Opinion
No. 7-96-14395 S, Adv. No. 99-1105 S
April 17, 2000
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This matter came before the Court for trial on the merits of Plaintiffs complaint to determine dischargeability of debt pursuant to 11 U.S.C. § 523(a)(8). Plaintiff appeared through her attorney Michael Daniels. Defendant appeared through its attorney Reginald Storment. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
FACTS
1. Plaintiff attended the University of New Mexico from 1981 to 1985 and obtained a Bachelors of University Studies.
2. Plaintiff had a number of forbearance and deferral agreements due to periods of unemployment and low paying jobs.
3. In August 1995 plaintiff obtained a consolidation loan for her debt to defendant in the amount of $6,917.00.
4. Plaintiff filed a pro se chapter 7 petition on October 8, 1996. This was a no asset case. Discharge was entered on February 3, 1997.
5. At the time of trial plaintiff was 68 years old. She now lives in Troy, New York. She has two part-time telemarketing jobs, one at $7.00 per hour and one at $8.00 per hour, and earns between $500 and $550 per month. This employment started about three months before trial.
6. Plaintiff was expected to have both eye surgery and knee replacement surgery shortly after trial. She estimated that recuperation would take three months and involve a great deal of physical therapy. She hopes to continue working.
7. Plaintiff receives social security of approximately $633 per month.
8. In 1997 plaintiff inherited approximately $64,000, receiving $5,000 in July 1997, $35,000 in November 1997, and $24,000 several months later.
9. At the time, plaintiff believed that the debt owed to defendant was discharged in her Chapter 7 proceeding. In the spring of 1997 she was informed by the former attorney for defendant that her debt had not been discharged by her chapter 7 proceeding.
10. Sometime in 1997 plaintiff purchased a house in Mountainair, New Mexico for $35,000. She paid $5,000 down. Plaintiff could not recall on cross examination whether she was aware of defendants claims at the time she contracted to buy this house. In any event, she was aware of the claim when she paid off the balance of $30,000 in November 1997. This house is currently vacant, and listed for sale at $42,000.
The house was originally listed at $46,000, and altogether has been listed for over one year with no offers, despite the improvements that plaintiff made on the property.
11. Plaintiff filed this adversary proceeding on June 2, 1999.
12. In July 1999 plaintiff purchased a house in Troy, New York for $60,000, paying $24,000 down (the balance of her inheritance) and financing $36,000. The contract calls for payments of $264. Taxes on the Troy house are about $3,000 per year. This house is a three-family house, and plaintiff currently rents it for $800 per month. The financing contract calls for a balloon payment of $36,000 in July 2001. Plaintiff testified that she made this purchase as an investment, hoping to add about $300 a month to her net income.
Currently the net rental income is approximately $300 ($ 800 less $264 payment less $250 taxes). After July 2001, however, the net will rise by the $264.
13. Currently, plaintiffs gross income is approximately $525 from employment, $633 social security, and $800 rents.
14. Plaintiff testified that her expenses are about $1,464 per month. Although plaintiff had been working for about three months at her jobs, the approximate $1,500 she had earned was gone, so plaintiff estimated that the $1,464 monthly expense estimate was actually too low.
15. The parties stipulated that for the purposes of this case the Court need not decide this case as an all or nothing discharge issue, but could fashion an equitable remedy in the event that an all or nothing decision would not be equitable. See, e.g., Griffin v. EDUSERV (In re Griffin), 197 B.R. 144, 147 (Bankr.E.D.Ok. 1996). The Court expressly makes no finding that an equitable approach is authorized by the statute, whether with or without the consent of either the debtor or the creditor.
16. In closing argument, defendant stated it was willing not to accrue additional interest on the loan, if it could obtain a lien on the Mountainair property.
CONCLUSIONS OF LAW
The Statute Section 523(a)(8) provides that a discharge does not discharge an individual for any debt for an educational . . . loan made, insured or guaranteed by a government 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 hardship on the debtor and the debtors dependents.
This statute must be viewed in the light of congressional policy that student loans should not be discharged except in rare circumstances. Griffin, 197 B. R. at 147. This policy is further evidenced by the elimination in 1998 of the seven-year discharge provision under former law. See Kopf v. United States Department of Education (In re Kopf), 245 B.R. 731, 735 n. 7 (Bankr.D.Me. 2000).
Tests for Undue Hardship
In Woodcock v. Chemical Bank, NYSHESC (In re Woodcock), 45 F.3d 363, 367-68 (10th Cir.), cert. denied 116 S.Ct. 97 (1995), the Court of Appeals for the Tenth Circuit affirmed (with little discussion) the Bankruptcy and District Courts application of three tests for a determination of undue hardship under section 523(a)(8).
The Court has previously adopted and discussed the tests set out in Woodcock in Shay v. NM Educational Assistance Foundation, Adv. 99-1021 (Bankr.D.N.M. Jan. 18, 2000).
Those tests were the mechanical test, as set forth in Craig v. Pennsylvania Higher Educ. Assistance Agency (In re Craig), 64 B.R. 854, 856 (Bankr.W.D.Pa.) appeal dismissed 64 B.R. 857 (W.D.Pa. 1986); the good faith and policy test, as set forth in North Dakota State Bd. of Higher Educ. v. Frech (In re Frech), 62 B.R. 235, 241, 244 n. 9 (Bankr.D.Mn. 1986); and the objective test, as set forth in In re Bryant, 72 B.R. 913, 915-16 (Bankr.E.D.Pa. 1987). In Woodcock, the debtor was found not to meet the tests for discharge of his student loans. Woodcock, 45 F.3d at 367-68. The Tenth Circuit did not, however, address the issue of whether meeting all three tests was necessary, or whether satisfaction of one test would allow discharge. Nor did the Tenth Circuit expressly limit future decisions to only these three tests.
Currently, four different Circuit Courts of Appeals have adopted a test set forth in Brunner v. New York State Higher Education Services Corp. (In re Brunner), 831 F.2d 395 (2nd Cir. 1987): the Second, Third, Seventh, and Ninth. Kopf v. United States Department of Education (In re Kopf), 245 B.R. 731, 739 (Bankr.D.Me. 2000) (detailed survey of various tests). In Brunner, 831 F.2d at 396, the Court announced the following test:
Undue hardship requir[es] a three part showing: (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 circumstances 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.
Two other circuits have adopted a Totality of the Circumstances Test: the Sixth and Eighth. Kopf, 245 B. R. at 739.
This test involves:
an analysis of (1) the debtors past, present, and reasonably reliable future financial resources; (2) calculation of the debtors and his dependents reasonably necessary living expenses; and (3) any other relevant facts and circumstances surrounding that particular bankruptcy case.
Id.
In a prior New Mexico case, Judge Rose cited the Brunner, Bryant, and In re Johnson, 5 B. C. D. 532 (E.D.Pa. 1979) tests as the three leading tests for determining § 523(a)(8) issues. Garcia v. New Mexico Student Loan Guarantee Fund, Adv. No. 96-1317R (Bankr.D.N.M. Aug. 9, 1999).
In In re Johnson 5 B. C. D. 532 the Court used a combination of three tests: undue hardship, mechanical and good faith.
Application of the tests
1. Mechanical Test.
In Craig, 64 B. R. at 857, the Court set forth the mechanical test as:
Will the Debtors future financial resources for the longest foreseeable period of time allowed for repayment of the loan, be sufficient to support the Debtor and her dependent at a subsistence or poverty standard of living, as well as to fund repayment of the student loan?
(Citing In re Johnson, 5 B. C. D. 532 (E.D.Pa. 1979)).
In this case, the debtor currently has a budget that is balanced, without payment of the student loan. She has, however, a substantial asset in the form of the Mountainair house. It is foreseeable that she will sell this house and, while she needs a portion of the proceeds to pay off the upcoming balloon payment on her New York property, will have the funds to repay the loan without impacting on her budget. The debtor fails the mechanical test.
2. Good Faith and Policy Test.
The Frech Court, cited by the Tenth Circuit in Woodcock, described the good faith and policy test as two separate tests. First, it described the good faith test as a showing by the debtor that he is actively minimizing current household living expenses and maximizing his personal and professional resources. 62 B. R. at 241. Then, if so, the policy test would apply:
The Court must determine whether allowing discharge of a given educational loan would constitute the abuse of bankruptcy remedies with which Congress was concerned. Basically, the Court must determine the relative magnitude of the debtors educational loan obligations as a component of his or her total debt structure, and in conjunction must consider the personal, professional, and financial benefit which the debtor has derived and will derive from the education financed by the loans in question.
Id.
The debtor does not meet this test for two reasons. First, under the good faith portion of the test the debtor would need to demonstrate she is maximizing resources in an attempt to pay the loan. The Court finds that this would include utilizing the equity in the Mountainair house, which the debtor has not offered to do. Then, even if the good faith portion were met, the Court finds that, given the small amount of the loan in relation to her obligation on the New York house (which was incurred after filing this complaint to determine dischargeability), it would not be consistent with stated congressional policy to discharge the debt.
The Court finds that the benefits derived and to be derived from the loan are not particularly relevant in this case, partially due to the fact that debtor is on the verge of retirement. The debtor does not meet this test.
3. The Objective Test.
In Bryant, the United States Bankruptcy Court for the Eastern District of Pennsylvania constructed an objective test for determining dischargeability of student loan obligations. 72 B. R. at 913. This test is objective because it is tied to federal poverty guidelines:
Undue hardship exists (1) Where the debtor has net income which is not substantially greater than federal poverty guidelines, because a debtor so living perforce is unable to maintain a minimal standard of living and make payments on student loans; or (2) Where the debtor has income substantially above the aforesaid poverty guidelines, but there is a presence of unique or extraordinary circumstances which render it unlikely that the debtor will be able to repay his or her student loan obligations.
Id.
As discussed above under the mechanical test, the Court finds that it is likely that debtor will be able to repay her student loan obligation. The debtor therefore also does not satisfy the objective test.
4. The Brunner Test.
The Court finds the Brunner test particularly persuasive in this case. First, the Court finds that the debtor can maintain, based on current income and expenses, a minimal standard of living for herself if forced to repay the loan out of the proceeds of the Mountainair house. Second, there are no additional circumstances that indicate that the debtor will not be able to maintain a minimal standard of living; indeed, the evidence appears to be that debtors standard of living will improve with the sale of the Mountainair property.
Third, the Court does not find that debtor made a good faith effort to pay the loan. It is true that she was in repayment for many years, but she also had many deferments. More to the point, plaintiff presented no evidence at trial about efforts to work with defendant to develop a consensual repayment program. If the debtor asserts that she cannot repay the loan as owed, then it is incumbent on the debtor, in most instances prior to filing her bankruptcy petition, to attempt to obtain a restructuring of the loan so that it can be paid.
The Court is not saying that a debtors efforts to renegotiate must be successful, only that under this prong of the Brunner test, the debtor must demonstrate a genuine good faith effort to reach agreement with the creditor on a workable repayment plan.
That restructuring can include deferrals, forgiveness of some or all of the fees, interest or principal, moratoria, and any number of other arrangements which the parties may devise. Here, there was no evidence whatever of plaintiff attempting to work out an overall agreement with defendant, even prior to initiating this adversary proceeding. Given the structure of Section 523(a)(8) and the congressional policy concerning student loans, the burden of coming forward with this evidence and the burden of persuasion on this issue is plaintiffs to carry. And significantly in this case, plaintiff failed to pay or negotiate a settlement when she inherited $64,000 in 1997.
5. Totality of Circumstances.
The debtors future financial resources will allow repayment of this loan without undue hardship when she sells the Mountainair house.
Conclusion
For the reasons set forth above, the Court will enter judgment in favor of defendant, declaring the principal of the student loan together with interest accrued through the date of the trial nondischargeable. Defendant of course is not precluded from filing a lien on the Mountainair property based on this judgment. Once the Mountainair house sells, interest will begin to accrue again on any balance that remains unpaid.
In so ruling, the Court is not suggesting that plaintiff should not have purchased the Troy property in order to assure herself an income stream. And in closing argument defendant did not suggest otherwise. What the Court is ruling, however, is that plaintiffs efforts to provide herself with a continuing income stream do not override her obligation to repay the student loans.