Opinion
CASE NO. 17-51357-KMS ADV. PROC. NO. 17-06060-KMS
01-29-2020
IN RE: VELMONT E. LEWIS JR. ALTEMICE M. LEWIS DEBTORS ALTAMIC M. LEWIS PLAINTIFF v. MASSACHUSETTS HIGHER EDUCATION ASSISTANCE CORPORATION d/b/a AMERICAN STUDENT ASSISTANCE, EDUCATIONAL CREDIT MANAGEMENT CORPORATION and THE UNITED STATES DEPARTMENT OF EDUCATION DEFENDANTS
The Order of the Court is set forth below. The docket reflects the date entered.
CHAPTER 7
OPINION HOLDING STUDENT LOAN DEBT NONDISCHARGEABLE
This matter came on for trial on the Complaint to Determine Dischargeability of Student Loan Pursuant to 11 U.S.C. § 523(a)(8), ECF No. 1, by chapter 7 Debtor Altemice M. Lewis. The United States Department of Education having been dismissed and American Student Assistance having transferred its interest in the promissory note to Educational Credit Management Corporation ("ECMC"), ECMC is the proper defendant, Pretrial Order ¶ (3), ECF No. 34 at 2. This proceeding is within the bankruptcy court's core jurisdiction under 28 U.S.C. § 157(b)(2)(I).
"ECF No. ___" references a docket entry in this adversary proceeding.
Lewis owes approximately $288,000 on a student loan consolidation loan ("Loan") that she argues should be discharged because repaying it would impose an undue hardship on herself and her children. Alternatively, Lewis seeks discharge of some portion of the Loan. In the Fifth Circuit, a student loan may be discharged only if the debtor satisfies all three prongs of the test set out in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). Because Lewis does not satisfy the Brunner test, neither the Loan nor any part of it may be discharged.
The parties stipulated that the underlying loans are federally insured student loans within the purview of 11 U.S.C. § 523(a)(8). Trial Tr. 3:22-25, ECF No. 50.
FINDINGS OF FACT
Lewis, who is forty years old, makes approximately $92,000 a year as a neurophysiologist. Trial Tr. 33:10, 30:3-5, ECF No. 50; Sch. I, Pl.'s Ex. 3, ECF No. 43 at 5. A neurophysiologist monitors a patient's brain and spinal cord during surgery: "Anything involving a nerve basically that the surgery could cause insult to, or the spinal cord, I monitor that and I give the surgeon feedback during the surgery." Tr. 15:11-14.
Plaintiff's Exhibit 3 and Defendant's Exhibit 10 both purport to be Schedules I/J updated for trial. Both exhibits were stipulated to and admitted into evidence. Tr. 4:25-5:9. But they differ materially. Counsel for both parties questioned Lewis only on Plaintiff's exhibit. Accordingly, the Court considers only Plaintiff's exhibit.
Lewis has been doing this kind of work for eight years and has worked for nine different companies. Id. at 15:6-7. She has developed the skills to handle "advanced cases," which with her years of experience and her relationships with hospital administrators keep her relevant and valuable to her employer. Id. at 15:23-25; 17:2-21; 41:12-13. This job pays more than any other she knows of or has applied for: "I've not found any job that I can do that's going to pay me what I make now, or even close." Id. at 48:10-11. But it requires constant travel: "I live in the state of Mississippi, but I don't work in Mississippi. I travel to Connecticut, New York, Florida, Louisiana, Tennessee, Ohio, Chicago. Wherever they basically need me to cover a case." Id. at 15:19-22. And it requires a reliable car. Id. at 26:25-27:1.
Lewis did not set out to be a neurophysiologist. She wanted to be a chiropractor. So she borrowed money and earned a bachelor's degree from McNeese State University in Louisiana. Loan Hist., Def.'s Ex. 2, ECF No. 44-1 at 5; Tr. 11:6-7. She borrowed more money and in 2006 graduated from Texas Chiropractic College with a Doctor of Chiropractic degree. ECF No. 44-1 at 5; Tr. 11:7-13. She started her first chiropractic job, a paid post-externship. Tr. 11:13-18. Then her life derailed.
In 2007, Lewis gave birth to a baby boy, who died. Id. at 11:24-25. Three days later, she was diagnosed with a pulmonary embolism and then an "unnamed blood disorder," for which she will take blood thinners the rest of her life. Id. at 11:25-12:9. Lewis "of course" lost her job, and her financial disintegration began. Id. at 12:4-5.
Lewis has not worked in chiropractic since. She got a full-time job with the state of Texas, but lost it after her second child, another boy, was born prematurely and spent eight weeks in the neonatal intensive care unit. Id. at 12:16-13:1. After that, she took a part-time position teaching anatomy and physiology. Id. at 13:3-4. She got pregnant again, delivered another boy prematurely, and herself developed new medical problems, including "really bad" asthma. Id. at 13:8-12. From 2006 to 2012, Lewis's income averaged $30,000 to $35,000 a year. Id. at 13:20-24.
In 2012, Lewis began to rebound. Married by this time, she seized an opportunity to train for her current career, moving her husband and two sons to Louisiana to stay with her mother, and herself to Buffalo, New York, for the training program. Id. at 13:25-14:9.
But Lewis's problems were not over. Shortly after arriving in Buffalo, Lewis was diagnosed with Type I diabetes. Id. at 14:10-13. Then, after her training, she moved her husband and sons to Buffalo only to have the company lose that contract, resulting in a six-month stint of unemployment during which she moved back home to Louisiana. Id. at 14:18-15:4.
Although her income has been "fairly consistent" in the past year, id. at 16:23-25, it was not consistent over the previous three years. In 2015, total income for Lewis and her husband was $103,724. Tax Return, Def.'s Ex. 6, ECF No. 44-3 at 13. In 2016, it was $92,868. Tax Return, Def.'s Ex. 7, ECF No. 44-3 at 19. But in 2017, the year she and her husband filed their underlying chapter 7 case, their income plummeted to $42,546, with Lewis as the only breadwinner. Tax Return, Def.'s Ex. 8, ECF No. 44-4 at 1, 2.
Lewis is still the only breadwinner; her husband has been unemployed "for a long time." Tr. 18:3-4. Lewis has relied on him for childcare, id. at 17:25-18:1; the couple's 2017 tax return shows his occupation as "SAHD [Stay At Home Dad]," Def.'s Ex. 8, ECF No. 44-4 at 2.
Recently, Lewis and her husband separated—a fact that counsel for ECMC did not know until the morning of trial. Tr. 18:1-2, 50:1. The separation raises evidentiary issues.
First, according to her Schedule J, updated for trial but not filed in the case, Lewis, her children, and her husband all live in the same household, creating a household of four. Pl.'s Ex. 3, ECF No. 43 at 7. The Court finds instead, as Lewis's testimony supports, that the household comprises only three: Lewis and her children.
Second, Lewis now pays "a full-time nanny" to care for her boys when she is away. Tr. 18:3-7. But the $450 for childcare and education shown on the Schedule J does not include that expense. Id. at 18:4-6 ("[N]ow I have a nanny that I have to pay for, which I didn't include that in the information you asked for because this is all kind of sudden . . . ."). Lewis did not testify as to how much she pays the nanny. Accordingly, the Court finds on the only evidence before it that Lewis spends $450 a month for childcare and education.
Lewis brings home $5390 a month, with expenses totaling $5261, resulting in a monthly surplus of $129. ECF No. 43 at 8. Her employer reimburses all her travel expenses, including food. Tr. 21:8-11 ("[E]verything that I do is reimbursable. So, when I eat, when I get a plane ticket, when I get a hotel room . . . it's reimbursed."). Notwithstanding, she spends $1000 for food and housekeeping supplies. ECF No. 43 at 8. She spends $425 for Internet, a streaming video service, and three cell phones for which the insurance alone costs $57. ECF No. 43 at 8; Tr. 32:15-33:3. Her car payment is $789, her car insurance is $242, and gas and maintenance are $260. ECF No. 43 at 8. Lewis's Schedule I, also updated for trial but not filed in the case, shows that she participates in an employee stock purchase plan at $229 a month. ECF No. 43 at 6.
Beginning with this sentence, money amounts may be rounded to the nearest dollar.
Lewis has paid nothing on the Loan. Tr. 28:13-15. Until she filed for bankruptcy, she either was in an income-sensitive repayment program, in which her monthly "payment" was $0, or the Loan was in forbearance. Id. at 28:19-25; 29:1-4; 34:4-8.
The Loan principal was originally $207,177. Def.'s Ex. 12, Klisch Aff. ¶ 6, ECF No. 44-4 at 12. Twelve years later, Lewis owes $288,080. Id. ¶ 10, ECF No. 44-4 at 13. It is undisputed that the Loan could be completely paid off in 30 years with payments of approximately $1200 a month. Tr. 51:24-52:1; Def.'s Post-Trial Br., ECF No. 54 at 8.
CONCLUSIONS OF LAW
Student loan debt is generally not dischargeable in bankruptcy. See 11 U.S.C. § 523(a)(8). Only if repayment "would impose an undue hardship on the debtor and the debtor's dependents" is discharge permissible. Id. Most recently, the Fifth Circuit Court of Appeals has interpreted the "undue hardship" standard to mean "that student loans are not to be discharged unless requiring repayment would impose intolerable difficulties on the debtor." Thomas v. Dep't of Educ. (In re Thomas), 931 F.3d 449, 454 (5th Cir. 2019).
Like most of the other circuits, the Fifth Circuit applies the three-prong Brunner test for undue hardship:
The Eighth Circuit applies a totality of the circumstances test. See Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir. 2003). The First Circuit has declined to adopt either test, but its bankruptcy appellate panel has endorsed the totality of the circumstances test. Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 797, 800 (B.A.P. 1st Cir. 2010).
(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.Brunner, 831 F.2d at 396 (adopted in U.S. Dep't of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003)). "The determination of undue hardship is case- and fact-specific." King v. Vt. Student Assistance Corp. (In re King), 368 B.R. 358, 367 (Bankr. D. Vt. 2007). The debtor bears the burden of proof on each prong of the test and if even one prong is not satisfied, the debt is not dischargeable. Salyer v. Sallie Mae Servicing Corp. (In re Salyer), 348 B.R. 66, 70 (Bankr. M.D. La. 2006).
I. Because Lewis Does Not Satisfy Prong One, the Loan Is Not Dischargeable.
Prong One requires Lewis to prove that if forced to repay the Loan, she "cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents." Brunner, 831 F.2d at 396. To repay student loans may require "major personal or financial sacrifices." Quackenbush v. U.S. Dep't of Educ. (In re Quackenbush), No. 17-00059-NPO, 2018 WL 4056993, at *3 (Bankr. S.D. Miss. Aug. 24, 2018) (quoting In re Salyer, 348 B.R. at 71). But repayment should not force the debtor into "abject poverty." Id. (quoting O'Donohoe v. Panhandle-Plains Higher Educ. Auth. (In re O'Donohoe), No. 12-03281, 2013 WL 2905275, at *3 (Bankr. S.D. Tex. June 13, 2013)).
Three questions determine whether a debtor satisfies Prong One: How much money does the debtor need to maintain a minimal standard of living? Does the debtor have any amount left after essential expenses to make payments on the student loans? Has the debtor "minimize[d] living expenses and maximize[d] financial resources"? Id. (quoting Justice v. Educ. Credit Mgmt. Corp. (In re Justice), No. 15-01083-JDW, 2016 WL 6956642, at *4 (Bankr. N.D. Miss. Nov. 28, 2016)).
As to the first question, the "minimally necessary" amount to provide for self and family is the amount required "to ensure that the debtor's needs for care, including food, shelter, clothing, and medical treatment, are met." Wynn v. Educ. Credit Mgmt. Corp. (In re Wynn), 378 B.R. 140, 148 (Bankr. S.D. Miss. 2007) (quoting Gill v. Nelnet Loan Servs., Inc. (In re Gill), 326 B.R. 611, 626 (Bankr. E.D. Va. 2005)).
At least in part, this determination may be subjective: "Common sense, knowledge gained from ordinary observations in daily life, and general experience, establish skills from which most people can determine whether someone's expenses are unnecessary or unreasonable . . . ." Ivory v. United States (In re Ivory), 269 B.R. 890, 899-900 (Bankr. N.D. Ala. 2001).
Objective standards may also apply. For income, some courts consider the federal poverty guidelines "a useful yardstick." Knox v. Sallie Mae (In re Knox), No. 060060-EE, 2007 WL 3332060, at *5 (Bankr. S.D. Miss. Nov. 6, 2007) ("[C]ourts who have had debtors whose income is two or three times the federal poverty guidelines have found that to be a factor that weighed against the debtor."). For expenses, at least one court has applied the Collection Financial Standards used by the Internal Revenue Service to evaluate a delinquent taxpayer's ability to pay a tax debt ("IRS Standards" or "Standards"). See In re Ivory, 269 B.R. at 906. The Bankruptcy Code applies the IRS Standards in the means test that determines whether a debtor may file under chapter 7 or must file under chapter 13. See 11 U.S.C. § 707(b)(2)(A)(ii); see also https://www.justice.gov/ust/means-testing/20190501 (updated Nov. 20, 2019) (attached to Opinion as Ex. A). The Standards establish allowances for categories of expenses that imperfectly but adequately correspond to the categories in Schedule J. The Standards incorporate a "necessary expense test . . . defined as expenses that are necessary to provide for a taxpayer's (and his or her family's) health and welfare and/or production of income." https://www.irs.gov/businesses/small-businesses-self-employed/collection-fmancial-standards (page last reviewed or updated May 30, 2019) (attached to Opinion as Ex. B).
To determine the minimally necessaiy amount Lewis needs to support herself and her children, this Court applies both a subjective standard based on life experience and an objective standard based on the federal poverty guidelines and the IRS Standards applicable on the date of the trial. See Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 800 (B.A.P. 1st Cir. 2010) ("Undue hardship is measured as of trial date . . . .").
The federal poverty guideline for a three-person household is $21,330 per year. Dep't of Health & Human Servs. Poverty Guidelines, Annual Update, 84 Fed. Reg. 1167-02 (Feb. 1, 2019). At approximately $92,000, Lewis's income is more than quadruple the poverty guideline. Although not determinative, this fact weighs against dischargeability.
The IRS Standards are based on either national or local data, depending on the expense category. National standards apply to the following five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. https://www.irs.gov/businesses/small-businesses-self-employed/national-standards-food-clothing-and-other-items (page last reviewed or updated May 30, 2019) (attached to Opinion as Ex. C). A national standard also applies to out-of-pocket health care costs, https://www.irs.gov/businesses/small-businesses-self-employed/national-standards-out-of-pocket-health-care (page last reviewed or updated July 29, 2019) (attached to Opinion as Ex. D). Local standards apply to housing and utility expenses, https://www.irs.gov/businesses/small-businesses-self-employed/mississippi-local-standards-housing-and-utilities (page last reviewed or updated Mar. 15, 2019) (attached to Opinion as Ex. E). Both national and local standards apply to transportation expenses; the ownership cost of the vehicle (monthly lease or loan payment) is national and the operating cost is local, https://www.irs.gov/businesses/small-businesses-self-employed/local-standards-transportation (page last reviewed or updated July 29, 2019) (attached to Opinion as Ex. F).
The IRS Standards do not, however, include every expense necessary in a particular debtor's circumstances. For Lewis, the omitted expense is childcare.
Where the IRS Standards do not accurately represent expenses over which the Court believes Lewis has little or no control, her actual, higher expense equals the minimally necessary amount. The first such expense is her car payment. Although $789 seems objectively excessive, she apparently bought this vehicle after receiving her bankruptcy discharge. Compare Line 17a, ECF No. 44-2 at 26 with Line 17a, ECF No. 43 at 8. In the circumstances here, the Court accepts Lewis's credible testimony that her job requires reliable transportation and recognizes that post-discharge financing is expensive. The second such expense is $242 for car insurance. A car loan requires the borrower to buy insurance in an amount adequate to protect the collateral, regardless of cost.
Where the IRS Standard allows more than Lewis spends, her actual, lower expense equals the minimally necessary amount. Accordingly, $150 is the minimally necessary amount for Lewis's health care. Line 11, ECF No. 43 at 8.
Where the IRS Standards subsume several kinds of expenses under one category and the Court believes one of Lewis's expenses in that category is excessive, the Court provides the minimally necessary amount for that expense. As a result, Lewis's $1000 for food and housekeeping supplies is cut to $700; her $260 for gas and car maintenance is cut to $100; and her $425 for telephone, cell phone, Internet, and cable services is cut to $300. See Lines 7, 6c, 12, ECF No. 43 at 8. Her food and housekeeping expense is cut because much of her own food costs are reimbursed; her gas and car maintenance are cut for the same reason, that gas costs would be included in her travel reimbursements; her cell phone, Internet, and cable services are cut because the Court believes $300 is sufficient for three cell phones, Internet, and a streaming video service. In addition, the $229 Lewis contributes to an employee stock purchase plan is wholly unnecessary.
Applying these adjustments to Lewis's expenses as shown on her updated Schedule J, her minimally necessary expenses total $4391:
| Rent | 1050 |
| Electricity | 160 |
| Water/sewer, garbage | 50 |
| Cell phones, Internet, cable services | 300 |
| Food and housekeeping supplies | 700 |
| Childcare | 450 |
| Clothing, laundry, dry cleaning | 150 |
| Personal care products and services | 100 |
| Medical, dental | 150 |
| Gas, car maintenance | 100 |
| Entertainment, clubs, etc. | 75 |
| Life insurance | 75 |
| Car insurance | 242 |
| Car payment | 789 |
|---|---|
| 4391 |
| Housing and utilities | 1616 |
| Food, housekeeping supplies,apparel and services, personal careproducts and services, miscellaneous | 1446 |
| Health care | 165 |
| Car maintenance, repairs,insurance, gas, and other expenses | 210 |
| Car payment | 508 |
|---|---|
| 3945 | |
| plus | |
| Childcare | 450 |
| 4395 |
As to the second question under Prong One, whether Lewis has any amount left after essential expenses to make payments on the Loan, the following calculation shows she can make a $1200 payment and still have money left:
| Monthly take-home pay, | 5390 |
| Line 7, ECF No. 43 at 6 | |
| plus | |
| Employee stock purchase plan, | 229 |
| Id., Line 5h | ___ |
|---|---|
| Total take-home pay | 5619 |
| minus | |
| Minimally necessary expenses | 4391 |
| Available for Loan payment |
Lewis contributes $229 per month pretax to her employer's 401(k) plan. Line 5c, ECF No. 43 at 6. Courts are split on whether retirement contributions may be permitted as minimally necessary expenses in the undue hardship analysis. The majority view seems to be that they may not. See, e.g., Educ. Credit Mgmt. Corp. v. Young, 376 B.R. 795, 800 (E.D. Tex. 2007) ("While saving money for one's retirement is certainly wise, Congress, through its demanding standard, has chosen to give priority to the repayment of student loan debts."); Perkins v. Pa. Higher Educ. Assistance Agency (In re Perkins), 318 B.R. 300, 306-07 (Bankr. M.D.N.C. 2004) ("Similarly, 401(k) contributions generally are not regarded as reasonably necessary for the support or maintenance of a debtor and thus may be considered as available income from which a debtor seeking a § 523(a)(8) undue hardship discharge could . . . repay an educational loan.") (collecting cases); Speer v. Educ. Credit Mgmt. Corp. (In re Speer), 272 B.R. 186, 194 (Bankr. W.D. Tex. 2001) ("For the purpose of analysis the $140.00 retirement deduction will be added back into [Debtor's] income as it appears clear that Congress intended [§ 523(a)(8)] to be applied against debtors in as punitive a manner as possible."); but see Augustin v. U.S. Dep't of Educ. (In re Augustin), 588 B.R. 141, 152 (Bankr. D. Md. 2018) ("[T]here is no per se rule that these types of expenses [including retirement contributions] are unnecessary to maintaining a minimal standard of living."); Larson v. United States (In re Larson), 426 B.R. 782, 786, 792-93 (Bankr. N.D. Ill. 2010) (holding that $86 retirement contribution was permissible given that Debtor was 58 years old and had minimal savings and meager income compared to expenses; employer matched 90% of Debtor's contributions; contributions were relatively small; and rest of budget was frugal); Allen v. Am. Educ. Servs. (In re Allen), 329 B.R. 544, 547, 551 (Bankr. W.D. Pa. 2005) (holding that $111.67 retirement contribution was permissible given that Debtor was 60 years old and had no retirement savings). Here, Lewis's monthly take-home pay covers both her minimally necessary expenses and the Loan payment even without adding back in her 401(k) contribution. Consequently, the Court does not reach the question of whether a retirement contribution may be a minimally necessary expense under the undue hardship analysis.
As to the third question, Lewis has maximized her resources by seeking, training for, and working in the highest-paying job she could find. But she has not minimized expenses, as the Court's adjustments show.
With income more than four times the federal poverty guideline and more than the amount of the Loan payment available after minimally necessary expenses, Lewis has failed to meet her burden of proof under Prong One of the Brunner test. The Loan is therefore not dischargeable.
II. Partial Discharge Is Not Available.
Sometimes, a debtor might be able to repay some but not all the student loan debt. In this circumstance, courts are divided on whether the debt may be discharged in part. Grigas v. Sallie Mae Servicing Corp. (In re Grigas), 252 B.R. 866, 870 (Bankr. D.N.H. 2000) ("[T]he issue of whether partial discharge is available under § 523(a)(8) has proved vexing to the judiciary . . . ."). Although no controlling opinion has issued from the Fifth Circuit, some courts within the circuit have held that a partial discharge may be granted under § 523(a)(8) through the court's equitable powers under § 105(a). See, e.g., Educ. Credit Mgmt. Corp. v. Young, 376 B.R. 795, 801 (E.D. Tex. 2007); Nary v. Complete Source (In re Nary), 253 B.R. 752, 767 (N.D. Tex. 2000); contra Roach v. United Student Aid Fund, Inc. (In re Roach), 288 B.R. 437, 448 (Bankr. E.D. La. 2003) ("partial discharges are not permitted").
Most courts that grant a partial discharge require proof that repaying that portion of the loan would impose an undue hardship. See Young, 376 B.R. at 801 ("Though the Fifth Circuit Court of Appeals has not weighed in on the issue, the other circuit courts that have done so have all agreed that a finding of undue hardship necessarily precedes the bankruptcy court's exercise of its equitable powers."); but see Manion v. Modeen (In re Modeen), 586 B.R. 298, 305-06 (Bankr. W.D. Wis. 2018) (granting partial discharge even though debtor demonstrated no exceptional circumstance and therefore failed to meet all elements under Brunner).
Without reaching the question of whether partial discharge is permitted, this Court agrees that if it is, the debtor must prove undue hardship as to the portion of the loan to be discharged. Accordingly, if partial discharge is permitted, it is not available to Lewis, who under Prong One of Brunner can maintain a minimal standard of living and repay the Loan in full.
CONCLUSION
Because Lewis did not prove under § 523(a)(8) that repaying the Loan will impose an undue hardship on herself and her children, the Loan is not dischargeable. Judgment will be entered accordingly. This decision is without prejudice to any future request to discharge the Loan should Lewis's circumstances change. See 11 U.S.C. § 523(b).
SO ORDERED,
/s/
Judge Katharine M. Samson
United States Bankruptcy Judge
Date Signed: January 29, 2020
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