Hayes v. Educational Credit Management Corporation

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
In re: *
JUSTIN J. HAYES, * Case Nos. 05-23997-JS
Debtor * Chapter 7
* * * * * * * * * * * * *
JUSTIN J. HAYES, *
Plaintiff, *
* Adv. Pro. No. 05-1765-JS
v.
*
EDUCATIONAL CREDIT
MANAGEMENT CORP., *
Defendant *
* * * * * * * * * * * * *
MEMORANDUM OPINION DISMISSING COMPLAINT
On March 1, 2006, the instant complaint to discharge student loans came on for
trial on the merits. For the reasons stated, the complaint will be dismissed.
Date signed October 11, 2006
Entered: October 12, 2006 Case 05-01765 Doc 37 Filed 10/12/06 Page 1 of 14

The debtor testified at trial that he took the course with the intention of1
becoming a tractor trailer driver, but that he failed the driving test. Trial transcript, 7-8.
A Stafford Loan is a program offered by the Federal Family Education Loan2
Programs in which lenders use their funds to make loans to enable a student to pay the
costs of the student’s attendance at post-secondary schools. 34 C.F.R. 682.100(a).
A portion of the loan was subsidized in the amount of $1,750. Tr. at 28. The3
amount claimed by the defendant to be due and owing as of February 6, 2006, was
$6,890. Tr. at 29; Defendant’s Exhibit C.
On direct examination at trial, the debtor testified that he made 10-12 payments,4
but admitted on cross examination that he made only eight payments. Tr. at 11 and 24.
2
FINDINGS OF FACT
From December 27, 1999, through May 9, 2000, the debtor, Justin J. Hayes, was
enrolled as a student in the Allstate Career School in a 480-hour course of instruction
for certification to enable him to obtain licensure as a driver of tractor trailers and
trucks. On December 31, 1999, the debtor signed an application and promissory note1
for Federal Stafford Loan [Defendant’s Exhibit A] in the amount of $4,250, to fund2 3
the cost of tuition. The loan was guaranteed by the Pennsylvania Higher Education
Assistance Agency (“PHEAA”) and American Education Services (“AES”). Beginning
on December 18, 2000, the debtor was required to repay the loan by making monthly
payments of $87.54. Between February 2001 and October 2002, he made only eight
payments.4
The undisputed history of the debtor’s postgraduate employment is as follows:
Case 05-01765 Doc 37 Filed 10/12/06 Page 2 of 14

These expenditures consisted of $485 for rent, $60 for telephone, $250 for food,5
$50 for clothing, $80 for laundry and dry cleaning, $118 for medical and dental, $100
for transportation, $50 for recreation, clubs and entertainment, newspapers and
magazines, $80 in charitable contributions and $167 for auto insurance.
3
September 2000 - May 2001 School bus driver for the Baltimore County
Public Schools
June 2001 - July 2002 Truck driver for Transforce, Inc.
July 2002 - December 2002 Truck driver by Broadway Services
February 2003 - November 2003 Stock clerk for Target
December 2003 - March 2004 Truck driver for Summit Moving and Storage
Co.
April 2004 - present W arehouse manager for Pinnacle Granite
&Marble, Inc.
The debtor is 53 years of age, unmarried and has no dependents. His annual
income in 2001 was $30,381, and he received $1,977 in income tax refunds. His
annual income in 2002 was $34,192, and he received $649 in income tax refunds. In
2003, he had an income of at least $24,435. In 2004, his income increased to $42,273,
and he owed Federal income taxes in the amount of $2,000.
On June 17, 2005, the debtor filed a Chapter 7 bankruptcy petition in this Court.
He disclosed a monthly net income of $1,461 in Schedule I and monthly expenses of
$1,440 in Schedule J, thus affording him excess income in the amount of $41.75 per5
Case 05-01765 Doc 37 Filed 10/12/06 Page 3 of 14

4
month. On July 13, 2005, he filed the instant adversary proceeding against PHEAA
seeking to discharge his student loan debt. By letter dated August 5, 2005
[Defendant’s Exhibit B], AES/PHEAA assigned the loan to Educational Credit
Management Corporation (“ECMC”). On September 21, 2005, the debtor substituted
ECMC as a defendant.
After the debtor filed bankruptcy, he rejected the defendant’s offer of four
alternate repayment options for the Stafford Loan, with proposed monthly payments
ranging in amount from $37.62 to $74.10. At trial, the debtor testified that he cannot
afford to pay even the lowest of the amounts proposed. Tr. at 31.
The complaint sets forth two alternative grounds for discharging the loan, namely
(1) that its repayment would cause the debtor undue hardship, and (2) that the Allstate
Career School was not a bona fide educational institution, citing the fact that the school
is a “for profit”enterprise, that it assigned the debt to a collection agency and that truck
driving schools as a genre have been shown to be unscrupulous based upon numerous
complaints made to the Federal Trade Commission. Counsel for ECMC argued that
because the Stafford Loan was issued through the Federal Family Education Loan
Case 05-01765 Doc 37 Filed 10/12/06 Page 4 of 14

Section 523(a)(8) provides, as follows:6
§ 523. Exceptions to discharge.
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or
1328(b) of this title does not discharge an individual debtor from any
debt–
(8) unless excepting such debt from discharge under this paragraph
would impose an undue hardship on the debtor and the debtor’s
dependents, for–
(A)(i) 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 nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit,
scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as
defined in section 221(d)(1) of the Internal Revenue Code of 1986,
incurred by a debtor who is an individual[.]
11 U.S.C. § 523(a)(8) (2006).
5
Program and was guaranteed by AES/PHEAA, it qualified as a student loan. Section
523(a)(8) governs the dischargeabilty of student loan debts in bankruptcy.6
The debtor testified at trial that his rent had increased from $485 to $550 per
month, but that he no longer had the expense of $167 per month for auto insurance,
thereby increasing his excess monthly income to $143.75, a net gain of $102.
Case 05-01765 Doc 37 Filed 10/12/06 Page 5 of 14

6
CONCLUSIONS OF LAW
NONDISCHARGEABILITY OF STUDENT LOANS
“. . .[W]hereas the Bankruptcy Code focuses on the impact financial problems
have on individual debtors, Section 523(a)(8) concentrates on the impact individual
debtors have on future educational debtors and institutional creditors, particularly
unsecured creditors like TIFCU.” TI Federal Credit Union v. DelBonis, 72 F.3d 921,
937 (1st Cir. 1995). “The legislative history of the 11 U.S.C. § 523(a)(8) teaches us
that the exclusion of educational loans from the discharge provisions was designed to
remedy an abuse by students who, immediately upon graduation, filed petition for
bankruptcy and obtained a discharge of their educational loans. This was due to the
fact that unlike commercial transactions where credit is extended based on the debtor’s
collateral, income, and credit rating, student loans are generally unsecured and based
solely upon the belief that the student-debtor will have sufficient income to service the
debt following graduation.” Andrews Univ. v. Merchant (In re Merchant), 958 F.2d
738, 740 (6th Cir.1992), citing H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 466-75
reprinted in 1978 U.S.C.C.A.N. 5787). See also, O’Brien v. First Marblehead
Education Resources, Inc. (In re O’Brien), 419 F.3d 104 (2d Cir. 2005).
Case 05-01765 Doc 37 Filed 10/12/06 Page 6 of 14

7
THE DEBTOR HAS FAILED TO PROVE UNDUE HARDSHIP
A debtor seeking to discharge a government-guaranteed student loan must show
that not discharging the debt would impose an undue hardship. Educational Credit
Management Corp. v. Frushour (In re Frushour), 433 F.3d 393, 399 (4th Cir. 2005).
In Frushour, the Fourth Circuit adopted the test enunciated by the Second Circuit in
Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395, 396
(2d Cir.1987), whereby the debtor must show “(1) that the debtor 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 the debtor has made good faith
efforts to repay the loans.” 433 F.3d at 398, citing Brunner, 831 F.2d at 396. “Failure
to meet any one of the three prongs of the Brunner test results in a determination that
the loans are not dischargeable.” Simms v. USA Funds ( In re Simms), 328 B.R. 437,
440 (Bankr. D. Md. 2005). In Frushour, the Fourth Circuit held the student loan to be
nondischargeable based upon the failure of the debtor to satisfy the second and third
prongs of the Brunner test. 433 F.3d at 400.
The debtor has the burden of proving undue hardship by a preponderance of the
evidence. Frushour, 433 B.R. at 400; In re Blair, 301 B.R. 181, 184 (D. Md. 2003),
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8
citing Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L. Ed.2d 755 (1991),
and United States v. McGrath, 143 B.R. 820, 825 (D.Md.1992), aff'd, 8 F.3d 821 (4th
Cir.1993) (Table).
To prove “undue hardship,” one must demonstrate “suffering from truly severe,
and even uniquely difficult circumstances.” Craig v. Penn. Higher Education
Assistance Agency (In re Craig), 64 B.R. 854, 857 (Bankr. W.D. Pa.1986), cited in
U.S. v. Davis, 142 B.R. 293, 295 (S.D. Ind. 1992).
Based upon the evidence of the debtor’s income and employment since his
graduation from truck driving school, this Court finds that he has failed to show by any
standard of proof that repaying the loan in question will cause him an undue hardship
and that he cannot maintain a minimal standard of living. The debtor is gainfully
employed as a truck driver, albeit not a tractor trailer driver, one of the vocations for
which he received student aid, and he enjoys excess income after rather generous
deductions for non-essential expenditures. See Frushour, 433 F.3d at 401 (“nothing
in the Bankruptcy Code suggests that a debtor may choose to work only in the field in
which he was trained, obtain a low-paying job, and then claim that it would be an
undue hardship to repay his student loans,” citing U.S. Dep't of Educ. v. Gerhardt (In
the Matter of Gerhardt), 348 F.3d 89, 93 (5th Cir.2003)).
Case 05-01765 Doc 37 Filed 10/12/06 Page 8 of 14

9
The evidence indicates that Hayes could appropriately reduce certain
expenditures and make his student loan payments without falling below a minimal
standard of living. Cf. Levernier v. Educational Credit Management Corp. (In re
Levernier), 307 B.R. 684, 689 (C.D. Cal. 2004), where, as in the instant case, a debtor
with no dependents who was gainfully employed but whose finances were “tight” was
held to have failed to prove any undue hardship in repaying her student loans.
While the fact that the debtor was offered repayment plans that required
payments of as little as $37.62 per month may be relevant to a finding of a lack of good
faith in failing to repay the loans, Frushour, 433 F.3d at 402, the failure of the debtor
to satisfy the first prong of the Brunner test is sufficient to deny him relief. In the
Matter of Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993)(the first prong of Brunner
is a threshold inquiry and only when the debtor has satisfied the first prong should the
court go on to consider the remaining two prongs.) The debtor has failed to satisfy the
second prong of Brunner because he has produced no evidence of the presence of
factors beyond his control, such as debilitating physical or mental health, lack of mental
capacity or intelligence, or an inability to work, that prevent him from maintaining
employment now and in the future. See In re Mallinckrodt, 274 B.R. 560, 567-8 (S.D.
Fla. 2002)(applying the Brunner test to an employed debtor with no dependents).
THE DEBT IS A GOVERNMENT-GUARANTEED EDUCATIONAL LOAN
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10
The creditor has the burden of showing by a preponderance of the evidence that
the subject loan qualifies as an educational loan for purposes of discharge under
Section 523(a)(8). Joint Apprenticeship Comm. of United Ass'n Local Union No. 307
v. Rezendes (In re Rezendes), 324 B.R. 689, 693-4 (N.D. Ind.2004). In the instant
case, it is the creditor’s burden to prove by a preponderance of the evidence, that the
loan at issue was “made, insured or guaranteed by a governmental unit.” Sheer v.
Education Credit Management Corp., 245 B.R. 236, 240 (D. Md. 1999), aff’d, In re
Sheer, 229 F. 3d 1143 (4th Cir. 2000)(Table).
Educational loans are generally evidenced by a formal, express contract between
the student and the educational institution, reflected, as in the instant case, by the
issuance of a promissory note. In re Chambers, 348 F. 3d 650 (7th Cir. 2003); Boston
Univ. v. Mehta (In re Mehta), 310 F.3d 308 (3rd Cir. 2002); Cazenovia College v.
Renshaw (In re Renshaw), 222 F. 3d 82 (2d Cir. 2000).
“Congress included government guaranteed educational loans in the group of
presumptively nondischargeable debts because it believed that many student borrowers
were abusing the ‘fresh start’ policy by filing for bankruptcy and obtaining discharge
of educational debt soon after graduation, before making any significant attempts at
repayment.” Hiatt v. Indiana State Student Assistance Com’n, 36 F.3d 21, 24 (7th Cir.
1994), cert. denied, 513 U.S. 1154, 115 S. Ct. 1109, 130 L. Ed.2d 1074 (1995), citing
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11
In re Nunn, 788 F.2d 617, 619 (9th Cir.1986), and 3 Collier on Bankruptcy § 523.18,
at 523-148 & n. 2 (15th ed. 1985) (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 133
(1979)).
“By enacting section 523(a)(8), Congress sought principally to protect
government entities and nonprofit institutions of higher education – places which lend
money or guarantee loans to individuals for educational purposes – from bankruptcy
discharge. Because such loans are not based upon a borrower's proven
credit-worthiness, and because they serve a purpose which Congress sought to
encourage, section 523(a)(8) protects the lender when a borrower, who often would not
qualify under traditional underwriting standards, files a chapter 7 bankruptcy.” Santa
Fe Medical Services, Inc. v. Segal (In re Segal), 57 F.3d 342, 348 (3d Cir. 1995).
“. . .[T]he text of the Bankruptcy Code, the Federal Family Education Loan Program
(‘FFELP’), and [the debtor]’s promissory notes support nondischargeability. In other
words, it is the purpose, not the use, of the loan that controls. Treating FFELP
guaranteed loans uniformly, regardless of actual use, is true to the text and will prevent
recent graduates from reneging on manageable debts and will preserve the solvency of
the student loan system.” Murphy v. Penn. Higher Education Assistance Agency (In
re Murphy), 282 F.3d 868, 870 (5th Cir. 2002).
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In relevant part, Section 221(d)(1) of the Internal Revenue Code of 1986 defines7
a “qualified educational loan” to mean “any indebtedness incurred by the taxpayer
solely to pay qualified higher education expenses which are incurred on behalf of the
taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the
indebtedness was incurred, which are paid or incurred within a reasonable period of
time before or after the indebtedness is incurred, and which are attributable to
12
The loan at issue is a government-guaranteed educational loan funded through
a Federal post-secondary educational loan program. Section 481 of the Higher
Education Act of 1965 (20 U.S.C. 1088) includes “any college, university, vocational
school, or other postsecondary educational institution” as educational institutions that
are eligible to participate in such student aid programs. The debtor introduced no
evidence to show that Allstate Career School was not eligible to participate in the
program as a vocational school. Nothing in the statutes cited required that such schools
be non-profit institutions in order for their students to qualify for student aid.
At trial, the debtor acknowledged that he signed a promissory note for the
Stafford Loan to pay the cost of tuition. The fact that the loan was granted at his
request and guaranteed by a Federal agency for educational purposes constitutes prima
facie proof that it was a qualified educational loan and that Allstate Career School was
a qualified educational institution. Because the debtor presented no contrary evidence,
the complaint must be dismissed. It is not the province of the bankruptcy court to
“second-guess” the propriety of the agency in granting the loan.7
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education furnished during a period during which the recipient was an eligible student.”
26 U.S.C. § 221(d)(1),
Section 25A(f)(2) of the Internal Revenue Code defines an “eligible educational
institution” to mean “an institution which is described in section 481 of the Higher
Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of
this section, and which is eligible to participate in a program under title IV of such
Act.” 26 U.S.C. § 25A(f)(2).
13
ORDER ACCORDINGLY.
END OF OPINION
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14
cc: Rand L. Gelber, Esquire
One Church Street
Rockville Maryland 20850
Attorney for the Defendant
Educational Credit Management Corporation
c/o Rand L. Gelber, Esquire
One Church Street, Suite 802
Rockville, Maryland 20850
John E. Beverungen, Esquire
Baltimore County Office of Law
Old Courthouse
400 Washington Avenue, 2nd Floor
Towson, Maryland 21204
Attorney for the Plaintiff
Mr. Justin J. Hayes
4026 Hilton Road, Apartment 2
Baltimore, Maryland 21215
Debtor
Joseph J. Bellinger, Esquire
Ballard Spahr Andrews & Ingersoll, LLP
300 East Lombard Street, 18th Floor
Baltimore, Maryland 21202- 3268
Chapter 7 Trustee
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