Court: United States Bankruptcy Court, D. Massachusetts; December 8, 2006; Us Bankruptcy; United States Bankruptcy Court
In the Chapter 7 bankruptcy case of Jennifer Gail Brunell, the plaintiff seeks the discharge of her educational loans under 11 U.S.C. § 523(a)(8). Educational Credit Management Corporation (ECMC) intervened and substituted as the defendant for Wells Fargo Education Financial Services and Sallie Mae Servicing Corporation. A trial was held on September 27, 2006, where Brunell and a co-worker testified, and thirteen exhibits were admitted without objection while ECMC presented no witnesses and submitted three exhibits. The central issue is whether Brunell can demonstrate that repaying her student loans would cause her undue hardship.
Brunell, 41, resides in Tiverton, Rhode Island, is divorced, and has custody of three children. She filed for bankruptcy with her ex-husband on September 23, 2004, receiving a discharge of eligible debts on February 25, 2005, excluding her student loans. She is employed in the health services industry and has minimal assets. The parties agreed that she borrowed approximately $16,000 for her bachelor’s degree, $35,000 for her master’s, and between $45,000 and $50,000 for her Ph.D., totaling $200,245.77 owed to ECMC as of September 19, 2006, with a monthly payment necessity of at least $1,298.79 over 30 years. Brunell's student loan obligations date back to her undergraduate studies from 1983 to 1987 and graduate studies from 1993 to 2001, funded through scholarships, loans, and part-time work.
The Debtor has had a successful career trajectory, initially in engineering and later in health services. After graduating college, she worked as a systems engineer at Teledyne Brown Engineering with a salary of approximately $30,000 annually, quickly transitioning to a similar role at Mitre Corporation. Within 16 months, she advanced to a higher-paying position at GTE Corporation, earning $33,000 annually for five years while also attending classes at Northeastern University and Middlesex Community College.
In 1993, she shifted her focus to psychology, completing a master's degree in counseling psychology at Lesley College in 1995, followed by enrollment in Ph.D. programs at Suffolk University and the Fielding Institute from 1996 to 2001, funded by student loans and her husband’s support. After her first child was born in 1998, she continued her studies until dropping out in February 2001, shortly before the birth of her twins. Following the couple's separation and subsequent divorce in 2003 and 2005, respectively, she began working at the Attleboro Center in August 2004 as a clinician, earning approximately $37,000 gross per year.
From August to November 2005, she worked as a fee-for-service staff therapist at South Bay Mental Health Services, earning $30.00 per contact hour before accepting her current role as a service coordinator and counselor at Associates for Human Services Incorporated in Taunton, Massachusetts, starting in November 2005 at a salary of $35,000 annually. As of September 2, 2006, her year-to-date net pay was reported at $22,531.80, and a later letter indicated her current hourly compensation to be $17.50.
The Debtor earns a higher salary with annual increases ranging from 1.5% to 4% over the past four years, as stated in a letter from her employer. Her salary range in her industry is between the teens and approximately $38,000. To achieve higher pay in a hospital setting, she would need to obtain her License Mental Health Counselor (LMHC) certification, requiring an exam and two years of experience; however, she believes the time and financial investment for this is unfeasible. The Debtor enjoys her current job and has not sought additional work, feeling unable to take on more hours.
In terms of financial support, the Debtor receives child support of $176 weekly, totaling $704 monthly for three children, with additional percentages from her ex-husband's commissions or bonuses. However, she expressed concerns about the reliability of this income due to her ex-husband's poor employment history. She receives no other financial assistance and does not anticipate any inheritance. Since 2003, her tax refunds have ranged from $1,070 to approximately $4,918 per year, with a joint refund in 2003. She previously received food stamps and cash assistance but is no longer eligible as a full-time worker.
The Debtor's current liabilities include a student loan and various bills totaling approximately $10,000, including a $4,000 loan from a friend for legal fees, $2,000 owed to a former landlord, and unpaid utility and child care bills. At trial, she detailed additional debts to her divorce lawyer, cable companies, and gas services. She also had to pay her ex-husband to avoid court costs related to medical insurance premiums. Her vehicle, a 1995 Mercury Villager bought for $4,000, is essential for her job, requiring significant weekly travel, and she plans to use her next tax refund for repairs.
The Debtor holds a checking account with a balance of $1,000 and a savings account with $10 at Citizens Bank, with no retirement savings due to financial constraints. She provided varying figures for her average monthly expenses at three points in time: December 2004, April 2006, and August 2006, and her testimony regarding the necessity of certain expenses fluctuated. Her older daughter has asthma, while her younger daughter has sensory integration dysfunction, requiring neurologist checkups but no current medication, although therapy may be needed in the future. The Debtor incurs an out-of-pocket health insurance cost of $122 per month for herself and her daughters.
Her ex-husband has visitation rights for two hours on Wednesday nights and alternate weekends, while she has her daughters two weekends a month. For entertainment, she opts for low-cost activities. The Debtor pays $200 weekly, totaling $2,400 monthly for daycare for her twins and has additional before and after school expenses for her oldest daughter. Currently, she pays $600 monthly to the caregiver, unable to cover the full daycare cost. Other expenses include internet access for her children's entertainment and personal use, as well as school-related costs for supplies and activities, which she estimates at $200 to $250 occasionally, with expected increases as her children grow. She is unable to afford participation in athletic programs, such as a $50 soccer program for her oldest daughter. Regarding her student loans, she did not provide evidence of any payments made, only a vague recollection of some payments before returning to graduate school.
The individual testified about her knowledge of the William D. Ford Direct Loan repayment program offered by the U.S. Department of Education, stating she attempted to enroll but had not received updates on her application by trial time. ECMC provided detailed information about the program, including options for loan consolidation. The Ford program offers four repayment options, with the first three requiring monthly payments between $1,133.46 and $2,266.92. The fourth option, the Income Contingent Repayment Plan (ICR Plan), bases payments on the borrower’s income, total debt, and family size, potentially resulting in payments as low as zero. Accrued interest may be added to the principal until it exceeds 110% of the original balance, after which it accrues without being added to the principal. The ICR Plan payment would be $153.27 based on a 2005 income of $28,565, and $260.83 for a gross income of $35,000 in 2006. Any remaining balance would be canceled after 25 years of repayment.
Under 11 U.S.C. § 523(a)(8), educational debts are non-dischargeable unless the debtor demonstrates undue hardship. The parties agreed the debts qualify under this statute, placing the burden on the debtor to prove undue hardship by a preponderance of evidence. Courts use various tests to evaluate undue hardship claims, including the 'Brunner test' and the 'totality of the circumstances' test, with many courts in the First Circuit opting for the latter. The judge indicated that he would apply the totality of the circumstances test to assess the undue hardship claim, considering all relevant factors in the bankruptcy case.
Key factors in assessing a debtor's ability to repay educational debt include their past, present, and reasonably projected future financial resources, alongside necessary living expenses. Using the totality of circumstances test, all relevant factors are considered to determine if the debtor can sustain herself and her dependents while repaying the debt.
The debtor has a consistent employment history, having worked in progressively responsible engineering roles post-college and in the health services industry since 2004. Her employment included positions at the Attleboro Center with an annual salary of approximately $37,000, South Bay Mental Health Services at $30 per contact hour, and her current role at Associates with an annual salary of $35,000. As of September 2, 2006, her recorded year-to-date net pay was $22,531.80, which, when accurately calculated, reflects a net monthly income of $2,712.20.
The debtor also receives $704 monthly in child support, leading to a combined monthly income of at least $3,416.20. Tax refunds of $4,918 in 2004 and $4,284 in 2005 were noted, but the reliability of future refund amounts has not been established. Assuming her monthly expenses amount to $3,225.66, she has a surplus of $190.54. The analysis highlights the debtor's stable income and ability to meet her financial obligations while repaying her educational debt.
ECMC presented evidence indicating that the Debtor's payment under the Income Contingent Repayment (ICR) Plan would be $153.27 based on her 2005 income of $28,565 and $260.83 based on a projected gross income of $35,000 for 2006. The Debtor's income is likely to increase, which would raise her required payments beyond her current disposable income. However, financial hardship alone does not qualify a debtor for student loan discharge; the debtor must also prove bleak prospects for future income growth. The Debtor's employment history since 2004 shows a consistent increase in salary and opportunities for further income growth, supported by annual raises of 1.5% to 4%. Although the Debtor claims that her expenses related to her children will increase, she failed to provide evidence of those additional expenses or the inability to work more hours as her children grow older. The court noted that debtors with reasonable future income prospects, even those with children, typically do not qualify for loan discharge. ECMC raised a question about the necessity of a $122 medical expense but did not contest the Debtor’s overall expenses, which average approximately $3,246.49 monthly. While these expenses are not excessive, the Debtor has not proven that all are necessary, as necessary expenses must be those that cannot be eliminated while maintaining a minimal standard of living.
The Debtor's expenses fluctuated between $2,761 and $3,246.49 over a year without a change in income level, indicating her ability to adjust expenses. It is deemed reasonable for her to reduce her expenditures by approximately $70 to $110 monthly to make minimal payments toward her student loans under the Income Contingent Repayment (ICR) plan. Based on her income of $28,565 in 2005 and $35,000 in 2006, her required payments would be $153.27 and $260.83, respectively, with an estimated payment of around $300 at an income of $38,000.
The Debtor has not shown any unusual medical or financial factors that would warrant a different conclusion. Both her health and her daughter's health are stable, and her outstanding bills have decreased over time, reflecting her resourcefulness. She plans to use her tax refund for car repairs and has an available $1,000 in her checking account that could be directed toward bills.
While acknowledging the challenges of raising three children while working full-time, it is concluded that she does not face undue hardship in making student loan payments, especially given her educational background and future income potential. The ICR plan offers options for forbearance and deferment in case of drastic changes in her situation, along with a provision for discharge after 25 years of participation. However, concerns regarding potential tax liabilities on forgiven debt at the end of the repayment period have been noted, with the conclusion that such liabilities would be an undue burden and thus dischargeable.
In the case of Austin v. Educ. Credit Mgmt. Corp., the court finds that predicting the specific amount or existence of a tax liability related to student loans is speculative, aligning with previous rulings. However, it acknowledges that any potential tax liability at the end of the Debtor's working life would constitute undue hardship resulting from the student loan. Should ECMC deny the Debtor's application for the Ford program or fail to offer an affordable payment plan, the court would reconsider the discharge of the student loans upon a renewed request from the Debtor. The court grants judgment for ECMC, stating that any tax liability arising from forgiven loan amounts will be discharged if the Debtor meets the Ford program requirements. The court allowed amendments to the original complaint to correct and add defendants, with default judgments entered against several parties, including Sallie Mae Servicing Corporation. The Debtor, who lived in Plainville, Massachusetts at the time of filing, reserved the right to contest other issues related to the student loan’s dischargeability. Additionally, discrepancies were noted between the Debtor’s reported joint tax refund amount and her responses to interrogatories. The Debtor also indicated financial struggles, including eviction and back rent owed. The applicable version of 11 U.S.C. § 523(a)(8) is the one in effect before the Bankruptcy Abuse Prevention and Consumer Protection Act, as this case was filed prior to its enactment.
Section 523(a)(8) prior to BAPCPA specifies that an individual debtor is not discharged from debts related to educational loans or benefits unless discharging the debt would cause undue hardship for the debtor or their dependents. The calculations of the Debtor’s income, considering a salary of $17.50 per hour, indicate little variation in net income after accounting for mileage reimbursement and averaging over eighteen weeks, resulting in a net income close to $2,710.63. The Debtor's year-to-date mileage reimbursement was deducted from total net pay, with specific calculations leading to an average bi-weekly pay of $1,106.78. The divorce judgment mandates the ex-spouse to pay $176 weekly, but the stipulated child support amount is $704 monthly, which is inconsistent with the standard calculation of $757 based on the weekly figure. The Debtor did not request a partial discharge of the student loan, despite ECMC's suggestion, and since courts in the First Circuit require proof of undue hardship for such a discharge, the court found that the Debtor failed to demonstrate this burden. Consequently, the possibility of a partial discharge was not considered. Additionally, Section 523(b) states that a debt previously excepted from discharge may be dischargeable in a new case unless it remains non-dischargeable under the current statute.
