Opinion
In Bankruptcy Case No. 01-70985, Adv. Nos. 01-7172, 01-7173
May 13, 2002
OPINION
The issue before the Court in these two adversary proceedings is whether requiring the Debtor to repay his student loans would impose an undue hardship on the Debtor so as to render the debts nondischargeable pursuant to 11 U.S.C. § 523(a)(8).
The Debtor, John C. Redfern, filed a petition pursuant to Chapter 7 of the Bankruptcy Code on March 16, 2001. The Debtor's Statement of Financial Affairs shows that he made $13,400.95 in 2000 and $8,589.10 in 1999. He owned a publishing business known as S.B.C.A.P. from 1988-2000. His schedules showed that he owned no real property and personal property which he valued at $1,855.
He scheduled two secured claims totaling $20,790.71 on leased equipment. Mr. Redfern scheduled unsecured claims totaling $169,913.08: approximately $80,000 on credit cards and $90,000 on two student loans. The student loans are the subject of these adversary proceedings.
The Debtor is 51 years old and single. He has no dependents. He lives in Palmyra, Illinois, a small town approximately 40 miles southwest of Springfield. He lives in a house which he values at $16,000 to $17,000. The house is owned by a trust; the Debtor is the grantor and trustee of the trust. The Debtor's motor vehicle, a 1995 Mercury Tracer, is also owned by the trust.
The Debtor can best be described as a professional student. He has two bachelors degrees, including one in accounting. He also has masters degrees in business administration, public administration, and economics. He also spent the summer and fall of 1999 working on his PhD in economics. He has written four books, all self-published and unprofitable. He is currently working on a book about small town America. The concept of the book is to visit various Palmyras around the country and write about them.
The Debtor previously filed bankruptcy in 1988. He testified that he has not had a steady source of income for 15 years. He is currently working as a telemarketer. He has had the job for two weeks and is netting $150 per week. He has had other telemarketing jobs over the past few years. He also has worked two stints for CCB, a credit services company. He was making $8 per hour, but he left his second stint there in April because of a lack of job security and personality issues. He described his leaving as "mutual".
The Debtor used the student loans at issue to acquire his masters of public administration and masters of economics from the University of Illinois at Springfield. He received his masters of economics degree in January, 1999. He also used the loans for work on his PhD of economics at Southern Illinois University in the summer and fall of 1999. He said that the work on the PhD "didn't work out".
Mr. Redfern testified that his degrees are not doing anything to help him find gainful employment. He did not know why this was the case. He stated that he has looked all over the country for employment, but he has not received any full-time offers at decent wages. However, he could not identify any companies that he sought employment with in the last month. Mr. Redfern does not foresee any employment taking advantage of his degrees. He testified that age has become a factor in seeking full-time employment.
Mr. Redfern has shown an ability to earn money. For example, he earned $12,000 in the first four months of 2000. However, he had an adjusted gross income of only $9,300 for all of 2001.
Mr. Redfern testified that the purpose of the trust which holds his house and car was to start planning for his retirement. It is unclear what he will be retiring from.
Mr. Redfern testified that he has looked into the Income Contingent Repayment Plan, 34 C.F.R. § 685.208(F), but he decided not to enroll in it. He concluded that it was a way to bypass the undue hardship provision of § 523(a)(8), a conclusion shared by this Court. See In re Herrmann, Case No. 99-70791, Adv. No. 99-7058 (Bankr.C.D.Ill. Feb. 7, 2000).
Mr. Redfern described his health as good but not perfect. He stated that his health was deteriorating, but he could not point to any specific ailments.
Mr. Redfern lives modestly. He estimated his monthly expenses at $750 per month, including $200 for food, $100 for gas, $150 for utilities, $40 for telephone service, and $30 for water. His only luxuries are cable television, a computer with internet service, and $40 haircuts.
The immediate question raised by the foregoing facts is this: Why would two government agencies extend $90,000 in student loans to an individual who has never had a steady source of income? The answer is that student loans are made without regard to the borrower's creditworthiness. In re Speer, 272 B.R. 186, 192 (Bankr.W.D.Tex. 2001). Student loans are granted only upon a debtor establishing need. In re Doersam, 849 F.2d 237, 240 (6th Cir. 1988), quoting State Education Assistance Authority v. Johnson, 43 B.R. 1016, 1021 (E.D.Va. 1984). In return, the government imposes a "quid pro quo" through § 523(a)(8) which bars discharge of student loans in all but extreme cases. (The Court notes that credit card companies, which are supposed to extend credit only upon a showing of creditworthiness, extended $80,000 of credit to Mr. Redfern, all of which was discharged in this bankruptcy case.)
The Debtor filed two adversary proceedings for the purpose of discharging his student loans under the undue hardship provision of § 523(a)(8). Adversary No. 01-7172 involves $61,162 in Stafford loans which were guaranteed by the Illinois Student Assistance Commission. The Illinois Student Assistance Commission has filed claims totaling $77,383.55. Adversary No. 01-7173 involves federal direct student loans with the United States Department of Education. The United States Department of Education asserts that it was owed $18,698.70 as of November 14, 2001.
In determining whether a student loan is dischargeable under 11 U.S.C. § 523(a)(8), the Seventh Circuit Court of Appeals has adopted the Second Circuit's three-pronged Brunner test, see Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2nd Cir. 1987); Goulet v. Educational Credit Management Corp., 284 F.3d 773(7th Cir. 2002); In re Roberson, 999 F.2d 1132 (7th Cir. 1993). Under this test, the Debtor must demonstrate (i) that he cannot maintain, based upon current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loans; (ii) that additional circumstances exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (iii) that the Debtor has made good faith efforts to repay the loans. Roberson, supra, 999 F.2d at 1135. The Debtor has the burden of establishing each element of the test by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654 (1991). If the Debtor fails to establish any one of the elements, the test has not been met and the Court need not continue the inquiry. Roberson, 999 F.2d at 1135.
The first prong of Brunner requires the Debtor to show that he cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if he is forced to repay his student loans. This analysis may be broken down into two parts: (i) an evaluation of the debtor's present standard of living based upon his lifestyle attributes which appear in the record, and (ii) whether the forced repayment of the student loan obligation will preclude the debtor from maintaining a minimal standard of living. In re Barron, 264 B.R. 833, 840 (Bankr. E.D. Tex. 2001). A debtor seeking to obtain an "undue hardship" discharge of a student loan does not have to "live in abject poverty." In re Faish, 72 F.3d 298, 305 (3rd Cir. 1995). Nevertheless, the debtors are expected to live within the strictures of a frugal budget for the foreseeable future. In re Ritchie, 254 B.R. 913, 917-18 (Bankr.D.Idaho 2000).
In deciding whether the Debtor can maintain a minimal standard of living if required to repay the student loans, the Court looks to the Debtor's monthly income and expenses. It is clear that Mr. Redfern cannot maintain a minimal standard of living for himself based upon his current income and expenses. At the time of the hearing, Mr. Redfern's yearly expenses, without factoring in the student loan debt, were approximately $9,000. This is about what he made in 2001. In addition, he testified that he is two months behind in his light bill and that he will probably need food stamps in the near future. Under these circumstances, Mr. Redfern has established the first prong of the Brunner test.
The second prong of the Brunner test requires the Debtor to prove that a present inability to make payments on their student loans is likely to continue for the reasonably foreseeable future. This second prong:
imputes to the meaning of the `undue hardship' a requirement that the debtor show his dire financial condition is likely to exist for a significant portion of the repayment period. . . . Accordingly, the dischargeability of student loans should be based upon the certainty of hopelessness, not simply a present inability to fulfill a financial commitment.
Roberson, supra, 999 F.2d at 1135-36.
The Debtor's attorney described this case as a "classic" case of undue hardship. The "classic" case of undue hardship involves illness, lack of job skills, a failure to attain a degree, a large number of dependents, or some combination of these. In re Kettler, 256 B.R. 719, 723 (Bankr.S.D.Tex. 2000). See In re Roberson, supra, 999 F.2d at 1137 (barriers to lack of ability ro repay for several years include psychiatric problems, lack of usable job skills, and severely limited education); In re Hurley, 258 B.R. 15 (Bankr.D.Mont. 2001) (60 year-old debtor had serious and permanent health problems, no medical insurance, and few marketable skills); In re Brown, 247 B.R. 228 (Bankr.N.D.Ohio 2000) (debtor unable to work because of medical injuries sustained in two automobile crashes); In re Green, 238 B.R. 727 (Bankr.N.D.Ohio 1999) (mental health problems); In re Markley, 236 B.R. 242 (Bankr. N.D. Ohio 1999) (single mother, 10th grade dropout, unable to complete community college degree). In this case, there was no evidence of any physical or mental illness, the Debtor has marketable job skills, three advanced degrees, and no dependents.
The Debtor argues that his age and the amount of his student loans mandate a finding of dischargeability. The Seventh Circuit's recent opinion in Goulet is instructive on this point. Mr. Goulet was 55 years old, had student loans totaling $76,000, and had completed all of his required courses for a masters degree in psychology. (He failed to complete a statistical analysis for his thesis.) In finding the student loans to be nondischargeable, the Seventh Circuit stated the following:
By returning to graduate school at the age of 45 and voluntarily assume the debt, Goulet must have believed that he had future earnings potential. . . . Goulet is an intelligent man. The record does not reveal that he lacks usable job skills or that he is hindered by a limited education. In fact, because of the loans, he received an excellent education. The natural conclusion, when considering his exemplary educational record and nearly-complete graduate work, is that Goulet can apply himself when he desires to do so. Moreover, even if Goulet's prospects in the mental health field or the insurance industry are foreclosed, there is no evidence that Goulet is unemployable in other areas. Rather, the record indicates that Goulet has simply failed to diligently pursue employment such that he would be able to alleviate his financial burdens.
In re Goulet, supra, 284 F.3d at 779.
Mr. Redfern's student loan debt exceeds Mr. Goulet's student loan debt by $14,000, but Mr. Redfern is also four years younger that Mr. Goulet. Moreover, Mr. Redfern does not have the substance abuse issues or felony convictions which were problematic for Mr. Goulet. Further, whereas Mr. Goulet has a nearly-completed graduate degree, Mr. Redfern has three completed graduate degrees. Like Mr. Goulet, Mr. Redfern is intelligent and has usable job skills. It is clear that Mr. Redfern's position is at least as good, if not a lot better, than that of Mr. Goulet.
A debtor cannot satisfy the second prong of the Brunner test when his financial distress is self-imposed. It is clear to the Court that Mr. Redfern enjoys two things — going to school and writing books. He has used credit cards and student loans to support himself while he pursued these passions. He has resorted to telemarketing work or similar types of jobs when he needed some extra cash. The Court does not believe that Mr. Redfern has diligently pursued the type of employment which would help him pay off his student loans. The Court recognizes that Mr. Redfern would probably like a job as a college professor. While there is a limited market for professors, Mr. Redfern's background makes him employable in other areas. There was no evidence as to why Mr. Redfern has not taken advantage of his accounting degree.
Finally, the third prong of the Brunner test requires the Debtor to show that he has made a good faith effort to repay his outstanding loans. This prong looks at the Debtor's efforts to "obtain employment, maximize income, and minimize expenses." Roberson, supra, 999 F.2d at 1136.
Mr. Redfern testified that he thought he showed good faith by obtaining deferments. However, the Seventh Circuit has observed that "it is hard to see good faith in paying nothing when obtaining payment deferrals." In re Goulet, supra, 284 F.3d at 779. The evidence showed that the Debtor has minimized his expenses, but the evidence was not convincing that Mr. Redfern has attempted to maximize his income. Further, there was little evidence that Mr. Goulet has made a good faith effort to make actual payments on his loans. Indeed, Mr. Redfern has taken what few assets that he does have — his house and his car — and placed them in a trust beyond the reach of his creditors. Under these circumstances, Mr. Redfern has not satisfied the good faith prong of the Brunner test.
For the foregoing reasons, Mr. Redfern's debts to the Illinois Student Assistance Commission and the United States Department of Education are determined to be nondischargeable.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons set forth in an Opinion entered this day, IT IS HEREBY ORDERED that John C. Redfern's debt to the Illinois Student Assistance Commission be and is hereby determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(8).
IT IS FURTHER ORDERED that John C. Redfern's debt to the United States Department of Education be and is hereby determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(8).