by The Bankruptcy Court for the District of Massachusetts applied the totality-of-the-circumstances test to find that the Chapter 7 debtor was entitled to have her student loans discharged in bankruptcy notwithstanding the fact that she had substantial exempt equity in her home. Schatz v. U.S. Dept. of Ed., No. 14-30825, Adv. Proc. No. 15-3001 (Bankr. D. Mass. Oct. 2, 2019).
When the debtor, Audrey Schatz, was in her fifties she attempted to improve her earning potential by attending law school, for which she incurred $106,000 in student loans. After becoming a lawyer, however, she was unable to find satisfactory employment and was earning approximately $25,000 when she filed for bankruptcy. The bankruptcy court rejected her position that the student loan debt caused her undue hardship and found that the loans were nondischargeable under section 523(a)(8).
The BAP for the First Circuit reversed and remanded. Under Law v. Siegel, 571 U.S. 415 (2014), with certain specific exceptions, a court may not consider exempt property as a source of income to repay a debt. The panel, in this case, found that, although the bankruptcy court ostensibly applied a totality of circumstances test to the question of dischargeability, it considered only the exempt equity in her home. The panel remanded with instructions for the bankruptcy court to consider all relevant circumstances and not rely on exempt assets in its analysis. Schatz v. Access Group, Inc. (In re Schatz), 602 B.R. 411 (B.A.P. 1st Cir. 2019) (blogged here).
On remand, the bankruptcy court applied the totality of circumstances test again, this time without considering Ms. Schatz’s exempt home equity, and was “persuaded that the Debtor is not currently, or in the foreseeable future, able to increase her annual income over reasonable expenses by approximately $12,000. Even were the Debtor to find additional employment, this Court finds that the Debtor would require those excess funds to cover necessary medical and dental procedures and other expenses that she is currently unable to afford. Furthermore, this Court finds that the ability of the Debtor to relocate to earn more money is not only highly unlikely but is also contrary to the BAP’s opinion emphasizing the importance of protecting the Debtor’s homestead.” It concluded, therefore, that repaying the loans would constitute undue hardship under section 523(a)(8) and entered judgment for the debtor.