The bankruptcy court failed to adequately consider all the relevant facts and circumstances when it granted discharge of the debtors’ student loan. Johnson v. ECMC, No. 15-2631 (D. Kans. March 2, 2016).
George Johnson and Melanie Raney-Johnson filed for chapter 7 bankruptcy listing a consolidated student loan of approximately $83,000. They were in their late thirties and had three children under the age of twelve. Melanie did not obtain her college degree and she worked as a billing supervisor for the VA Hospital. George had a degree in sociology and, having been recently laid off from his job as a guidance counselor, was working part-time as a substitute teacher and coach. They had obtained deferrals and forbearances on the loan and had actually paid approximately $2440.00 during the eight years they made payments. In the hearing on their adversary proceeding to discharge their student loan under section 523(a)(8), the Johnsons testified that until their bankruptcy they were not aware of the possibility of taking part in an income based repayment plan. When they were told they were eligible under an IBR plan to make monthly payments of $234.00 they testified that the payments would create a significant hardship when their children entered college. The bankruptcy court granted discharge of the loan. The district court vacated and remanded.
In considering student loan discharge the Tenth Circuit applies a non-formulaic version of the three-part, undue hardship, test established in Brunner v. New York State of Higher Education Services, 831 F.2d 395, 396 (2d Cir. 1987), taking into consideration the unique facts and circumstances of each case. With this in mind the district court began with the debtor’s ability to maintain a minimal standard of living. Here, the court agreed with the bankruptcy court’s finding that the Johnsons established this factor. Even taking out what the trustee called “gratuitous” expenses such as fees for children’s sports, birthday parties, dining out, etc., the Johnsons were still in the red with no provision for unexpected expenses.
The next Brunner factor of “additional circumstances” suggesting that a debtor will not be able to repay the debt, does not require “certainty of hopelessness” but does require more than the financial distress typical of all bankruptcy filers. The district court found the bankruptcy court’s conclusion that the Johnson’s current financial situation was likely to persist did not delve deeply enough into the circumstances of the case in that it did not apparently consider Mr. Johnson’s good health and his expectation that he would find employment and increase his income.
Additionally, part of the bankruptcy court’s reasoning that additional circumstances favored the Johnsons was based on its conclusion that the student loan had a ten-year expiration period that had expired, and that since Brunner was adopted at a time when student loans were generally dischargeable after five years, the expiration of the loan was a significant circumstance. The district court found that conclusion, at least arguably, both factually and legally erroneous. The loan documents listed the loan as a 30-year loan, and while the court did not say that the passage of ten years was irrelevant, it instructed the bankruptcy court to conduct a more “searching inquiry.”
The court also found that the bankruptcy court had not adequately addressed the issue of the Johnson’s good faith in trying to repay the loan. This inquiry looks to the debtors’ efforts to maintain employment, maximize income, and minimize expenses. While the bankruptcy court had been persuaded in favor of the Johnsons based on the payments they had made, their consolidation of their individual loans and their efforts to remain in contact with the lender, the district court found these facts insufficient on their own to establish good faith. The ECMC countered that a good faith effort to repay the loan would demand that the debtors avail themselves of the IBR plan. The tenth circuit in In re Alderete, 412 F.3d 1200 (10th Cir. 2005), held that the availability of an IBR plan is a factor in the consideration of whether a debtor has made a good faith effort to repay.
The court remanded with instructions that the bankruptcy court conduct a more thorough analysis of the facts relevant to the second and third prongs of the Brunner test.
Johnson D Kans opinion March 2016
Tags: Student loans
