Opinion
No. 00-82044, Adv. No. 02-8018
October 22, 2002
OPINION
This matter was tried on the adversary complaint filed by the Debtor, LINDA M. ROBINSON (DEBTOR), against the ILLINOIS STUDENT ASSISTANCE COMMISSION (ISAC), seeking a determination that excepting her student loan from discharge would impose an undue hardship on her and her dependents under Section 523(a)(8) of the Bankruptcy Code. The DEBTOR was the only witness to testify at trial, following which the Court took the matter under advisement.
FACTUAL BACKGROUND
The DEBTOR is forty-nine years old and has been divorced for approximately twenty years. She has three grown children and is the sole parent of two adopted children, a son age fourteen and a daughter age eight. She has been employed since 1987 at Peoria School District 150, on a part-time basis, working three hours a day as a cafeteria employee, serving food and washing trays. She works when school is in session, nine months a year, currently earning $8.79 per hour. With the exception of a few small, short-term, part-time jobs, she has had no other employment for the past fifteen years.
In 1987, divorced and raising three children on her own, with a high school degree but no job skills, the DEBTOR sought to better her situation by enrolling at Illinois Central College, a Peoria-area junior college. She started as a full-time student in August, 1987, taking basic courses, hoping to obtain an Associate's Degree in two years. To help pay her first year's tuition and expenses, she obtained a loan through the Guaranteed Student Loan Program, that was subsequently assigned to the Illinois State Scholarship Commission, ISAC'S predecessor, in the amount of $2,625.00. She signed a Loan Application and Promissory Note ("NOTE") for that amount on January 6, 1988, and the loan proceeds were disbursed two days later. The DEBTOR failed to complete her course work and dropped out without obtaining a degree.
The DEBTOR'S student loan first came due on December 30, 1989. Then on public aid, the DEBTOR sought and obtained a forbearance of one month. Still unable to afford the payments, the DEBTOR negotiated with the lender and agreed to make monthly payments of at least $20.00. The DEBTOR made ninety-five payments totaling $2,005.00, from 1991 through 2000. Eighty-four payments were in the amount of $20.00; ten payments were in the amount of $30.00; and one payment was made in the amount of $25.00. As of the petition date, the student loan balance was $3,561.00. As of the date of trial, the balance was $4,031.00.
Due to the passage of time, the DEBTOR'S recollection of dates was understandably fuzzy. This date, December 30, 1989, was supplied by ISAC in its response to the DEBTOR'S interrogatories, admitted into evidence as Plaintiff's Exhibit #1.
The DEBTOR filed a Chapter 7 bankruptcy petition on June 29, 2000. According to her schedules, the DEBTOR earned $4,230.00 in 1998, $4,231.00 in 1999 and $3,905.00 in 2000.
The DEBTOR scheduled nonpriority, unsecured claims, including her student loan, in the total amount of $9,965.00. She listed no bank accounts and no property which was not exempt. After the case was closed, the DEBTOR filed this complaint to determine the dischargeability of her student loan.
The DEBTOR testified that she reaffirmed a debt to Heights Finance, but indicated that the payments were being made by a third party.
The DEBTOR suffers from an array of health problems. She has varicose veins which make it difficult for her to stand for any length of time. She has high blood pressure, problems with her bladder and sporadic pain in her arm. The DEBTOR testified that it would be difficult for her to have a job where she is seated for long periods of time, because of her arm.
The DEBTOR testified to monthly expenses of $1,342.00. Those expenses include: rent $202.00; utilities $217.00; water and sewer $65.00; phone $70.00; cable television $35.00; food $150.00; clothes $100.00; transportation expenses $50.00; prescription drugs $200.00; car insurance $40.00; life insurance $30.00; renters insurance $10.00; children's activities $60.00; soaps and toiletries $20.00; charitable contributions $43.00; and recreation $50.00. The DEBTOR does not receive food stamps and testified that she will no longer be eligible for medicaid when she returns to work in the fall. As a consequence, she will be required to pay for her doctor visits. The DEBTOR was unable to predict what this expense might be.
From her part-time employment with the school district, working three hours a day and earning $8.79/hour, she takes home $221.00 every two weeks, during the school year.
In addition, she receives a monthly adoption subsidy of $764.00, and an SSI payment of $364.00 each month for her son. Apart from her vehicle, a 1994 Cavalier in poor condition, the DEBTOR owns no property other than household goods and furnishings. She has been shopping for a replacement vehicle but has no ability to obtain financing until she returns to work in the late summer.
The DEBTOR valued the car in her schedules at $1,800.00. At that time, she still owed $600.00 on it and her schedules disclosed a monthly payment of $270.00.
ANALYSIS
A student loan is not dischargeable in bankruptcy unless "excepting such debt from discharge . . . will impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523(a)(8). The Seventh Circuit Court of Appeals has interpreted "undue hardship" to require a three-part showing:
1. That the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for the debtor and the debtor's 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.
3. That the debtor has made good faith efforts to repay the loans.
Matter of Roberson, 999 F.2d 1132 (7th Cir. 1993) (adopting the three-part test established by the Second Circuit in Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2nd Cir. 1987), the "Brunner test"). The debtor has the burden to prove each of the three prongs of the Brunner test by a preponderance of the evidence. In re Elmore, 230 B.R. 22, 26 (Bankr.D.Conn. 1999).
1. Current Inability to Repay.
In order to satisfy the first prong of the Brunner test, the DEBTOR need only show that she cannot repay her student loan and maintain a minimal standard of living for herself and her dependents. The first step to be taken by the Court in making this determination is to evaluate the DEBTOR'S present standard of living based upon her lifestyle attributes which appear from the record. Second, the Court must determine whether forced repayment of the student loan will preclude her from maintaining a minimal standard of living. In re Barron, 264 B.R. 833 (Bankr.E.D.Tex. 2001).
The evidence establishes that based on her current income and expenses, the DEBTOR cannot maintain a minimal standard of living if forced to repay her loan. The DEBTOR'S net monthly income is $1,603.00, for nine months of the year. For the remaining three months, her net income drops to $1,128.00. Annualizing those amounts, her net monthly income is $1,484.00. Her itemization of current expenses, totaling $1,342.00, does not include any payment for her medical expenses other than prescription drugs, nor does it include a car payment. The DEBTOR'S bare bones budget shows a "surplus" of $142.00 which would have to cover, at a minimum, her uninsured medical expenses and a monthly installment payment for a replacement vehicle. In addition, the DEBTOR'S expense for food of $150.00 per month, for herself and two children, is minimal, if not unrealistic.
On her bankruptcy Schedule J, the DEBTOR listed a monthly car payment of $270. The car loan was paid off as of the trial date. She testified that her 1994 Cavalier was "junk" and she had been looking to replace it because it was no longer reliable transportation.
The parties stipulated in their Joint Pretrial Statement that the balance due on the student loan as of the petition date was $3,561.00. The undisputed evidence at trial indicated that the loan balance as of the date of trial, August 6, 2002, was $4,031.00. With interest on the trial date balance at nine percent (9%), the DEBTOR would have to make monthly payments of $31.00 just to cover the accruing interest. Anything less would result in negative amortization. Amortized over five years, the level monthly payment amount is $84.00; over ten years, the payment is $51.00.
ISAC pinpoints the DEBTOR'S expenditure of $30.00 for cable television and her weekly offering of $10.00 to her church, suggesting those expenses are not appropriate and that the DEBTOR should devote those funds to the payment of her student loan. Basic cable television service is a reasonable and necessary expense, particularly with two minor children living at home. In determining a debtor's disposable income for purposes of applying the Brunner test under Section 523(a)(8), it is appropriate to calculate disposable income as in Chapter 13 cases pursuant to Section 1325(b)(2). In re Sequeira, 278 B.R. 861, 865 (Bankr.D.Or. 2001). The Religious Liberty and Charitable Donation Protection Act of 1998 ("RLCDPA") amended Section 1325(b)(2) to exclude up to fifteen percent (15%) of the debtor's yearly income from disposable income if the funds constitute a charitable contribution to a qualified religious organization. Though not argued by either party, there is a split of authority among bankruptcy courts as to whether charitable donations are permissible expenses for purposes of the undue hardship standard of Section 523(a)(8).
Compare In re Ritchie, 254 B.R. 913 (Bankr.D.Idaho 2000) (excluding religious and charitable donations as a proper expense item under Section 523(a)(8)) with In re Lebovits, 223 B.R. 265 (Bankr.E.D.N.Y. 1998) (including donations within the 15% limit of the RLCDPA as permitted expenses under Section 523(a)(8)). The DEBTOR'S donations are qualified charitable contributions covered by the RLCDPA within the fifteen percent (15%) ceiling.
It is not necessary for this Court to decide today whether such donations are permissible as a matter of law. Even if they are not, the DEBTOR'S donations here are so small as to have no effect on the Court's decision.
The DEBTOR lives on a shoe-string budget. Given the DEBTOR'S low level of income, the monies received by the DEBTOR on behalf of her children are necessary for their well-being and should be spent for their benefit. In light of the DEBTOR'S circumstances and anticipated future medical expenses and car payments, the Court finds that she would not be able to maintain a minimal standard of living for herself and her children if forced to repay her student loan.
2. Future Inability to Repay.
To satisfy the second prong of the Brunner test, the DEBTOR must prove that her inability to pay is likely to continue for a significant portion of the repayment period of the loan. As this Court has inexplicably encountered in other cases, the "repayment period" of the DEBTOR'S loan was not established through any trial testimony or exhibits. The NOTE, admitted into evidence as Defendant's Exhibit #1, does not refer to the term of repayment.
ISAC'S attorney, however, having considerable experience in collecting student loans for ISAC, represented during closing argument that the NOTE would have been payable over a ten-year term. Admitted as Defendant's Exhibit #2 is a Forbearance Agreement covering only the single month of December, 1989. Admitted as Defendant's Exhibit #3 is another Forbearance Agreement form, dated February 22, 1990, not signed by the lender, that appears to contain nothing more than the DEBTOR'S offer to pay at least $20.00 per month on the loan. There is no evidence that this loan was "consolidated," restructured or reamortized. Accordingly, based on the evidence in the record, the Court finds that the repayment term of the loan was ten years and one month, running from December 30, 1989, to December 30, 1999.
When the DEBTOR filed her Chapter 7 petition on June 29, 2000, the entire repayment term of the student loan had already elapsed. Accordingly, the predictive element of Brunner's second prong, whether the inability to pay will extend for a "significant portion of the repayment period of the student loan," is necessarily satisfied by the expiration of the entire repayment period. It is now an established fact that the DEBTOR'S inability to pay lasted for the entire loan term, and there is no need for the Court to predict just how long her present financial hardship will continue. The second prong of the Brunner test has been met.
Even so, the DEBTOR'S inability to pay will likely extend well into the future.
ISAC contends that the DEBTOR has not made a sufficient effort to obtain more gainful employment. ISAC insists that the DEBTOR is not working full-time simply because she does not want to, rather than because she is not able to. The DEBTOR testified that she had not sought additional or different employment in the preceding three years, with the exception of recently applying for a position at a chain discount grocery store. Given the DEBTOR'S age and her health problems, ISAC'S theory that she could find another job which would enable her to repay her student loan is little more than conjecture. According to the DEBTOR, her health problems prevent her from both performing physical labor or enduring a sedentary work setting. She has no marketable skills, and her uncompleted junior college education has not, and will not enhance her prospects.
It is reasonable to conclude that the DEBTOR will not be able to work more than part-time due to her array of physical maladies. Even if she could, the availability of day care for her minor children is not guaranteed, and the cost of such care could eat up most or all of any increase in income. It is also reasonable to assume that the expenses attributable to the DEBTOR'S children are likely to increase. Based on her testimony, the DEBTOR is likely to face greater medical expenses in the future and will be required to replace her vehicle soon.
For those reasons, this Court concludes that the second prong of the Brunner test has been met.
3. Good Faith Efforts to Repay.
The DEBTOR promptly sought a deferment and made regular, albeit small, payments under an agreement with ISAC, for nearly a decade before filing for bankruptcy. ISAC acknowledges that the DEBTOR has made a good faith effort to repay her loan and this Court finds that the DEBTOR has unquestionably satisfied this prong of the Brunner test.
The DEBTOR started with a loan of $2,625.00. Ninety-five payments and eleven years later, she owed $3,561.00, an increase of thirty-five percent (35%)! Something is seriously awry with a student loan system that permits unsophisticated borrowers who make a good faith effort to repay over a period of years to unwittingly end up owing more than the loan amount because the interest accrual has outpaced the payment amount.
Having carried her burden of proof on each of the three elements of the Brunner test, the DEBTOR is entitled to a determination that excepting her student loan from discharge would impose an undue hardship on her and her dependents so that the loan is, therefore, dischargeable.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.