Halatek v. William D. Ford Fed. Direct Loan (Direct Loan) Program (In re Halatek)

Citation: 592 B.R. 86Docket: CASE NO. 16-03464-5-DMW; ADVERSARY PROCEEDING NO. 16-000150-5-DMW

Court: United States Bankruptcy Court, E.D. North Carolina; September 28, 2018; Us Bankruptcy; United States Bankruptcy Court

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David M. Warren, United States Bankruptcy Judge, presided over a case involving the Department of Education's Motion for Summary Judgment, filed on November 8, 2017, regarding the dischargeability of educational loans under 11 U.S.C. § 523(a)(8). The Plaintiff, Julie Faenza Halatek, filed a response on February 8, 2018, after initiating an adversary proceeding on September 23, 2016, subsequent to her Chapter 7 bankruptcy petition on July 1, 2016, which resulted in a discharge on September 28, 2016. Halatek's complaint sought a determination that certain educational loans should not be deemed nondischargeable due to undue hardship.

On October 27, 2016, Halatek and Navient Private Loan Trust entered a stipulation for discharge of educational loan debt, which the court approved, leading to the dismissal of Navient Private Loan Trust from the proceeding on November 23, 2016. The Department of Education denied the dischargeability of Halatek's debt after filing its answer on December 5, 2016. Following discovery, the Department of Education asserted that no genuine dispute of material fact existed, entitling it to judgment as a matter of law.

The court confirmed its jurisdiction over the case as a core proceeding per 28 U.S.C. § 157(b)(2) and asserted its authority to adjudicate the matter based on relevant jurisdictional statutes and prior case law, specifically referencing the ruling in In re Kelly. The court ultimately granted summary judgment in favor of the Defendant, the Department of Education, based on the established facts and legal arguments presented.

Summary judgment will be granted under Rule 56 if the movant demonstrates that there is no genuine dispute regarding any material fact and is entitled to judgment as a matter of law. In deciding on a summary judgment motion, the court evaluates whether a reasonable jury could favor the non-moving party, interpreting all facts in the light most favorable to them. Summary judgment is appropriate when the combined evidence from pleadings, depositions, interrogatories, admissions, and affidavits reveals no genuine issue of material fact.

Factual background indicates that the Plaintiff, approximately 37 years old, suffers from two chronic medical conditions: Hypermobile Ehlers-Danlos Syndrome (hEDS) and narcolepsy. Although the Plaintiff has had symptoms of hEDS throughout her life, she was formally diagnosed in January 2016. Her symptoms include repeated injuries and various musculoskeletal pain, including arthritis. The Plaintiff was diagnosed with narcolepsy in April 2014, which she believes developed as an autoimmune response post-upper respiratory infection during her teenage years. She experiences constant pain and fatigue from both conditions, leading to cognitive difficulties, or "brain fog." Additionally, she has suffered from migraines since age 17, which she associates with hEDS, and experiences cataplexy related to her narcolepsy, causing leg weakness triggered by strong emotions. Despite utilizing medications and positive-thinking techniques for management, the Plaintiff reports ongoing issues with her symptoms at work and feels her health is worsening.

The Plaintiff graduated cum laude with a Bachelor of Science in Justice and Law Administration from Western Connecticut State University in May 2003. After relocating to North Carolina in 2006, she worked at Bath and Body Works and later secured a full-time position with Blue Cross Blue Shield (BCBS), continuing part-time at Bath and Body Works for additional income. Motivated by her studies, she enrolled in a four-year night program at North Carolina Central University School of Law in August 2007, resigning from Bath and Body Works to focus on her legal education while remaining full-time at BCBS. She graduated cum laude in May 2011 and was licensed by the North Carolina State Bar after passing the bar exam.

On October 1, 2012, the Plaintiff began working as a Project Analyst for the North Carolina Department of Health and Human Services (NCDHHS) in a role that does not require a law license, although her legal background was advantageous for her hiring. She continues to seek legal employment, having applied for over 100 attorney positions, but will not consider roles involving litigation due to health issues affecting her ability to endure high-stress situations. The Plaintiff typically works 40 hours per week at NCDHHS but has occasionally missed work due to medical conditions, leading to some unpaid leave. Her supervisor, Elisabeth Pittman, acknowledges the impact of these health conditions but affirms that the Plaintiff is a competent and hardworking employee whose performance meets or exceeds expectations. The Plaintiff is a permanent state employee, with no indications of termination from her role.

Additionally, with NCDHHS approval, she has engaged in side work as an independent beauty consultant with Mary Kay from 2012 to 2014 and has contracted with Sotomayor IP Consulting, LP since 2015 for patent and intellectual property research. The Plaintiff is interested in returning to law school to prepare for the patent bar exam but cites a lack of stamina as a barrier.

The Plaintiff borrowed a total of $114,783.09 from the Defendant through twelve federal educational loans, disbursed in various amounts from 2007 to 2013. The initial eight loans were for $82,000, followed by subsequent loans for specific purposes, including consolidation of undergraduate loans and subsequent disbursements. Payments on the first eight loans and Loan 9 were deferred while the Plaintiff attended law school, with the first payment on Loans 1-8 due in November 2011. The Plaintiff initiated a $0.00 repayment plan for these loans from December 2011 to July 2013 and made sporadic payments on Loan 9 during that period.

From August 2013, the Plaintiff entered the Income-Based Repayment (IBR) plan, which adjusts monthly payments based on income. Payments increased with loan consolidation and changes in income, reaching $492.84 by August 2014, which the Plaintiff did not pay. The Plaintiff sought to transition to the Revised Pay As You Earn (REPAYE) program in December 2015, but failed to make the required payment to effectuate this change. By July 1, 2016, the Plaintiff had filed for bankruptcy, having paid only $3,937.87 since repayment began in 2011. As of October 31, 2017, the outstanding balance, including interest, was $164,207.29.

The Plaintiff remains eligible for the REPAYE program, which calculates monthly payments based on discretionary income, projecting a payment of $362.00 for 2017. As a State of North Carolina employee, she is also eligible for the Public Service Loan Forgiveness (PSLF) program, having made 19 qualifying payments towards the 120 required for forgiveness. Additionally, the Plaintiff may apply for temporary forbearance or deferment under specific circumstances, including total and permanent disability discharge after a monitoring period.

The Plaintiff married Robert Halatek in May 2011, shortly after graduating from law school, and they separated in March 2016, just before the Plaintiff filed for bankruptcy. They are now divorced and filed joint tax returns from 2012 to 2016, reporting combined adjusted gross incomes of: $40,561 (2012), $50,966 (2013), $50,034 (2014), $76,332 (2015), and $82,592 (2016), primarily attributed to the Plaintiff's income. At marriage, the Plaintiff earned approximately $33,000 annually with BCBS, and her salary at NCDHHS increased from $64,214 in October 2012 to $66,192 by 2016. Additionally, she earned $1,470 in 2015 and $2,590 in 2016 from Sotomayor.

During their marriage, the couple incurred household expenses, but specific amounts were not detailed. The Plaintiff noted that Mr. Halatek had two children from a prior marriage, and they purchased a home and a timeshare in Williamsburg, Virginia, which required monthly mortgage payments and annual fees. The last recalled mortgage payment was $69, reduced after downgrading their timeshare, with an estimated annual fee of $200. Mr. Halatek took over financial responsibility for the timeshare after their separation.

In her bankruptcy filing, the Plaintiff's Schedule I indicated a monthly gross income of $4,678 from NCDHHS, with a take-home pay of $3,227. Schedule J detailed monthly expenses exceeding her take-home pay, totaling $3,391.01. Key expenses included rent ($799), utilities, insurance, transportation, and various personal and entertainment expenses.

On August 25, 2016, the Plaintiff reaffirmed a loan for her 2015 Ford Escape through a Reaffirmation Agreement, agreeing to monthly payments of $405.61 until October 2021. Although the Plaintiff reported a reduction in monthly expenses from $3,391.01 to $3,225.00, specific reductions were not detailed. An affidavit by Shannon Titch, an auditor for the U.S. Attorney's office, noted the Plaintiff's annual income has been increasing since her employment with NCDHHR, projecting a salary of $68,432.00 in 2022. From July 2016 to July 2017, her average take-home pay was $3,530.95, exceeding the figure reported in Schedule I, while her average monthly expenses were $3,657.83.

The Plaintiff utilizes a budgeting program that details discretionary spending, including expenses for clothing, chorus participation, and entertainment, among others. She has made cost-cutting measures, such as canceling certain subscriptions and downgrading her phone plan, but maintains other expenses she deems necessary, such as her vehicle for transporting her handicapped mother and memberships that could aid her career prospects.

Despite efforts to curb expenses, the Plaintiff anticipates a $400.00 monthly increase in medical costs due to changes in her health plan. She requires uninsured orthodontic work costing $6,580.00, for which she has made a $500.00 down payment, and jaw alignment surgery estimated at $7,200.00, potentially requiring unpaid leave. She also incurred costs for new eyeglasses and contact lenses. An updated budgeting register presented at the hearing did not show significant changes in her financial situation and was not summarized by the court.

Section 523(a)(8) of the Bankruptcy Code states that educational loans are not dischargeable in Chapter 7 bankruptcy unless the debtor proves that discharging the debt would cause "undue hardship." The term "undue hardship" lacks a statutory definition but has been interpreted by the Fourth Circuit to mean more than the typical financial difficulties associated with bankruptcy. The court emphasized that "undue" signifies a level of hardship that is excessive or unwarranted, distinguishing it from ordinary financial struggles. To establish undue hardship, the Fourth Circuit adopted the Brunner test, which requires the debtor to demonstrate: 1) an inability to maintain a minimal standard of living based on current income and expenses if required to repay the loans; 2) the existence of additional circumstances indicating that this inability is likely to continue for a significant portion of the loan repayment period; and 3) that the debtor has made good faith efforts to repay the loans. This court is bound to apply the Brunner test as established by the Fourth Circuit.

Under the Brunner test, debtors must satisfy three criteria to have their student loans discharged, with the burden of proof resting on them (Vujovic v. Direct Loans, 388 B.R. 684, 688). In summary judgment motions, the defendant must demonstrate undisputed material facts that would prevent the debtor from meeting their burden at trial regarding any of the three prongs (Nightingale v. N.C. State Educ. Assistance Auth., 529 B.R. 641, 648). For the first prong, courts assess a debtor's current income and expenses, focusing on whether the debtor has minimized their living expenses (U.S. Dept. of Health, Human Servs. v. Smitley, 347 F.3d 109). This prong requires more than demonstrating financial strain; it necessitates evaluating whether repaying the loan would hinder the debtor's ability to maintain a minimal standard of living, which includes basic necessities (Cleveland v. Educ. Credit Mgmt. Corp., 559 B.R. 265). A minimal standard of living is not defined by past living standards and does not encompass luxury expenses (Gesualdi v. Educ. Credit Mgmt. Corp., 505 B.R. 330). After covering basic needs, debtors may not spend on non-essential items instead of repaying loans (Johnson v. Access Group, Inc., 400 B.R. 167). The federal poverty guidelines serve as a framework for assessing a debtor's financial situation, with the 2018 poverty threshold for a one-person household in North Carolina set at $12,140. A plaintiff with a gross income five times this threshold would struggle to prove an inability to maintain a minimal standard of living while making loan payments under the REPAYE program (Hart v. ECMC, 438 B.R. 406; Elmore v. Mass. Higher Educ. Assistance Corp., 230 B.R. 22).

The Defendant identified discretionary expenses exceeding twice the monthly REPAYE payment available to the Plaintiff. While the Plaintiff claims to maintain a strict budget and has cut some luxuries, her efforts do not reflect the necessary frugality to satisfy the first prong of the Brunner test. The court acknowledges the Plaintiff's occasional higher medical expenses but finds no evidence that these expenses exceed her financial means. Concerns arise from the Plaintiff incurring additional debt for orthodontic work, perceived as more cosmetic than medical. Insufficient information exists regarding her anticipated jaw surgery. The Plaintiff's documented expenses indicate a comfortable lifestyle, including ownership of a three-year-old SUV, use of daily disposable contact lenses, purchasing gifts and lottery tickets, and enjoying various entertainment options. Her income also significantly surpasses the poverty level, preventing her from meeting the first Brunner prong. Consequently, the court will not evaluate the second and third prongs and will grant summary judgment in favor of the Defendant.

The Plaintiff benefited from student loans provided by the Defendant, which enabled her to obtain a law degree and secure a job with a salary double that of her previous employment. Although not currently practicing law, she enjoys financial security in her tenured position. The court found that the Plaintiff is not entitled to discharge her student loans, as many debtors would willingly take on her loan obligations for her current income. The Plaintiff is eligible for the Public Service Loan Forgiveness (PSLF) program, which could discharge any remaining student loan debt after ten years of qualifying payments while employed by a state agency, but she has not utilized this option for several years. The court acknowledged her medical challenges but noted her productivity at work. If her medical condition worsens, she may qualify for a loan discharge. The court granted the Defendant's Summary Judgment Motion, declaring the Plaintiff's student loan debt nondischargeable under 11 U.S.C. 523(a)(8). Additionally, it noted discrepancies in her income calculations related to past programs and clarified that her current gross income is significantly lower than in 2016. The document also references her budgeting terminology and cites a relevant case regarding the standard of living assessment date.