Wright v. Sallie Mae et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF MISSOURI
In re: )
)
LAVERNE WRIGHT, ) Case No. 04-42330
)
Debtor. )
)
)
LAVERNE WRIGHT, )
)
Plaintiff, )
)
v. ) Adv. No. 04-5138
)
SALLIE MAE and EDUCATIONAL CREDIT )
MANAGEMENT CORPORATION, )
)
Defendants. )
MEMORANDUM OPINION
On July 14, 2004, the Debtor, LaVerne Wright, initiated the above-captioned adversary
proceeding to determine the dischargeability of her student loan debt under 11 U.S.C. § 523(a)(8). On
January 21, 2004, the court held a hearing to determine the issue central in this case, as it is to all §
523(a)(8) actions – that is, whether excepting the student loan debt from discharge would impose an undue
hardship on the Debtor. At the hearing, the Debtor, who is not represented by counsel, was the only
witness. Counsel for Defendant Educational Credit Management Corp. (“ECMC”), assignee of the loans
previously held by Sallie Mae, cross-examined the Debtor and made a closing argument. The court took
the matter under advisement and, upon consideration of the evidence and applicable law, finds that the
Debtor will suffer an undue hardship unless her student loan debt is discharged. Accordingly, for the
reasons stated below, the Debtor’s student loan debt owed to ECMC will be discharged pursuant to 11
U.S.C. § 523(a)(8).
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1 Section 523(a)(8) of the Bankruptcy code provides:
(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) 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 any 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).
2
I. DISCUSSION
From 1988 to 1994, the Debtor received approximately $44,000 in student loans to finance her
education at the University of Missouri at Kansas City (“UMKC”). In 1996, she consolidated the loans
with Sallie Mae. The original principal amount of the consolidation loan was $43,324.46. Since 1996, the
Debtor has only made approximately $700 in payments on the loan. The current loan balance, including
fees, capitalized interest, and accrued interest, is $102,144.99. Notwithstanding the actual amount due,
counsel for ECMC announced at the outset of the hearing that ECMC would stipulate to the discharge of
all amounts over $54,000, and would accept payments of $300.00 a month for 15 years to pay off the
balance. Accordingly, the Court will use those figures in its determination of undue hardship.
Due to the fact intensive nature of the § 523(a)(8) undue hardship analysis, the remainder of the
facts necessary to the Court’s holding will be developed in the court’s analysis below.
II. ANALYSIS
Section 523(a)(8) of the Bankruptcy Code provides that educational or student loans are excepted
from the general discharge provisions of the Bankruptcy Code "unless excepting such debt[s] from
discharge ... will impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. §
523(a)(8).1 Congress did not define undue hardship; therefore, it has been left to the courts to decide, on
a case-by-case basis, what constitutes undue hardship. The Eighth Circuit has adopted the "totality of the
circumstances" test as set forth in Andrews v. South Dakota Student Loan Assistance Corp. (In re
Andrews), 661 F.2d 702, 704 (8th Cir. 1981). Despite being denominated “totality of circumstances,”
the test actually focuses on three specific areas; although, the last area is, indeed, a catch-all category: (1)
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2 This figure is slightly more than what the Debtor listed in her schedules and slightly less than
stated in the interrogatory answers provided to ECMC.
3 The Debtor testified that her mother and two siblings have died of cancer.
3
the debtor's past, current, and reasonably reliable future financial resources; (2) the reasonable necessary
living expenses of the debtor and the debtor's dependents; and (3) any other relevant facts and
circumstances unique to the particular bankruptcy case. Long v. Educ. Credit Mgmt. Corp. (In re
Long), 322 F.3d 549, 554 (8th Cir. 2003). Essentially, undue hardship exists where the debtor’s
reasonable future financial resources will not allow the debtor to repay the student loan and maintain a
minimal standard of living. Id. The burden is on the debtor to prove undue hardship by a preponderance
of the evidence. Andrews, 661 F.2d at 704. In this case, despite ECMC’s generous offer to write off
close to one-half of the outstanding loan balance and the Debtor’s income, the Court believes that the
Debtor has established by a preponderance of the evidence that excepting her student loan from discharge
will impose an undue hardship.
Applying the totality of the circumstances test to the instant case, the Court will examine each factor
separately.
1. The Debtor's past, present, and reasonably reliable future financial resources
Based on the most recent pay stub entered into evidence (for the period ending 12/31/04), the
Court finds that the Debtor has a monthly gross income of $2,332.62 and a monthly net income of
$1,757.90.2 The only voluntary deductions made from her gross income are for life ($17.50), disability
($68.10), and cancer insurance ($64.08). At the hearing, ECMC suggested that the amounts expended
for disability and cancer insurance might be excessive or at least duplicative, but the evidence adduced did
not conclusively establish those allegations and, moreover, in light of the Debtor’s family history of cancer,3
the Court believes that the additional insurance is reasonable.
ECMC also questioned the deduction from the Debtor’s gross income for retirement, but the Debtor
offered credible evidence that this deduction is not voluntary and, thus, that money would not be available
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4 All public school teachers in Missouri are required to participate in and contribute to the
teacher and school employee retirements systems established pursuant to Chapter 169 of the Missouri
Revised Statutes. The current contribution rate required of teachers is 7.5 percent of their salary.
4
to repay the student loan debt.4
Annualized, these figures indicate that the Debtor can expect a gross income of $31,789.92 in
2005. This represents a $3,361.00 increase from 2003 and a $5,292.00 increase from 2002. The Debtor
testified that neither raises nor continued employment was guaranteed, but on the other hand no evidence
was adduced to show that she was likely to lose her job in the immediate future. As is true for most public
employees, the yearly raises approximate or lag behind inflation and therefore do not represent a true
increase in salary. Therefore, the Court bases its determination of undue hardship on a projected continued
income of $31,789.92.
Taken by itself, the Debtor’s considerable income weighs significantly in favor of a finding that there
is no undue hardship, especially in comparison to the majority of findings of undue hardship issuing from
this Court, in which the debtors hover perilously close to the poverty line. This debtor is nowhere near the
poverty line, which is approximately $9,000 for an individual in the Debtor’s circumstances. But financial
resources are only one of the factors used to determine undue hardship, and this Court does not believe
that it is in society’s interests or that it was the intent of Congress that debtors be forced to live in poverty
just so they can repay their student loan debts. In light of the other factors present in this case, the finding
of undue hardship should not be so surprising.
2. The reasonable, necessary living expenses of the debtor and the debtor's dependents
The Court was presented with evidence of the Debtor’s expenses from three sources – the
Debtor’s schedules, her interrogatory answers supplied to ECMC, and her testimony. Because this case
pushes the envelope of what may be considered undue hardship, the Court calculated the Debtor’s
expenses by reviewing them in the light most favorable to ECMC and adopting the lowest reasonable
amount adduced for each category of expense, with several exceptions which are noted. Using this
methodology, the Court concludes that the Debtor has reasonable necessary living expenses of $1,578.00
a month. The chart below and notes that follow detail the Court’s findings.
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Expense Schedule J Answer to
Interrogatory
Figures Used Note
Rent 475 475 475
Electricity and Heating 275 220 220
Telephone 65 50 50
Water and Sewer 80 65 65
Home Maintenance 50 50 50
Food 400 400 300 1
Meals Outside Home 0 10 0
Clothing 30 30 30
Laundry and Dry Cleaning 48 60 48
Medical and Dental 20 85 85 2
Transportation 60 50 50
Recreation 10 15 15 3
Charitable Contributions 10 30 30 4
Auto Insurance 150 130 130
Health Insurance 23 0 0 5
Life Insurance 0 23.10 0 5
Disability Insurance 33 0 0 5
Personal Property Tax 30 0 30 6
Personal Items 0 35 0
TOTAL EXPENSES $1,759 $1,728.10 $1,578
Notes:
1. ECMC argued at trial that the Debtor’s food budget was excessive for a single person not on a
special diet and offered evidence that the USDA’s estimated food budget under a “liberal” plan
was only $235.90 a month. The Court agrees that $400.00 is excessive for a single person, but
considering the Debtor’s family history of cancer, it is reasonable that she would alter her diet to
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reduce the risk of cancer, and, frankly, healthier food tends to cost more. Therefore, the Court
finds that the Debtor’s reasonable food expense should be $300.00 a month.
2. The Debtor testified at trial that the increase in medical expenses is the result of the cost of
medications she has been put on since she filed her schedules. That cost, in addition to the Court’s
belief that the amount listed in her interrogatory answer is reasonable (and more realistic), led to
the adoption of the higher figure.
3. Whether the meager $5.00 increase in the recreation category is simply a result of the passage of
time between her bankruptcy filing and answer to interrogatory, or an underestimation on her
schedules, the $15.00 a month expense for recreation is very reasonable, especially in view of the
fact that the Debtor, somewhat incredibly for these times, does not have cable television.
4. Although the $30.00 allotted for charitable contributions in her interrogatory answer represents a
three-fold increase from the amount listed in her schedules, the amount is still reasonable and the
Court is disinclined to criticize reasonable contributions to charity. Moreover, the $20.00 increase
would not affect the Court’s conclusion here.
5. With the exception of auto insurance, all of the insurance expenses listed in the Debtor’s schedules
or interrogatory answers are duplicative of deductions from her gross income.
6. The Debtor’s omission in her Schedule J of a monthly set aside for annual personal property taxes
appears to have been an oversight. At any rate, it is both reasonable and prudent to account for
such an expense.
Subtracting the $1,578.00 in reasonable monthly expenses from the Debtor’s monthly net income
of $1,757.90 leaves $179.90 which, although not insignificant, is not enough to repay her student loans,
even based on the generous offer of ECMC to write down the debt by almost 50% to $54,000.00 and
accept payments of $300.00 a month for 15 years. Assuming that the Debtor could afford payments of
$300.00 a month in the first instance, it is unlikely that she would be able to continue the payments for any
long period of time, given her age (53) and health.
3. Other relevant facts and circumstances unique to the particular bankruptcy case
The Court recognizes that $120.00 of “belt tightening” would yield enough disposable income in
this case to enable the Debtor to make the $300.00 a month payment to ECMC. But as little as $120.00
may seem, the Debtor’s current budget cannot accommodate it now, and she’ll be even less likely to be
able to afford it in the future – primarily because she will almost certainly need to replace or make major
repairs to her car, a 10-year-old Nissan with over 100,000 miles on it. A modest $200.00 car payment
would not have raised any eyebrows if it had been included in the Debtor’s current expenses, and that
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would have created a monthly deficit for the Debtor – a situation the Court hopes the Debtor does not find
herself in in the future, but a situation the Court believes will likely occur if her student loan is not
discharged. The Court does not know how the Debtor will replace her present car when that becomes
necessary, for there is no indication that she has even the most meager of savings.
Additionally, there is no evidence that the Debtor is wasteful or spends her money on anything other
than the necessities of life. She has lived in the same rented house for 15 years. She does not, apparently,
have a cell phone, an item that many of us now consider a necessity. As previously noted, she does not
have cable television, and the Court suspects she does not have a computer. She testified that she has not
taken prescribed medications for her health conditions because she could not afford the drugs.
The Court is cognizant that the result in this case is partially a function of the large amount of student
loan debt owed by the Debtor. If the loan were smaller and required payments of only $50.00 or $100.00
a month, the result here would likely have been different, inasmuch as the Debtor would have been able
to afford a smaller payment (although the risk of a deficit would still loom when her car needs to be repaired
or replaced). And the Court acknowledges the risk that this holding might be interpreted as condoning the
unreasonable accumulation of more student loans in an attempt to tip the totality of circumstance test in their
favor. But that simply does not appear to have been the Debtor’s intent here, and it is unlikely that others
would be so farsighted (and dishonest) in their financial planning. Furthermore, while the Court is hesitant
to discourage Sallie Mae or ECMC from assisting students in need, Sallie Mae and ECMC must bear part
of the risk of lending students large sums of money when repayment of those sums may have the effect
demonstrated in this case.
Therefore, for the reasons stated above, the Court finds that excepting the Debtor’s student loan
debt to ECMC from discharge will impose an undue hardship on the Debtor.
III. CONCLUSION
This opinion constitutes the Court’s findings of fact and conclusions of law. A separate order shall
be entered pursuant to Fed. R. Bankr. P. 9021.
ENTERED this 17th day of February 2004.
/s/ Jerry W. Venters
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United States Bankruptcy Judge
A copy of the foregoing mailed electronically or
conventionally to:
LaVerne Wright
N. Larry Bork
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