Fonte v. Sallie Mae Servicing et al

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Order Entered.

Wa

j S Bankruptcy Judge
DatedyTuesday, July 19, 2005 9:35:49 AM

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

IN RE §
§
NICHOLAS MICHAEL FONTE § BEKNO. 04-00954

§
Debtor. §
§
NICHOLAS MICHAEL FONTE, §
§
Plaintiff. §

v. § APNO. 04-0083
§
SALLIE MAE SERVICING, AND §
EDUCATIONAL CREDIT MANAGEMENT §
CORPORATION, §
§
Defendants. §

MEMORANDUM OPINION AND ORDER
Facts

Debtor filed the instant adversary proceeding in order to discharge approximately $95,000 in
Federal Parent PLUS Student loans under the undue hardship provisions of 11 U.S.C. § 523(a}(8).
Debtor lives alone in Aurora, Illinois and is a 56 year old divorced man with three children. He has a
bachelor of science and a master of science degree and was employed for 27 years by Alcan
Aluminum, where he earned approximately $100,000 per year, including bonuses, in the last years of
his employment. Since his layoff from Alcan, Debtor experienced a two-year period of unemployment

during which time he sustained himself and his family obligations on his severance pay for most of the

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OS

first year, and by drawing from his Alcan retirement plan, which he still does. During that period of
unemployment, debtor actively sought employment, but eventually filed for Chapter 7 bankruptcy relief.

According to testimony, Debtor incurred approximately $80,000 of this Parent PLUS
obligation covering the educational expenses of his son, as is required under the terms of his divorce
settlement order. His son, a graduate of the University of Southem Califormia with a degree in Cinema,
is bipolar/depressive and currently unable to work. The other $15,000 was borrowed on behalf of his
second child.

Since the filing of his bankruptcy in March 2004 and this adversary action in June 2004, Debtor
has become employed as an Environmental Health and Safety Coordinator at a foam production facility
in Illinois. He now earns $69,000 per year, plus irregular bonuses averaging roughly $100 per month.
After much figuring by the parties at trial, the Court concludes that he nets approximately $5,600 per
month, $4,200 from his employment and $1,400 from his Alcan retirement account.

Debtor’s only significant debt is the subject student loan obligation. His monthly expenses
include $885 rent for a one bedroom apartment, approximately $140 for basic utilities, $95 for cable
television, $245 for telephone service, $400 for food, $125 for clothing, $50 for dry cleaning, $200 for
gasoline and car repairs, $218.79 for car insurance, $150 for medical, $50 for church donations, $100
for recreation, and $281.66 in alimony or support payments. Most significantly, and pursuant to his
divorce settlement order, Debtor pays for 67% of his youngest daughter’s $14,000 college tuition and
expenses, roughly $9,380 during the last academic year with two undergraduate years remaining. He
has not borrowed to meet this educational obligation.

Debtor owns his 2002 Toyota Camry outright, has no substantial cash accounts, and owns no

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real estate. He has no credit card debt or installment debts. He takes no elaborate vacations and does
not own a motorcycle, recreational vehicle, or boat.

Debtor had been current on the Parent PLUS payments throughout the time he was married until
six to seven months after his divorce. He testified that he stopped payment on the advice of an Indiana
lawyer upon contemplation of filing for bankruptcy. When asked if he could currently make the
payments, he indicated that he “probably could make close to the payment that [he had] before.” He
seeks discharge of the obligation in order to protect his future retirement. With a discharge he will be
able to discontinue drawing on his Alcan account and roll what remains of that account into his current

employer’s 401(k) plan so that he may “retire at a respectable age.”

Discussion
Section 523(a)(8) of the Bankruptcy Code permits an exception to the nondischargeability of
student loans. The exception exists when repayment of the student loan would impose an undue
hardship on the debtor.

A discharge ... does not discharge an individual from any debt—

* oe Ok

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

11 U.S.C. § 523(a)(8) (emphasis added).

The Bankruptcy Code supplies no specific guidance as to the determination of undue hardship.

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Rather, bankruptcy judges are to “exercise discretion in determining whether payment of the debt will
cause undue hardship on the debtor and his dependents, thus defeating the ‘fresh start’ concept of the
bankruptcy laws.” 4 Collier on Bankruptcy §| 523.14[2] (15th ed, Revised 2002). Courts have
developed a number of tests to determine if a debtors student loans should be discharged under §
523(a)(8). See e.g., Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661

F.2d 702 (8th Cir. 1981); Bryant v. Pennsylvania Higher Educ. Assistance Agency (In re Bryant), 72

B.R. 913 (Bankr. E.D. Pa. 1987). A majority of courts, however, have adopted the three-part test set
forth by the court in Brunner v. New York State Higher Educ. Services Corp, (In re Brunner), 831 F.2d
395 (2nd Cir. 1987). In Brunner, the Second Circuit Court of Appeals adopted a test which required,

a three-part showing: (1) that the debtor cannot, based on current

income and expenses, maintain 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 pericd of the student loans; and

(3) that the debtor has made good faith efforts to repay the loans.
Id. at 396.

In Ekanasi v. Educ. Resource Inst. (In re Ekanasi), 325 F.3d 541 (4th Cir. 2003), the Fourth

Circuit reviewed a bankruptcy court’s application of the Brunner factors, thereby giving its first published

stamp-of-approval to the Brunner undue hardship analysis. Accordingly, in the instant case, this Court

will utilize the three Brunner factors to determine whether repayment of the student loans will subject the

debtor to undue hardship.
First Prong - Inability to Maintain a Minimal Standard of Living

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There is no set standard of whether a lifestyle constitutes a “minimal’standard of living. Rather,
the determination of whether a debtor is unable to maintain a minimal standard of living if forced to repay
his or her educational debt involves each court applying “its own intuitive sense of what is a ‘minimal?
standard of living.” Cooper v. Educ. Credit (Inre Cooper), 277 B.R. 853, 857 (Bankr. M.D. Ga.
2002). This determination, required of bankruptcy courts by the Bankruptcy Code, has been described
as a decision of “how much personal sacrifice society expects from individuals who accepted the
benefits of guaranteed student loans but who have not obtained the financial rewards they had expected
to receive as a result of their educational expenditures.” Id. (citing 4 Collier of Bankruptcy, T]
523.14f2] (15th ed. Rev. 2001)).

“Minimal,” under the Brunner standard is a “flexible and subjective term that can only have
objective meaning in light of the particular facts of each case.” Afflitto v. United States of America (In re
Afflitto), 273 B.R. 162, 170 (Bankr. W.D, Tenn. 2001), The Bankruptcy Code does not “require
debtors to live ‘at or below poverty level to be entitled to a fresh start.” Id, (quoting Frattini, The
Dischargeability of Student Loans: An Undue Burden? 17 Bankr. Dev. J. 537, 573 (2001)). This
Court endeavors to examine “‘the overall living situation of the debtor,’ in an effort to ‘ensure the debtor
is not living an extravagant life, incurring unnecessary and frivolous expenses, and sitting on comfortabie
income or assets.”” Id.

As itemized on his Worksheet for Student Loan Hardship Discharge, most of Debtor’s monthly
expenses appear reasonable. A few, however, raise doubt that he has fully minimized his monthly
outlays. For example, his $95 per month cable television expense indicates that he has expanded or

premium service that the Court finds unnecessary for one seeking an undue hardship determination.

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Other examples which would militate against a finding that he is unable to maintain a minimal standard of
living if forced to repay his Parent PLUS obligation include his monthly telephone expense of $245 and
monthly food expenses of $400. That being said, no single factor points against such a finding more than
Debtor’s own testimony that, as conditions stand now, he “probably could make close to the payment
that [he had] before” by continuing to draw on his Alcan retirement. While Debtor would undeniably
prefer to preserve his Alcan retirement for his later years, it remains a legitimate asset upon which he is

able to draw in order to maintain his current standard of living while continuing to make his loan

payments.

Second Prong — Persistence of Condition

Having concluded that Debtor is able to maintain a minimal standard of living while making his
Parent PLUS payment, it is unnecessary to determine whether “‘additional circumstances exist indicating

that this state of affairs is likely to persist for a significant portion of the repayment period.” Brunner, 831

F.2d at 396. However, it is worth commenting that Debtor’s youngest daughter, for whom he pays
two-thirds of her coilege tuition and expenses, has only two years of undergraduate school remaining.
While he might pay for her graduate school beyond that two year point, it is too tenuous a proposition
for the Court to find, at this time, that his payments on her behalf constitute an additional factor that
indicate his current state of affairs is likeiy to persist.
Third Prong - Good Faith Efforts to Repay

The third prong of Brunner requires Debtor to have made good faith efforts to repay his student
loans. While most courts look exclusively at a debtor’s repayment history for prong three, others have

measured good faith in debtors’ efforts to obtain employment, maximize income, minimize expenses,

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participate in alternative repayment options, and whether the discharge itself is sought in good faith, as
opposed to a debtor intentionally creating the hardship. See Goulet v. Educ. Credit Mgmt. Corp., 284
F.3d 773 (7th Cir. 2002); Educ, Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302 (10th Cir. 2004);
O’Hearn v. Educ. Credit Mgmt, Corp,, 339 F.3d 559 (7th Cir. 2003).

While unnecessary to evaluate having already found against Debtor on prong one of the analysis,
Debtor has clearly made good faith efforts to repay the loans in the past.
Conclusion
Forcing Debtor to repay his Parent PLUS loans would not mean that he is unable to maintain a

minimal standard of living under the Brunner test. Therefore the Court cannot find that

nondischargeability will impose an undue hardship under § 523(a)(8) of the Bankruptcy Code.
Therefore, Debtor’s Parent PLUS loans are hereby NONDISCHARGEABLE, and it is SO
ORDERED.

The Clerk is directed to transmit copies of this order to the parties in interest.

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