Ben Barry
Ch. 7
OPINION
Lori Johnson [the debtor] filed her bankruptcy petition on December 30, 2009, in Las Vegas, Nevada, and received her discharge on April 7, 2010. Her case was closed on June 14, 2010. Prior to getting her discharge, the debtor moved to Springdale, Arkansas, and later petitioned the Nevada bankruptcy court to reopen and transfer her case to the Western District of Arkansas for the purpose of filing adversary complaints seeking a determination of the dischargeability of multiple student loan debts under 11 U.S.C. § 523(a)(8). The Nevada bankruptcy court granted the debtor's motion on October 17, 2012, and the case was transferred to this Court on November 8, 2012. On February 8, 2013, the debtor filed three adversary proceedings against the following student loan defendants: (1) Sallie Mae, Inc. [Sallie Mae] in 5:13-ap-07010; (2) National Collegiate Trust [National Collegiate], The Education Resources Institute, Inc., and Daphne Solomon in 5:13-ap-07011; and (3) Educational Credit Management Corporation [ECMC] in 5:13-ap-07012. After answers were filed, the three adversary proceedings were consolidated for purposes of trial. The debtor later dismissed her complaint against ECMC, and the Court held a hearing on the two remaining adversary proceedings on February 27, 2014, after which the Court took the matters under advisement. For the reasons stated below, the Court denies the debtor's complaints against Sallie Mae and National Collegiate.
In 5:13-ap-07011, only one of the three defendants-National Collegiate-filed an answer to the complaint. The debtor dismissed the second defendant, The Education Resources Institute, Inc. The debtor filed a motion for default against the third defendant, Daphne Solomon, but subsequently withdrew the motion. At the time of the hearing, Solomon still had not filed an answer to the debtor's complaint, but the debtor did not attempt to resurrect her motion for default against Solomon.
BACKGROUND
The debtor seeks to discharge student loans that accrued from two separate educational endeavors. In December 1996, the debtor graduated from Central Washington University with two bachelor's degrees: one in theater arts with an emphasis in children's education, and one in elementary education. Almost 10 years later, the debtor returned to school and graduated in May 2008 from Chapman University in California with a masters degree in film production/directing. In all, the debtor contracted for ten separate student loans that currently total approximately $317,370.00: one loan from National Collegiate; four private loans from Sallie Mae; two federal loans from Sallie Mae; and three federal loans currently held by an entity identified by the debtor as ACS [the third lender], which is the successor in interest to ECMC. The only loans before the Court in this proceeding are the four private loans from Sallie Mae and the one loan from National Collegiate. available monthly income. Accordingly, the debtor asks this Court to find that her student loans owed to Sallie Mae and National Collegiate place an undue hardship on her and are dischargeable under § 523(a)(8).
With the exception of the student loan debt owed to National Collegiate, which originated in May 2006 in the amount of $17,500.00, the Court does not have evidence of the origination date or initial principal amount of each loan.
At this time, the third lender is in the process of consolidating the debtor's federal loans-two federal Sallie Mae loans and three loans that were held by ECMC-and establishing an income contingent repayment plan for the debtor. This settlement prompted the dismissal of the third adversary proceeding, 5:13-ap-07012. Therefore, a portion (approximately $198,000.00) of the total student loan debt is no longer before this Court for determination of dischargeability.
LAW AND ANALYSIS
The Eighth Circuit has adopted a totality-of-the-circumstances test for making a determination of undue hardship under § 523(a)(8). Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir. 2003). Under this test, a bankruptcy court must consider the following factors: (1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. Long, 322 F.3d at 554 (citing Andresen v. Neb. Student Loan Program, Inc. (In re Andresen), 232 B.R. 127, 132 (B.A.P. 8th Cir. 1999)). Other relevant facts and circumstances that courts have considered include:
(1) the total present and future incapacity to pay debts for reasons not within the control of the debtor;
(2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payments;
(3) whether the hardship will be long-term;
(4) whether the debtor has made payments on the loan;
(5) whether there is a permanent or long-term disability of the debtor;
(6) the ability of the debtor to obtain gainful employment in the area of the study;
(7) whether the debtor has made a good faith effort to maximize income and
minimize expenses;
(8) whether the dominant purpose of the bankruptcy petition was to discharge the student loan;
(9) the ratio of student loan debt to total indebtedness.
Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775, 783-84 (8th Cir. 2009). In total, the chief inquiry is a balancing of finances-"if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt-while still allowing for
a minimal standard of living-then the debt should not be discharged."
Long, 322 F.3d at 554. The debtor has the burden of proving by a preponderance of the evidence that she cannot afford to pay her student loan debt.
Jesperson, 571 F.3d at 779. As the
Jesperson court noted, this burden is rigorous.
Id. Determining what constitutes a minimal standard of living also requires a balancing of the circumstances because there is no statutory definition provided. Addressing this issue, one court provided the following considerations (internal citations omitted):
On one end of the spectrum, it is clearly not enough for a debtor simply to demonstrate that payment of a student loan would require a readjustment of his financial situation or a diminution in lifestyle. A debtor is therefore not entitled to maintain the standard of living enjoyed before the filing of the petition. On the other hand, it is not necessary that a debtor live in abject poverty in order to demonstrate undue hardship and obtain a discharge of student loans.
Shadwick v. U.S. Dept. of Educ. et al. (
In re Shadwick),
341 B.R. 6, 10-11 (Bankr. W.D. Mo. 2006) (citing
Educ. Credit Mgmt. Corp. v. Stanley (
In re Stanley),
300 B.R. 813, 817-18 (N.D. Fla. 2003)). Courts have found that a minimal standard of living includes the ability to pay for food, shelter, utilities, personal hygiene, clothing, medical and dental expenses, and recreation.
Id. at 11. In the present case, the Court will examine each of the three factors set forth in the Eighth Circuit's totality-of-the-circumstances test to determine whether the debtor can maintain a minimal standard of living while also paying her student loan debts. The debtor's expenses will be addressed first.
1. Reasonable Necessary Living Expenses
The debtor testified at the hearing that her current expenses in 2014, not including monthly payments to Sallie Mae and National Collegiate, are approximately $2492.83 per month:
|
Rent |
$635.00 |
| Electricity |
$150.00 |
| Cable/internet |
$142.00 |
| Cell phone |
$85.00 |
| Car ins |
$90.00 |
| HSA |
$100.00 |
| Water |
$20.00 |
| Food/groceries |
$345.00 |
| Vehicle repair/fuel |
$180.00 |
| Eating out |
$70.00 |
| Gym |
$9.00 |
| Recreation |
$15.00 |
| Medical/dental |
$85.00 |
| Clothing |
$50.00 |
| Tax repayment |
$25.00 |
| Tithe |
$350.00-360.00 |
| Third lender |
$141.83 |
The Eighth Circuit has stated that in order for expenses to be reasonable and necessary, they must be "modest and commensurate with the debtor's resources."
Jesperson, 571 F.3d at 780. While the total amount of monthly expenses must be reasonable, courts also scrutinize specific expenses to determine whether those expenses are unnecessary or excessive to the extent that funds can be reallocated to pay for the student loans the debtor seeks to discharge. After reviewing the debtor's expenses covering groceries, rent, utilities, clothing, medical
necessary and reasonable. As a result of the Court's reduction of the debtor's expenses, the Court finds that the debtor's total monthly expenses are $2005.83 before factoring in student loan payments to Sallie Mae and National Collegiate. As discussed in the next section, a comparison of the debtor's reduced expenses with her monthly income shows that she has sufficient funds to make both student loan payments.
Comparing the debtor's current expenses with those listed in her Schedule J filed on December 30, 2009, highlights several substantial changes in her specific expenses: (1) a significant decrease in rent because the debtor moved from Las Vegas to Springdale, Arkansas, where the cost of living is notably less; (2) a significant increase in food expenses because the debtor now lives alone (whereas she previously shared food expenses with an aunt who temporarily lived with her); (3) a significant increase in charitable donations because the debtor renewed her relationship with her church after filing bankruptcy; and (4) the lack of a monthly car payment because the debtor has since paid off her 2005 Ford Escape. Overall, the debtor's monthly expenses are approximately $200.00 more now than in 2009.
HSA is the abbreviation for health savings account.
The $141.83 listed is the expected monthly payment amount for the debtor's federal student loans, once consolidated by the third lender. See footnote 3.
The debtor entered into evidence the IRS's Form 9465, Installment Agreement Request, showing her proposed payment of $25.00 per month for money owed on her 2010 federal income taxes.
On appeal, the district court agreed with the McLaney court's conclusion that the charitable donation was a proper expense but found that the bankruptcy court erred in its determination that the allowance of charitable contributions under § 548 is applicable to a § 523(a)(8) analysis.
An Ohio bankruptcy court, similarly faced with a lack of evidence, distinguished between tithing and other expenses: "Finally and perhaps most importantly, the Linvilles have failed to provide any proof or documentation, such as canceled checks or acknowledgments from the church, to support their budgeted tithing expenditures. Although unnecessary for routine expenses such as rent and food, such proof is required for extraordinary expenditures such as the Linvilles' budgeted tithe." Linville v. Hills Bank & Trust Co. et al. (In re Linville), 95-60183, 1995 WL 783218 (Bankr. N.D. Ohio Dec. 12, 1995).
2. Past, Present and Reasonably Reliable Future Financial Resources
Although the debtor has struggled with employment, particularly during the recession, she has proven herself capable of supporting herself, even if those jobs have not been related to her degrees. In the past 10 years, the debtor has been an administrative assistant once and an executive assistant twice (including her current job) with an average salary of about $40,000.00. Considering her past success in these positions, the Court does not have any reason to believe she will not continue to be successful in positions such as these. In addition, because she has no financial obligations to dependents and no known disabilities to prevent her from continuing to earn an income, the analysis here is a relatively straight-forward comparison of income versus expenses. At the trial, the debtor's monthly income was loosely calculated as $2500.00 by doubling the debtor's bi-weekly net pay of $1258.94, the amount shown on her paystub. However, a more accurate calculation shows that her monthly income is $2727.70. Factoring in the newly calculated monthly expenses of $2005.83, the debtor is left with $721.87 per month to make her student loan payments to Sallie Mae and National Collegiate. The evidence provided to the Court shows that the debtor's current monthly payment to National Collegiate is approximately $210.00. The debtor's monthly payment to Sallie Mae, according to a proposal made by Sallie Mae's counsel at the hearing, will be expense-that her payment to the third lender will double next year-the debtor currently has about $150.00 in excess monthly income that would be sufficient to cover that additional expense.
This amount is reached by multiplying the debtor's bi-weekly net pay ($1258.94) by 26 weeks, and then dividing the result by 12 months.
Counsel for Sallie Mae stated at the hearing that Sallie Mae has offered to reduce the debtor's total balance on the four private loans to $70,000.00, at two percent interest for 20 years, with a monthly payment of $354.12.
The Court notes that a modest monthly payment for a replacement vehicle would be offset somewhat by a reduction in the $180 per month expense the debtor currently has allotted for the repair and maintenance of her 2005 Ford Escape.
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3. Other Relevant Facts and Circumstances
At the hearing, both the debtor and the creditors developed facts that are applicable to some of the enumerated "other relevant facts and circumstances" to be considered in a totality-of-the-circumstances test. The debtor testified about her inability to find work in the extremely competitive entertainment industry despite having a costly degree. She also testified about her good-faith efforts to work with her lenders and make payments, and specified that she has never defaulted on any of her student loans. Alternatively, counsel for Sallie Mae suggested through questioning of the debtor that she has failed to maximize income by not securing a teaching job, although no evidence was admitted to support the theory that the debtor would earn more as a teacher than she does now. Regardless, these considerations do not outweigh the Court's finding that the debtor has sufficient monthly income to make payments to Sallie Mae and National Collegiate while maintaining a minimal standard of living.
Conclusion
For the foregoing reasons, the Court finds that the student loans owed to Sallie Mae and National Collegiate are nondischargeable because the debtor did not prove by a preponderance of the evidence that these loans impose an undue hardship upon her. As the Court stated previously, this determination is based on a review of the debtor's current monthly income and expenses. Because the debtor's circumstances may change in the future (including the addition of substantiated expenses), the Court denies the debtor's request for relief without prejudice to the debtor seeking a new determination of dischargeability of her student loan obligations at such time. IT IS SO ORDERED.
___________________
Ben Barry
United States Bankruptcy Judge
cc: Samuel Frank Eastman
Lori Johnson
Burton E. Stacy, Jr.
John Blume Buzbee
Mac D. Finlayson
Daphne Solomon
U.S. Trustee