Roth v. Educational Credit Management Corp. (In re Roth)

9th Cir. BAP Case No. AZ-11-1233RnPaKi; Adv. No. 2:10-ap-0764-RJH
The Ninth Circuit BAP REVERSED the Bankruptcy Court's ruling that the Debtor's student loans were non-dischargeable and REMANDED the case to the Bankruptcy Court for purposes of entering a judgment discharging the Debtor's FFELP loans. The BAP entered its ruling without oral argument presented by either party. The BAP agreed with the Bankruptcy Court’s ruling that the Debtor had met the first prong of the "Brunner Test"; however, the BAP reversed the lower court's ruling that the Debtor failed to meet the third prong of the Brunner Test. The BAP determined that the Brunner Test is based on a mixed question of fact and law. ECMC met its initial burden that the education loans were within 11 U.S.C. § 523(a)(8) parameters. The third prong of the Brunner Test based on non-exclusive facts such as (1) debtor’s efforts to procure employment (2) debtor’s efforts negotiate a payment plan (3) whether the debtor made any payments toward the student loan(s) or (4) whether debtor sought deferment / forbearance of the obligation. Citing various cases in the Ninth Circuit the BAP reasoned that lack of minimal voluntary payments toward student loans is not lack of good faith if Debtor did not have financial ability to make payment. The BAP determined that the preponderance of evidence provides (1) Debtor remained employed full-time until shortly before filing bankruptcy (2) Debtor used her job skills productively and (3) Debtor made effort to maximize income and minimize expenses. The BAP reasoned that the Debtor’s refusal to enroll in the income based repayment plan should not be weighed against the Debtor because of the Debtor’s age, medical condition, and limited income prospects. Moreover, the lack of voluntary payment is mitigated by the Debtor’s belief that the pre-Petition garnishments / offsets were being applied to the ECMC loan.
Procedural context:
In determining whether the Debtor’s student loan obligations were dischargeable, the Bankruptcy Court utilized the Brunner Test: (i) whether Debtor could maintain minimal standard of living based on current income and expenses (2) facts evidence that Debtor’s financial difficulties would continue for significant part of the Debtor’s future and (3) whether Debtor made a good faith effort to repay loans. The Bankruptcy Court held that Debtor met the first 2 prongs of this test; however, since Debtor did not make voluntary payments nor made any effort to renegotiate the student loan obligations, the Brunner Test had not been met. Thus student loans were non-dischargeable.
Prior to the Debtor filing for voluntary relief under Chapter 7 the Debtor obtained 13 federally guaranteed student loans under the Federal Family Educational Loan Program (“FFELP”). The Debtor took out an additional 5 student loans administered by the U.S. Department of Education (“DOE”). Due to family issues, the Debtor did not graduate from college. Debtor did not make any voluntary payments to FFELP, and by 2001 the Debtor had defaulted on all of the FFELP loans. Debtor did not follow up with a potential forbearance of her student loans and did not seek any type of restructuring of the student loans. The Debtor’s wages were garnished and some tax refunds offer set by the DOE. Debtor asserted that she was unaware there were two separate loans during this time. January 2009 Debtor filed Chapter 7 bankruptcy. As of the Petition Date, the Debtor suffered from various medical illnesses/conditions, some of which required surgery. Despite the medical issues, the Debtor asserted that she does not believe she is “totally disabled” unless her eye sight is affected by the medical conditions. Debtor filed an adversary against FFELP and DOE seeking to discharge the student loan obligations. After the adversary was commenced, the FFELP loans were assigned to Educational Credit Management Corporation (“ECMC”). Based on the administrative discharge, the DOE claims were dismissed. As of January 2011 ECMC asserted that the aggregate amount it was owed totaled $95,403.86. Between 2009 and 2011, the Debtor unsuccessfully applied for over 280 federal jobs. ECMC provided Debtor with various alternatives to potentially administratively discharge the student loan obligations; however, the Debtor did not pursue those options stating that the same options would be available if the Court determined that the ECMC obligation was non-dischargeable.
Hon. Thomas M. Renn (sitting by designation); Hon. Jim D. Pappas; and Hon. Ralph B. Kirscher.

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