FREDERICK P. CORBIT, Bankruptcy Judge.
Autumn and Justin McCafferty filed a chapter 7 bankruptcy petition in December 2014 seeking to discharge their consumer debt. The discharge was granted on April 15, 2015. On March 24, 2015, Autumn McCafferty commenced this adversary proceeding seeking an undue hardship discharge of her student loan obligations pursuant to 11 U.S.C. § 523(a)(8). Defendants, the United States Department of Education ("DOE") and Educational Credit Management Corporation ("ECMC"), filed answers denying that Mrs. McCafferty satisfies the test for undue hardship. A one-day trial was held on September 23, 2015. Mrs. McCafferty, pro se, appeared and testified. Defendant ECMC was represented by Daniel J. Bugbee and Defendant DOE was represented by Vanessa R. Waldref. Defendants called to testify Justin McCafferty, (Plaintiff's husband) and Philippe Guillon, loan analyst. Plaintiff's exhibits B-E and K and Defendants' exhibits 2, 8-12 and 14 were admitted into evidence without objection. This matter is ready for decision.
This court has jurisdiction of this adversary proceeding under 28 U.S.C. § 1334(b). This is a core proceeding to determine dischargeability of a particular debt under 28 U.S.C. § 157(b)(2)(I). This memorandum decision includes the court's findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052 (applying Fed. R. Civ. P. 52 in adversary proceedings). For the reasons set forth below, an order shall be entered denying Autumn McCafferty an undue hardship discharge pursuant to 11 U.S.C. § 523(a)(8) of her student loan debt.
Mrs. McCafferty is a healthy thirty-three-year-old female who lives in an apartment in Pullman, Washington, with her husband and thirteen-year-old daughter. Mrs. McCafferty began her postsecondary education in 2000 at Spokane Community College. From 2000-2014, she attended various institutions and obtained a cosmetology license, a cosmetology instructor license, and an A.S. degree in office administration. Mrs. McCafferty is currently working toward obtaining a B.A. in accounting.
During the same time frame, Mrs. McCafferty's employment history varied from unemployed to working full-time.
Mr. McCafferty worked as a car salesman at Chipman & Taylor Chevrolet from 2003-2015. Mr. McCafferty voluntarily left that position in March, 2015 to start his own lawn-care company, Level 5 Lawn Care Services. The decision to leave the car dealership was based on Mr. McCafferty's family's best interest. Despite long hours and diligence at Chipman & Taylor Chevrolet, a down-turn in the economy had severely affected car sales and he had four months of zero-sum paychecks. Therefore, Mr. McCafferty justifiably decided to put his hard work and energy into a different business.
During discover, Mrs. McCafferty submitted gross income information for the last seven years. From the evidence presented, the McCaffertys' income was highest in 2008 (approximately $82,000) and steadily declined until 2011, where it has remained fairly steady averaging approximately $55,000.
At issue in this case are Mrs. McCafferty's multiple student loans. It is not disputed that Mrs. McCafferty primarily financed her postsecondary education with loans and currently has outstanding loans with both the DOE and ECMC. Mrs. McCafferty received her first educational loan disbursement in 2001 and her last in 2013. The interest rates on the loans vary from 2.3% to 6.6%. The combined amount owing on both the DOE and ECMC loans is approximately $73,000.00, which includes the principal, accrued interest, and fees. Mrs. McCafferty has never made a payment on her DOE loans and has paid about $1,000 toward her ECMC loans.
As to her student loans, Mrs. McCafferty testified that (1) in the past she was unable to pay any amount toward her student loans, (2) she currently remains unable to pay, and (3) she does not foresee any change in the future as to her ability to make payments on her student loans. According to Mrs. McCafferty, paying any amount toward her student loans would be an undue hardship. Defendants disagree. Defendants argue that Mrs. McCafferty incurred significant student loan debt, and now, having paid almost nothing on that debt, seeks to discharge it all despite being young, healthy, and employable.
All parties agree that flexible repayment options remain available to Mrs. McCafferty under the William D. Ford Program ("Direct Loan Program").
The purpose of bankruptcy is to give good-faith debtors a fresh start. Little v. Reaves (In re Reaves), 285 F.3d 1152, 1157 (9th Cir. 2002). In tension with this overall purpose, educational loans are presumptively non-dischargeable in bankruptcy "unless 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). Thus, to obtain a discharge, a debtor must demonstrate that she meets the "undue hardship" requirement of § 523(a)(8).
To determine what constitutes undue hardship under 11 U.S.C. § 523(a)(8)(B), the Ninth Circuit, along with many other circuits, has adopted a three-part test first enunciated in In re Brunner.
In this case, Mrs. McCafferty satisfies the first two prongs of the Brunner test. However, she fails to satisfy prong three because she has not shown that she made a good faith effort to repay her student loans.
The initial prong of the undue hardship analysis under Brunner requires the debtor to show a present inability to maintain a minimal standard of living if forced to repay her student loan. Rifino, 245 F.3d at 1088. Although the standard to obtain a discharge of student loans is high, it is not unattainable. See Pa. Higher Educ. Assistance Agency v. Birrane (In re Birrane), 287 B.R. 490, 495 (B.A.P. 9th Cir. 2002). "[C]ourts require more than temporary financial adversity, but typically stop short of utter hopelessness." Id. (quoting In re Nascimento, 241 B.R. 440, 445 (B.A.P. 9th Cir. 1999)). Thus, this element of the undue hardship analysis compares the individual's standard of living against her current income and expenses. See cf., Rifino, 245 F.3d at 1088 (finding this element satisfied if the debtor proves she could not maintain a minimal standard of living based on her current income and expenses); Pena, 155 F.3d at 1112-13 (subtracted debtor's average monthly expenses from net monthly income to determine whether first prong of Brunner test was met).
The McCaffertys' monthly net income is $3,726.00 per month. Mrs. McCafferty testified that her family's monthly expenses totaled approximately $3,700 per month. The defendants do not contest the fact that the McCaffertys incur the specified expenses. Rather, the defendants argue that many of the expenses are not reasonably necessary to achieve a minimal standard of living.
Resolving the dispute over the McCaffertys' budget, "is a matter properly left to the discretion of the bankruptcy court." Pena, 155 F.3d at 1112. This court employs common sense, knowledge gained from ordinary observations in daily life, and general experience when determining whether someone's expenses are unnecessary or unreasonable, whether someone is paying for something that is not needed, or whether someone is paying too much for something that is needed. This court agrees that "[p]eople must have the ability to pay for some small diversion or source of recreation, even if it is just watching television or keeping a pet." Ivory v. United States Dep't of Educ. (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001). Additionally, in a previous case, this court rejected Defendant ECMC's assertion that a debtor eligible to participate in an IBR plan could never show undue hardship under prong one. ECMC's argument impermissibly substituted an administrative formula for a bankruptcy judge's discretion.
Defendants argue that the McCaffertys' tithing and charitable giving expenses are not allowable expenses under a § 523(a)(8) undue hardship analysis and contend that the monthly donated amounts should be considered available to pay on the student loans. The court is not convinced.
The RLCDPA amended several sections of the Bankruptcy Code to exclude charitable contributions of up to fifteen percent of the debtor's adjusted gross income ("AGI") from consideration by the bankruptcy courts.
Ritchie v. Northwest Educ. Loan Assn. (In re Ritchie), 254 B.R. 913, 920 (Bankr. D. Idaho 2000). Notably however, the RLCDPA made no amendments to § 523(a)(8). Courts have interpreted this omission as Congressional intent to alternatively create (1) a per se prohibition of charitable giving as an allowable expense under the § 523(a)(8); (2) a per se allowable expense of charitable giving (not to exceed 15% of a debtor's gross annual income); or (3) no impact on the § 523(a)(8) analysis.
Courts construing the omission of a change to § 523(a)(8) under the RLCDPA as acting as a per se exclusion of charitable giving as an allowable expense rely on the rule of statutory interpretation stating that "[w]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposefully in the disparate inclusion or exclusion." Ritchie, 254 B.R. at 919 (quoting Bates v. United States, 522 U.S. 23, 29-30 (1997)). Following this statutory interpretation, some courts concluded that because Congress chose not to amend § 523(a)(8), the negative implication must be that Congress intended to prevent debtors from including tithing as a permissible expense when calculating income available for student loan repayment. See, e.g., Ritchie, 254 B.R. at 919-21. However, this analysis fails to take into account that RLCDPA was passed primarily to protect churches from being sued by bankruptcy trustees attempting to recover tithes previously made by debtors. See H.R. Rep. No. 105-556, at 2-3 (1998). Given this purpose, "Congress would have little reason to make changes to § 523(a)(8) when it deals only with whether or not a student loan should be discharged and never allows a retroactive reach back into a church's coffers. Therefore, the omission of a tithe protection in § 523(a)(8) should not be construed as Congressional intent to always exclude tithes as an expense under the undue hardship analysis but rather that Congress simply paid no mind to § 523(a)(8) when it passed the RLCDPA." McLaney v. Ky. Higher Educ. Assistance Authority (In re McLaney, 375 B.R. 666, 681 (M.D. Ala. 2007).
Courts that have concluded that tithes are a permissible expense when conducting a § 523(a)(8) undue hardship analysis rely on the rule of statutory construction instructing that provisions in one act which are omitted in another on the same subject matter should be applied when the purposes of the two acts are consistent. See cf. Durrani v. Educ. Credit Mgmt. Corp. (In re Durrani), 311 B.R. 496, 503-04 (Bankr. N.D. Ill. 2004) ("conclud[ing] that a bankruptcy judge should not override a debtor's commitment to tithing"); In re Cavanagh, 242 B.R. 707 (Bankr. D. Mont. 2000), aff'd, 250 B.R. 107 (B.A.P. 9th Cir. 2000) (finding charitable contributions to the extent not exceeding 15% are reasonable). Such courts concluded that because (1) a determination of disposable income is a component of all the bankruptcy sections and (2) the RLCDPA creates a presumption that bona fide charitable giving (up to 15% of debtor's AGI) will be protected, that (3) the § 523(a)(8) analysis should also permit similar contributions. See, e.g., Lebovits v. Chase Manhattan Bank (In re Lebovits), 223 B.R. 265 (Bankr. E.D.N.Y. 1998) (tithing was permissible expense under § 523(a)(8)); Meling v. United States (In re Meling), 263 B.R. 275 (Bankr. N.D. Iowa 2001) (monthly tithes of $100 were reasonable for purposes of § 523(a)(8)). However, it is not so clear that the purpose of the Code sections changed by the RLCDPA and § 523(a)(8) are similar enough to presume charitable donation protection.
Indeed, this court is hesitant to automatically sweep the § 523(a)(8) hardship analysis under the RLCDPA protections. Rather, this court agrees with the Fulbright court in that it does "not view the subject matter of § 523(a)(8) . . . as the same subject matter or purpose as the subject matter and purposes of § 548(a)(2) (recovery of fraudulent transfers), § 707(b) (dismissal for substantial abuse if Chapter 7), and § 1325(b) (confirmation of a Chapter 13 plan)." Fulbright v. United States Dep't of Educ. (In re Fulbright), 319 B.R. 650, 660 (Bankr. D. Mont. 2005) (emphasis added). This court finds the First Circuit accurately explained why the purpose of the bankruptcy sections amended by the RLCDPA are simply too different from § 523(a)(8) to be considered "consistent" with each other. Educ. Credit Mgmt. Corp. v. Savage (In re Savage), 311 B.R. 835 (B.A.P. 1st Cir. 2004). When explaining, the Savage court stated:
Savage, 311 B.R. at 840 n.7 (citations omitted). Because of the differences in the Code sections, it would be inappropriate to automatically transfer the RLCDPA's charitable safe harbor to the § 523(a)(8) hardship analysis.
This court echoes the other courts that have noted that the RLCDPA made no changes to § 523(a)(8). Therefore, any interpretation that expressly allows or disallows tithing should be rejected as both interpretations seem to effectively amend § 523(a)(8) when Congress did not. See Pa. Dep't Pub. Welfare v. Davenport, 495 U.S. 552, 562 (1990) ("We will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure."). Rather, having thoroughly reviewed relevant authority, this court finds the last interpretation most convincing: RLCDPA's passage does not impact the analysis of whether tithing should be considered a reasonable and necessary expense under § 523(a)(8). See, e.g., Educ. Credit Mgmt. Corp. v. Rhodes, 464 B.R. 918 (W.D. Wash. 2012) (finding religious or charitable contributions not per se reasonable or unreasonable). Therefore, this court will continue to consider charitable giving expenses on a case-by-case basis, considering factors such as the amount and the debtor's history in order to determine whether, for that particular debtor, tithing constitutes a reasonably necessary expenditure. "[I]f bankrupt families are allowed to indulge a family pet or watch . . . cable television [then] surely a bona fide tithe to their church may at least be considered as a proper expense." McLaney, 375 B.R. at 682. In this case, the McCaffertys are deeply religious with a long history of monthly tithing. Therefore, tithing expenses up to $150 per month would be reasonable.
Additionally, defendants challenge the following expenses: the McCaffertys' cell phone expense ($250), monthly vehicle fuel ($300), daughter's allowance ($40), groceries ($675), clothing ($50), orthodontist ($235), Geidel Clinic Fees ($80), prescriptions ($20), fitness gym membership ($70), Netflix ($17), Hulu ($8), and Ipsy subscription ($10). Defendants argue that many of these expenses are discretionary and can be eliminated altogether, while other expenses are merely excessive.
Under Brunner's second prong, Mrs. McCafferty must prove "that her present inability to pay will likely persist throughout a substantial portion of the loan's repayment period." Educ. Credit Mgmt. Corp. v. Nys (In re Nys), 446 F.3d 938, 945 (9th Cir. 2006) (citing Pena, 155 F.3d at 1114). The Ninth Circuit explained that bankruptcy courts should endeavor to identify whether "additional circumstances" exist to support this finding, but clarified that "the determinative question is whether the debtor's inability to pay will, given all we know about the salient features of her existence, persist throughout a substantial portion of the loan's repayment." Id. at 946. Importantly, the second prong does not require the debtor "show exceptional circumstances beyond the inability to pay in the present and a likely inability to pay in the future. Nys, 446 F.3d at 947.
In Nys, the Ninth Circuit indicated that courts may refer to the following non-exhaustive list of possible "additional circumstances" which may prevent a debtor from having the ability to pay in the future. Nys, 446 F.3d at 946-47.
Nys, 446 F.3d at 947.
In this case, Mrs. McCafferty is thirty-three-years-old with no physical or mental limitations. However, the McCaffertys have very limited savings and minimal assets. Mrs. McCafferty's marketable skills are limited. Thus, it is unlikely that Mrs. McCafferty could obtain significantly better employment prospects or chances for more lucrative earnings. Additionally, Mr. McCafferty's business is physically demanding and weather dependent. Therefore, the new business (while not an unwise decision), will not likely lead to substantial changes in the McCaffertys' current income. The court finds Mrs. McCafferty sustained her burden as to prong two.
The third and final prong of the Brunner test requires the debtor to prove that she made good faith efforts to repay the loans or show that the forces preventing repayment are truly beyond her control. Brunner, 46 B.R. at 755. The final prong of the Brunner test requires that the debtor exhibit good faith in her efforts to repay the student loans. Mason, 464 F.3d at 884; Pena, 155 F.3d at 1114; Rifino, 245 F.3d at 1087.
Significant to this court's analysis of prong three is that despite maximizing her income and minimizing her expenses, Mrs. McCafferty has made minimal payments on her student loans in the last fourteen years. Mrs. McCafferty testified that she has made no voluntary payments on her DOE debt at any time and she has only paid approximately one thousand dollars toward her ECMC loans. Further, Mrs. McCafferty testified that when she had the financial ability to pay down debt, she has always chose to make payments on debts other than her educational loans. Unfortunately, a lack of any meaningful payment by debtors weighs heavily against finding of good faith. See contra England v. United States (In re England), 264 B.R. 38, 48 (Bankr. D. Idaho 2001) (finding no lack of good faith even though debtor had failed to make payments because debtor did not have the financial wherewithal to make payments). Mrs. McCafferty's decision to focus on other debt first "makes perfect sense if one ultimately pays off all one's debts. However, in a bankruptcy context, the court simply cannot conclude that paying non-student loan debt while not paying student loan debt constitutes a good faith effort to repay student loan debt." Fuller v. United States Dep't of Educ. (In re Fuller), 296 B.R. 813, 819 (Bankr. N.D. Cal. 2003).
Also relevant to the good faith analysis and the facts at hand, is a "debtor's effort—or lack thereof—to negotiate a repayment plan." Mason, 464 F.3d at 884 (internal quotation marks and citations omitted). Some courts have found the debtor's unwillingness to do so to be a significant factor in the good faith analysis. Birrane, 287 B.R. at 500 ("Good faith is also measured by a debtor's effort—or lack thereof—to negotiate a repayment plan."); United States Dep't of Educ. v. Wallace (In re Wallace), 259 B.R. 170, 184 (C.D. Cal. 2000) ("A debtor's good faith can be measured by evaluating how he responded to repayment opportunities that were presented to him.").
Mrs. McCafferty testified that prior to the filing of this adversary proceeding, she had not attempted to negotiate a repayment plan with either lender. Defendants indicated that had Mrs. McCafferty investigated, at least four different income contingent repayment plans were available. Although this court makes no finding as to the prudence of the repayment plans available to Mrs. McCafferty, the court finds it relevant that Mrs. McCafferty failed to even investigate. See, e.g., Mason, 464 F.3d at (finding debtor's failure to diligently pursue "renegotiation of his debt under the ICRP" demonstrated lack of good faith); Educ. Credit Mgmt. Corp. v. DeGroot, 339 B.R. 201, 339 B.R. 201 (D. Or. 2006) (finding failure on part of Chapter 7 debtor to even apply for income-contingent repayment program was failure to make "good faith" effort to repay her student loan debt); Fulbright, 319 B.R. at 663 (finding no discharge for debtor who declined repeated offers by student loan creditor to allow him to participate in income-contingent repayment program).
Mrs. McCafferty failed to satisfy the third prong of the Brunner test, therefore her student loan debt is not dischargeable under 11 U.S.C. § 523(a)(8).
