Summary
finding good faith where debtor made consistent payments on her student loans for twelve years, and an additional twenty-nine payments after consolidating her loans
Summary of this case from In re AylsworthOpinion
Case No. 01-30624, AP No. 01-3128
March 25, 2003
MEMORANDUM OPINION
Trial was held March 12, 2002, on plaintiff-debtor Marcella Wilson's complaint to determine the dischargeability of student loan debts owed to defendant-creditor Educational Credit Management Corporation. The court took the ruling under advisement and asked counsel for ECMC to submit proposed findings and conclusions of law along with debtor's payment history. Debtor was instructed to respond in writing if she disputed the payment history presented by ECMC. ECMC filed its proposed findings and payment history on April 1, 2002. Debtor's response denied the amount owed but offered no proof of past payment or of the amount currently owed.
In the early stages of this case debtor failed to respond to discovery requests submitted by counsel for ECMC or to subsequent letters asking debtor to respond to discovery. ECMC filed a motion for sanctions against debtor for her failure to respond to its interrogatories and request for admissions. The court took the motion for sanctions under advisement and deferred ruling on the admissibility of exhibits submitted by both parties. The court will now admit all exhibits into evidence.
Findings of Fact.
Debtor filed a voluntary petition under chapter 7 by counsel on February 2, 2001, and was discharged on August 17, 2001. She filed this adversary proceeding pro se against Diversified Collection Services, Inc., on July 16, 2001, to discharge student loan debts owed to ECMC. Debtor, who is fifty-three years of age, has been deaf since birth. She is unable to speak or hear and communicates through sign language. Her condition is such that she has no residual hearing and is not eligible for a medical procedure (cochlear implant) that would improve her hearing.
Debtor's Education and Employment History
Debtor received a bachelor's degree with a concentration in social work from Gallaudet University. She then attended Western Maryland College from January 1983 to August 1986 and earned a master's degree in deaf education. Debtor has been employed continuously since 1986.
Debtor was employed by Gallaudet University since 1986 and lost her job in 2000. She was then hired by Stafford County Public Schools part-time as a teacher for deaf children from August 2000 to August 2001. According to her Schedule I, she was paid $1,578.99 per month. Debtor testified that she lost her job in Stafford county because the county prefers deaf teachers with cochlear implants who can speak as well as use sign language.
Based on debtor's testimony, a cochlear implant is a medical procedure available to certain deaf persons with some residual hearing. The procedure restores or improves their hearing. It also affords them some capacity to speak beyond that of a profoundly deaf person with no ability to hear.
Debtor was most recently employed as a teacher with the Virginia School for the Deaf and the Blind. At the time of trial her income was roughly $2,000.00 per month; however, her employment with the school was to be terminated in the near future. Debtor's prospects for future employment are not promising.
Prior to trial, debtor attended a job fair to search for openings in special education. She found that there were no jobs available to her because special education employers have a strong preference for deaf teachers with cochlear implants who can speak and sign. At trial, debtor stated that her dim employment prospects would force her to stop working and collect disability.
Debtor's Loan History
The debts in this adversary proceeding relate to educational loans taken by debtor to fund her graduate studies at Western Maryland College. On January 12, 1996, debtor signed an application and promissory note to consolidate her Federal Stafford Loans with Citibank (NYS). The note indicated that five loans (four Guaranteed Student Loans and one Federal Insured Student Loan) were to be consolidated and repaid to the consolidating lender. The new loan balance was $19,710.16 with a fixed interest rate of 8.25% to be distributed on January 23, 1996.
The original holder of the consolidated promissory notes was United Student Aid Funds, Inc. Defendant ECMC is a guarantor of government-guaranteed student loans. ECMC guaranteed the loan in question. USA Funds made a claim under ECMC's guaranty. ECMC accepted the claim and agreed to pay under the terms of the guaranty. As part of the agreement USA Funds assigned the promissory notes to ECMC.
The original defendant in this suit, Diversified Collection Services, Inc., is a collection agency. Debtor's Schedule E lists Diversfied as a creditor holding an unsecured priority claim for student loans in the amount of $27,138.97. ECMC moved to substitute itself as defendant in place of Diversified due to this transfer of interest with USA Funds. An order granting the motion to substitute was entered on December 5, 2001.
Since February 1996 debtor has made 29 payments to the consolidated lender. Her last payment was in August 1998. In addition, debtor submitted cancelled checks showing 34 payments to the DOE from January 1991 to December 1995. The bulk of payments made by debtor were for the interest due and did not serve to reduce the principal significantly. Though she disputes the total amount claimed by ECMC, debtor did not submit evidence as to the current amount due or the total she has paid.
Conclusions of Law.
Student loans are generally non-dischargeable. However, the exception to this rule allows student loans to be discharged for undue hardship. 11 U.S.C. § 523(a)(8). Bankruptcy Code § 523 provides in relevant part:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt —
. . . .
(8) for an educational benefit overpayment or 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 education benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents;
11 U.S.C. § 523 (emphasis added).
I. Undue Hardship
Section 523(a)(8) creates a presumption of nondischargeability, and the burden of establishing that student loans are dischargeable is on the debtor. United States v. Wood, 925 F.2d 1580, 1583 (7th Cir. 1991). There is no definitive test to determine whether repayment of a student loan will impose undue hardship on a debtor. In fact, Congress did not define "undue hardship" in the Bankruptcy Code. See Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 753 (S.D.N.Y. 1985), aff'd, 831 F.2d 395 (2d Cir. 1987). Congress instead chose to leave the interpretation of the phrase to the courts. See Kapinos v. Graduate Loan Ctr., Pa. Higher Educ. Assistance Agency (In re Kapinos), 243 B.R. 271, 274 (W.D.Va. 2000).
Courts within the Fourth Circuit have not adopted a definitive test to determine whether repayment of a student loan will impose an undue hardship. See id. at 275. However, a number of courts in this Circuit have adopted the three part Brunner test set out by the Second Circuit Court of Appeals in Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987). See, e.g., In re Kapinos, 243 B.R. at 274; Ammirati v. Nellie Mae, Inc. (In re Ammirati), 187 B.R. 902, 905 (D.S.C. 1995), aff'd, 85 F.3d 615 (4th Cir. 1996); Walcott v. USA Funds, Inc. (In re Walcott), 185 B.R. 721, 724 (Bankr.E.D.N.C. 1995).
The Brunner test requires the debtor to prove:
(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.
In re Brunner, 831 F.2d at 396. Though a number of tests have been used to determine undue hardship, it seems that "the national trend is toward adoption of the Brunner standard." Ammirati, 187 B.R. at 905 (noting that courts in the Second, Fourth, Sixth, Seventh, Eighth and Eleventh Circuits have adopted the Brunner standard).
In a recent decision, this court followed a two-part test to determine whether repayment of loans would cause undue hardship. See Lohr v. Mae (In re Lohr), 252 B.R. 84, 87 (Bankr.E.D.Va. 2000). The Brunner test is more appropriate under the facts of this case. The court will adopt the Brunner standard to determine whether debtor would suffer undue hardship if forced to pay her student loans.
"[C]ourt decisions determining whether repayment of student loans constitute undue hardship under § 523(a)(8) focus on two issues:
(1) the economic prospects of the debtor, and
(2) whether the conduct of the debtor disqualifies the debtor from taking advantage of the exception."
a. Minimal Standard of Living
Debtor's Schedule J shows her current monthly expenses as $1,829.03. The scheduled expenses do not include her student loans. At the time of filing her petition, debtor's monthly income was $1,578.99. She has not submitted evidence regarding the income from her present job or the disability benefits she would receive if she were unemployed. After trial, she informed the court by letter that she was to be terminated on June 14, 2002, and had no prospects for future employment. In addition, debtor testified that her income was only enough to cover her monthly expenses and that the disability benefits she will collect if she is unemployed would be lower than her scheduled income.
Based on debtor's testimony the court is satisfied that she would be unable to maintain a minimal standard of living if forced to repay the full amount due on her student loans.
b. Debtor's Disability Will Continue for the Duration of the Repayment Period
Undue hardship is not based on a present inability to pay but rather upon a "certainty of hopelessness that future payments cannot be made." In re Love, 33 B.R. 753, 755 (E.D.Va. 1983).
Debtor's hearing impairment is not curable and cannot be improved through a medical procedure. She has no residual hearing and is not eligible for a cochlear implant. She is unable to speak and relies only on sign language to communicate. According to debtor, the current trend in the field of special education is for a school to hire deaf teachers with cochlear implants who have the ability to speak and use sign language, and parents prefer such teachers as many deaf children today rely heavily on lip-reading and not sign language. Debtor attributes losing her past three jobs to this growing trend and her inability to have this implant procedure.
Her disability is the reason debtor is unable to maintain steady employment. The condition is permanent and will continue for the remainder of the loan repayment period. Debtor has demonstrated to the court that she has both a present inability to pay her loans and a certainty of hopelessness that future payments can be made. c. Debtor Has Made Good Faith Efforts to Pay
To show that she has acted in good faith, debtor must prove that "the forces preventing repayment are truly beyond his or her reasonable control." Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 756 (S.D.N.Y. 1985). Good faith effort also requires "the debtor to have made payments when he or she was in a position to make such payments." Lohr, 252 B.R. at 89. A relevant factor is also the lapse of time between debtor's entry into her repayment period and when she filed for a discharge in bankruptcy. Finally, the court should consider the size of her loan in relation to her other debt. "Courts have usually refused to discharge student loans when they are the bulk of the debtor's debt or when student debt is the first or second largest single type of debt." Id.
Debtor was continuously employed from 1986 through June 2002. For the bulk of that time (1986-1998), she consistently made education loan payments. Since consolidating her loans with Citibank (NYS) in 1996, debtor has made 29 payments toward the interest or principal. Her attempt to discharge this debt comes roughly 15 years after she entered repayment. Further, the student loan debt listed on debtor's schedules comprises only 17% of her total liabilities of $153,933.77. Although it is her second largest debt, no bad faith will be imputed where "several years ha[ve] elapsed between the date the loan payments became due and the filing of bankruptcy, and the debtor ha[s] made payments on the loan. . . ." Id.
The bankruptcy was not filed solely to discharge the education loans. The court is satisfied that debtor has made good faith efforts to repay her student loan debts.
Based on the evidence presented at trial, the pleadings and exhibits submitted by the parties, and the court's review of applicable case law, the court finds that debtor meets the requirements of the Brunner test. She will suffer undue hardship if her loan is not discharged. Therefore, the court holds that debtor's total student loan debt owed to ECMC is dischargeable.
The court will deny defendant's motion for sanctions without further discussion. A separate order will be entered.