Kelly v. Sallie Mae Servicing & Educational Credit Management Corp.

Citations: 351 B.R. 45; 2006 Bankr. LEXIS 2433Docket: Bankruptcy No. 1-05-13887-dem; Adversary No. 1-05-1220-dem

Court: United States Bankruptcy Court, E.D. New York; September 21, 2006; Us Bankruptcy; United States Bankruptcy Court

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On June 15, 2005, Laura Kelly initiated an adversary proceeding against Educational Credit Management Corporation (ECMC) and Sallie Mae, seeking to discharge her pre-petition student loans under Section 523(a)(8) of the Bankruptcy Code. Following a trial on April 4, 2006, the court concluded that the plaintiff did not demonstrate "undue hardship" necessary for discharging her student loans, thus rendering the debts non-dischargeable. The court's jurisdiction is affirmed under 28 U.S.C. 1334(b) and 157(b)(2)(c), and this Decision and Order serves as the court’s findings of fact and conclusions of law as required by Fed. R. Bankr. P. 7052.

Background information reveals that Kelly filed for Chapter 7 bankruptcy on March 21, 2005, and subsequently sought to discharge approximately $19,791.39 in loans from ECMC and $31,629.93 from Sallie Mae. The trial featured testimony from Kelly and her medical expert, Dr. Jonathan W. Stewart. Kelly, 44, holds a bachelor's degree in Fine Arts from Yale and resides alone in Astoria, New York, receiving $1,133 monthly in Social Security Income (SSI), with monthly expenses totaling $1,045. She has a history of major depressive disorder and social phobia, experiencing multiple depressive episodes over the years, including hospitalization for severe depression and suicidal thoughts. Despite her mental health challenges, Kelly reported a twelve-year period of relative symptom-free status during which she maintained various employment positions.

From 1991 to 1996, the plaintiff worked part-time as a secretary in Boston while pursuing a part-time graphic design certificate at the Massachusetts College of Art, which she completed in 1996. She then freelanced as a graphic designer for two years before being hired as a full-time graphic designer by Coco Raines in 1998 at an annual salary of $30,000. In 1999, she joined the Museum of Fine Arts in Boston, earning $44,000 annually until her departure in fall 2003 to attend graduate school at the School of Visual Arts in New York. To fund her education, she took out student loans from Sallie Mae and NY-HESC but withdrew from the program due to depression without earning a degree.

In November 2004, she was granted a deferment on her student loans, which were due that fall. Despite taking steps to reduce her living expenses, including filing for bankruptcy and applying for disabled housing, she did not explore available repayment options. The parties acknowledged her eligibility for the William D. Ford Direct Loan Program, which offers deferment and repayment options, including an Income Contingent Repayment Plan (ICRP) requiring monthly payments of $23.83. Sallie Mae, although not part of the Ford Program, had renegotiated repayment terms, which the plaintiff rejected.

Dr. Stewart, who treated the plaintiff since November 2004, was involved in a research study examining a treatment for major depressive disorder. After a six-week hospitalization in December 2004 due to suicidal ideation, her symptoms improved significantly during the study, with her depression ratings indicating no symptoms by February 2005. Dr. Stewart assessed her again in April 2006 for trial preparation.

Stewart testified that the plaintiff's HAM-D score of seventeen indicated moderate depression and attributed her relapse to inconsistent use of light treatment, which he believed was beneficial. He noted the importance of timing in the application of the light therapy for correcting bodily rhythms. Based on her condition, Stewart concluded that the plaintiff could not manage a full-time job due to her struggles with social interactions and transportation, though he acknowledged that she could attend important appointments, as evidenced by her timely arrival at court. He characterized psychiatry as "more of an art than a science," stating that current treatments are inadequate, and predicted that the plaintiff's depression would continue unless effective interventions are found. 

The court instructed the plaintiff's counsel to submit a post-trial memorandum by May 4, 2006, and the defendants' counsel by May 25, 2006, but only the defendants complied. The court then took the matter under advisement. 

In terms of bankruptcy, it is generally difficult for debtors to discharge student loan debt under Section 523(a)(8) of the Bankruptcy Code unless they can prove undue hardship, which is a heavy burden. The "undue hardship" determination follows the three-prong Brunner test: (1) inability to maintain a minimum standard of living while repaying loans; (2) existence of additional circumstances likely to persist during a significant portion of the repayment period; and (3) good faith efforts to repay the loans. The standard of proof is preponderance of the evidence, and failing to meet any prong is detrimental to the debtor's claim. The plaintiff's inability to maintain a minimal standard of living if forced to repay the loans was highlighted as the first prong of the analysis.

The first prong of the Brunner test requires the plaintiff to demonstrate an inability to maintain a minimal standard of living based on her current income and expenses if required to repay her student loans. The court assesses the plaintiff's monthly income of $1,133 from SSI and her expenses, which total $1,045 (rent, food, telephone), leaving her with $98 in excess income. Although she could theoretically afford minimal loan payments under repayment plans, the court recognizes that other expenses, such as laundry and transportation, may not have been fully considered. Ultimately, the court concludes that the plaintiff cannot maintain a minimal standard of living if forced to repay her debts, thus satisfying the first prong.

The second prong, known as "the additional circumstances test," requires the plaintiff to show that her inability to improve her financial situation is likely to persist throughout the loan repayment period. The plaintiff has a long history of depression and related disorders, but despite this, she has achieved significant educational and professional milestones, including a degree from Yale and years of employment. The court finds that her past ability to work suggests that her current state may not persist significantly into the future. Testimony from her expert witness supports this view, indicating that her previous functionality implies potential future functionality. Consequently, the court is not convinced that the plaintiff's inability to work will likely continue for a significant portion of the repayment period.

Dr. Stewart testified that the plaintiff is unable to work full-time due to difficulties with punctuality, primarily stemming from her inability to fall asleep before 3 a.m. However, she can manage to arrive on time for important tasks. The Court determined that the plaintiff failed to demonstrate that her sub-minimal standard of living will persist significantly during the student loan repayment period. 

The plaintiff has not shown good faith efforts to repay her student loans, as required by the third prong of the Brunner test. ECMC and Sallie Mae argued that the plaintiff's actions during her bankruptcy indicate a lack of good faith, citing her failure to explore repayment options under the Ford Program and her refusal to negotiate repayment terms. Although the plaintiff sought deferments, she did not attempt to renegotiate or utilize the Ford Program. Given her current income, the Income Contingent Repayment Plan (ICRP) would allow her to repay her $19,791.49 debt to ECMC for $7,149.00 over 300 months, and similar reduced terms were offered by Sallie Mae, which she rejected. 

The Court noted that the plaintiff's student loan debt exceeds 70% of the total debt she sought to discharge, which further undermines her claim of good faith efforts. Consequently, the Court concluded that the plaintiff did not meet her burden under Section 523(a)(8) of the Bankruptcy Code to prove "undue hardship," resulting in her student loan debts to ECMC and Sallie Mae being deemed non-dischargeable. 

Additionally, ECMC was added as a party defendant after identifying itself as a real party in interest related to the student loans, which have a combined balance of approximately $19,791.39 at a fixed interest rate of 5.3%. The plaintiff also receives monthly SSI payments of $1,173.70, which were reduced due to the direct withdrawal of medical expenses.

Plaintiff's current expenses are restricted to rent, food, and telephone service, with a significant reduction in previous expenditures such as entertainment, laundry, medical and dental expenses, transportation, and charitable contributions. Notably, the plaintiff was unaware of the defendants' proposals, including her eligibility for the Ford Program, which would require a monthly payment of only $23.83. Dr. Stewart described light therapy, which involves exposure to bright lights to help regulate biological rhythms. The Hamilton Depression Rating Scale (HAM-D) is utilized by physicians to assess the severity of depression through a structured interview and questionnaire. The Beck Depression Inventory (BDI) is a self-assessment tool for measuring the presence and severity of depression, scoring responses to determine overall depression levels. Section 523(a)(8) was enacted by Congress to address the increasing number of bankruptcies among former students primarily attempting to evade educational loan debts, aiming to ensure access to low-interest loans for students.