Opinion
Case No. 18-20792 Adv. No. 18-6052
2020-08-25
IN RE: Martha Louise STANDISH, Debtor. Martha Louise Standish, Plaintiff, v. Navient, Nelnet Loan Services, and University of Missouri Kansas City, Educational Credit Management Corporation, and Texas Guaranteed Student Loan Corporation, Defendants.
Keith A. Wellman, Wellman Law LLC, Overland Park, KS, for Plaintiff. N. Larry Bork, Topeka, KS, for Defendants.
Keith A. Wellman, Wellman Law LLC, Overland Park, KS, for Plaintiff.
N. Larry Bork, Topeka, KS, for Defendants.
Memorandum and Order Denying Discharge of Debtor's Student Loan Debt
Robert D. Berger, United States Bankruptcy Judge
Plaintiff Martha Louise Standish ("Debtor") requests that this court discharge her student loans. In consideration of the evidence addressed at trial and the arguments of the parties, the Court will deny discharge of the Plaintiff's student loans.
I. Findings of Fact
Debtor Martha Louise Standish filed her Chapter 7 bankruptcy petition on April 18, 2018. On July 23, 2018, Debtor filed an adversary proceeding seeking discharge of certain student loans under § 523(a)(8).
Case No. 18-20792, ECF 1.
Between 2004 and 2007, Debtor pursued a Bachelor of Science in Accounting at the University of Missouri Kansas City (UMKC). She graduated in 2007 with her intended degree in Accounting. To pay for this degree, she incurred six educational loans. These loans are currently held by Educational Credit Management Corporation (ECMC) and Texas Guaranteed Student Loan Corporation (TGSLC). Antecedent to the evidentiary hearing on this matter, ECMC agreed to discharge half of her student loan obligation, leaving her debt at $10,068.41 with a 4.66% interest rate. Her total indebtedness to TGSLC is $20,523.45, which reflects two loans with balances of $7,656.26 and $12,867.19 at a 6.8% interest rate. She took out the loans to attend UMKC between the ages of 48 to 50. After graduating, she received deferments during the time that she was unemployed. After beginning her employment as an accountant, she paid a total of around $4,000 on her student loans. In 2017, Debtor took out a Parent PLUS loan in the amount of $10,000 to pay for her daughter's education at Avila University. Debtor provided no evidence addressing the burden of this loan, but the statutory fixed interest rate at the time was 7.0% and the court will take judicial notice of that fact.
ECF 50.
ECF 50.
Def. ECMC's Ex. S.
Def. TGSLC's Ex. D.
ECF 50.
Id.
Id.
Federal Student Aid , Federal Interest Rates and Fees (2020).
Debtor is now 63 years old. Her only child is an adult and works as a registered nurse. The Debtor provided significant assistance to her daughter throughout her education, totaling between $24,000 or $25,000. She also incurred a Parent PLUS loan with a current balance of around $10,000, which is not included in the request for discharge. Her daughter currently pays her $400 a month to compensate her for this assistance.
ECF 50.
Id.
After the Debtor graduated from UMKC in 2007, it took her three years to find a job utilizing her degree. For three years she diligently applied for work to no avail until she was hired by Account Temps at $13.15/hour in May 2010. In her testimony, she stated that this was hardly more than the welfare she previously received, but that it was important to her to work for her living. In May 2014, she began work at Taylor Forge Engineered Systems, with a starting hourly pay of $16.50. She now earns $18.36/hour. At some points, she would receive occasional bonuses and overtime, but had no ability to predict when either would be offered. As of now, Taylor Forge does not currently offer overtime opportunities.
Id.
Id.
ECF 50.
Id.
Debtor's monthly gross income is $3,304.17, and her net income is $2,547.42. Her total monthly payroll deductions total $1,156.75. After tax deductions of $715, Debtor also deducts $54.17 for her retirement plan, $143.85 for health insurance, and 243.73 for her Medical Flexible Spending Account (FSA). She receives a company match for her retirement funds and has accumulated $14,059.41 in her 401(k) account. As of 2018, Debtor had $2,288 set aside in her Medical FSA. Her payroll tax of $715 reflects the fact that she takes no deductions on either her federal or state taxes. This has resulted in combined federal and state tax refunds of almost two thousand dollars each year from 2018 onward.
Case No. 18-20792, ECF 16.
Id.
Pl.’s Ex. 10.
Def. ECMC's Ex. J, K.
Debtor claims monthly expenses of $2,581.00, resulting in a negative balance of $33.58 per month. The Debtor's expenses reported on her amended Schedule J are as follows:
| Rent/Upkeep/Property Tax | $605 |
| Utilities/Water/Sewage | $225 |
| Telephone/Cable/Internet | $135 |
| Food/Housekeeping/Petcare | $285 |
| Personal Care/Clothing | $120 |
| Medical/Dental | $250 |
| Transportation (gas and maintenance) | $300 |
| Insurance (life, vehicle, renters) | $195 |
| Recreation | $0 |
| Vehicle Installment Payments | $466 |
At the time of trial, Debtor had just renewed their occupancy of an apartment with the Olathe Public Housing System. She pays $565 a month for the apartment and $8 a month for lawn maintenance. This is likely at or significantly below what Debtor would pay to live in privately owned apartments.
ECF 50.
Debtor's estimated monthly medical budget is split between her budgeted $250 for medical and dental care and her 243.73 monthly contribution to her medical FSA. This totals to $493.73 per month. While this may seem high, Debtor's testimony as to their significant and continuing medical expenses indicates that this projection is likely accurate. Debtor testified that at as of trial, she had a failed shoulder surgery that cost $1200 and a root canal that cost $515. She expected to have a tooth pulled later in the year, with an out of pocket cost of $365, and a cataract surgery with an unknown cost. Debtor testified that her bill for the failed shoulder surgery was outstanding and that she was waiting to get her dental implant until January when her dental benefit renewed. Her willingness to undergo discomfort by postponing a medical procedure indicates that this significant medical budget still does not cover the extent of her ongoing medical expenses. As Debtor ages, it is likely that her medical expenses will increase as well, though this may be moderated by her possible eligibility for Medicare coverage.
Case No. 18-20792, ECF 16.
ECF 50.
Id.
ECF 50.
When Debtor filed for bankruptcy, her only mode of transportation was a 2001 Ford Explorer. Debtor testified that the continuing maintenance cost on this vehicle and the risk of it breaking down during her necessary commute to work led her to seek a new vehicle. She purchased a 2018 Ford Escape with 4500 miles after trading in her previous vehicle. The $400 per month she receives from her daughter principally goes towards her car payments.
Id.
At the time of trial, the balance of the student loans for which Debtor is seeking discharge was $22,490.62. Debtor asserted that the required monthly payment for an income-based repayment plan was $297 per month. In her testimony, she indicated this would be an impossible payment within her current budget and the evidence supports that conclusion. Additionally, the twenty-five year period required to be eligible for forgiveness under the income-based repayment plan is far beyond even the most optimistic projection of Debtor's working years.
ECF 50.
II. Exempting Student Loans From Discharge Would Not Impose Undue Hardship
The Tenth Circuit adopted what is commonly known as the "Brunner test" in In re Polleys . It held that to establish undue hardship under 11 U.S.C § 528(a)(8), a debtor must prove:
(1) that she cannot maintain a minimal living for herself and her dependents if forced to repay the loans;
(2) that additional circumstances exist indicating that this state of affairs will persist a significant portion of the repayment period of the student loans; and
(3) that she made good faith efforts to repay the loans
Educ. Credit Mgmt. Corp. v. Polleys , 356 F.3d 1302, 1309-10 (10th Cir. 2004).
The Tenth Circuit observed that "overly restrictive" applications of the Brunner test have often resulted in denial of discharge even for those who face truly dire financial struggles. To advance the Bankruptcy Code's fresh start policy, the Tenth Circuit allowed courts to consider "all relevant considerations", including but not limited to the "health of the debtor and any of his dependents and the debtor's education and skill level" and "whether he has made a good faith attempt to repay the loan by maximizing income and minimizing expenses."
Id. at 1308.
Id. at 1309.
1. Debtor Cannot Maintain a Minimal Standard of Living If Forced to Repay Her Student Loans
The first prong of the Brunner test requires that a Debtor show she cannot maintain a minimal standard of living while repaying her student loans. This minimal standard of living requires appropriate expenditures for "food, shelter, clothing, and medical treatment." More simply, it requires that the Debtor live "within the strictures of a frugal budget for the foreseeable future."
Id.
Innes v. Kansas (In re Innes) , 284 B.R. 496, 504 (D. Kan. 2002) (quoting In re Nary , 253 B.R. 752, 763 (N.D. Tex. 2000) ).
Id. (quoting In re Ritchie , 254 B.R. 913, 918 (Bankr. D. Idaho 2000)).
Debtor's amended Schedule J indicates that after expenses, Debtor has a monthly deficit of $33.58. However, after trial and consideration of the evidence, some of these expenses may not be reflective of the actual state of Debtor's finances. Debtor's budget for gas and maintenance is significantly greater than that required for an essentially new vehicle. Because of the significant distance of Debtor's commute, it would be appropriate to fix the amount for gas and maintenance at $150 per month. This would cover gas expenditures and the wear and tear the car incurs due to the Debtor's high monthly mileage. Additionally, Debtor receives significant tax refunds on a yearly basis. In 2018, Debtor received a refund of $1,189 from the Internal Revenue Service and $781 from the Kansas Department of Revenue. In 2017, she received a $1,195 federal refund and $611 state refund. If the amount reported for her 2018 federal and state refund were prorated across her budget, she would receive an additional $164.16 per month. Debtor's testimony indicates that these refunds are used to pay expenses otherwise not covered by her budget. However, the purpose of a Schedule J is precisely to report these expenses and provide evidence of Debtor's current financial situation. Without an accurate report, the Court cannot factor in these expenses to its analysis. While such expenses may seem exceptional or irregular, they do seem to have been sufficiently regular to prevent Debtor from being able to dedicate any part of these large tax refunds to payment of her loans.
Case No. 18-20792, ECF 16.
Def. ECMC's Ex. J.
Def. ECMC's K.
ECF 50.
Debtor's Schedule J also fails to allocate any money to pay off the Parent PLUS loan she incurred in 2017. With a current balance of $10,826 and an interest rate of 7.0%, this loan will require monthly payments of $126 to pay off on a ten-year schedule or $84 a month on a twenty-year schedule. Because Debtor has not requested a discharge for this loan, the court must conclude that she does intend to pay for it through her monthly budget. As such, these expenses must be included in considering her monthly budget.
Even if Debtor redirects her unnecessary expenses, it is clear that under either a ten-year or twenty-year payoff period, Debtor will be unable to maintain a minimal standard of living. Under a ten-year payoff plan, the Debtor must pay $236 on the TGSLC loans and $105 on their ECMC loans monthly. She will also pay $126 on her Parent PLUS loan. This results in a monthly budget deficit of $186.42. Under a twenty-year payoff plans, the monthly payments on the TGSLC loans and ECMC loans will be $157 and $65, respectively. The Parent PLUS loan would be paid in monthly increments of $84. This still leaves debtor with a budget deficit of $24.42. In the Income-Based Repayment option the Debtor was presented with scarcely improves her situation. The monthly payment she was quoted of $297 per month is greater than that required of the 20-year payoff plan and would still leave Debtor with a budget deficit.
2. Debtor's Inability to Repay Will Exist For a Significant Portion of the Repayment Period of the Student Loans
The second prong of the Brunner test recognizes that "a student loan is viewed as a mortgage on the debtor's future." The Commission on the Bankruptcy Laws of the United States recommended that student loans be nondischargeable in light of the potential that debtors would be incentivized file for bankruptcy shortly after graduation from post-secondary education when their non-exempt assets are low. To assuage this concern, the Brunner test requires that the debtor show that their current financial hardship will persist through a significant portion of the repayment period. In line with its less punitive application of the Brunner test, the Tenth Circuit requires that courts realistically consider "debtor's circumstances and the debtor's ability to provide for adequate shelter, nutrition, health care, and the like." The Tenth Circuit requires that Debtor demonstrate some "additional circumstances" distinct from the general financial hardship that faces a debtor in bankruptcy and which would indicate that this hardship will likely persist for the foreseeable future.
Polleys , 356 F.3d at 1310.
Id. at 1306.
Id.
Polleys , 356 F.3d at 1310.
Id.
Debtor's age, poor health, and unfortunate employment history constitute the additional circumstances necessary to demonstrate a likelihood that her impecunious circumstances will persist. Debtor is currently 63 years old. In most cases, she would be soon contemplating retirement; however, she has indicated that she will likely work significantly past that point. As her age advances and health deteriorates, she will soon reach a point at which continuing employment is no longer possible. At such point, her income will significantly decrease as she shifts to relying on Social Security income. While this may not occur during the ten-year payoff period, it is a virtual certainty if the Debtor were to pay her loans through the twenty-year payoff plan or the twenty-five year IBR plan.
ECF 50.
Id.
Debtor's health already appears to be declining. Over the last year, she has undergone five operations, one of which failed and will likely have to be redone. She forecasts more medical interventions in the next year. As she ages, it is likely that she will incur even more medical expenses and do so more frequently. While her medical expenses may decrease as she becomes eligible for Medicare, her compounding medical needs may require her departure from the workforce as a necessity and not a choice.
Id.
Finally, Debtor's employment history indicates that it is unlikely she will earn significantly more income in the future such that she will become able to pay these loans. Per her testimony, it is unlikely that her wage will increase significantly or that she will have future job opportunities which offer her a meaningfully higher income. After graduating from college, Debtor diligently searched for jobs for three years before securing work at Account Temps which paid hardly more than welfare. While her work for Taylor Forge is better compensated than her earlier positions, her difficulty finding work indicates that her ability to improve her circumstances by reentering the job market is quite limited.
Id.
3. Debtor Cannot Demonstrate Good Faith
The Tenth Circuit's application of the Brunner test in In re Polleys indicates that good faith is proven by showing that the "debtor's circumstances are a result of ‘factors beyond her reasonable control.’ " Good faith is not demonstrated just by showing a history of payment. Courts may also consider the extent to which Debtor pursued deferments and forbearances during times in which they could not make payments on their loans, and their efforts to maximize their income while limiting expenses. Failure to make payments does not, in of itself, require a finding of bad faith. Instead, the primary purpose of this test is to prevent abuse of the student loan system by those who seek to discharge their student loans before embarking on lucrative careers.
Polleys , 356 F.3d at 1311 ; see also Azwar v. Tex. Guaranteed Student. Loan Corp. (In re Azwar) , 326 B.R. 165, 173 (B.A.P. 10th Cir. 2005) (listing whether debtor is "willfully contriving" hardship as one of many factors in determining good faith).
Id.
Id.
Id. at 1312.
Two cases raised by the parties have discussed this issue, namely, In re Lozada and Beece v. AES/Brazosus . In each, the decision to contribute none of the inheritance debtor received was important to the court's decision to find against good faith. However, in In re Lozada , the debtor's decision to not pursue paying work and donate more than $100,000 to religious institutions and charity appeared to account more for the court's finding than the debtor's disposal of his relatively small inheritance. Similarly in Beece v. AES/Brazosus , the debtor's failure to present a frugal budget and maximize the value of her three degrees clouds whether her failure to pay her inheritance towards student loans was the basis for the court's decision to find against good faith. However, in each case, the failure to pay inheritance towards the debtor's student loans weighed heavily against the debtor's good faith. Paying such large amounts of money towards student debt can substantially decrease the size of the debtor's obligation or eliminate it entirely and failure to do so indicates that the debtor has decided in favor of living with student debt.
In re Lozada , 604 B.R. 427 (Bankr. S.D.N.Y. 2019).
Beece v. AES/Brazosus (In re Beece), 2019 WL 1769605, 2019 Bankr. LEXIS 1230 (Bankr. M.D. Fl. Apr. 17, 2019).
Lozada , 604 B.R. at 430.
Beece at *4, 2019 Bankr. LEXIS 1230 at *8.
Debtor has consistently made payments on certain loans and otherwise sought forbearances or deferments where necessary. Since she started her employment she has largely made monthly payments of around $40 on some of her loans while deferring others. During this time, she, in large part, diligently minimized her expenses while maximizing the income she could earn with her degree. Her graduation at the beginning of a severe economic recession significantly hampered her job prospects, and her testimony about this time period indicates that she unceasingly searched for work. The work she did secure scarcely covered the costs she incurred for herself and her teenaged daughter and left little surplus that could be dedicated towards paying back her debt.
ECF 50; Def. ECMC's Ex. C; Def. TGSLC's Ex. H.
ECF 50; see, e.g. Philip Oreopoulos, Till von Wachter, Andrew Heisz, The Short-and Long-Term Career Effects of Graduating in a Recession , 4 American Economic Journal: Applied Economics 1 (2012) (students graduating into a recession suffer a significant drop in earnings with the effect persisting for at least a decade)
However, Debtor's decision to dedicate her inheritance to her daughter's education and other expenses prohibits the Court from finding that her pursuit of a discharge is in good faith. Debtor received around $45,000 from her mother's estate. None of that money was used to pay the student loans. It is notable that this money would have been enough to pay off all or almost all her student loans. While the desire to use this money to pay for her daughter's education is understandable, this expense was not necessary to maintain a minimal standard of living. Because these funds were available and spent elsewhere, the Court must find that the Debtor's financial circumstances are a result of factors within her control. The circumstances which have resulted in a request to discharge Debtor's student loans are a product of unnecessary expenses that were willfully incurred by the Debtor.
ECF 50.
Id.
While the Tenth Circuit intended the test set out In re Polleys to be applied such that "debtors who truly cannot afford to repay their loans may have their loans discharged," it is of the nature of this three-part test that one could demonstrate dire and enduring financial circumstances yet fail to demonstrate good faith. It is a tragic irony that Debtor's very efforts to relieve her daughter of the financial enserfment caused by student loan debt has doomed her effort to discharge her own student loans. Yet, the element of good faith is binding precedent in the Tenth Circuit. It is clear that with this large, discretionary expenditure, Debtor forewent her opportunity to pay her student loans and for this reason the Court cannot find Debtor pursued discharge in good faith.
See, e.g. Hua Hsu, Student Debt is Transforming the American Family , The New Yorker (Sept. 2, 2019); see also Christopher Ingram, 7 Ways $1.6 Trillion in Student Loan Debt Affects the U.S. Economy , Washington Post (June 25, 2019).
III. Conclusion
For the reasons stated above, the Court finds that the student loan debt owed by Debtor to ECMC and TGSLC must be excepted from discharge pursuant to § 528(a)(8). The Court concludes that Debtor cannot repay her student loans through any available program and maintain a minimal standard of living. The court further concludes that Debtor's financial situation is likely to deteriorate in the foreseeable future. However, because Debtor did not minimize her expenses by foregoing payment for her daughter's education, the Court finds that she did not demonstrate a good faith effort to repay her student loan. For these reasons, the Court finds that the student loan debt in question should not be discharged.
IT IS THEREFORE ORDERED that the student loan debt owed by Debtor to Education Credit Management Corporation and Texas Guaranteed Student Loan Corporation is excepted from Debtor's discharge under § 528(a)(8).