Eddy v. Direct Loan/US Department of Education et al

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE )
)
SHANNON LYNETTE EDDY, ) Case. No. 1:05-bk-02523
)
Debtor. )
)
SHANNON LYNETTE EDDY, )
)
Plaintiff, ) Adv. Pro. No. 1:05-ap-00210
)
v. )
)
EDUCATIONAL CREDIT )
MANAGEMENT CORPORATION, and )
U.S. DEPARTMENT OF EDUCATION, )
)
Defendants. )
MEMORANDUM OPINION
Shannon Lynette Eddy (the “Debtor”) seeks to discharge government-guaranteed student loans
owed to the U.S. Department of Education (“DOE”), under the William D. Ford Federal Direct Loan
program, and to the Educational Credit Management Corporation (“ECMC”), on the grounds that
repayment of the loans would constitute an undue hardship on her and her dependent child. The DOE
and the ECMC object to the requested relief. For the reasons stated herein, the court finds that
repayment of the debts does not constitute an undue hardship, and, thus, the loans are excepted from
discharge pursuant to 11 U.S.C. § 523(a)(8).
Dated: Thursday, September 28, 2006 12:35:00 PM
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I. BACKGROUND
The Debtor is a 34-year old single mother. She has one dependent, a four-year old daughter.
They reside with the Debtor’s parents. She has no major medical problems and is currently in good
health.
During the years 1989 through 2004, the Debtor attended three separate educational
institutions. From 1989 to 2001, she attended Salem International University and earned a Bachelor of
Arts in criminal justice and psychology. Although she did not complete the programs, from 1995 to
1996 she studied business and office technology at Webster College and accounting and finance at
Fairmont State University from 2002 to 2004. Her education was financed with government-
guaranteed student loans, which had a balance of $62,461.00 as of May 24, 2006. In addition to
deferring payments on her student loans, the Debtor has entered into several forebearance agreements.
Although the Debtor has paid one student loan in full, she ceased making payments to the ECMC in
2000 and failed to make a single payment to the DOE. Although the Debtor has experienced two
periods of unemployment during the past five years, she is currently employed in accounts payable and
billing with a pay rate of $15.00 per hour. According to the Debtor, her average net monthly income
has ranged from a low of $1,300.00 during one period of unemployment to her current high of
$1,660.00. Additionally, the Debtor has consistently received tax refunds of approximately $2,800.00
per year from 2001 through 2005. The Debtor also receives child support in the amount of $327.00
per month. In examining the Debtor’s actual paystubs, combined with child support and tax refunds,
her net monthly income averages $2,680.39. The Debtor asserts average monthly expenses of
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1 This calculation includes a loan repayment of $1,875.00 to the Debtor’s mother and sister.
The court also notes that the Debtor’s expenses during the second two months of this time period are
elevated, which is likely a result of the Debtor having received her tax refund during this period.
2 The Debtor was required to keep a list of all of her expenditures during a three-month period
of time, which was then filed with the court.
3 This amount includes a monthly payment of $550.00 toward the student loans.
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$1,627.00 in interrogatory responses, $3,514.331 in her expenditures worksheet2, and $2,232.003 on
Schedule J.
II. DISCUSSION
Section 523(a)(8) of the Bankruptcy Code excepts from a bankruptcy discharge, debts that are
owed on government-guaranteed education loans. 11 U.S.C. § 523(a)(8). The seminal case in the
Fourth Circuit interpreting § 523(a)(8) is In re Frushour, 433 F.3d 393 (4th Cir. 2005). In Frushour,
the Fourth Circuit sets forth significant guidance for judging an action for an undue hardship discharge
brought pursuant to § 523(a)(8). Frushour teaches that, because Congress has expressly excluded
government-backed student loan debts from discharge, a debtor faces a difficult burden in obtaining a
discharge for educational debt - one must show that failing to discharge it would create an undue
hardship. In creating such a burden, Congress sought to protect the financial integrity of the various
government-sponsored student loan programs. Id. at 400-01.
The undue hardship standard requires more than the usual hardship that accompanies
bankruptcy. Inability to pay one’s debts, by itself, is insufficient. Frushour, 433 F.2d at 399
(“Debtors receive valuable benefits from congressionally authorized loans, but Congress, in turn,
requires loan recipients to repay them in all but the most dire circumstances.”). Repayment can’t be
avoided merely because it would require some major personal and financial sacrifices. Id.
In cases seeking to discharge a student loan on the basis of undue hardship, courts must apply a
three-prong test originally adopted by the Second Circuit in conducting an undue hardship analysis
under § 523(a)(8). See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2nd
Cir. 1987). A debtor carries the burden of proving all three prongs by a preponderance of the
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4 The Debtor currently drives a 1997 Ford Taurus with 160,000 miles.
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evidence in order to demonstrate that undue hardship exists. Frushour, 433 F.2d at 400. First, a
debtor must demonstrate that she cannot maintain, based on current income and expenses, a “minimal”
standard of living for herself and her dependents if forced to repay her student loan obligation. Id.
Second, a debtor must show that some additional circumstances exist indicating that her state of affairs
is likely to persist for a significant portion of the repayment period of the student loans. Id. Lastly, a
debtor has the burden of proving that she has made good faith efforts to repay the loans. Id.
A. Minimal Standard of Living
The Debtor contends that she is not able to maintain a minimal standard of living if her student
loans are not discharged because she will need to purchase a new vehicle4 and intends to move out of
her parents’ home, which will result in increased living expenses. As noted, the first prong of the
Brunner test requires a debtor to demonstrate that she is not able to maintain a minimal standard of
living for herself and her dependents if forced to repay her student loans. Moreover, the undue
hardship test necessarily requires a case-by-case approach in determining what expenses are
unnecessary for maintaining a minimal standard of living. See Rifino v. United States, 245 F.2d 1083,
1087 (9th Cir. 2001) (holding that a debtor had satisfied the first prong of the Brunner test even though
she paid for cable television).
The Debtor asserts that her net monthly income from employment is $1,660.00. The Debtor's
actual paystubs show that her earnings average $2,153.35 net monthly. It is appropriate to consider
income that is available to a debtor from sources outside of employment. See In re Greco, 251 B.R.
670, 677 (Bankr. E.D. Pa. 2000) (stating that assistance to the debtor from any source must be
weighed as a factor in determining the debtor's overall financial picture). The Debtor receives regular
child support payments of $327.00 per month and tax refunds of approximately $2,800.00 per year.
The Debtor’s average monthly net income, including child support and tax refunds, is $2,680.39.
The Debtor’s reports of her expenses are inconsistent. In her answers to Direct Loan’s
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5 Because the court finds that the Debtor has not satisfied the first prong, it is not necessary to
address the second and third prongs; however, the court will do so in the interest of a complete
analysis.
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interrogatories, the Debtor stated that her monthly expenses averaged $1,627.00, excluding any
payment on her student loan obligations. This amount coincides with the amount on Schedule J, which
shows monthly expenses of $2,232.00, including a monthly payment of $550.00 toward her student
loans. According to these figures, the Debtor has approximately $1,000.00 per month in disposable
income, which could be used to repay her student loan obligations. The Debtor, however, testified that
these figures underestimate her expenses and that the expenditures worksheet, which shows a three-
month average of $2,889.33 is accurate. During this three-month period, however, the Debtor
received her 2005 tax refund. It follows, therefore, that her expenditures were elevated by this increase
in income. For example, the Debtor tithes to her church. In the first month of her log, her church
donation was $174.06. This amount increased to $569.07 in the third month of her log. Also, the
Debtor’s recreational expenses totaled $132.02 in the first month and increased to $417.40 for the
second month and $467.17 for the third month. Likewise, the Debtor’s food expenses in the first
month were $413.59 and $709.74 in the third month. The court finds that the expenses of $2,150.81
listed in the first month of the Debtor's log, which are still significantly more than those listed on
Schedule J and in the answers to the interrogatories, offer the most accurate picture of the Debtor's
expenditures. This would still give the Debtor approximately $530.00 in disposable income each
month. Because the court concludes that the Debtor has $530.00 per month in disposable income with
which to repay her student loans, the Debtor has failed to meet the first prong of the Brunner test;
consequently, the court will deny the Debtor a discharge of her student loans.5
B. Certainty of Hopelessness
The Debtor contends that her circumstances are likely to continue because she anticipates
increased expenses in the future and does not foresee the possibility for increased earnings due to the
job market. The second prong of the Brunner test requires a debtor to demonstrate additional
circumstances exist that show that the current state of affairs is likely to persist for a significant portion
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of the repayment period. Brunner, 831 F.2d at 396. According to Frushour, the second prong is at
the heart of the Brunner test. Frushour, 433 F.3d at 401. It is a demanding requirement and
necessitates a “certainty of hopelessness” that a debtor won’t be able to repay her student loan
obligations. Brightful v. Pa. Higher Educ Assistance Agency, 267 F.3d 324, 328 (3rd Cir. 2001).
As the Fourth Circuit stated in Frushour, “[o]nly a debtor with rare circumstances will satisfy this
factor. For example, although not exhaustive, a debtor might meet this test if she can show ‘illness,
disability, a lack of useable job skills, or the existence of a large number of dependents.’ ” Frushour,
433 F.3d at 401 (quoting Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 386 (6th
Cir. 2005)).
This prong is prospective in nature and requires a debtor to show exceptional circumstances
beyond her current situation. Id. The Debtor does not have any disability or medical condition that
prevents her from working. The Debtor is well-educated and has earned a Bachelor of Arts degree,
which serves to increase her employment potential. When put on the stand to testify the Debtor
appeared intelligent, thorough, and well-spoken. In sum, the Debtor has not demonstrated the certainty
of hopelessness required by Frushour.
C. Good Faith
The Debtor contends that she has made a good faith effort by paying one small student loan to
the State of West Virginia (not a party to this proceeding) and two payments on the loan owed to the
ECMC. She admits that she has made no payments regarding her obligations to the DOE. The third
prong of the Brunner test necessitates a showing by the debtor of good faith efforts to repay the
obligations. Brunner, 831 F.2d at 396. Determining whether or not this prong is satisfied requires the
court to examine a debtor’s efforts to obtain employment, maximize income, and minimize expenses.
Frushour, 433 F.3d at 402. According to the Debtor’s own expense log, the Debtor has not
sufficiently minimized expenses to satisfy this prong. The Debtor is paying the following on a monthly
basis: $67.00 for health club dues, $55.00 for dance classes, $123.99 for cable, and $132.02 for
recreational expenses. Reducing these expenses would produce additional income, from which
payments on the student loan obligations can be made.
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Furthermore, while not always dispositive, a debtor’s efforts to explore an income contingent
repayment plan or loan consolidation options indicate that a debtor is putting forth her best efforts to
repay the loan obligations in light of her financial circumstances. Tirch v. Pa. Higher Educ. Assistance
Agency, 409 F.3d 677, 682-83 (6th Cir. 2005). Counsel for ECMC sent a letter to the Debtor
explaining the various payment options that she has, including information on the income contingent
repayment plan, which is available to the Debtor as a way of reducing the repayment expenses. (Def.’s
Ex. B.) See 34 C.F.R. 685.208. This plan would recalculate a debtor’s payment amount each year
based on her adjusted gross income, the variable interest rate, and the income percentage factors.
After twenty-five years, any remaining debt would be discharged. Cunningham v. Sallie Mae
Servicing Corp., 2006 U.S. Dist. LEXIS 24427 *10 (N.D. W. Va. 2006). According to ECMC, the
Debtor’s payment under the income contingent repayment plan is estimated to be $272.67 per month,
but the Debtor testified that she was only vaguely familiar with the income contingent option. The lack
of the Debtor’s consideration of the income contingent repayment plan is indicative of a lack of good
faith.
The Debtor has not made any payments on the obligation to the DOE and has made only two
payments on the loan currently held by ECMC. The Debtor’s lack of any meaningful repayment effort
is also indicative of a lack of good faith. See Cunningham, 2006 U.S. Dist. LEXIS at *12 (finding that
a sole payment of $25.00 toward a graduate loan and failure to make any regular payments toward the
loans were relevant to a finding of a lack of good faith); In re Perkins, 318 B.R. 300, 312 (Bankr.
M.D.N.C. 2004) (holding that obtaining repeated forebearance while not even paying the accruing
interest unnecessarily increases indebtedness). The Debtor offers her repayment of a separate
educational loan, which was owed to a non-party, as evidence of her good faith. Repayment of
another loan cannot be used to conceal the non-payment of the loans at issue in this case for purposes
of the good faith analysis. Cunningham, 2006 U.S. Dist. LEXIS at *13. Therefore, the Debtor has
failed to establish good faith efforts to repay the student loans that she seeks to discharge.
III. CONCLUSION
For the above-stated reasons, the court finds that excepting the Debtor’s government-
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guaranteed student loans from discharge does not impose an undue hardship on the Debtor or her
dependent. Therefore, the Debtor’s government-guaranteed education loans are excepted from
discharge.
The Court will order a separate order pursuant to Fed. R. Bankr. P. 9021.
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