IN RE LEAHY, (Bankr.C.D.Ill. 2002)

LARRY LESSON, United States Bankruptcy Judge.

The issue before the Court is whether the repayment of a debt for student loans would impose an undue hardship on the Debtor and her dependents so as to render the debt dischargeable pursuant to 11 U.S.C. § 523(a)(8).

Between 1985 and 1993, Debtor took out a number of student loans with Sallie Mae Consolidation. In 1990, Debtor received her bachelor of arts degree in sociology from Quincy University. She returned to school in 1993, during which time she began, but did not complete, work on a registered nursing degree. In 1996, Debtor received a federally-insured consolidation loan in the amount of $43,217.42.

On January 24, 2001, Debtor filed her voluntary chapter 7 petition in bankruptcy. On May 1, 2001, Debtor filed this adversary proceeding seeking a hardship discharge. On May 14, 2001, the subject loan was assigned to the Illinois Student Assistance Commission ("ISAC") as guarantor of the Debtor's educational loan. On May 21, 2001, ISAC filed a Proof of Claim in the amount of $66,499.45. No objections to ISAC's claim were filed. On June 28, 2001, Debtor's discharge was issued.

The Debtor is 47 years of age. She is married, and her husband is 56 years old and permanently disabled. Debtor is not currently employed. Debtor's aggregate monthly household income is $1,745, and the source of this income is Mr. Leahy's social security disability as well as social security for Debtor and her children. Debtor's necessary household expenses are modest, especially in view of the size of the family. Debtor and her family live in a two-bedroom home, which they rent, and Debtor drives a 1991 Dodge Spirit automobile. Nonetheless, all of the household income is required each month to meet necessary living expenses.

Debtor has five children. Her eldest, a son, is an adult and emancipated. The other four are daughters, ranging in age from 14 to 18, all of whom are living with the Debtor.

Debtor's work history has been spotty. She was last employed in 1999 at a prison in Bowling Green, Missouri, 50 miles from her home. She earned $12 per hour and worked for one month. Prior to that, Debtor worked briefly at a nursing home. Debtor explained that it is difficult to find employment in and around Quincy. She further indicated that her health problems, along with the challenges of attending to her husband and family's needs, have made it impossible to maintain sustained employment.

Debtor has had several surgeries in recent years, and her husband is currently undergoing treatment for cancer.

The Debtor has not made any voluntary payments on the loans because of insufficient income.

Debtor did make one token payment of $10.

ISAC takes the position that the Debtor should submit herself to a repayment program known as the Income Contingent Repayment Plan. See 20 U.S.C. § 1078(m); 34 C.F.R. § 685.209. Pursuant to this program, the annual amount payable by a borrower is the lesser of (i) the amount the borrower would repay annually over twelve years, or (ii) twenty percent of discretionary income. The application of these guidelines in this case would result in the Debtor monthly payments of $0 unless or until Debtor's income increased significantly. The Debtor's income would be examined each year to determine her level of payment. After 25 years, any unpaid amount would be canceled. However, it appears that the amount discharged would be considered taxable income. See In re Wallace, 259 B.R. 170, 175; In re Thomsen, 234 B.R. 506, 509-10 (Bankr.D.Mont. 1999); In re Rose, 227 B.R. 518, 521 (W.D.Mo. 1998), aff'd in part, remanded in part, 187 F.3d 926 (8th Cir. 1999).

In order to be eligible for the Income Contingent Repayment Plan, a borrower must submit certain paperwork to ISAC. The Debtor was given the necessary paperwork, but she never submitted the paperwork. She explained that she did not think that her income was ever going to be high enough to warrant a payment under the Plan, and she did not want the debt hanging over her head for another 25 years.

The Debtor seeks to discharge her debt to ISAC pursuant to 11 U.S.C. § 523(a)(8), which provides as follows:

(a) A discharge under section 727 . . . 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 part by a governmental unit or nonprofit institution, or for an obligation to repay funds received, as an educational benefit, scholarships, or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents[.]

The determination of whether there is undue hardship under § 523(a)(8) requires a three-pronged inquiry. In re Roberson, 999 F.2d 1132 (7th Cir. 1994). First, the Debtor must show that her current financial condition precludes her from maintaining a minimal standard of living if forced to repay her student loan.

Second, the Debtor must show that additional circumstances exist which indicate that her dire financial condition is likely to exist for a significant portion of the repayment period. Third, the Debtor must demonstrate that she has made a good faith effort to repay her loans.

ISAC concedes that the Debtor currently cannot repay the loans and maintain a minimal standard of living. The testimony of the Debtor and a review of her family income and expenses clearly demonstrate that the current income of the Leahy family is barely sufficient to pay their normal living expenses, let alone to be able to provide any funds for repayment of the debt to ISAC.

To satisfy the second prong of the Roberson test, the Debtor must prove that her state of affairs is likely to persist. In 1990, Debtor obtained a degree in sociology from Quincy University.

Since that time, she has had no success finding employment in her field. There does not appear to be much demand for sociologists in the Quincy area. Debtor was not able to complete her course work when she returned to school to study registered nursing. Debtor indicated that her subsequent physical and health-related problems would probably prohibit her from working in that field even if she were able to become a registered nurse. Debtor's husband is permanently disabled and seriously ill. There is no evidence before the Court which would indicate that the Debtor's dire financial condition is only temporary.

ISAC concedes that it is unlikely that the Debtor will ever repay her loans. Nevertheless, ISAC argues that no undue hardship exists because the Debtor's monthly payments would be $0 under the Income Contingent Repayment Plan and the debt would be canceled after 25 years. The Court has previously rejected that argument.

See Herrmann v. U.S. Department of Education, Adv. No. 99-7058, slip op. at 7 (February 7, 2000) (Department of Education may not usurp judicial function of determining undue hardships by promulgating regulations governing repayment of student loans. Income Contingent Repayment Plan is a factor to be considered in determining undue hardship, but it does not control the decision.)

The Court concludes that the second prong of the Roberson test is satisfied because it is unlikely that the Debtor will ever have the means to repay her student loan obligations. This conclusion is not changed by the likelihood that the Debtor's loans would be discharged after 25 years in the Income Contingent Repayment Plan.

The third prong of the Roberson test is whether the Debtor has made a good faith effort to repay her loans. While the Debtor has not made any meaningful voluntary payments on the loans, this was not the result of any willful or negligent action on the part of the Debtor. The Debtor's sporadic and minimal income over the years has been insufficient to cover her own minimal expenses, let alone to make payments on the student loans. There was no evidence that the Debtor never intended to repay the student loans, only that she never had any ability to make payments.

ISAC suggests that the Debtor's failure to apply for the Income Contingent Repayment Plan demonstrates her lack of good faith. While the Court agrees with ISAC that a debtor should try to negotiate a repayment schedule or deferment with the application student loan agency, see In re Douglass, 237 B.R. 652, 657 (Bankr. N.D. Ohio 1999), such an effort in this case would have been an exercise in futility. The Court agrees with the Debtor that she will never have the income to make payments on her student loans, and she should not have to have these student loans hanging over her head for another 25 years.

For the foregoing reasons, the Complaint to Determine Dischargeability of Student Loans Under 11 U.S.C. § 523(a)(8) is allowed, and the loans are hereby discharged.

This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.

See written Order.

ORDER

For the reasons set forth in an Opinion entered this day, IT IS THEREFORE ORDERED that the Complaint to Determine Dischargeability of Student Loans Under 11 U.S.C. § 523(a)(8) be and is hereby allowed, and the debt is hereby discharged.