PETER C. McKITTRICK, U.S. Bankruptcy Judge
This adversary proceeding tells a far too common story of the plight of a professional swallowed by massive student loan debt, much of which she has no hope of repaying during her lifetime. In 2005, when Leslie Nitcher ("Nitcher") enrolled in law school, it was with the hope and expectation her advanced degree would lead to a legal career at a level of compensation commensurate with the standard of living that lawyers historically have enjoyed. Instead, she faced a bleak job market when she graduated from law school in 2008. After trying to balance her living expenses and massive student debt for 11 years, Nitcher finally succumbed to her growing consumer debt. She filed chapter 7 bankruptcy and received her discharge. The question posed for the court in this case is to what extent her student loan debt will remain a noose around her economic neck for the remainder of her economically productive years.
After considering the evidence presented, I hold that payment of the entire debt would impose an undue hardship on Nitcher and that the debt is discharged to the extent it exceeds $16,500.00. My findings of facts and conclusions of law follow.
Nitcher filed this adversary proceeding seeking a partial or total discharge of her student loans. Nitcher's original Complaint, Doc. 2, named fourteen loan servicers as defendants. After she was able to identify the current holders and servicers of her loans, Nitcher dismissed most of the defendants.
PNC Bank, N.A., did not file an Answer. Nitcher and ECMC settled and ECMC was dismissed from this action. Docs. 49, 50. NC was the sole remaining active defendant at the time of trial.
The bulk of Nitcher's loans are held by ECMC and are federal student loans. Pursuant to the parties' settlement agreement, Nitcher stipulated to the non-dischargeability of the student loans held by ECMC and will apply for a Revised Pay as You Earn (REPAYE) Income Driven Repayment program once her loans with ECMC have been consolidated. The balance owed ECMC as of February 26, 2019, is $198,691.00. Doc. 49. Nitcher testified her initial payment under the REPAYE program will be approximately $479.00 a
At issue in this adversary proceeding are three private loans held by NC. The loans are identified as Loan ID #001, #002, and #003 (together, the "Student Loans"). Loan #001 was disbursed in August 2005 in the original amount of $20,032.26. Loan #002 was disbursed in October 2005 in the original amount of $1,505.38. Loan #003 was disbursed in August 2006 in the original amount of $24,064.52. As of August 28, 2018, the charge-off balance of the loans is $23,744.33, $823.13, and $27,254.16, respectively, for a total of $51,821.62. Statement of Joint Stipulated Facts for Trial in Adversary Proceeding ("Stipulated Facts"), Doc. 64. All three loans had variable interest rates.
Loan #002 has fully matured. Plaintiff's Exhibit 1, p. 11. Loan #001 was to mature in November, 2028, and Loan #003 was to mature in October, 2028.
Nitcher does not dispute her liability for, or the amount of, the Student Loans or that she obtained those loans for educational purposes. NC does not dispute Nitcher has paid a total of $18,215.82 toward her student loan obligations to NC. Stipulated Facts.
Nitcher is a 38-year-old, single attorney with no dependents. She is a graduate of Oregon State University and Willamette University School of Law. She was admitted to the Oregon State Bar in 2008. After graduation, Nitcher was unable to find full-time employment. She lived in Salem, Oregon and did sporadic contract work for different attorneys. She was self-employed from October 2010 through August 2014. In 2014, Nitcher accepted a position with the small criminal defense firm of Kollie Law Group (formerly DeKalb & Associates) in Bend, Oregon. She has been steadily employed there since 2014. Her taxed Social Security income since 2010 is as follows:
2010 2011 2012 2013 2014 2015 2016 2017
$17,131 $40,981 $34,168 $45,378 $62,672 $60,112 $68,813 $74,403
Nitcher's W-2 earnings for 2018 were $69,398.00. Stipulated Facts. Debtor testified that given her age, education, background, experience, location and practice, she is probably near the top of her earning potential.
The record shows Nitcher has no nonexempt assets. She owns no real estate, drives a 2012 car worth less than $11,000.00, and has no retirement accounts or retirement benefits through her employer. Plaintiff's Exhibit 7.
A student loan is dischargeable in bankruptcy if "excepting such debt from discharge ... would impose an undue hardship on the debtor and the debtor's dependents[.]" 11 U.S.C. § 523(a)(8). Undue hardship is determined by applying the three-part test enunciated in
If a debtor proves the undue hardship test is met as to only a portion of the debt, the court can partially discharge the debt.
The first prong of the
The second part of the test requires the debtor to show "that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans."
The final prong of the
At first glance, Nitcher does not fit the standard profile of a debtor who is unable to maintain a minimal standard of living
Rent $1,500.00 Transportation 350.00
Renter's Insurance 14.00 Recreation 50.00
Heat & Electricity 200.00 Life Insurance 120.00
Cell Phone, Internet 288.00 Auto Insurance 119.00
Food & Housekeeping 500.00 Flex Spending Acct 83.00
Clothing & Dry Cleaning 145.00 Pet Care 50.00
Personal Care Products 100.00 ECMC Loan 479.00
Medical & Dental 215.00 Total Expenses $4,213.00
Those expenses, which include the anticipated payment to ECMC in the amount of $479.00, result in a negative monthly net income of ($474.00).
Nitcher admits some of her monthly expenses exceed the IRS Standards. "While a bankruptcy court may consider the IRS Standards as one piece of evidence in relation to its first prong analysis, it should not use the IRS Standards as the sole measure of what is necessary to maintain a minimal standard of living."
Nitcher testified that the move to Bend did increase her income, but it also increased her monthly expenses. She testified, credibly, that Bend is a tourist town where rents, food costs, utilities and gas prices are higher than in Salem. NC argues that certain of Nitcher's budget items are excessive or unnecessary. I agree in two respects.
At trial, Nitcher testified she maintains a life insurance policy naming her non-dependent mother as a beneficiary because of her mother's recent divorce. Although admirable, that $120.00 monthly expense is not necessary for Nitcher to maintain a minimal standard of living. Nitcher's transportation expense at $350.00 a month is likely excessive. However, even if the life insurance expense is eliminated and the transportation expense is reduced, Nitcher will not be able to pay her necessary living expenses and maintain a minimal standard of living.
Importantly, the Student Loans have all matured or been accelerated. If those loans are not discharged, Nitcher's required payments on the Student Loans will consume 25% of her net income and her wages will be subject to garnishment by NC until the Student Loans are fully paid.
Nitcher points out that the term "undue hardship" was not defined at the time of the
The second prong of the
The court in
NC addressed the bulk of the "additional circumstances" set forth in
Despite the surface appeal of NC's argument, Nitcher testified that her prospects for future increased income are modest at best. Due to market conditions, she found work and developed expertise in indigent criminal defense. Her pay and job are subject to her firm retaining its criminal defense contracts at their current levels. Although Nitcher can earn additional money if she works on "private pay" clients, those amounts have been steadily minimal over the past three years. She testified she already works approximately 50 hours a week and does not have the time to work another job. She further testified that she has no civil experience and is not qualified to be hired to do civil work, at least not without starting at lower pay if she could find a job. Nitcher also testified that she has been looking for other jobs in the area, but nothing has come available. She indicated she would be hard-pressed to find a position at higher pay. I found Nitcher's testimony on these points to be convincing and credible.
Nitcher's young age and advanced education make this analysis difficult. Attorneys can certainly make significant amounts of money, well more than the $64,000 annual income currently being generated by Nitcher.
If NC is left to its own devices and garnishes Nitcher's wages for the next several years, she will be left unable to make her monthly payment to ECMC, let alone afford the necessities of life. In addition, Nitcher's required payment to ECMC will increase if her gross wages increase. The applicable formula translates to an additional $300.00 per month in payments to ECMC for every $2,000 of increased gross income. The effect of an increase in income would also increase the amount of Nitcher's wages subject to garnishment by NC, thereby substantially diluting any benefit from an increase in income.
Nitcher and NC disagree on the applicable repayment period. Consistent with
Nitcher's inability to pay her basic living expenses, the ECMC debt and the NC garnishment will continue for a substantial duration of the repayment period. She will drown from the weight of her necessary monthly living expenses, her payment to ECMC, and a garnishment of 25% of her net wages, even with a material increase in her compensation.
Therefore, I conclude Nitcher has met her burden of proof as to the second prong of the
"To determine a debtor's good faith efforts to repay the loan, the court measures the debtor's efforts to obtain employment, maximize income, minimize expenses, and negotiate a repayment plan."
NC claims Nitcher has not made a good faith effort to repay the Student Loans. In support of that contention, NC points out that Nitcher stopped making payments on her loans in late 2015, just when her income was increasing significantly. Nitcher argues she has made significant payments, including voluntary payments on the federal
A review of Nitcher's bankruptcy schedules demonstrates that the timing of her default is not a product of a failure to make good faith efforts to repay the debt, but rather because she fell prey to her consumer debt, which piled up as she valiantly tried to continue paying her student loans. Nitcher's schedules show that she had amassed significant credit card debt. Nitcher testified she incurred that debt in trying to pay for normal living expenses and stay current on her student loans. She also suffered the interception of her federal tax refunds by her federal student loan lender during the times she was in default. Many of the cases that address this prong of the
Nitcher presents a different profile. She made substantial payments to NC and her other lenders, even when she was a recent graduate with almost no income. She credibly testified, without contradiction, that she was offered settlement options with NC, but none that reduced the payments or the amount due to a level she could afford. She has voluntarily entered a repayment program with ECMC which will last for 20-25 years, at which time she likely will still have a significant balance due on her federal loans that will be discharged. There is no mandated income-driven repayment option available to Nitcher with regard to the Student Loans without NC voluntarily agreeing to such a payment plan. Nitcher has made every effort to maximize income, even by moving cities to accept a full-time position at her law firm. She incurred consumer debt to supplement her resources and lives in a one-bedroom condominium, drives a 7-year-old car, and has limited assets. She has no retirement or other savings.
I therefore find Nitcher has met this prong of the
The reason that I have concluded that the Student Loans should be discharged is largely because Nitcher cannot survive if NC garnishes her wages. The fact that NC is a private lender complicates the equation because there is no income driven repayment option available. However, the fact that Nitcher cannot afford to repay the Student Loans in full, does not mean that she cannot afford to pay some portion of those loans in smaller periodic payments. As stated, in the Ninth Circuit, a bankruptcy court may partially discharge student loans when payment of the full amount would constitute an undue hardship.
As I discuss above, some of Nitcher's expenses are not necessary to maintain a minimal standard of living. The life insurance expense is unnecessary and Nitcher's transportation budget is excessive. It is also reasonable to presume her income will increase modestly as she continues to practice indigent criminal defense. Therefore, I conclude that Nitcher can afford to pay the sum of $150.00 per month and under the circumstances, I find it appropriate she make payments for the remainder of the repayment period, 110 months. That sum equals $16,500.00. Rather than discount this amount to a present value and add interest, I have reached this number based on the debtor's ability to pay, and such amount will not accrue interest.
For the reasons stated, I find that the Student Loans are discharged to the extent they exceed $16,500. Loans 001 and 003 shall be decelerated. No interest shall accrue on the loans. All other terms of the notes shall remain as in the original. Unless the parties agree otherwise, the Debtor shall commence making payments of $150.00 per month on September 1, 2019, and shall make 110 consecutive monthly payments.
Mr. Parker should submit an order consistent with this decision.
