588 B.R. 226
8th Cir. BAP2018Background
- Debtor Erin R. Kemp filed Chapter 7 and an adversary proceeding seeking discharge of student loans owed to the U.S. Department of Education under 11 U.S.C. § 523(a)(8).
- At trial Kemp was a 36‑year‑old single mother who formerly earned $45,000 as a bank branch manager but left that full‑time job in 2015 and now works part‑time at Lowe’s and runs a small childcare business.
- Kemp’s income streams: part‑time wages, childcare net receipts (disputed), $175/month child support, and a prorated tax refund; she estimated monthly net income of $1,711.
- Kemp is enrolled in an income‑based repayment (IBR) plan with the DOE that currently calculates her monthly student loan payment as $0.00.
- The bankruptcy court adjusted Kemp’s schedules (finding higher childcare income and disallowing some anticipated expenses), found at least $105/month surplus, and concluded Kemp chose part‑time work for flexibility despite available full‑time options.
- The bankruptcy court denied discharge, concluding Kemp failed to prove undue hardship under the totality‑of‑the‑circumstances test; the district court (appeal) affirmed.
Issues
| Issue | Plaintiff's Argument (Kemp) | Defendant's Argument (DOE) | Held |
|---|---|---|---|
| Whether bankruptcy court applied correct totality‑of‑the‑circumstances test | Bankruptcy court misapplied standard and made erroneous factual findings | Court applied Long/Jesperson totality test correctly and reviewed facts | Affirmed: correct standard applied and no error |
| Whether eligibility for zero‑payment IBR was given dispositive effect | Court improperly gave dispositive effect to zero‑payment IBR eligibility | IBR eligibility is a relevant factor but not dispositive | Affirmed: IBR is a factor that weighs against discharge but not dispositive |
| Whether inability to pay full contractual amount at filing mandates discharge | Kemp contends inability to pay full contractual payments at trial requires discharge | DOE: availability of IBR and ability to earn under programs preclude discharge | Affirmed: inability to pay full contract does not require discharge; consider IBR/options |
| Whether bankruptcy court clearly erred in income/expense findings (childcare income, $50 vacation) | Court overstated childcare net income and wrongly disallowed vacation deduction | Court relied on incomplete/inconsistent evidence and made reasonable adjustments | Affirmed: factual findings not clearly erroneous; Kemp failed burden of proof |
Key Cases Cited
- Walker v. Sallie Mae Servicing Corp., 650 F.3d 1227 (8th Cir.) (standard of review—undue hardship reviewed de novo)
- Long v. Educ. Credit Mgmt. Corp., 322 F.3d 549 (8th Cir. 2003) (adopts totality‑of‑the‑circumstances undue hardship test)
- Educ. Credit Mgmt. Corp. v. Jesperson (In re Jesperson), 571 F.3d 775 (8th Cir.) (courts should consider availability of special repayment programs when evaluating undue hardship)
- Reynolds v. Penn. Higher Educ. Assistance Agency (In re Reynolds), 425 F.3d 526 (8th Cir.) (subsidiary factual findings reviewed for clear error)