EDWARD D. JELLEN, United States Bankruptcy Judge
By this adversary proceeding, plaintiff Janny Castillo, the above debtor ("Castillo"), seeks to discharge an educational loan pursuant to Bankruptcy Code § 523(a)(8). Defendant Educational Credit Management Corporation ("ECMC") is the current holder of the loan. The court will grant Castillo the requested relief.
A. Facts
The relevant facts are basically undisputed. Castillo is a 40-25 year old woman, generally in good health, and is the sole provider for her four minor children, who live with her. The children are ages 9, 13, 15, and 16. Castillo has a high school diploma. Castillo took out the loan at issue (the "Loan") in 1993 to consolidate two loans that helped fund Castillo's expenses in obtaining a certificate from Dickinson Warren Business College, where she studied word processing and related skills. The original amount of the Loan was in the sum of $9,759. Because of Castillo's inability to make payments, the current balance of the Loan is now in the approximate sum of $22,700.
After 1993, Castillo faced some difficult challenges. Over the following six-year period, she was homeless or living in a homeless shelter with four children, and dependent on AFDC.
Thereafter, with the assistance of a United Way agency and a Section 8 voucher, Castillo was able to rent living space. She also started providing volunteer services at the Oakland, California public school that her children attended. After Castillo performed volunteer work for three years, the school offered her a position as a salaried instructional assistant, the position that she now holds. Castillo currently earns a gross monthly salary of $1,544 at the school. With anticipated overtime, Castillo estimates that her gross monthly income will be approximately $1,720, and that her monthly take-home pay will be $1,470. Castillo's monthly expenses total approximately $1,760, which is $290 in excess of her monthly take-home pay. The amount and reasonableness of Castillo's expenses are not in dispute.
B. Discussion
Bankruptcy Code § 523(a)(8), as in effect for bankruptcy cases filed on or after October 7, 1998, provides:
(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 governmental unit, or made under any program funded in whole or in part by a governmental unit or non-profit institution, or for an obligation to repay funds received as an educational 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.
Although the Bankruptcy Code does not define "undue hardship," the meaning of the term is governed by the Ninth Circuit's decision in In re Pena, 155 F.3d 1108 (9th Cir. 1998). Pena adopted the three-part test articulated in In re Brunner, 46 B.R. 752, 753 (S.D.N.Y. 1985), aff'd, 831 F.2d 395 (2d Cir. 1987). Pena, 155 F.3d at 1114. Under this test, the debtor must first establish that she:
cannot maintain, based on current income and expenses, a `minimal' standard of living for herself and her dependents if forced to repay the loans.
Pena, 155 F.3d at 1111 (quoting Brunner, 831 F.2d at 396).
Next, she must show 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." Id. Finally, she must have made "good faith efforts to repay the loans." Id.
The first issue, then, is whether Castillo could maintain a minimal standard of living if she were forced to repay the loan. Here, the court's answer is in the negative.
ECMC has not challenged the accuracy or reasonableness of Castillo's budget, which has no room for any payments on the loan. Rather, ECMC argues that the first prong of the Pena test is not met because Castillo is eligible for one or more forbearance programs currently in effect. In this regard, ECMC references the Ford Program described at 34 C.F.R. § 685, which includes an Income Contingent Repayment Program, described at 34 C.F.R. § 685.208(f). ECMC calculates that based on her current circumstances, Castillo's monthly payments under the Income Contingent Repayment Program would be "$0.00," and notes that the debt remaining after 25 years of participation in the program would be cancelled.
The court recognizes that because of the Ninth Circuit's decision in In re Myrvang, 232 F.3d 1116 (9th Cir. 2000), partial discharge of a student loan debt is probably permissible notwithstanding the BAP's prior decision to the contrary in In re Taylor, 223 B.R. 747 (9th Cir. BAP 1998).
The court rejects ECMC's argument for several reasons. First, and most significantly, it begs the question raised by the first prong of the Pena test, which is not whether the debtor will or will not be forced to repay the loans. Rather, the relevant consideration is whether the debtor and the debtor's dependents could maintain a minimal living standard, assuming that the debtor is, in fact, "forced to repay the loans." Here, there is no question that if Castillo is forced to repay, she could not maintain a minimal standard of living for herself and her dependent children.
Indeed, carrying ECMC's argument to its logical conclusion, it would follow that the mere availability of exemption laws to protect debtor from forced repayment may preclude satisfaction of the first Pena prong.
This conclusion is reenforced by the facts of Pena, wherein the bankruptcy court found, as is the case here, that the debtors' net monthly income was less than their monthly expenses. In applying the first prong to this circumstance, the Pena court stated, quite simply
Subtracting the Penas' average monthly expenses . . . from their net monthly income . . . the Penas faced a deficit of $41. Clearly, in these circumstances the Penas could not maintain a minimal standard of living and pay off the student loans.
Pena, 155 F.3d at 1112. Thus, the court's relevant focus was the impact, rather than the likelihood, of the debtor being forced to repay. (The court also notes that in Pena, the debtors met the first prong of the test when their monthly expenses exceeded their net monthly income by only $41, whereas here, the amount of the excess is $290.)
Moreover, under ECMC's interpretation of the first Pena prong, the dischargeability of an educational loan would be within the discretion of the lender, whether or not in the view of the court, nondischargeability would result in an undue hardship. All that lender would have to do to render an educational loan nondischargeable would be to agree to forbear from collection, conditionally based on the debtor's inability to repay, or unconditionally for some meaningful period of time. And in any case where that agreement is enforceable under applicable nonbankruptcy law, it would follow, according to ECMC's argument, that an educational debt cannot be discharged because nondischargeability would not result in any diminution of the debtor's standard of living.
Such a reading of Bankruptcy Code § 523(a)(8) would clearly be contrary to the Congressional intent. Had Congress wanted to empower creditors to render otherwise dischargeable educational debts nondischargeable merely by agreeing to forbear from collection, or by enacting regulations adopting rules for forbearance, it could have said so. It did not.
The court holds that Castillo has satisfied the first Pena prong.
The next issue is whether "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." The court answers in the affirmative.
In In re Rifino, 245 F.3d 1083 (9th Cir. 2001), the Ninth Circuit noted with reference to this prong that discharge of student loan debts should be "more difficult than that of other nonexcepted debt." Id. at 1088-89 (internal citation and quotes omitted). In Rifino, the debtor was a social worker with a Masters degree who worked at a child care center. Expert testimony established that social workers such as the debtor often enjoy the opportunity for a significant income increase by moving into administrative positions or private practice, and that the debtor's Masters degree offered her "numerous opportunities for advancement." Id. at 1089.
Here, the evidence showed that Castillo has no advanced degree, just a high school diploma. Although Castillo testified that she has some basic computer skills that she uses to help the children at her school, ECMC presented no expert testimony or other evidence to suggest that Castillo's high school diploma or basic computer skills would likely result in any future measurable net income increase that would enable her to make any payments of relevance on the Loan. It is true, as ECMC argues, that all of Castillo's children will have reached 18 years of age in nine more years, at which point Castillo will no longer be responsible to care for and support them. This fact alone, however, does not negate the fact that Castillo's financial condition is likely to persist for a significant portion of the repayment period.
An exhibit submitted by ECMC shows that for Castillo's loan, the repayment period for a "standard" repayment play would be 120 months, and that the repayment period for an "extended" or a "graduated" repayment plan would be 240 months.
The court holds that Castillo has satisfied the second Pena prong.
The final issue is whether Castillo made a good faith effort to repay the Loan. A debtor's failure to make payment when the debtor is unable to do so, does not, by itself, preclude a finding that the debtor has made a good faith effort. See In re Brown, 239 B.R. 204, 209 (S.D. Cal. 1999).
Here, the evidence showed that Castillo was never financially able to make any repayments. Nor did ECMC present any evidence suggesting that Castillo's inability to pay resulted from any factors beyond her reasonable control, see In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993), or any improper attempts to manipulate the Bankruptcy Code.
Some courts have stated that a debtor's refusal to negotiate repayment terms might indicate a lack of good faith, see, e.g., Brunner, 831 F.2d at 397, especially given the availability of forbearance programs such as the Ford Program mentioned above. See, In re Wallace, 259 B.R. 170, 183-84 (C.D. Cal. 2000). Here, ECMC concedes that Castillo cannot make any payments and was never in a position to make any payments since the inception of the Loan. Moreover, the court has found that the debtor has no reasonable prospects in the future for being able to make payments. Under these circumstances, Castillo's failure to make payments or to enter into an agreement under which the Loan cannot be discharged for up to 25 years (pursuant to the Income Contingent Repayment Program) does not evidence lack of good faith on her part.
A contrary holding would be tantamount to a holding that the mere availability to a bankruptcy debtor of a forebearance program precludes a debtor from satisfying the third Pena prong, either because the debtor has elected to enter into the program and thereby forego potential relief under Bankruptcy Code § 523(a)(8) or has refused to enter into the program, thereby precluding a finding of good faith.
The court holds that Castillo has satisfied the third Pena prong.
C. Conclusion
Castillo is entitled to a judgment that the Loan is dischargeable herein, and the court will issue its judgment so providing.