Leading Cases: Student Loans

Background: Chapter 7 Debtor filed an adversary proceeding seeking an “undue hardship” discharge of her student loans held by Tennessee Student Assistance Corporation (TSAC), a state entity. TSAC brought a motion to dismiss the complaint for lack of jurisdiction, asserting its sovereign immunity under the Eleventh Amendment. The Bankruptcy Court denied the motion, holding that 11 U.S.C. § 106(a) abrogated TSAC’s sovereign immunity. TSAC filed an interlocutory appeal, and the Bankruptcy Appellate Panel of the Sixth Circuit affirmed, 262 B.R. 412 (6th Cir. B.A.P. 2001). TSAC appealed to the Sixth Circuit Court of Appeals, which affirmed, holding that the Bankruptcy Clause of the Constitution, U.S. Const., Art. 1, § 8, cl. 4, provides Congress with the necessary authority to abrogate state sovereign immunity in 11 U.S.C. § 106(a). 391 F.3d 755, 767 (6th Cir. 2003). The U.S. Supreme Court granted certiorari, 539 U.S. 986, 124 S.Ct. 45 (2003), to determine whether the Bankruptcy Clause grants Congress the authority to abrogate state sovereign immunity from private suits.

Holding: The Supreme Court held that an adversary proceeding to determine the dischargeability of a student loan debt is not a suit against a State for purposes of the Eleventh Amendment. In so holding, the Supreme Court affirmed the Sixth Circuit Court of Appeals and remanded the case without reaching the question on which certiorari was granted.

• The discharge of a debt by a Bankruptcy Court is an in rem proceeding.
• A Bankruptcy Court has exclusive jurisdiction over a debtor’s property, wherever located, and over the debtor’s estate.
• A Bankruptcy Court’s in rem jurisdiction allows it to adjudicate a debtor’s discharge claim without in personam jurisdiction over the state.
• States, whether or not they choose to participate in the proceeding, are bound by a Bankruptcy Courts’s discharge order no less than other creditors.
• Where a Bankruptcy Court’s jurisdiction over the res is unquestioned, the exercise of its in rem jurisdiction to discharge a debt does not infringe state sovereignty.
• The service of a summons and complaint in the adversary proceeding does not infringe on state sovereignty, because it does not seek to establish in personam jurisdiction, and because the service of a summons in a discharge proceeding is indistinguishable in practical effect from a motion.
  

In re Reynolds, 425 F.3d 526, (8th Cir. 2005), cert. denied by 127 S.Ct. 46 (2006)
Background: Chapter 7 Debtor was 32 years old, married with three teenage step-children, and a law school graduate. Debtor’s student loan indebtedness exceeded $142,044.55 at the time of trial. Debtor was diagnosed by several different mental health professionals as having one or more of the following conditions: major depression, panic and anxiety disorder, and borderline personality disorder. Debtor began experiencing symptoms of mental illness as early as junior high school. Since graduating from law school in 1995, Debtor had been unable to obtain substantial employment in the legal field, and had worked primarily in clerical and secretarial positions. Debtor viewed her financial situation, particularly her large educational loan burden, as a “major stressor” which triggered her depressive illness. Debtor and her spouse owned minimal assets. They had a monthly income surplus of $700.00. Bankruptcy Court granted undue hardship discharge (303 B.R. 823) and Appellants appealed. District Court affirmed Bankruptcy court ruling and Appellants appealed.

Holding: Affirmed. No error in the bankruptcy court's holding that excepting the student loans from the discharge would cause an undue hardship.

• Determination of undue hardship under 11 U.S.C. §523(a)(8) is a question of law to be reviewed de novo.
• Bankruptcy Court’s factual findings are reviewed under the clearly erroneous standard.
• The test for undue hardship in the Eighth Circuit is the totality of the circumstances test, which considers the following factors: (1) the debtor’s past and present financial resources, and those the debtor can reasonably rely on for the future, (2) the reasonable necessary living expenses of the debtor and the debtor’s dependents, and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.
• Subordinating financial circumstances for non-pecuniary ones under the totality of circumstances test should be reserved only for the extraordinary case, where the potential of non-pecuniary hardship is manifest, palpable, and of great magnitude.
• Existence of student loan debts constituted a major stressor on debtor which impacted not only her future health, but her future financial situation. “Where the evidence shows that financial obligations are likely to undermine a debtor's health, which in turn will affect the debtor's financial outlook, such facts and circumstances should be taken into account…We will not adopt an interpretation of "undue hardship" that causes the courts to shut their eyes to factors that may lead to disaster, both personal and financial, for a suffering debtor.”
• “While it is true that the income and expenses of husband and wife are combined for the purpose of examining a household's finances, it does not seem proper, in the circumstances where the debtor and non-debtor spouse have contributed about equally to the family income and expenses, to attribute the entire surplus to the debtor in favor of the debtor's creditors.” (Concurring opinion).

Background: Chapter 13 debtors prevailed on adversary proceeding in Bankruptcy Court to discharge student loan debt. District court reversed, ruling that the adversary proceeding was not ripe for adjudication. Debtor appealed.

Holding: The Eighth Circuit affirmed the District Court’s decision that the proceeding was not ripe for adjudication.

• The factual question under 11 U.S.C. §523(a)(8) is whether undue hardship exists at the time of discharge, not at the time that the adversary proceeding is commenced.
• Proceedings under 11 U.S.C. §523(a)(8) should take place close to the discharge date “so that the court can make its determination in light of the debtor’s actual circumstances at the relevant time.”
• The possible accrual of interest payments while adjudication is deferred does not prejudice the Debtor and is insufficient to justify premature adjudication of the issue.

Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003).

Background: Debtor was a 39-year-old single mother of a 10-year-old child. Debtor lived in the basement of her parents’ home, and worked nine months out of the year while she pursued an additional degree. Debtor was being treated for a medical condition. Her monthly income exceeded her expenses by an amount ranging from about $60-$330 per month. The Bankruptcy Court found undue hardship, and the B.A.P., reviewing the case for “clear error,” affirmed. 271 B.R. 322.

Holding: The Eighth Circuit REMANDED the case to the B.A.P. for a de novo review of the Bankruptcy Court’s undue hardship determination.

• The bankruptcy court's decision as to whether a debtor's student loans would impose an "undue hardship" under 11 U.S.C. § 523(a)(8) is a question of law, because the determination requires a conclusion regarding the legal effect of the Bankruptcy Court's findings as to the debtor's circumstances. Such a legal conclusion is subject to de novo review. NOTE: This standard of review set forth by the Eighth Circuit differs from the pre-Long decisions in this circuit which discuss the standard of review for undue hardship determinations. UNDUE HARDSHIP DETERMINATIONS MUST NOW BE REVIEWED DE NOVO.
• The Court reaffirmed the totality-of-the-circumstances test as set forth in Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews ), 661 F.2d 702, 704 (8th Cir. 1981), as the proper standard for the bankruptcy court to apply in § 523(a)(8)actions. "In evaluating the totality-of-the-circumstances, our bankruptcy reviewing courts should consider: (1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case."
• "Simply put, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt--while still allowing for a minimal standard of living--then the debt should not be discharged. Certainly, this determination will require a special consideration of the debtor's present employment and financial situation--including assets, expenses, and earnings--along with the prospect of future changes--positive or adverse--in the debtor's financial position."

Upon remand, the B.A.P. reviewed the Bankruptcy Court’s findings “de novo” and reversed the Bankruptcy Court. Long, 292 B.R. 635. The B.A.P. noted that the Debtor demonstrated no inability to work full time despite her medical condition, that Debtor’s monthly surplus was sufficient to make her student loan payments, and that under the Creditor’s Income Contingent Repayment Plan, any unpaid balance would be forgiven after 25 years. Id

Rose v. U.S. Dep’t of Educ., et al. (In re Rose), 187 F.3d 926, 42 Collier Bankr. Cas.2d 899, 34 Bankr. Ct. Dec. 1046, 137 Ed. Law Rep. 885, Bankr. L. Rep. P 77,977 (8th Cir. 1999).

Background: Debtors sought to discharge student loans in a Chapter 7 bankruptcy proceeding. Both the bankruptcy court and the district court on appeal ruled that the Missouri Student Loan Program (MSLP) had waived the right to claim sovereign immunity through the filing of proofs of claim to recover on some of the loans. The bankruptcy court also ruled that Debtors' loans were dischargeable under 11 U.S.C. § 523(a)(8) because of undue hardship, and the district court remanded that issue for further consideration. The MSLP filed an interlocutory appeal with the Eighth Circuit on the issue of sovereign immunity.

Holding: The Eighth Circuit AFFIRMED the district court’s holding that MSLP waived its Eleventh Amendment immunity with regard to its claims for which it had filed proofs of claim, and REMANDED for further proceedings on whether the student loan debts were dischargeable.

• A district court’s denial of a motion to dismiss based on Eleventh Amendment immunity is reviewed de novo.
• Submission of a proof of claim by a state is sufficient to waive any immunity which it otherwise might have had respecting the adjudication of the claim.
• Creditor’s submission of proofs of claims in the bankruptcy case waived its immunity in related adversary proceedings required to adjudicate the dischargeability of those claims.

Groves, et al. v. LaBarge (In re Groves, et al.), 39 F.3d 212 (8th Cir. 1994).

Background: Three Debtors appealed the district court judgment affirming bankruptcy court orders denying confirmation of their proposed Chapter 13 plans. The issue was whether a plan that proposes to separately classify and fully repay nondischargeable student loans discriminates unfairly against other unsecured creditors who will receive only partial repayment of their dischargeable claims.

Holding: The Court of Appeals AFFIRMED the district court and the bankruptcy court, holding that nondischargeability of student loan debt was not, without more, sufficient justification for according substantially different treatment to student loan versus other unsecured debt.

• A debtor may "designate a class or classes of unsecured claims [for purposes of repayment] but may not discriminate unfairly against any class so designated." 11 U.S.C. § 1322(b)(1).
• The debtor bears the burden of proving that the proposed classification does not discriminate unfairly.
• A plan that proposes to separately classify and fully repay nondischargeable student loans discriminates unfairly against other unsecured creditors who will receive only partial repayment of their dischargeable claims.
• Nondischargeability of student loan claims, by itself, does not justify substantial discrimination against other, dischargeable unsecured claims in a chapter 13 plan.
• Whether a chapter 13 plan could classify unsecured student loan debt separately from the debtor’s other unsecured debt is primarily a question of statutory construction, to be reviewed de novo by the Court of Appeals.
• A bankruptcy court order denying confirmation of a Chapter 13 plan without dismissing the bankruptcy case is not a “final order” from which an appeal may lie.

U.S. Dep’t of Health & Human Servs. v. Smith, 807 F.2d 122, 55 USLW 2330, 15 Collier Bankr.Cas.2d 1405, 15 Bankr.Ct.Dec. 610, 36 Ed. Law Rep. 560 (8th Cir. 1986).

Background: The issue was whether Debtor’s financial obligation incurred under the Physician Shortage Area Scholarship Program (“PSASP”), 42 U.S.C. § 295g-21 (Supp. V 1975), was a debt “for an educational loan” under 11 U.S.C. §523(a)(8), and as such not dischargeable in bankruptcy. Both the bankruptcy court and the district court held that the Debtor’s PSASP scholarship was not a “loan” and, therefore, was dischargeable. The government appealed.

Holding: The Court of Appeals REVERSED the district court and the bankruptcy court, holding that the physician-debtor’s financial obligation incurred under the PSASP was a “debt . . . for an educational loan” and hence not dischargeable.

• The Bankruptcy Code does not define "educational loan". Under well established definitions, however, Debtor’s PSASP scholarship constituted a "loan", since he agreed to reimburse the United States if he failed to practice in a physician shortage area.
• Although a strained construction of the language of PSASP arguably may be said to give rise to certain ambiguities as to whether a PSASP scholarship is a loan, the legislative history shows beyond doubt that Congress intended § 523(a)(8) of the Bankruptcy Code to make nondischargeable those debts incurred under programs such as PSASP.

Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 63 A.L.R. Fed. 563, 5 Collier Bankr.Cas.2d 307, 8 Bankr.Ct.Dec. 358, Bankr. L. Rep. P 68,369 (8th Cir. 1981).

Background: Debtor obtained a student loan in order to attend a local vocational school and study nursing. The debtor successfully completed two quarters of study when she learned that she had Hodgkin's Disease. At the time of the discharge proceedings, Debtor was thirty-six years old, divorced, received no alimony, had no support obligations, and no dependents. Debtor’s disease was in remission but there was a possibility that she would suffer a relapse. The Bankruptcy Court granted the hardship discharge, and Creditor appealed.

Holding: The Eighth Circuit Court of Appeals VACATED the judgment and REMANDED the case to the Bankruptcy Court, because the record lacked information regarding the Debtor’s necessary living expenses. The Eighth Circuit instructed the Bankruptcy Court to examine the Debtor’s reasonable living expenses and determine whether Debtor would be able to repay her student loan out of the balance of her estimated income less reasonable living expenses.

• The Andrews court’s analysis for determining “undue hardship” is now referred to as the “totality of circumstances” test, which continues to be the prevailing test for “undue hardship” in the Eighth Circuit. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). The test requires an analysis of: the debtor’s past, present, and reasonably estimated future resources; the reasonable necessary living expenses of the debtor and her dependents; and other facts and circumstances surrounding that particular case.
• Debtor’s disease is a relevant factor in the determination of undue hardship, since serious illness often requires expensive treatment and medication, and may affect an individual’s ability to work.

Educational Credit Management Corp. v. Jesperson (In re Jesperson), 2007 WL 4105221 (D. Minn. 2007)

Background:  Debtor was a 43-year-ld, unmarried, non-custodial parent of two young children from different relationships.  He was in good physical health, but was a recovering alcoholic who attended multiple weekly meetings to remain sober.  Debtor held a law degree, but his legal career consisted of brief periods of employment as a judicial clerk and solo practitioner, and frequent periods of unemployment.  Debtor was currently employed by a temporary legal services firm and earning a career high of $48,000 per year, but his monthly expenditures still exceeded his monthly income.  Debtor owed approximately $364,000 in student loan debt at the time of the Bankruptcy Court trial to determine student loan dischargeability.  The Bankruptcy Court held that repayment of the student loans constituted undue hardship under 11 U.S.C §523(a)(8).   366 B.R. 908 (Bankr. D. Minn. 2007).  Educational Credit Management Corp., the holder of $304,000 in federally guaranteed student loans, appealed.

Holding:  The District Court AFFIRMED the Bankruptcy Court’s opinion discharging the student loan debt in its entirety.

• Question of whether declining to discharge a student loan debt would pose undue hardship is a question of law to be reviewed de novo.
• Debtor bears the burden of proof by a preponderance of evidence to prove undue hardship under 11 U.S.C. §523(a)(8).
• In the Eighth Circuit, a court determines undue hardship based on “totality of circumstances test,” which considers: (1) debtor’s past, present and reasonably reliable future financial resources; (2) a calculation of the debtor’s and his dependents’ reasonable necessary living expenses; and (3) any other relevant facts and circumstances in the particular bankruptcy case.
• If debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt while still allowing for a minimal standard of living, then the debt should not be discharged.  Debtor’s monthly deficit indicated he could not make student loan payments.
• In the Eighth Circuit, good faith is just one of the non-economic factors a bankruptcy court can consider.  Debtor’s failure to make a single student loan payment, given his lack of income, did not imply a lack of good faith.
• Income contingent repayment plans (ICRPs) serve a different purpose than the discharge provisions of the Bankruptcy Code.  An ICRP in this case would result in negative amortization of student loan debt and a potentially significant tax bill if the student loan were ultimately forgiven after 25 years.

Background: Debtor obtained a bachelor’s degree in business administration with a major in finance. Debtor is divorced, 31 years old, and is the custodial parent of two children, ages eleven and six. Debtor receives no child support, because the father of her children is unemployed, living with family, and without the means to pay her. Debtor is to undergo an unspecified surgery in the near future. Debtor works 32 hours per week in the admissions department of a medical center. She continues to search for work in her field but has so far been unsuccessful. Debtor’s expenses exceed her gross monthly income by $214. The Bankruptcy Court determined that Debtor’s student loans were dischargeable under 11 U.S.C. §523(a)(8). Defendant appealed.

Holding: The Bankruptcy Appellate Court affirmed the Bankruptcy Court decision.

• Determinations of dischargeability under 11 USC §523(a)(8) implicate two standards of review. The ultimate determination of whether excepting a student loan debt from discharge will impose an undue hardship is reviewed de novo, but the subsidiary factual findings underpinning the undue hardship analysis are reviewed for clear error.
• Bankruptcy court’s finding that Debtor could not afford to make monthly payments of $13.03 under an Income Contingent Repayment Plan (ICRP) was not clearly erroneous, because Debtor’s expenses exceeded her gross monthly income.
• Bankruptcy court’s determination that Debtor’s future financial resources will be insufficient to enable to repay her student loan debt was supported by evidence in the record, including Debtor’s past earning history, her ties to her geographical area where her relatives provide free daycare, and the low likelihood that Debtor will receive child support in the future.
• Availability of an Income Contingent Repayment Plan is a factor to be considered in determining undue hardship, but it is not determinative.
• Unlike the inquiry required under the ICRP, determination of undue hardship under 11 USC §523(a)(8) requires a case-by-case analysis of a debtor’s income in relation to her reasonable expenses.
• The availability and terms of the ICRP should not be given undue weight under the totality of circumstances analysis, because the ICRP serves a fundamentally different purpose than the discharge provisions (and exceptions thereto) of the Bankruptcy Code.

(Judge Schermer concurrence): Disagrees with majority’s assessment that the ability to afford payments under the ICRP is merely a single factor among many to be considered in the student loan discharge context. If a debtor’s budget demonstrates the debtor can afford payments under the ICRP, continued liability on the student loans does not create an undue hardship. In the present situation, however, Debtor’s budget does not permit payment of the amount that would be due under the ICRP, nor does the Debtor face any prospect which would permit repayment in the reasonably foreseeable future, and the student loans are therefore dischargeable under 11 USC §523(a)(8).

Background: Debtor held a master’s degree in nursing and was employed in that profession after obtaining her degree. Debtor made timely payments on her student loans for a period of five years, and then defaulted on her obligations. Shortly after defaulting, debtor negotiated an income contingent repayment plan and made regular payments under the plan for approximately two years. At that time, the Department of Education (DOE) informed the Debtor it was reviewing her case and requested information concerning Debtor’s financial situation. The DOE claimed Debtor failed to provide the requested information, and demanded that Debtor begin making significantly larger monthly payments. Debtor attempted to provide additional information and negotiate another income contingent repayment plan, but negotiations failed. During this time, Debtor underwent surgery to alleviate severe pain in her lower back. The surgery was unsuccessful, and the Social Security Administration (SSA) determined that Debtor was 100% permanently disabled. Debtor retired from her nursing job due to her disablility. Debtor receives social security disability and federal pension payments. Debtor’s spouse suffers from multiple mental and physical conditions, and is also classified by the SSA as 100% permanently disabled. Debtor’s spouse receives both social security disability income and VA disability income. It is undisputed that neither Debtor nor her spouse will be able to obtain employment in the future, due to their respective disabilities. At the time Debtor filed the adversary complaint to discharge her student loan obligations, the balance including penalties and interest totaled $64,233.89. The bankruptcy court held that requiring the Debtor to repay her student loan obligations would constitute an undue hardship under 11 U.S.C. §523(a)(8), and found that her student loan debt was discharged.

Holding: The Bankruptcy Appellate Panel affirmed the bankruptcy court.

• The determination of undue hardship under 11 U.S.C. §523(a)(8) is a question of law to be reviewed de novo.
• A bankruptcy court’s subsidiary factual findings underpinning its undue hardship analysis are subject to the clearly erroneous standard of review.
• Under the clearly erroneous standard of review, an appellate court may only upset a trial court’s finding if, after reviewing the complete record, the appellate court is left with a definite and firm conviction that the finding is incorrect. The mere fact that evidence in the record would support the opposite result is not sufficient to disturb the bankruptcy court’s factual findings.
• Debtor has the burden of proving by a preponderance of the evidence that excepting her student loan debt from discharge would impose an undue hardship.
• The test for undue hardship in the Eighth Circuit is fact intensive and requires an examination of the totality of circumstances. The bankruptcy court should consider the following factors: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependents’ reasonably necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.
• Generally a bankruptcy court must include the non-borrowers spouse’s income in its undue hardship analysis; however, Debtor produced uncontroverted evidence that her spouse’s disability income was not available to pay Debtor’s student loan debt.
• The totality of the circumstances test does not require a bankruptcy court to examine Debtor’s expenses on a line-by-line basis and reduce expenses which are not reasonable or necessary. Rather, bankruptcy court is only required to examine whether Debtor’s total monthly expenses are reasonable and necessary given the particular facts and circumstances of the case.
• Debtor’s significant reduction in her living expenses, as well as Debtor’s unique circumstances, were factors supporting the bankruptcy court’s finding that Debtor’s overall expenses were reasonable and necessary.
• A debtor’s ability or inability to take advantage of an income contingent repayment program is not determinative of undue hardship under 11 U.S.C. §523(a)(8); rather, it is simply one of the many factors the bankruptcy court should consider.
• The flexible totality of the circumstances test allows the bankruptcy court to examine non-economic factors in appropriate cases.
• Non-economic factors which the bankruptcy court properly considered in its undue hardship analysis included: Debtor’s good-faith effort to negotiate an income contingent repayment plan, Debtor’s payment history on her student loans while she was employed, and Debtor’s complete and permanent disability which prevented her from increasing her income through no fault of her own.

Background: Debtor is a 51-year-old divorced woman with no dependents. Debtor graduated with a degree in art education and was employed as an art teacher. During the summer months, Debtor did not have a paying job, and provided free child care for her grandchildren. At the time of the trial to determine whether Debtor’s student loan should be discharged, Debtor owed nearly $70,000 in student loan obligations. The Bankruptcy Court found that if the Debtor’s student loan payment were eliminated from her budget, her net monthly income would be sufficient to make payments under the William D. Ford Consolidation Program. Nevertheless, the Bankruptcy Court determined that repayment of the student loan would impose an undue hardship on the Debtor, and discharged the student loan debt. Creditor appealed.

Holding: The Bankruptcy Appellate Panel for the Eight Circuit reversed the Bankruptcy Court’s decision, and found that the Debtor’s student loan obligation did not impose an undue hardship on the Debtor.

• A Bankruptcy Court’s determination of undue hardship is reviewed de novo.
• Debtor bears the burden of proving that excepting her student loans from discharge pursuant to 11 U.S.C. §523(a)(8) of the Bankruptcy Code would result in an undue hardship.
• The test for undue hardship “requires an inquiry into the totality of circumstances with special attention to the debtor’s past, current, and reasonably reliable future financial resources; the reasonable necessary living expenses of the debtor and the debtor’s dependents; and any other relevant facts and circumstances unique to the particular bankruptcy case.”
• Debtor has a duty to maximize her income.
• Where a debtor has future monthly income sufficient to make payments on her student loan under a student loan consolidation program, while still allowing for a minimal standard of living, the debt should not be discharged.
  

Background: Debtor was 42 years old and worked 40 hours per week as a teacher/caregiver for toddlers at a private school with a high percentage of special needs students. Debtor held a degree in early childhood education, and had completed most of the coursework for a masters degree in early childhood special education. Debtor shared a one-bedroom apartment with her boyfriend. At the time of trial, the Debtor owed nearly $90,000 in student loans. Creditor argued that Debtor was underemployed, and that repaying her student loans would not impose an undue hardship if she were to obtain a second job or a higher paying position. The Bankruptcy Court found that excepting Debtor’s student loans from discharge would impose an undue hardship on her, and that the Debtor’s student loans should therefore be discharged.

Holding: The Bankruptcy Appellate Panel reversed, holding that the Debtor’s current income was sufficient to make payments under the Income Contingent Repayment Program, and that no reasonably reliable evidence existed to show that Debtor’s financial circumstances would change in the near future. Therefore, no undue hardship existed and Debtor’s student loan was not dischargeable.

• A bankruptcy appellate panel reviews de novo the bankruptcy court’s determination of undue hardship under 11 U.S.C. 523(a)(8).
• The test for undue hardship in the Eighth Circuit is the totality of circumstances. In applying this test, a court must consider: (1) the debtor’s past, current and reasonably reliable future financial resources; (2) the reasonable necessary living expenses of the debtor and the debtor’s dependents; and (3) the other relevant facts and circumstances unique to the particular case.
• Debtor whose income was sufficient to make payments on her student loan showed no reasonably reliable evidence that her financial circumstances would change in the near future.

Ford v. Student Loan Guarantee Foundation (In re Ford), 269 B.R. 673 (B.A.P. 8th Cir. 2001).

Background: Sixty-two-year-old debtor owed over $73,000 in student loan debt after obtaining a Bachelor of Arts degree and attending one year of law school. The debtor had no net disposable income, and suffered from an arthritic condition that necessitated frequent breaks, preventing her from working for more than four or five hours per day. The Bankruptcy Court found that repaying the loan would cause an undue hardship for the debtor, and declared the debt to be nondischargeable. The SLGF appealed.

Holding: The B.A.P. AFFIRMED bankruptcy court’s decision to grant an “undue hardship” discharge.

• To determine whether debtor is entitled to “undue hardship” discharge of student loan obligations, bankruptcy court must apply the Eighth Circuit’s “totality of circumstances” test, and consider: (1) the debtor's past, current and reasonably reliable future financial resources; (2) the debtor’s and his/her dependents’ reasonable necessary living expenses; and (3) any other relevant facts and circumstances in particular bankruptcy case.
• The debtor has the burden of demonstrating “undue hardship” by a preponderance of the evidence.
• Debtor's failure to make voluntary payments against the debt and her neglect in pursuing forbearance or deferment options were relevant but not determinative factors in the totality of circumstances test for undue hardship.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Svoboda v. Educational Credit Management Corp. (In re Svoboda), 264 B.R. 190, 155 Ed. Law Rep. 553 (B.A.P. 8th Cir. 2001).

Background: Debtor was a healthy 38-year-old mother with a three-year-old son. Debtor obtained a bachelor's degree in elementary education with a certification for teaching children with learning disabilities. At the time of trial, Debtor owed over $17,000 in student loan debt, and was employed as an elementary school teacher working with children who have learning disabilities. To maintain her employment, Debtor was required to obtain a masters degree within the next four years. Upon obtaining her masters degree, she would receive an immediate salary increase of approximately $3,000.00 per year. While obtaining her masters degree, Debtor could defer payment of her student loan obligation, and was eligible to obtain a forgivable loan or subsidy because she would be getting her masters degrees in a field where there was a critical teacher shortage. Debtor’s monthly income slightly exceeded her monthly expenses.

The Bankruptcy Court found that repayment of the student loan obligation at issue would not create an undue hardship. Debtor filed a motion to "set aside" the bankruptcy court's judgment on the grounds that she had not received a support payment from her estranged husband. The Bankruptcy Court denied the motion, and Debtor appealed the Bankruptcy Court’s judgment and the denial of her motion.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court’s holding that Debtor was not entitled to an “undue hardship” discharge of her student loan debt.

• The Eighth Circuit test for “undue hardship” under §523(a)(8) is the “totality of the circumstances” test, requiring an analysis of: (1) the debtor's current and future financial resources; (2) the necessary, reasonable living expenses of the debtor and the debtor’s dependents; and (3) any other relevant facts or circumstances unique to the particular case.
• The debtor bears the burden of proving “undue hardship” by a preponderance of the evidence.
• Decisions on motions to alter or amend judgment are reviewed under an “abuse of discretion” standard. The Bankruptcy Court’s denial of Debtor's motion to alter or amend its earlier judgment was not an abuse of discretion, because the motion, which was based on a missing support payment from Debtor’s estranged husband, simply “rehashed” a factor that the Bankruptcy Court had already considered in entering its original judgment.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

McCormick v. Diversified Collection Services, Inc., (In re McCormick), 259 B.R. 907 (B.A.P. 8th Cir. 2001).

Background: Bankruptcy court found that Debtor was not entitled to and “undue hardship” discharge of her student loan debt. Debtor appealed.

Holding: The B.A.P. AFFIRMED the bankruptcy court’s decision, because the debtor failed to provide the appellate court with a transcript of the trial

• A determination of “undue hardship” under 11 U.S.C. §523(a)(8) is based on the “totality of the circumstances,” with a particular analysis of: (1) the debtor’s past, present, and reasonably reliable future financial resources, (2) a calculation of the debtor’s and her dependants’ reasonable, necessary living expenses, and (3) any other relevant facts and circumstances surrounding a particular case.
• Debtor bears the burden, both in terms of production of evidence and of persuasion, of proving an “undue hardship” by a preponderance of the evidence.
• The B.A.P. would not consider evidence that was not submitted to the trial court.
• The discharge exception based on the age of a debtor’s student loans, previously available under a prior version of the Bankruptcy Code, did not apply to Debtor, who filed her chapter 7 petition two months after the effective date of the amendment.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Related decision: 8th Cir. 9/7/2001 unpublished affirmance of above BAP decision.

Cline v. Illinois Student Loan Assistance Assoc. (In re Cline), 248 B.R. 347, 143 Ed. Law Rep. 928 (B.A.P. 8th Cir. 2000).

Background: Thirty-four-year-old single debtor with no dependents held a bachelor’s degree in psychology and sociology from and a master's degree in sociology. The balance on her student loan debt exceeded $53,000. Although Debtor was employed in her field as a caseworker, her income was modest. Debtor tried unsuccessfully to work in positions with higher pay, but those positions involved more stress than she could handle. The Bankruptcy Court found that the Debtor’s student loan was dischargeable on the basis of undue hardship. ISLAA appealed.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court’s discharge of the debtor’s student loan debt on the basis of undue hardship.

• The test for undue hardship is the totality of circumstances, with particular attention to the debtor’s current and future financial resources, to the necessary and reasonable living expenses of the debtor and the debtor’s dependents, and to any other facts unique to the particular bankruptcy case.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Andresen v. Nebraska Student Loan Program, Inc., (In re Andresen), 232 B.R. 127, 41 Collier Bankr.Cas.2d 1147 (B.A.P. 8th Cir. 1999).

Background: Debtor had a disability which made it unlikely that her income would increase at any time in the future. The child support received by Debtor for her son’s care would be eliminated when he soon reached the age of majority. Debtor’s minor daughter had medical problems which generated “extraordinary” expenses. The Bankruptcy Court granted hardship discharge for two of the debtor’s three student loans, and found that Debtor could pay the third loan without undue hardship.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court.

• The “undue hardship” exception to nondischargeability applies to each student loan individually and not to the aggregate obligation of cumulative student loan debt. The Bankruptcy Court did not grant Debtor a “partial discharge” of her student loan debt when it granted an “undue hardship” discharge for two of the Debtor’s three student loans. The express language of 11 U.S.C. §523(a)(8) refers to a student loan, an overpayment, or any obligation; the Code does not refer to a debtor’s sum of student loans.
• The “totality of the circumstances” test established by the Eighth Circuit in Andrews, 661 F.2d 702 (8th Cir. 1981), is the proper test for “undue hardship.” This test requires an analysis of (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) calculation of the debtor’s and his dependents’ reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding that particular bankruptcy case.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Johnson v. Missouri Baptist College (In re Johnson), 218 B.R. 449 (B.A.P. 8th Cir. 1998).

Background: Debtor executed a promissory note to obtain credit for tuition, books and other expenses. Debtor defaulted on the note and filed a Chapter 13 bankruptcy petition. The College filed a complaint to determine whether the debt qualified as a student loan under 11 U.S.C. §523(a)(8). The Bankruptcy Court determined that the debt to the College was a nondischargeable student loan under that provision, and Debtor appealed.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court’s holding that the College’s extension of credit to its student debtor constituted a “loan” within the meaning of the discharge exception for student loan debt, despite the fact that though no money had actually changed hands.

• The debtor signed a promissory note to evidence her debt, and by allowing the debtor to attend class without pre-payment, the college was in effect “advancing” the funds or credits to debtor’s student account.
• The debtor’s promise to remit the cost of tuition to the college in exchange for an opportunity to attend classes created a debtor-creditor relationship.

Background: Forty-eight year old married Debtor had a severely disabled 19 year old daughter and a healthy 14 year old son. Debtor owed over $90,000 in student loan debt. After a trial on the issue of undue hardship, the Bankruptcy Court found that the Debtor had sufficient disposable income to service the student loan debt, and found the student loan to be nondischargeable. See, 2003 WL 21397713 (Bankr. D. Minn. 2003). Debtor filed a motion for relief from the judgment.

Holding: The Bankruptcy court granted the Debtor’s motion for relief, finding that three categories of the Debtor’s monthly household expenses were omitted in error, and that Debtor no longer had a monthly surplus when those expenses were added to Debtor’s monthly budget. Debtor’s income was unlikely to increase materially in the foreseeable future.

• A debtor prevails under 11 U.S.C. §523(a)(8) “upon a showing of a lack of actual ability to make payment on account of the subject debt, at present and for the relevant future.”
• After factoring in three previously omitted categories of household expenses, Debtor had no surplus income with which to repay his student loan debt.
• The record at trial could not support a finding that Debtor’s income would increase materially for the foreseeable future. The age of Debtor’s law degree and Debtor’s lack of experience practicing law made it unlikely that Debtor could find a more lucrative position than his current vocation as a research attorney.
• Debtor’s wife was unable to work outside the home, because she served as the primary caregiver for their severely disabled adult daughter.
• 11 U.S.C. §523(a)(8) does not authorize a partial discharge of a singular student loan debt. Therefore, the Debtor was not required to pay down the student loan debt with funds Debtor obtained from refinancing his home.
  

Background: Fifty-year old, single debtor owed nearly $60,000 in educational debt. At the time of trial, two of debtor’s sons, ages 19 and 17, were living with her, and a third, older son had recently left the debtor’s household to live on his own. Debtor’s educational background was as an occupational therapy assistant, but she never obtained her OTA certificate, due to her inability in finding employment as an OTA for an adequate wage in the Duluth area where she lived. At the time of trial, Debtor was working a full time, temporary position with the Post Office with no benefits, and actively seeking employment for when that position terminated. Debtor received irregular child support payments from her former spouse averaging $260 per month. Debtor’s monthly expenses included $42 for internet access and $42 for a cell phone. Debtor’s monthly expenses exceeded her income. Her only significant assets were her home and her late model, high mileage automobile.

Holding: Excepting the student loan debts from discharge would impose an undue hardship on the debtor, and the loans were therefore dischargeable under 11 U.S.C. §523(a)(8).

• Determination of “undue hardship” is an issue of law.
• The “totality of the circumstances test” is the standard for undue hardship under 11 U.S.C. §523(a)(8). Factors to consider under this test include: a debtor’s income and other reasonably reliable future financial resources; the debtor’s reasonably necessary living expenses, both now and with respect to future changes in the debtor’s financial situation; and any other relevant facts and circumstances surrounding the particular bankruptcy case.
• Debtor bears the burden of proving she is entitled to an exception to the exception for discharge.
• Non-pecuniary factors may be assigned significant weight in an undue hardship analysis.
• Where a debtor proves a de facto inability to repay the debt over a relevant period of time, non-pecuniary factors do not come into play, and the debtor is entitled to a determination that the debt is dischargeable.
• Anticipated future monthly expenses for medical insurance premiums ($200), delinquent real estate tax payments ($75), a replacement vehicle and auto maintenance ($50), and an emergency reserve ($100) were reasonably necessary in determining this debtor’s monthly expenditures.
• Undue hardship must be measured as of the date of the trial, and for a reasonably-forecast near future alone. Therefore, the anticipated payoff of the debtor’s mortgage more than 7 years into the future was not factored into the undue hardship analysis.

Background: Forty one year old Debtor owed approximately $36,000 in educational loans at the time of trial. Debtor was married, with five children ranging in age from 3 to 10. Debtor’s husband was employed, but Debtor was unable to work outside the home due to the demands of her severely autistic 9-year-old son. Debtor’s household income, including annual income tax refunds, slightly exceeded household expenses. Debtor’s only significant assets were her home, which had equity of approximately $40,000, and a 40-acre parcel of undeveloped property with little or no equity. Debtor was making monthly payments of $300 on the undeveloped property, and used the land for therapeutic horseback riding for her autistic son. Debtor hoped to eventually build a home on the undeveloped property.

Holding: Excepting the student loans would not impose an undue hardship on the Debtor, and the loans were therefore not dischargeable under 11 U.S.C. §523(a)(8).

• Determination of undue hardship under 11 U.S.C. §523(a)(8) is a question of law.
• The debtor bears the burden of proof under 11 U.S.C. §523(a)(8).
• The “totality of the circumstances” test for undue hardship requires the court to consider: 1) debtor’s past, present, and reasonably reliable future resources, including assets, expenses, and earnings and the prospect of future changes-positive or negative-in the debtor’s financial position; 2) debtor’s and debtor’s dependents’ reasonable necessary living expenses; and 3) any other relevant facts and circumstances surrounding each particular case.
• “[I]f the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt—while still allowing for a minimal standard of living—then the debt should not be discharged.” 303 B.R. at 625 (quoting Long, 322 F.3d at 554-555).
• In this case, Debtor’s slight monthly surplus, along with financial assets that could be sold or reorganized, made it possible for Debtor to meet the basic needs of the family and still make meaningful payments on the student loan debt.
• The amount of the student loan was “not so much as to be wholly or eternally insurmountable.” 303 B.R. at 625.
• A debtor should not be allowed to maintain non-essential assets or other types of disposable income or surplus at the expense of creditors.

Strand v. Sallie Mae Servicing Corp. et. al. (In re Strand), 298 B.R. 367 (Bankr. D. Minn. 2003)

Background: Fifty-four-year-old Debtor suffered from several physical and psychological conditions, including post traumatic stress syndrome, dyslexia, diabetes, arthritis and heart disease. As a result of these conditions, Debtor had difficulty finding and maintaining employment. Debtor’s monthly expenses exceeded his income. At the time of trial, Debtor owed approximately $130,000 in student loans.

Holding: Requiring the Debtor to repay the student loan debt would impose an undue hardship, and the debt was therefore dischargeable.

• The “totality of the circumstances “ test is the only permissible test in the Eighth Circuit for undue hardship under 11 U.S.C. §523(a)(8). The test requires the Court to consider three elements: (1) the debtor’s past, present, and reasonably reliable future financial resources, including assets, expenses, and earnings and the prospect of future changes—positive or negative—in the debtor’s financial position; (2) the debtor’s and the debtor’s dependents’ reasonable and necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular case.
• Unique circumstances for purposes of determining undue hardship include physical or mental disability of the debtor or other dire circumstances that are beyond the control of the debtor.
• The debtor bears the burden of proving undue hardship by a preponderance of the evidence.
• The Income Contingent Repayment Program is merely one factor underlying the totality of the circumstances analysis, and should not be given more weight than other factors.

Korhonen v. Educational Credit Management Corporation, et. al. (In re Korhonen), 296 B.R. 492 (Bankr. D. Minn. 2003). [Requires Visioneer viewer for .max format]

Background: Forty-two-year-old, homeless Debtor owed over $110,000 in student loans at the time of his Chapter 7 filing. Debtor earned up to $500 per month from odd jobs. His monthly expenses were consistently in excess of $700 and were certain to rise once he added expenses for shelter and utilities. Debtor had chronic psychological problems and recent physical ailments, which kept him from retaining employment for longer than a few months. Debtor’s psychological and physical situation were not likely to change significantly in the future, and it was doubtful that his student loans would ever be repaid.

Holding: The Bankruptcy Court granted an undue hardship discharge.

• The Eighth Circuit test for undue hardship requires an inquiry into the totality of circumstances, with special attention to the debtor's past, current, and reasonably reliable future financial resources; the reasonable necessary living expenses of the debtor and the debtor's dependents; and any other relevant facts and circumstances unique to the particular bankruptcy case.
• Debtor bears the burden of proving undue hardship by a preponderance of the evidence.
• A debtor’s willingness to participate in the Department of Education’s Income Contingent Repayment Plan is one factor to be considered in determining undue hardship, but it is not determinative.

Status: notice of appeal filed.

Soler v. U.S. Dep’t of Health & Human Servs., et al. (In re Soler), 261 B.R. 444, Bankr. L. Rep. P 78,455 (Bankr. D. Minn. 2001). [Visioneer .max format viewer required]

Background: Debtor was from Puerto Rico and spoke and understood little English. She attended dental school in Milwaukee, and financed her education through student loans. At the time of trial, Debtor had two loans insured by the Higher Education Assistance Loan Program. (“HEAL loans”). One HEAL loan was held by the Wisconsin Higher Education Aids Board (“WHEAB”), in the amount of approximately $150,000. The other HEAL loan was held by the U.S. Department of Health and Human Services (“U.S.”), for about $80,000. Debtor also owed a non-HEAL loan to U.S. Air Funds (USAF”), for approximately $56,000.

Upon graduating, repaying her student loans was the “driving force” in Debtor’s life. She continuously searched for higher paying jobs, explored numerous options to increase her income, worked with chronic back pain which was aggravated by her work as a dentist, sought to cut and minimize her expenses everywhere she could, and went without the things that many take for granted. She made monthly payments on her loan debt for almost eight years.

Debtor filed an adversary proceeding, seeking a “hardship discharge” under 11 U.S.C. § 523(a)(8) of her student loan obligations. The United States filed a counterclaim and sought a judgment against the debtor for the amount owed by the debtor.

Holding: Excepting Debtor's HEAL loan held by WHEAB from discharge would be unconscionable under 42 U.S.C. § 292f(g), and the WHEAB loan was therefore discharged. However, excepting the HEAL loan held by the United States would not be unconscionable under 42 U.S.C. § 292f(g) and the U.S. loan was therefore not dischargeable. Excepting the USAF loan from discharge would impose an undue hardship on the debtor within the meaning of 11 U.S.C. § 523(a)(8), and the USAF loan was therefore discharged.

• Dischargeability of loans insured under the HEAL program is determined exclusively under 42 U.S.C. § 292f(g). Congress created the HEAL program to enable health profession students the means to borrow sufficient funds for their graduate school education. See generally, 42 U.S.C. § 292, et seq. A loan insured under the HEAL program may be discharged in bankruptcy "only if such discharge is granted—

(1) after the expiration of the seven-year period beginning on the first date when repayment of such loan is required, exclusive of any period after such date in which the obligation to pay installments on the loan is suspended;
(2) upon a finding by the Bankruptcy Court that the nondischarge of such debt would be unconscionable; and
(3) upon the condition that the Secretary shall not have waived the Secretary's rights to apply subsection (f) of this section to the borrower and the discharged debt."
42 U.S.C. § 292f(g). All three of the requirements must be met in order for a HEAL loan to be discharged.

• The burden is on the debtor to prove that failure to discharge the HEAL loans would be unconscionable.
• Courts have adopted the ordinary usage of the term, "unconscionable," finding that it means: “shockingly unfair, harsh or unjust,” “excessive, exorbitant, lying outside the limits of what is reasonable or acceptable.”
• Under a totality of the circumstances examination as to unconscionability, the bankruptcy court should consider the following objective factors, the debtor's: 1) income, 2) earning ability, 3) health, 4) educational background, 5) dependents, 6) age, 7) accumulated wealth, and 8) professional degree, including whether the debtor has obtained employment commensurate with her education. In addition, courts should also consider: the amount of the debt and the rate of interest; the debtor's claimed expenses and living standard, including whether the debtor has taken steps to minimize the expenses; whether the debtor has attempted to maximize her income and whether the debtor can supplement that income through part-time employment; whether, and to what extent, the debtor's situation is likely to continue or improve; and, the debtor's good faith, including the debtor's efforts to repay the HEAL loans and the debtor's financial situation when making any repayment efforts.
• The test in the Eighth Circuit for “undue hardship” under 11 U.S.C. §523(a)(8) is the totality of the circumstances, with special attention to: (1) the debtor's current and future reasonably reliable financial resources; (2) the debtor’s, and her dependents’, reasonable, necessary living expenses, and (3) any other circumstances unique to the particular bankruptcy case.
• Where Debtor’s income is not likely to increase in the future due to her back injury, and where Debtor has taken all reasonable steps to minimize expenses and maximize income, excepting the student loan from discharge would impose undue hardship.

Soler v. U.S. Dep’t of Health & Human Servs., et al. (In re Soler), 250 B.R. 694 (Bankr.D.Minn. 2000) [Visioneer *.max format viewer required]

Background: Shortly after filing her Chapter 13 case, Debtor brought adversary proceeding to determine the dischargeability of her student loans under 11 U.S.C. 523(a)(8) and 42 U.S.C. 294f(g). The United States moved to dismiss the complaint for failure to state a claim upon which relief can be granted.

Holding: The Bankruptcy Court DISMISSED the adversary complaint because it was not ripe.

• The dischargeability of a student loan depends not only on the nature of the debt, but also depends on the debtor’s situation at the time of discharge.
• A dischargeability determination is only necessary if there is a discharge, and Debtor’s discharge was remote in time and speculative.
• Debtor’s complaint to determine dischargeability five years in advance of her anticipated discharge is premature and seeks relief which cannot presently be granted.

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