Robert D. Berger, United States Bankruptcy Judge.
The Court is intimately familiar with the minute details of Debtors George Johnson and Melanie Raney-Johnson's financial life, as it has now conducted two trials on whether Debtors' sizeable student loan debt is eligible for discharge under 11 U.S.C. § 523(a)(8)
The Court has now held a second trial, focusing specifically on Debtors' potential earning capacity, the term of repayment of Debtors' loan, and the repayment options available to Debtors to restructure their student loan debt. The Court is happy to report that Debtors' earning capacity has significantly improved for the better, and that both the terms of repayment and restructuring options for Debtors' student loan have also improved, and therefore concludes that Debtors' student loan debt does not qualify for an undue hardship discharge under § 523(a)(8). The Court therefore denies judgment to Debtors on their § 523(a)(8) claim.
Debtors filed their pro se Chapter 7 bankruptcy petition more than 6 years ago. At about the same time, they also filed a pro se adversary proceeding seeking discharge of their student loan obligations.
Creditor Educational Credit Management Corporation ("ECMC") was substituted as the correct party in Debtors' adversary case, and after the appropriate discovery was undertaken, the Court held a trial of the matter in September 2013. The Court made multiple pertinent findings of fact:
Based on those findings of fact, the Court made the following Conclusions of Law:
The Court then entered judgment for Debtors, finding Debtors' consolidated student loan should be discharged as an undue hardship under § 523(a)(8). ECMC appealed the decision to the District Court.
On appellate review, the District Court vacated this Court's judgment and remanded Debtors' case. The District Court concurred that Debtors were not able to currently maintain a minimal standard of living, because George had been laid off from his employment and "was bringing in next to no income to support the family" and, therefore, Debtors' budget "was significantly in the red."
Upon remand, the parties again undertook discovery. The Court held a second trial in August 2017. At the second trial, the Court learned that Debtors' income had increased fairly significantly: Melanie was now a billing supervisor with the same employer and received an hourly pay rate that had doubled since the first trial and a net income of $3640.43 per month. George had also been hired at the Department of Veterans Affairs as a biller where he had worked for the last 2 years and 3 months. Debtors' combined net income was now $6189.64 per month and had been stable for some time.
Melanie testified that the family's expenses had also increased, however, to a total of $6234 per month, leaving them with a negative balance of $44.36 each month.
Home rental and insurance $1130 Utilities (electricity, heat, water, sewer, trash) $281 Telephone, internet, cable $404 Food and housekeeping $800 Childcare and children's education $100 Clothing and laundry $300 Personal care products and services $150 Medical/Dental expenses $333 Transportation $600 Recreation $300 Vehicle insurance $290 Taxes $405 Vehicle installment payments $1141
Debtors currently rent an older four bedroom, two and a half bathroom home, that Melanie described as "not extravagant," and Debtors' housing expense has decreased since the first trial. Regarding Debtors' high vehicle installment payments of $1141 per month, as Debtors' children have grown they have become more involved in sports, and Debtors purchased their daughter a used vehicle and also added their daughter to their vehicle insurance. As a result, Debtors currently own three vehicles: a 2006 GMC Yukon Denali (with monthly payments of $272.32 for the next 68 months) that George drives, a 2015 Chevy Cruze (with payments of $445 for the next 47 months) that Melanie drives, and a 2005 Acura MDX (with payments of $255.93 for the next 45 months) that Debtors' daughter drives. They are also paying a deficiency from a prior vehicle, with payments of $150 for the next 36 months.
Debtors' pay for five cell phones for their family each month, which Debtors feel is necessary because they do not have a land line and their children each "need" a phone for their parents to communicate with them. Melanie testified that she expects Debtors, starting in about 2 years, to have increased expenses relating to their children's college education for the next 12 years thereafter. Debtors' children are currently 16, 14, and 10, and Debtors expect to need to pay more for their children's education because of Debtors' self-described "middle income" status. Debtors intend to contribute money directly to their children's college education, although they understand their children will need to work and apply for scholarships and grants as well.
Melanie testified that her potential for a promotion at work was limited, simply because she was already a supervisor at the GS-11 level, so there were few advancement opportunities beyond that in her department. Melanie would not be eligible to apply for an advancement for about a half of a year, but the positions rarely become available. George was hired a little more than 2 years previously in the same department, but he is currently a GS-6 and has little opportunity for advancement due to his status compared to those with far higher tenure, beyond general step increases based on years of service. Debtors have about $25,000 saved for retirement through their employer's thrift savings plan. Melanie contributes about $50 per month, and George contributes about $32 per month.
Melanie testified that Debtors have always been in contact with their student loan lenders. When they consolidated their loans in 2005, Debtors owed about $63,000, with an APR of 4.5%. Debtors have paid only $2440 since that time, and nothing since the first trial. Melanie testified that Debtors have tried to minimize expenses through coupons and limited expenditures on shoes and clothing. On the other hand, however, Debtors admit they spend money each month (estimated at $300 a month) on sports and athletic events for their children, which they believe is necessary to maintain a minimal standard of living.
The current balance on Debtors' consolidated student loan is $93,599.10, with a 30 year repayment plan.
A proceeding to determine the dischargeability of particular debts is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter jurisdiction.
With certain exceptions, the Bankruptcy Code provides debtors with a "fresh start" by eliminating or restructuring their debts. One such exception to a "fresh start" is § 523(a)(8)'s presumption that student loans are non-dischargeable in the absence of a showing of undue hardship on the debtor or her dependents.
To determine what constitutes "undue hardship," the Tenth Circuit has joined several other circuit courts in adopting the tree-part test set forth in Brunner v. New York State of Higher Education Services:
The debtor must prove all three Brunner elements by a preponderance of the evidence to be entitled to a discharge.
Under the first prong of Brunner, the Court must "evaluate the debtor's current financial situation" and "take into consideration whether the debtor has demonstrated any reason why he or she is unable to earn sufficient income to maintain him/herself and dependents while repaying the student loan debt."
Debtors' income has increased substantially since the Court first reviewed Debtors' financial picture. At the time of the first trial in this case, only Melanie was working, and she was netting only $1977 a month. Time has drastically changed Debtors' situation, however, and for the better. Melanie is now earning about double her hourly wage, and netting, in her estimation, $3640.43 per month. George has been employed with the same employer for more than two years, giving the Court confidence in his job stability and security. Debtors no longer have a negative or volatile income history, but both have stable, good-paying jobs. Combined, Debtors report a monthly net income of $6189.64.
Debtors have increased their expenses along with their income, but the Court cannot say that Debtors would be unable to support themselves and repay their student loan. As people do, Debtors have filled their lives with things they think they need: cell phones, three vehicles, sports activities for their children, etc. And the Court is sympathetic to the plight of parents with three teens or near-teens, who feel they need to keep up with their peers. But the test the Court has been tasked with applying asks whether Debtors could make payments on their student loan and maintain a minimal standard of living.
Debtors simply have not met their burden to show that they are "unable to earn sufficient income to maintain [themselves] and dependents while repaying the student loan debt."
The second prong of the Brunner test, which requires that additional circumstances exist indicating that Debtors will be unable to repay the loans while maintaining a minimal standard of living for a significant portion of the repayment period, "properly recognizes that a student loan is viewed as a mortgage on the debtor's future."
Debtors credibly testified that they should expect minimal overtime and that neither of them had good opportunities for career advancement, other than general salary step increases built into the federal salary structure and cost of living increases. As a result, Debtors' current financial situation will probably persist. But as the Court just noted, however, Debtors' current financial situation is not dire, and there is ample room in Debtors' budget for a monthly student loan payment.
In addition, the only additional circumstances raised by Debtors is the prospect of college for their children beginning in a couple of years. But Debtors' children's reasonable education expenses, if incurred, will be so variable depending on myriad facts unknown, that the Court finds it difficult to assess them.
The third prong of the Brunner test requires the Court to determine if the debtor has made a good faith effort to repay the loan "as measured by his [or] her efforts to obtain employment, maximize income and minimize expenses."
"The Tenth Circuit has also held that a debtors' willingness to consolidate his loan under the William D. Ford Federal Direct Student Loan Program's Income Contingent Repayment Program or Income Based Repayment is an important factor to consider in determining whether a debtor has made a good faith effort to repay a student loan debt."
Despite their increased income, Debtors have not made a single payment on their student loan. Debtors are eligible for the REPAYE program, with a monthly payment of $210.06 per month for 20 years. Debtors freely admit they have not taken advantage of this repayment option, citing their increasing age and the possibility for future tax consequences from any debt that is forgiven.
ECMC argues that the issue of a potential future tax consequence is grossly overstated. First, it is true that numerous bankruptcy courts have chosen not to speculate about a potential future taxable event for a debtor at the end of a lengthy
Regardless, in light of Debtors' considerably improved financial situation, coupled with Debtors' unnecessarily high expenses, the Court finds that Debtors' failure to make any material payments toward their student loan debt does not demonstrate their good faith effort to repay their student loan debt. Debtors have failed to meet their burden to prove the third and final prong of the Brunner test.
For the reasons set forth above, the Court finds that the student loan debt owed by Debtors to ECMC should be excepted from Debtors' discharge pursuant to § 523(a)(8). The Court finds that Debtors have the ability to repay their student loans through the REPAYE program. While the Court finds that Debtors' current financial situation is likely to persist or, perhaps deteriorate slightly, they are not living a spartan lifestyle and their participation in the REPAYE program will not impose a spartan lifestyle upon them. Finally, in light of Debtors' considerably improved financial situation, coupled with Debtors' unnecessarily high expenses, the Court finds that Debtors' failure to make any material payments toward their student loan debt does not demonstrate their good faith effort to repay their student loan debt. Based on these findings, the Court finds that the repayment of the student loan debt should not be discharged.
IT IS THEREFORE ORDERED that student loan debt owed by Debtors to Education Credit Management Corporation is excepted from Debtors' discharge under § 523(a)(8).
IT IS FURTHER ORDERED that judgment is entered against Plaintiffs, George A. Johnson and Melanie Raney-Johnson,
IT IS SO ORDERED.
Regardless, the issue was not raised by any party in either the complaint or the amended pretrial order, and the Court noted in its prior Opinion that Debtors did not contest that their loan "falls within the ambit of § 523(a)(8)." Johnson v. Sallie Mae, Inc. (In re Johnson), No. 11-23108, 2015 WL 795830, at *1 (Bankr. D. Kan. Feb. 19, 2015), vacated and remanded by Johnson v. Educ. Credit Mgmt. Corp. (In re Johnson), No. 15-2631-JAR, 2016 WL 827752 (D. Kan. Mar. 2, 2016). The Court will not, therefore, raise the matter on its own motion.
There are a few cases, of course, that hold differently. See, e.g., Todd v. Access Group, Inc. (In re Todd), 473 B.R. 676, 695 n.28 (Bankr. D. Md. 2012) (stating that there could be "serious tax consequences ... that would negate the (income based repayment) program's superficial solution"), Gregoryk v. United States (In re Gregoryk), No. 00-31050, 2001 WL 1891469, at *3 (Bankr. D.N.D. 2001) (agreeing with the reasoning in Thomsen v. Dep't of Educ. (In re Thomsen), 234 B.R. 506, 512-14 (Bankr. D. Mont. 1999), that "a student loan obligation cancelled by the Secretary of Education must be recognized and treated as taxable income by the debtor" and finding that discharge is a better option because of "the large potential income tax burden that could result from the cancellation of a large student loan obligation upon which interest has accrued for twenty-five years"). But the overwhelming majority of courts conclude otherwise, as stated above. See Gesualdi v. Educ. Credit Mgmt. Corp. (In re Gesualdi), 505 B.R. 330, 346 (Bankr. S.D. Fla. 2013) (citing cases and stating: "The vast majority of courts that have addressed this issue have concluded that it is speculative, at best, to guess what the tax laws will be in 25 years.").
