Janice Miller Karlin, United States Chief Bankruptcy Judge.
This adversary proceeding is before the Court on Plaintiff/Debtor Paula Maxine Edwards' complaint to discharge a portion of the student loans she owes Navient Solutions, Inc. (Navient) under 11 U.S.C. § 523(a)(8).
The Court conducted a trial and is now prepared to rule. Because the Court finds that Debtor has carried her burden to show repayment of the loans would create an undue hardship on her and her family, as required by § 523(a)(8), the Court grants judgment to Debtor, discharging the non-Stafford portion of the loans she owes Navient.
Debtor filed her Chapter 7 bankruptcy petition in October 2015, and received her discharge in March 2016. At the time of filing, she had no secured debt, but scheduled nearly $188,000 of unsecured debt. Of this total, she claims about $151,000 in student loans. Prior to the trial on the claim against Navient, the Court granted summary judgment to the U.S. Department of Education ("DoEd") on Debtor's § 523(a)(8) claim against it, deciding for several reasons that the almost $72,000 of Debtor's student loans owed to the DoEd were not dischargeable. One of the key reasons for this finding was that DoEd offers a repayment plan (with a debt forgiveness component). The plan requires very small monthly payments, based on income, and Debtor agreed she could make the small payments.
Debtor admitted at trial that she has very recently been accepted into an income based repayment program for those loans, and understands her monthly payment will be somewhere between $20 and $115; the precise amount has not been determined.
Debtor is a thirty six year old single mother of two daughters who are fifteen and six years old. Neither Debtor nor her children suffer from any physical or mental disability or illness. She receives some child support from the father of her older child when he is working (about $200 a month), but receives none from the father of her younger child and does not expect to receive any. In an attempt to maximize her income, she has supplied information to child support collection personnel to aide in collecting support from him, but her efforts have been unsuccessful.
At the time she filed her bankruptcy, Debtor was driving a twelve year old car and had no car payment. Recently, however, the struts and transmission went out on that car and she needed to replace it. She apparently did not have the money for a down payment, as her parents both co-signed the note and loaned her the $1500 down payment required to purchase the used 2013 Nissan Altima. The car cost $14,700, and her monthly payments are $237.
In addition to now having a car payment, her car insurance increased; she testified it went from $53 per month to $119 per month.
Debtor is in her fourth year as an elementary school teacher. She incurred her student loans while pursuing a bachelor's degree in education from Newman University. She chose Newman University, a private college, despite its higher cost of attendance, because it offered a program with evening classes that allowed her to complete her degree while working full time so she could support her (then only) child. She used her student loans for tuition, books, and to pay living expenses not paid with her earnings as a paraprofessional. She did not study abroad or take any classes unnecessary to her degree.
Debtor's annual salary is $35,300 for work performed during all but approximately 2 months a year. The income and expense schedules she filed with her petition indicate that she nets $2699.77 in income each month (consisting of $2085.69 net salary, $183 child support, and $431.08 in amortized tax refunds
Regarding her food and housekeeping budget, Debtor testified that she and her daughters used to eat out two to three times a week, depending on her older child's sports schedule. But she has already had to reduce this expense due to the added car and insurance expenses, and due to increased gas and maintenance expenses she now incurs due to her daughter borrowing her grandfather's old pickup truck since recently reaching driving age.
Regarding her entertainment budget, Debtor testified that she takes only one vacation a year — an annual vacation to Branson with her extended family, which has been a family tradition since her childhood. Although her parents pay for all lodging and food, she estimates her expenses are approximately $500 to $700 for tickets to a show and an amusement park. This appears to be the only real luxury for this family.
Another exhibit admitted at trial showed that she actually has higher expenses in some categories than she included on her expense schedule. The largest discrepancy (besides those related to the car purchase) is for medical/dental expenses. She estimated $0 for medical/dental on Schedule J, but Exhibit 4 showed she had actually spent $2,106 for health related expenses in 2015 (in addition to the cost of health insurance). That would equal approximately $175/month in expenses for which she budgeted zero. This appears a reasonable expense for a family of this size (while the $30/month cost of health insurance reflected on Schedule J appears quite low).
Prior to filing her bankruptcy petition, Debtor's wages were being garnished (or threatened by garnishment) by two creditors, including the DoEd
As noted above, Debtor testified to some changes to her income and expenses since filing. First, her annual salary increased by $200, due to the lock-step pay scale for teachers in her district.
Debtor also testified extensively about the dim prospects for future income increases in her profession, due to no fault of her own. Unless she returns to school for graduate classes (an expense her budget
Debtor is working in the very field in which she obtained her degree, and she is unaware of any realistic way to increase her income. Although she does not work during the eight to nine week summer break from teaching, she credibly testified that for now, childcare costs would be offset against the limited income she could earn during the summer, assuming she could consistently find a job. She has taught summer school in the past and testified she may do so in the future.
Debtor's exhibits show Debtor's lengthy loan history. She took out her first student loans in 2001 and 2002. She then borrowed significant amounts each year between 2004 and 2008. Debtor ultimately consolidated her federal student loans in 2012. In addition to the approximately $72,000 nondischargeable debt she owes the DoEd, Debtor owes $56,640.15 to Navient for "tuition answer loans," and $8,354.93 to Navient for Stafford loans.
The exhibits also show that Debtor attempted to make some payment arrangement with Performant Recovery on her DoEd loans in June 2015. She also included as exhibits several examples of handwritten notes from telephone calls referencing "Navient," "Fed. Default," or "Loan Rehabilitation." But these handwritten notes are undated, and it is unclear how extensive were her attempts to make payment arrangements and on which loans. Debtor freely admits her confusion as to who she owes on which student loans, or who owns or services which loans — a complaint this Court frequently hears.
The exhibits do show that since Debtor's tuition answer loans from Navient were initially disbursed in December 2007 and January 2008, Debtor made one payment of $365.05 in April 2009, and then made $150 payments in July, August, and September 2010. No other payments have been made on these Navient tuition answer loans, and Debtor presented no additional evidence that she made any payment or attempted to negotiate a repayment arrangement for the last six years. Her only other effort to repay student loans due Navient was her decision to teach at a
Based on the exhibits provided by Debtor, if Debtor were to remain on the "Standard Billing" payment method with the "Full Principal and Interest" payment plan, her monthly payment on the Navient tuition answer loans would equal $314.75. This figure may be dated, however, as the interest rate on these loans is 9.75%, and the exhibit containing those amounts appear to be from 2015. While no witness explained the terms "Standard Billing" or "Full Principal and Interest," some elementary math shows that the repayment term is 15 years ($30,005 ÷ $166.69 = 180 months/15 years, and $26,653.62 ÷ $148.06 = 180 months/15 years). In addition, no evidence was presented that any alternate repayment plans are available to Debtor on these private student loans as was the case with the DoEd loans.
Debtor testified that in addition to paying the small amount she expects to pay to DoEd under its repayment plan, she would likely be able to pay $50 a month toward her Navient loans, but not as much as $100 a month. She testified that she does not believe she can ever repay the total amount owed to Navient.
An adversary 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.
Although a Chapter 7 discharge is generally designed to be a relatively quick method of discharging debts and providing debtors a fresh start, there are certain debts that Congress decided would not be dischargeable. Under § 523(a)(8), a Chapter 7 discharge does not discharge debts for educational loans
The Tenth Circuit, however, has adopted the three-part Brunner test for analyzing whether a debtor has shown that his or her student loan debt should be discharged because it would cause undue hardship.
If the court finds the debtor has failed to prove any of the three Brunner elements, the inquiry ends and the student loan is not dischargeable.
This Court has had prior occasion to apply the Brunner test. In Buckland v. Educational Credit Management Corp. (In re Buckland),
Debtor's evidence on the first prong of the Brunner test is convincing. Debtor's realistic budget demonstrates it is difficult for her to cover her reasonable living expenses now, without making any payment to Navient. Her monthly income of $2699.77 relies on amortizing her anticipated tax refund, which has been in the $5,000 range the last two years (likely due to the earned income credits
Because Debtor's expenses have increased since filing due to her need to purchase a reasonable replacement vehicle (and her omission of other expenses in her budget), it is difficult to see on paper how Debtor is presently covering those higher expenses even with no payment on her student loans. Although Schedule J showed a $1.44 monthly balance after expenses, as noted above, Debtor's realistic expenses are now as much as $450 a month higher. Debtor testified one way she is trying to handle these additional expenses is by reducing her food budget (including eating out), which was admittedly high when she filed bankruptcy.
Ultimately, the Court finds Debtor cannot meet basic food, shelter, transportation, clothing, and medical treatment needs of herself and her two children if she has to pay any amount to Navient now. Even if Debtor stopped spending the $500 to $700 she has spent in the past on her annual family vacation, and totally eliminated her entertainment budget, she would still be unable able to make the Navient student loan payment.
Debtor also apparently has nothing saved for an emergency, and no line item in her budget for even minimal savings she might need in the event of any blip in her health or her children's health, or for any other emergency that might arise. She even had to borrow $1,500 from her parents to buy a used replacement car — a necessity, and apparently could not obtain the loan without their co-signature. As a result of all these facts, Debtor has met her burden to show that, given her current income and expenses, she cannot maintain a minimal standard of living while repaying her student loans to Navient.
Regarding the second prong of the Brunner test, this Court in Buckland stated:
When it adopted the Brunner test, the Tenth Circuit explained the reasoning behind this second prong. "The reason for this requirement is simple: A recent graduate's salary might be so low that it is difficult to pay the loans now, but it is clear that his salary will increase in the future and therefore his loans should not be discharged."
Second, the Navient loan documents suggest the repayment period on the Navient loans is 15 years. What does Debtor's future hold, on the expense side, over the next 15 years? While it is likely her 15 year old will leave her care at some point in the next several years, the $200 child support that she has received, off and on, for this child will also likely terminate — perhaps only 3 years from now when she turns 18. In addition, Debtor will be unable to claim the older daughter as a dependent on her tax return at some point, reducing the tax refund on which she now relies to try to meet expenses. Many of Debtor's expenses are fixed, regardless of family size, such as her car expenses. So it is completely uncertain whether Debtor's expenses will be reduced significantly enough to the point where she can start repaying this loan once her older child is no longer dependent on her.
Her younger daughter is only 6, meaning Debtor will likely support that child for the entire duration of these loans — at least for the vast majority of the repayment period. Because the Court has found Debtor has no ability to realistically pay anything to Navient now, because it also has found Debtor's income is not likely to increase, and because there is no prospect for reducing her expenses until her older daughter leaves the home, this would leave Debtor paying almost nothing on these loans for several years.
In addition to the reasons given above for this Court's conclusion that Debtor's state of affairs is likely to persist for a significant portion of the repayment period of the student loans, if we assume the best case scenario for Navient — that this is one of those rare cases where a mother would have no need or desire to continue providing any support the moment her child turns 18 (three years from now) — we know Debtor would then owe at least $56,600 at 9.75% interest (and likely several thousand more due to interest accruals). Assuming the 15-year repayment period reflected in the trial exhibits, she would only have 12 years to repay the loan. Simple math would show that she would need to pay $668 a month to retire $56,600 at 9.75% interest over the remaining years of the loan repayment period.
This Court's experience, coupled with a review of Debtor's expenses, does not reflect that a reduction of one child would result in a net savings anywhere close to the (at least) $668 a month payment that would then likely be required on the Navient loans. But far more important, the Court knows from the evidence received in the DoED portion of the case that Debtor's repayment obligation to DoEd (on the $72,000 nondischarged loan) will increase under the REPAYE program over the next 20 years if her expenses decrease. Similarly, in the even more unlikely event that her income increases, again, Debtor's monthly payment to DoEd under the REPAYE program will likewise increase. And while there is no evidence how much her DoEd payment would increase, there is no reason to expect Debtor will have excess disposable income for a significant portion of the repayment period on the Navient loans. Accordingly, the Court finds Debtor has carried her burden to show that her state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
Regarding the third prong of the Brunner test, the Court in Buckland stated:
In other words, the inquiry for the third prong is not necessarily limited to the amount or number of payments a debtor has made, but instead, to an analysis whether the debtor has made a good faith attempt to repay the loan by maximizing income and minimizing expenses.
Admittedly, Debtor has not made any payments on the Navient loans in the last 6 years — coincidentally the age of her youngest daughter and thus the number of years she has been supporting her second child without help. Her only payments were in 2009 and 2010. Admittedly, she elected not to use significant tax refunds to
But this Court has previously held that a finding of good faith is not precluded by a debtor's failure to make payments,
This Court's finding on this third element is also buttressed by Debtor's decision to work in a Title 1 school. Debtor testified one reason she remains at her school is that the Stafford component of the Navient student loans (which she does not seek to discharge herein) will be forgiven at some point. While making monetary payments would have been very difficult for this Debtor in light of her financial situation, she is effectively helping retire a part of her student loans by teaching at this school. So she is not trying to simply wipe her hands clean of all her student loan obligations. Her decision to remain at a Title 1 school should count for something, and this Court finds that this fact helps her meet the requirement that she made good faith efforts, in light of her financial circumstances, to repay the loans she owes Navient.
While it is true that Debtor spent $500-$700 a year during her extended family's long-standing family vacation, the Court does not find that this expenditure alone should disqualify Debtor from discharging over $56,000 in student loans. As the Tenth Circuit has noted, "the good-faith requirement `should not be used as a means for courts to impose their own values on a debtor's life choices.'"
As this Court noted in Junghans v. William D. Ford Federal Direct Loan Program (In re Junghans),
The Court found Debtor to be an honest and hardworking individual who appears to be doing her best to provide for her family — not a debtor attempting to abuse the bankruptcy system. Because the Tenth Circuit disdains "overly restrictive" interpretations of the Brunner test, because the test should be applied to further the Bankruptcy Code's goal of providing a `fresh start' to the honest but unfortunate debtor, and because exceptions to discharge are to be narrowly construed, the Court finds under these facts that the statutory exception must be resolved in Debtor's favor. Debtor's § 523(a)(8) claim again Defendant Navient is granted, and the two tuition answer loans owed to Navient are discharged.
There is no dispute that the Navient loans fall within this definition.
