- Hurst v. Southern Arkansas University (Case No. 15-6031, July 19, 2016)
- The bankruptcy court did not err in holding that the debtor did not meet her burden of proving that repayment of her student loan would impose an undue hardship on her.
- Procedural context:
- Debtor appealed from bankruptcy court's order denying her request to discharge her student loan for undue hardship pursuant to Section 523(a)(8).
- Debtor obtained a $4,000 federal Perkins student loan while attending college, majoring in education, for the 1994-1995 academic year. At the end of the school year she broke her ankle for which she had surgeries and therapy. She subsequently was involved in a car accident further preventing her from returning to college. She never returned to school. Debtor is 66 years old and plans to work until age 70. She has vision problems, hearing problems, as well as some occasional problems with her ankle. Debtor is employed, working part-time and collects social security benefits. Before debtor defaulted on the student loan, the regular payment amount was $42. Debtor never made a payment on the loan. As of the date of trial, the loan balance was $7,477. Debtor filed a chapter 7 case in February 2011. She did not list the college as a creditor but later reopened her case in 2014 to seek a discharge of the student loan as an undue hardship pursuant to Section 523(a)(8). Under Section 523(a)(8), the BAP observed that in the Eighth Circuit the courts apply a "totality of the circumstances" test in determining whether a student loan should be discharged as an undue hardship. Under this test, the courts must consider (1) the debtor's past, present, and reasonably reliable future financial resources, (2) the debtor's reasonable and necessary living expenses, and (3) any other relevant fats an circumstances. The debtor has the burden of proving undue hardship by the preponderance of the evidence, which burden has been described as rigorous. Put simply, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt -- while still allowing for a minimal standard of living -- then the debt should not be discharged. The BAP noted that when a student loan dischargeability adversary proceeding is brought years after the debtor's discharge, as was the situation here, the court should consider the debtor's financial circumstances between her chapter 7 discharge and the trial date. As to the first factor of the above test, debtor testified concerning her employment history. Debtor's pay stubs, schedules, checking account statements, and tax returns were presented as evidence at trial. The bankruptcy court found that debtor's average income, together with her social security benefits, averaged about $1,818 per month, which the BAP found amply supported by the evidence. As to the second factor, whether the debtor's living expenses are reasonable and necessary, the college did not argue that any of debtor's specific expenses were unreasonable or unnecessary. The question here was whether debtor had income remaining after such expenses with which to make her student loan payments. The evidence concerning debtor's current expenses were sparse. Debtor testified that she no longer had a car payment of $297, but could not point to any specific expense which ate up those extra funds. The bankruptcy court had found that part of the $297 could go toward student loan payments, which finding the BAP found supported by the evidence. The BAP noted that the Eighth Circuit has repeatedly said that "a court may not engage in speculation when determining net income and reasonably necessary living expenses." With income averaging about $1,800 and no evidence as to how debtor's expenses might have otherwise have changed since 2011, the record showed that she had sufficient income to make the $42 student loan payment. As to the last factor of the above test, the BAP noted that courts in the Eighth Circuit look to a number of facts and circumstances to assist in making the determination concerning other relevant facts and circumstances, which include: (1) total present and future incapacity to pay debts for reasons not within the debtor's control, (2) whether the debtor has made a good faith effort to negotiate a deferment for forbearance of payment, (3) whether the hardship will be long-term, (4) whether the debtor has made payments on the loan, (5) whether there is permanent or long-term disability of the debtor, (5) the ability of the debtor to obtain gainful employment in the area of the study, (7) whether the debtor has made a good faith effort to maximize income and minimize expenses, (8) whether the dominant purpose of the bankruptcy petition was to discharge the student loan, and (9) the ratio of student loan debt to total indebtedness. Apply those factors the bankruptcy court found the following: (1) debtor had the ability to make some payments on her student loan debt, (2) debtor had made no effort to obtain deferment or forbearance on her loan, (3) debtor had the ability to make payments at least until her retirement, (4) debtor had not made payments on the loan, (5) debtor had some hearing and vision problems which could affect her ability to earn income, but there was no evidence that such problems would lead to a reduction of her income during the time she continued to work, (6) debtor had not been able to obtain gainful employment in the field of education, (7) there was no evidence that debtor had attempted to supplement her income during her seasonal unemployment periods or that she had used tax refunds toward student loan payments. No evidence was offered as to the last two factors. Debtor asserted that the bankruptcy court placed a significant amount of emphasis on the fact that she had not made a single payment on, or otherwise attempt to even address, her student loan in the twenty years since she incurred them, despite the fact that they payments were only $42 per month. The bankruptcy court concluded that, to the extent that requiring debtor to repay the loan -- given her age and her current balance of nearly $7,500 -- could be viewed as an undue hardship, those circumstances were of debtor's own making. The BAP noted that the Eighth Circuit has said that "while the size of the student loan debts relative to the debtor's financial condition is relevant, this should rarely be a determining factor: it would be perverse to allow the debtor to benefit from [his] own inaction, delay and recalcitrance by automatically granting a discharge simply because the debt is a sizeable one." While the bankruptcy court acknowledged that debtor's circumstances were "sympathetic", debtor had not proven that she lacked ability to make student loan payments while maintaining a minimum standard of living. The other facts and circumstances considered did not justify a different conclusion. The BAP noted that the availability of an income-based repayment plan is an important factor to consider in discharging student loans. While the college here was not subject to the Department of Educations income based programs, it testified that the loan could be "rehabilitated" through twelve months of negotiated payments, at which time the loan would come out of default and debtor could resume the $42 monthly payments. Debtor, however, never applied to participate in that rehabilitation program. In any event, the evidence showed that she had the ability to make payments in excess of $42 per month, at least during the year required. The BAP stated that student loan cases must be decided based only on the evidence offered. Debtor failed to meet her burden that she lacked the present ability to make payments on her student loan.
- Federman, Saladino, Shodeen (dissenting)
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