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agreeing with the reasoning in Thomsen v. Dep't of Educ. (In re Thomsen), 234 B.R. 506, 512–14 (Bankr. D. Mont. 1999), that "a student loan obligation cancelled by the Secretary of Education must be recognized and treated as taxable income by the debtor" and finding that discharge is a better option because of "the large potential income tax burden that could result from the cancellation of a large student loan obligation upon which interest has accrued for twenty-five years"
Summary of this case from Johnson v. Sallie Mae, Inc. (In re Johnson)Opinion
No. 00-31050, Adversary No. 00-7056.
March 30, 2001
MEMORANDUM OPINION AND ORDER
By Complaint filed October 17, 2000. Debtor John Gregoryk seeks a determination that his student loan obligation of approximately $77,957.82 is unduly burdensome and, therefore, dischargeable under II U.S.C. § 523 (a)(8). The trial in this matter was originally scheduled for March 22, 2001. However, the parties have agreed to submit this matter for determination on the basis of their respective briefs and supporting documents. The following constitutes the Court's findings of fact and conclusions of law:
I. FINDINGS OF FACT
The parties have submitted a joint stipulation of facts which establishes that the following facts are not in dispute. Debtor John Gregoryk is a 52 year old divorced male residing at 3061 32nd Avenue S.W. #22, Fargo, North Dakota 58103. In 1966, Gregoryk obtained a high school diploma from Wilton High School in Wilton, North Dakota. Over the years, Gregoryk obtained several post secondary degrees from North Dakota State University in Fargo, North Dakota. Gregoryk currently holds a Bachelor of Science Degree in Physical Education, a Bachelor of Science Degree in Recreation and Leisure Studies, and a Masters Degree in Physical Education. Gregoryk financed his post secondary education with student loans. In March 1999, Gregoryk obtained a William D. Ford Direct Consolidation Loan pursuant to the federal Direct Loan Program. The consolidation loan proceeds were used to fully repay Gregoryk's student loan creditors. The consolidation loan itself is evidenced by a promissory note dated March 12, 1999, which was signed by Gregoryk and reflects a principal amount of $76,125.37. At the time Gregoryk filed his Chapter 7 bankruptcy petition on July 14, 2000, the outstanding balance on the consolidation loan was $77,957.82.
Gregoryk is currently enrolled in the Income Contingent Repayment Plan ("ICRP") available under the William D. Ford Federal Direct Loan Program. See 34 C.F.R. § 685.209. Under the ICRP, a borrower's monthly payment is calculated according to the total amount of the borrower's outstanding loans, family size, and adjusted gross income. 34 C.F.R. § 685.208 (f) (1). Currently, Gregoryk's monthly ICRP payment is calculated to be zero based on the fact that his adjusted gross income does not exceed the applicable federal poverty guidelines. Under the ICRP, the maximum repayment period is twenty-five years. 34 C.F.R. § 685:209 (c)(4). After twenty-five years, the Secretary of Education cancels any remaining unpaid student loan debt. Id.
Gregoryk has an extensive history of mental illness dating back to 1977. Over the years, he has been consistently diagnosed as suffering from manic depression and anxiety disorder and continues to receive treatment for chronic anxiety disorder and major depression. In addition, Gregoryk has been hospitalized four times — in 1977, 1979, 1999, and 2000. In a February 12, 2001, letter to Gregoryk's attorney, Gregoryk's current physician, Andrew J. McLean, M.D., states the following:
[I]t is my impression that [Gregoryk] suffers from major mental illness . . . It is my opinion that Mr. Gregoryk is unable to be gainfully employed in a normal, competitive work environment, and this is unlikely to change for the foreseeable future. Regarding his school work, Mr. Gregoryk has been attempting part-time school, but I do not believe that he would be able to maintain full time schooling with resultant ability to use his degree towards gainful employment. This obviously is subject to change, as in medicine we are constantly provided with newer and more effective treatments. I am reluctant to use the term "permanently disabled," but I believe that it is at least as likely as not that John will not be able to be gainfully employed nor utilize his schooling.
Due in large part to his mental illness, Gregoryk has had difficulty maintaining steady employment. Between 1972 and 1980, Gregoryk was employed as a physical education teacher at five different high schools in North Dakota, Minnesota, and Colorado. Gregoryk then left teaching to become an insurance agent from 1981 to 1986. From 1987 to the present, Gregoryk has worked sporadically as a substitute teacher. In 2000, Gregoryk held brief stints as a telephone surveyor and as a store clerk at two different stores. Gregoryk has received social security disability income since approximately 1986 and currently receives $1,048.00 per month.
II. CONCLUSIONS OF LAW
A student loan obligation may be discharged in bankruptcy if excepting such loan from discharge would result in an undue hardship on the debtor. 11 U.S.C. § 523 (a)(8). The debtor has the burden of proving undue hardship by a preponderance of the evidence. Randall v. Norwest Student Loan Services (In re Randall), 255 B.R. 570, 576 (Bankr. D.N.D. 2000); Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). However, "undue hardship" is not defined in the Bankruptcy Code, and the courts have developed several tests for undue hardship. See Andresen v. Nebraska Student Loan Program, Inc. (in re Andresen), 232 B.R. 127, 137-40 (B.A.P. 8th Cir. 1999). The undue hardship test to be employed within the Eighth Circuit is a "totality of the circumstances" test requiring analysis of "the debtor's current and future financial resources, the necessary reasonable living expenses for the debtor and the debtor's dependents, and other relevant facts or circumstances unique to the particular case." Randall, 255 B.R. at 577 (citations omitted). For an undue hardship to exist, there must be a certainty of hopelessness as to repayment of the student loan obligation at issue. Id, Erickson v. North Dakota State University (In re Erickson), 52 B.R. 154, 158-59 (Bankr. D.N.D. 1985).
In the case at bar the totality of the circumstances supports a finding of dischargeability. Currently, Gregoryk's monthly income is derived from a social security disability payment in the amount of $1,048.00 and from substitute teaching. At best, Gregoryk's substitute teaching income is sporadic and unreliable. During the summer months, such income is nonexistent altogether. On Schedule "J" of his petition and schedules, Gregoryk lists monthly expenses totaling $1,491.50. None of the expenses from Schedule "J" appear to be unreasonable or overstated. Accordingly, in the absence of any substitute teaching income, his monthly income falls short of his expenses by approximately $443.50. Moreover, it appears highly unlikely that any income that he receives from substitute teaching would be large enough to make up for his monthly shortfall or indeed exceed that shortfall in an amount large enough to make a meaningful payment toward his student loan obligation. Gregoryk's treating physician has opined that Gregoryk is unable to be gainfully employed in a normal, competitive work environment and that this state of affairs is unlikely to change for the foreseeable future. Accordingly, Gregoryk's future prospects appear equally grim. At age 52, Gregoryk has only 13 years left before retirement, and his continuing struggle with mental illness is likely to generate future medical expenses which he will not be able to pay. The Court notes that Gregoryk has already successfully discharged over $35,000.00 in unpaid medical expenses in the course of this Chapter 7 case. Given Gregoryk's continuing struggle with mental illness and his resultant inability to maintain gainful employment both now and in the foreseeable future, the Court cannot agree with the United States' assertion that this case does not present a certainty of hopelessness as to repayment of the subject student loan obligation. Therefore, under the totality of the circumstances, the Court finds that Gregoryk would suffer an undue hardship if the student loan obligation at issue is not discharged.
The United States argues that there is no undue hardship in this case because Gregoryk's monthly ICRP payment is zero and because any unpaid portion of Gregoryk's student loan obligation will be cancelled by the Secretary of Education upon completion of the twenty-five year term of the ICRP. This argument was rejected by the court in Thomsen v. Dept. of Education (In re Thomsen), 234 B.R. 506. 512-14 (Bankr. D.Mont, 1999). InThomsen, the court recognized that a student loan obligation cancelled by the Secretary of Education must be recognized and treated as taxable income by the debtor. Id. at 514. Recognizing the large potential income tax burden that could result from the cancellation of a large student loan obligation upon which interest has accrued for twenty-five years, the court ruled that "the better result is to discharge the Debtors' educational loan debt, which they have no prospect of ever repaying, now and give the Debtors the benefit of a fresh start." Id. This Court agrees with the Thomsen court's reasoning Accordingly, for the reasons stated above, the student loan obligation at issue in this case is hereby declared dischargeable pursuant to 11 U.S.C. § 523 (a)(8).
JUDGMENT MAY BE ENTERED ACCORDINGLY.
SO ORDERED.