Lewellen v. Access Group, Inc. et al

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-1-	MEMORANDUM DECISION
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re 	)
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NANCY YUDELSON LEWELLEN, 	)
)
)
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Debtor. 	)
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NANCY YUDELSON LEWELLEN, 	)
)
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Plaintiff, 	)
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vs. 	)
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ACCESS GROUP, INC.; KENTUCKY 	)
HIGHER EDUCATION STUDENT LOAN )
CORPORATION; EDUCATIONAL 	)
CREDIT MANAGEMENT 	)
CORPORATION; ACS; and ALLIED 	)
INTERSTATE, INC., 	)
)
Defendants. 	)
)
Case No. 07-31666 TEC
Chapter 7
Adv. Proc. No. 08-3119 TC
MEMORANDUM DECISION
Plaintiff seeks a determination that her student loans should
be discharged, because repayment of those loans would impose an
undue hardship on her. 	The court held a trial in the matter on
October 12, 2010. 	Plaintiff Nancy Lewellen (Lewellen) appeared in
Signed and Filed: December 01, 2010
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
December 02, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-03119 Doc# 47 Filed: 12/01/10 Entered: 12/02/10 10:35:32 Page 1 of 9

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-2-	MEMORANDUM DECISION
pro per. 	Miriam E. Hiser appeared for Defendant Educational Credit
Management Corporation (ECMC). 	Sydney E. Fairbairn appeared for
Defendant Access Group, Inc. (Access Group). 	Upon due
consideration, and for the reasons set forth below, the court
determines that the loan payable to ECMC should be discharged in
part, and that the loan held by Access Group should be discharged
in full.
BACKGROUND FACTS
Plaintiff Nancy Lewellen earned a bachelors degree and an MBA
in her twenties. 	She worked in banking until she was laid off when
she was about 49 years old. 	Lewellen began law school at age 50,
and earned a JD from Santa Clara Law School in 2000 at age 54. 	She
was admitted to the California Bar the same year, and was hired by
an established mid-sized law firm, where she earned a decent income
until she was laid off in 2001.
Although Lewellen’s income declined after 2001, for several
years she earned enough to make payments on her student loans. 	She
made regular payments on those loans through mid-2006.
In 2005, Lewellen was laid off again, and has earned only a
small income thereafter, from what is essentially a solo practice
with a small loan brokerage on the side. 	The income she reported
on her last five tax returns is as follows:
Income Other than IRA withdrawals 	Income from IRA withdrawals
2005 	$ 4,007 	$14,000
2006 	15,854 	50,800
2007 	8,737
2008 	25,138
2009 	4,254
Average 	$11,598
Case: 08-03119 Doc# 47 Filed: 12/01/10 Entered: 12/02/10 10:35:32 Page 2 of 9

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-3-	MEMORANDUM DECISION
The income shown above does not include income that Lewellen earned
by renting part of her house, or the net losses she incurred in
doing so, which are discussed in detail below.
Plaintiff testified that in 2010 she expects to have combined
income of $22,104 from her law practice, the mortgage brokerage,
and social security. 	This testimony was not contested.
LEGAL STANDARD
Guaranteed student loan debts are excepted from the discharge
a debtor receives in a chapter 7 case, unless such exception from
discharge “would impose undue hardship on the debtor and the
debtor’s dependents.” 	11 U.S.C. § 523(a)(8).
To establish undue hardship, Lewellen must establish: (1) 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; (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 she has made a good faith effort to repay the loans.
United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108,
1111 (9th Cir. 1998).
“Minimal standard of living” does not mean a middle-class
lifestyle, and contemplates that the debtor can be required to make
“major personal and financial sacrifices,” but it does not require
the court to apply Internal Revenue Service standards or federal
poverty guidelines. 	Educ. Credit Mgmt. Corp. v. Howe (In re Howe),
319 B.R. 886, 889-90 (9th Cir. BAP 2005). 	The court may consider
such guidelines, but must make its determination on the basis of
the debtor’s individual circumstances, taking account of all actual
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-4-	MEMORANDUM DECISION
expenses that are necessary to the maintenance of a minimal
standard of living by that debtor. 	Id. at 893-94.
THE ECMC LOAN
As of the date of trial, Lewellen owed ECMC approximately
$125,000. 	Counsel for ECMC stated that her client does not object
to a discharge of part of that amount. 	ECMC urges only that
$25,000 of the debt should be excepted from discharge.
ECMC argues that this remaining $25,000 should not be
discharged, because Lewellen has not sought to make payments
adjusted to her ability to pay via the Income-Based Repayment
program (IBR).
Lewellen first argues that she is not eligible for IBR. 	This
argument is unpersuasive, because ECMC has stipulated in this court
that Lewellen is eligible for the program, and this court is ready
to enforce that stipulation.
Lewellen next argues that she should not be forced into IBR,
because under IBR she may be subject to tax upon release-of-
indebtedness income to the extent her liability ultimately is
forgiven. 	This argument has previously been rejected by this
court. 	See Healy v. U.S. Dept. of Educ., 2010 WL 2650438 at 3.
I determine that Lewellen should not be discharged from the
remaining $25,000 of her debt to ECMC, because she failed to
satisfy two elements of the three-part Pena test described above.
First, Lewellen cannot establish that she has made a good faith
effort to repay the ECMC debt, because she is eligible for IBR but
has declined to enroll in it. 	See Mason v. Educ. Credit Mgmt.
Corp. (In re Mason), 464 F.3d 878, 884-85 (9th Cir. 2006). 	Second,
Lewellen failed to show that she will be unable to maintain a
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-5-	MEMORANDUM DECISION
minimal standard of living if she is forced to deal with her debt
through IBR. 	It is undisputed that under IBR, she would not be
required to make any payment at her current level of income. 	If
her income increases in the future, she will be required to pay
only 15 percent of the amount by which her income exceeds 150
percent of the poverty level for a family of her size. 	Lewellen
has not shown that she could not make the limited payments required
under that formula, while still maintaining a minimal standard of
living. 	See Healy, supra, at 4-3.
ACCESS GROUP LOAN
As of the date of trial, Lewellen owed Access Group
approximately $29,000. 	Counsel for Access Group stipulated that
IBR is not available for this loan.
1. 	Current inability to repay loan while maintaining a minimal
standard of living. 	Since the time Lewellen ceased making payments
on the Access Group loan in 2006, she has earned on average less
than $12,000 per year. 	Access Group does not dispute Lewellen’s
testimony that she works a 40-hour week at her solo law practice.
Access Group suggests, however, that because her solo law practice
earns so little, Lewellen should look for a salaried job as an
attorney, a paralegal, or in her old profession, banking. 	Lewellen
credibly testified that she has completed dozens of job
applications without success. 	She testified that she has tried
particularly hard to find a banking job, but that she has been
unsuccessful, because she does not have the experience and skill in
utilizing mathematical models currently required in that
profession.
I credit Lewellen’s testimony, and I find that Lewellen has
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-6-	MEMORANDUM DECISION
attempted to maximize her income, and that her current income is
not sufficient to enable her to sustain even a minimal standard of
living if she is required to repay any part of her debt to Access
Group. 	At first glance, Lewellen’s general experience and
education (many years in banking plus an MBA and law degree) would
seem to enable her to earn a larger income. 	From observing
Lewellen in court and listening to her work history, however, it
does not appear to the court that she has the specific skills and
temperament that would be necessary for her either to develop a
more successful law practice, or to secure other than a starting-
level job at a bank or law firm. 	The starting-level job option is
more-likely-than-not closed to Lewellen because of her age (64 at
the time of trial).
2. 	Likelihood that Debtor’s circumstances will change for the
better. 	For the reasons set forth immediately above, I also
determine that there is little likelihood that Lewellen’s income
will increase sufficiently to permit her to repay any part of the
Access Group loan while maintaining a minimum standard of living.
Access Group argues that it should receive some payment if
Lewellen’s income increases. 	Access Group concedes that the IBR
program does not apply to its loan, and asks the court to impose
upon Lewellen by court order obligations similar to those under the
IBR program: that Lewellen be required to pay Access Group a
percentage of any income over a certain level.
I decline to order such relief, because there is no practical
way to coordinate such obligations with Lewellen’s obligations
under IBR. 	To require Lewellen to pay to ECMC 15 percent of any
income that exceeds 150 percent of the poverty level under IBR, and
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-7-	MEMORANDUM DECISION
to order her to pay a similar amount to Access Group, would place
too heavy a burden upon Lewellen. 	To require ECMC to share any
amounts payable under the IBR formula would interfere with the
rights of ECMC under the IBR program, which the Code of Federal
Regulations has not made applicable to the Access Group loan. 	See
generally 34 C.F.R. § 682.215. 	Any court order requiring such
sharing would also undermine IBR as a program to be implemented
outside the supervision of a court.
3. 	Good faith effort to repay. 	Lewellen offered evidence that she
made payments to Access Group from 2001 through 2006, during which
time she paid Access Group a total of $16,660. 	Lewellen also
offered evidence that she was unable to make payments after 2006,
because she lost her job and was unable to secure a replacement job
that provided sufficient income to enable her to make any loan
payments.
Access Group does not challenge the evidence described above,
but argues that Lewellen did not make a good faith effort to repay.
Lewellen failed to minimize her housing expense, Access Group
argues, because she continued to own and reside in an expensive
single-family residence in San Francisco. 	Access Group notes that
the minimum standard of living identified in Pena does not mean a
middle-class standard of living. 	Access Group introduced evidence
that Lewellen could rent a fully adequate apartment for $1,500 per
month, much less than the mortgage and tax payments on her house.
I agree that Lewellen was obligated to minimize her housing
expense, but I find that in the past three years Lewellen’s net
housing expense has not been materially greater than the amount
Access Group concedes is reasonable and necessary. 	By taking on
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1 Mortgage payments, taxes, other expenses, and rental income
for 2008 and 2009 taken from schedules A and E of federal tax
returns. 	Data for 2010 from Plaintiff’s Exhibit 1. 	Lewellen
testified that she receives $700 per month from her ex-husband to
help her meet the cost of supporting her adult disabled daughter,
who lives with Lewellen. 	If those payments were applied to reduce
rental expense, Lewellen’s rental expense would be lower than shown
in the table. 	It is doubtful, however, that the cost of housing is
the only, or even major, expense incurred in maintaining a home for
the daughter.
2 Tax savings shown represent the difference between the
combined state and federal tax on income other than rent, and the
federal and state tax due after taking account of the deductions
and losses claimed from ownership of the house. 	I decline to
attempt to calculate any tax savings for 2010 without tax returns.
Any tax savings would reduce Plaintiff’s net housing expense for
that year.
-8-	MEMORANDUM DECISION
boarders, and by using the mortgage payments and tax payments to
reduce her income tax liability, Lewellen has effectively reduced
her housing expense to the amount shown in the following table.
Monthly Net Housing Expense
2008 	2009 	2010
Mortgage payments 1 	$3,506 	$2,970 	$3,993
Real estate taxes 	402 	378 	Included in mtg.
Other expenses 	548 	686 	224
Less:
Rental income 	(2,841) 	(2,222) 	(2,750)
Tax savings 2 	(152) 	(0) 	(0)
Net housing expense 	1,463 	1,812 	1,467
Lewellen was not as successful in controlling her net housing
expense in 2007, the first full year after she ceased making
payments to Access Group. 	This fact, however, does not indicate
that she did not make a good faith effort to minimize her housing
expense. 	First, Lewellen had so little income in 2006 and 2007,
other than withdrawals from her IRA, that she would have been
unable to make any payments on the Access Group loan even if she
had rented a $1,500-a-month apartment. 	Her average income monthly
in 2006 and 2007 from sources other than her IRA was only $1,025.
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-9-	MEMORANDUM DECISION
In substance, Lewellen used exempt assets to make her mortgage
payments in 2006 and 2007.
Second, it is only in hindsight that we see that Lewellen was
never able to secure a good replacement job after being laid off in
2005. 	That she did not recognize this fact immediately, and that
it took her some time to realize maximum rental income from the
property, does not negate the evidence of a good faith effort to
repay that is embodied in her record of payments on the loan from
2001 to 2006, and in the subsequent reduction of her net housing
expense from 2008 to the present.
CONCLUSION
The amount due ECMC in excess of $25,000 should be discharged,
because ECMC does not object to the discharge of that debt. 	The
remaining $25,000 due ECMC should be excepted from discharge and
subject to repayment under the IBR program, because payment of the
amounts due under the IBR program would not impose an undue
hardship upon Plaintiff. 	The entire amount due Access Group should
be discharged because the IBR program is not applicable to that
debt, and because Plaintiff has met the three requirements of the
Pena test regarding that debt.
**END OF MEMORANDUM DECISION**
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