creditors" and "the avoidance of

administrative inconvenience," were not applicable to an action

brought against the debtor personally.    Id. at 362-63.
          While Bruning was decided prior to the enactment of the

Bankruptcy Code, it has been applied by other courts of appeals

to cases arising under the Code.   See Burns v. United States (In

re Burns, 887 F.2d 1541, 1543 (11th Cir. 1989) (specifically

addressing the issue of whether the Bruning holding survived the

enactment of the Bankruptcy Code of 1978 and answering

affirmatively); In re Hanna, 872 F.2d at 830-31 (same); see also

Bradley v. United States, 936 F.2d 707, 709-10 n.3 (2d Cir. 1991)

(declining to reach the issue, but acknowledging that "the weight

of authority" permits accrual of interest on nondischargeable tax

debts during a bankruptcy); Paulson v. United States (In re

Paulson), 152 B.R. 46, 49-51 (Bankr. W.D. Pa. 1992) (concluding

that the Bruning rule applies to actions arising under the

Bankruptcy Code).

          In addition, while Bruning involved the accrual of

post-petition interest on a nondischargeable tax debt, its

reasoning has been applied to other types of nondischargeable

debts.   See In re Fullmer, 962 F.2d 1463, 1468 (10th Cir. 1992)

(applying Bruning to post-petition interest on a nondischargeable

tax penalty); In re Burns, 887 F.2d at 1543 (same); In re Brace,
131 B.R. 612, 613-14 (Bankr. W.D. Mich. 1991) (holding that post-

petition interest may accrue on a debt that was nondischargeable

under 11 U.S.C. § 532(a)(2) because it arose from fraudulent

misrepresentations); In re Kellar, 125 B.R. 716, 720-21 (Bankr.

N.D.N.Y. 1989) (same).

          The Bruning decision therefore stands for the general
proposition that creditors may accrue as to the debtor personally
post-petition interest on nondischargeable debts while a

bankruptcy is pending.   The bankruptcy court and the district

court relied primarily upon this proposition in granting and

affirming summary judgment in favor of PHEAA in this case.     But

while courts have applied the Bruning rule to permit accrual of

interest on nondischargeable debts, no court of appeal has

specifically applied the rule in the Chapter 13 context.   In this

case, the debtors argue that Bruning is inapplicable to Chapter

13 bankruptcies and to student loans in particular.

                                 B.

           The debtors contend that it is unfair to apply Bruning

to Chapter 13 debtors because a Chapter 13 bankruptcy plan cannot

make any provision for the payment of the post-petition interest

that accrues on a nondischargeable debt.   The debtors fail to

explain why this problem distinguishes Chapter 13 from Chapter 7

or Chapter 11.   In all situations where the Bruning rule is

applicable, the bankruptcy plan cannot make allowances for post-

petition interest; the interest merely accrues and is collectable

against the debtor after the bankruptcy is completed.   Thus, the

debtors' effort to distinguish Chapter 13 cases on this ground is

unpersuasive.

           The debtors argue that we should follow the authority

of the New Mexico bankruptcy court in In re Wasson, 152 B.R. 639
(Bankr. D. N.M. 1993), that rejected a creditor's objection to

the confirmation of a debtor's Chapter 13 plan that failed to

provide for post-petition interest on a nondischargeable student

loan.   Id. at 642.   Notwithstanding the fact that the Wasson
court explicitly limited its holding disallowing the claim for

post-petition interest on the nondischargeable student loan to

instances where the underlying debt was paid in full from the

bankruptcy estate, id. at 642, the debtors rely on Wasson for the

general principle that Bruning is inapplicable to Chapter 13

cases.

          The result in Wasson has been expressly disapproved in

In re Shelbayah, 165 B.R. 332, 337 (Bankr. N.D. Ga. 1994), and

Branch v. UNIPAC/NEBHELP (Matter of Branch), 175 B.R. 732 (Bankr.

D. Neb. 1994), both of which held that post-petition interest may

accrue on a nondischargeable student loan during the debtor's

Chapter 13 bankruptcy.   In Shelbayah, the debtor had conceded

that the creditor could file a claim for the principal plus all

pre-petition interest, but objected to the inclusion of the post-

petition interest in the claim.   The debtor argued that the

creditor was barred from filing a claim for post-petition

interest by 11 U.S.C. § 502(b)(2), and, further, that such

interest was dischargeable pursuant to 11 U.S.C. § 1328(a) (1988

& Supp. II 1990), which permits discharge of all debts

"disallowed under section 502."   Shelbayah, 165 B.R. at 334.
          The Shelbayah court, applying the analysis of Bruning,

held that while the creditor was barred from claiming the post-

petition interest in the bankruptcy proceeding, such post-

petition interest could accrue during the course of the

bankruptcy and would not be dischargeable.   Id. at 337.   The

court noted that "[a]lmost all courts that have considered the

issue presented have concluded that the disallowance of
postpetition interest has no effect on the dischargeability of a

claim for, and an individual's future liability for, such

interest."   Id. at 335 (citing, inter alia, Bruning, 376 U.S. 358

(1964)).   The Shelbayah court acknowledged that the Wasson

decision reached a contrary result, but concluded that the Wasson

court's reasoning was based on a decision that "confus[ed] the

disallowance of unmatured interest with the non-accrual of

interest."   Shelbayah, 165 B.R. at 337.    The court held that

while section 502(b)(2) bars claims for unmatured interest

against the bankruptcy estate, it should not preclude the accrual

of interest on nondischargeable claims against the debtor.        Id.

           Even more recently, the bankruptcy court in Branch held

that post-petition interest may accrue on a nondischargeable

student loan and is nondischargeable, therefore remaining an

obligation of the debtor after the bankruptcy case is completed.

Matter of Branch, 175 B.R. at 734-35.      Branch rejects the Wasson

analysis as "contrary to the logic of [In re Hanna], the

authority in [the Eighth] circuit."   Id. at 734.     In re Hanna

followed Bruning and held that a debtor remains personally liable

for post-petition interest on a nondischargeable tax debt after

bankruptcy proceedings are completed.      See 872 F.2d at 831.   We

agree that the Wasson decision failed to distinguish properly

between a claim for unmatured interest and the accrual of post-

petition interest on a nondischargeable debt, and that the

discharge of post-petition interest on nondischargeable debts was

clearly inconsistent with the mandate of Bruning.
          With the exception of Wasson, every court that has

addressed the issue has determined that interest may accrue on

nondischargeable student loans during the pendency of a Chapter

13 bankruptcy plan.   See Jordan v. Colorado Student Loan Program

(In re Jordan), 146 B.R. 31, 32-33 (D. Colo. 1992) (affirming

denial of debtor's motion to confirm a Chapter 13 plan based on

creditor's objection that the plan improperly provided that

interest on the debtor's non-dischargeable student loans would be

tolled while the bankruptcy was pending); Ridder v. Great Lakes

Higher Educ. Corp. (In re Ridder), 171 B.R. 345, 346-47 (Bankr.

W.D. Wis. 1994) (post-petition interest on a nondischargeable

student loan may be collected after bankruptcy concluded); see

also In re Crable, 174 B.R. 62, 63 (Bankr. W.D. Ky. 1994)

(permitting accrual of post-petition interest on nondischargeable

debt for child support during pendency of Chapter 13 proceeding

and noting that cases involving student loans are analogous).

          It remains to be considered whether there is any

validity to the debtors' argument that the bankruptcy court

improperly created two classes of debtors in Chapter 13 cases

involving nondischargeable student loans.   The debtors base this

argument on the bankruptcy court's acceptance of the premise in

Wasson that debtors who will completely satisfy their student
loan obligations during the course of the Chapter 13 plan will

have no obligation to pay any post-petition interest,3 whereas

    3
       In In re Christian, 25 B.R. 438, 438-39 (Bankr. D. N.M.
1982), the New Mexico bankruptcy court had held that the Bruning
rule did not apply to a tax debt which was fully paid out of the
estate. Wasson followed Christian and reasoned that "[a]s
those who, like themselves, will not have satisfied all of their

loan obligations during the course of the Chapter 13 proceeding

will be obligated to pay post-petition interest on the loans.

The debtors then reason that because there is no statutory basis

for such a distinction, this court should extend the Wasson

reasoning to bar the accrual and collection of all post-petition

interest on all nondischargeable student loans in Chapter 13

cases, whether or not the debt was paid in full during the

bankruptcy.

          The premise of the debtors' "two class" argument is

that no post-petition interest accrues when a nondischargeable

debt is fully paid out of the estate in the course of the

bankruptcy proceeding.   The difficulty with the debtors' argument

is that this court has already held that the Bruning reasoning

applies even in instances where the debt is paid in full.      In

Hugh H. Eby Co. v. United States, 456 F.2d 923 (3d Cir. 1972), a

taxpayer in a pre-Code case where the underlying debt was paid in

full argued that it was entitled to recovery of post-petition

interest on taxes that it had paid.   The taxpayer sought to

distinguish Bruning, which would have permitted the interest to
accrue, on the ground that in Bruning the taxes had not been paid

in full out of the estate.   Id. at 925.   The taxpayer also argued

Bruning does not apply to cases in which tax debts are fully paid
out of the estate, it logically follows that Bruning should not
apply to student loan debts which are fully paid out of the
estate." In re Wasson, 152 B.R. 639, 642 (Bankr. D. N.M. 1993).
in Eby that because only liability for post-petition, pre-

confirmation interest was at issue, Bruning was inapplicable.

          We rejected both distinctions.    We stated: "[I]n

Bruning, the Supreme Court held that all post-petition interest,

including interest accrued during the pendency of the bankruptcy

proceeding, could be collected by the Government from after-

acquired assets of the debtor.    A fortiori, post-petition, pre-

confirmation interest is also collectible."    Id.   We then stated,

in language of particular relevance here, "That the underlying

taxes were later paid in full here does not affect the fact that

appellant had the use of the Government's money during the

pendency of the reorganization proceeding, and that since the

underlying debt is not discharged . . . neither is the interest

which accrues by reason of the use of such money during the

pendency of the proceedings."    Id.; see also United States v.

River Coal Co., Inc., 748 F.2d 1103, 1107 (6th Cir. 1984)

(holding that the Bruning rule applied "regardless of whether the

underlying debt has been paid or not").

          Eby is good precedent.    We cannot distinguish it, even

if we were so inclined, on the ground that it is a pre-Code case

because as we noted earlier, Bruning has been held as equally
applicable to cases under the Bankruptcy Code.    It follows from

our construction of Bruning in Eby that even if the

nondischargeable debt has been paid in full by the bankruptcy

estate, accrual of post-petition interest is not precluded.

Therefore the two-class problem identified by the debtors is

eliminated.
                                 C.

            Finally, the debtors argue that Bruning has been

overruled by the automatic stay provision of the Bankruptcy Code.

See 11 U.S.C. § 362(a) (1988).    Relying on cases suggesting that

the automatic stay provision of the Bankruptcy Code should be

broadly construed, the debtors contend that the accrual of

interest against them while a bankruptcy is pending violates the

stay.   They reason that insofar as Bruning permitted such accrual

prior to the enactment of the Code, it is no longer valid.

            The debtors' argument here rests on the dubious

assertion that the act of charging interest on a nondischargeable

claim is essentially an act to "collect" a debt.    See Appellant's

Brief at 24.    Because the automatic stay provision bars the

collection of any debts from the debtor while a bankruptcy is

pending, see 11 U.S.C. §§ 362(a)(6), the debtors reason that

charging interest must necessarily be barred.

            As the debtors acknowledge, none of the cases applying

Bruning to post-Code bankruptcy cases has addressed the effect of

the automatic stay provision on the accrual of post-petition

interest.   Indeed, those cases permit the accrual of such

interest with no mention of the automatic stay provision.

Moreover, as PHEAA notes, the cases cited by the debtors do not

support the debtors' theory.   Instead, those cases only support

the propositions that the enforcement of a judicial lien, see,
e.g., In re Miller, 98 B.R. 110, 113-14 (Bankr. N.D. Ga. 1989),

and the garnishment of wages, see, e.g., In re Hulvey, 102 B.R.
703, 704-05 (Bankr. C.D. Ill. 1988), after the filing of a
bankruptcy proceeding violate the automatic stay.   The actions in

those cases, which involve affirmative efforts by the creditor to

collect from the debtor, differ significantly from the mere

accrual of interest, which requires a wholly separate action for

collection.

           In light of the lack of support for the debtors' theory

in either the Code or caselaw, and in light of the continued

viability of Bruning in bankruptcy cases arising under the Code,

see Burns, 887 F.2d at 1543, we decline to hold that the

automatic stay provision of the Bankruptcy Code overruled

Bruning.   We conclude that the mere accrual of post-petition

interest does not violate the automatic stay.

                                D.

           We are not unaware that the result in this case may be

viewed as harsh by student debtors saddled with the mounting

costs of higher education.   In this case the Websters listed the

claim of PHEAA as totalling a combined $34,302.74 on their

bankruptcy schedules.   The Leepers listed the claim of PHEAA as

totalling a combined $18,542.26 on their bankruptcy schedules.

During the Websters' Chapter 13 plan, PHEAA will accrue almost

$15,000 in interest on the Websters' debt.   During the Leepers'

Chapter 13 plan, PHEAA will accrue almost $8,000 in interest on

the Leepers' debt.   As a result, both the Leepers and the

Websters will emerge from bankruptcy owing PHEAA more money than

was owed to PHEAA at the time of their bankruptcy petitions.

           However, whether Bruning should be applied to permit
post-petition interest to accrue on nondischargeable student
loans is a political decision.   Congress, which created the

student loan program and which then decided for policy reasons to

make debts arising from those loans nondischargeable (presumably

with the knowledge that under Bruning post-petition interest

would then also be nondischargeable) may choose to amend the

statute with respect to the treatment of post-petition interest.

But until and unless it does so, we see no basis for the courts

to change the longstanding rule as to nondischargeability of

post-petition interest.

          Congress did provide for amelioration of the effect of

nondischargeability in appropriate circumstances by authorizing

the bankruptcy court to discharge the remainder of a debt for a

student loan if, inter alia, the debt "will impose an undue

hardship on the debtor and the debtor's dependents."   11 U.S.C. §

523(a)(8)(B) (1988); see note 2 supra.   On this appeal, we have

no occasion to determine whether the debtors status at the close

of bankruptcy will be sufficient to support a finding of "undue

hardship."   Undoubtedly, the amount of post-petition interest

that will have accrued on the loans is a factor that the

bankruptcy court will consider in making its "undue hardship"

determination.
                              III.

                           CONCLUSION

          For the foregoing reasons, we conclude that the

bankruptcy court did not err in ruling that PHEAA is entitled to

accrue interest on the nondischargeable student loans during the

pendency of the debtors' Chapter 13 bankruptcies.   We therefore

will affirm the order of the district court.