ORDER FOR JUDGMENT DETERMINING DISCHARGEABILITY
This matter came before the Court on May 6, 2008, at 9:30 a.m., for trial on the
I. FINDINGS OF FACT
The parties stipulated to several facts before trial on this matter. These findings incorporate those stipulations.
a. The Debtor’s Personal History
The debtor, Julie Ann Brooks, is 48 years old. Brooks is divorced with three children ages 15(C.B), 18 (Briana) and 19 (Allyson). C.B. lives with her father in Austin, Minnesota. Briana does not live with either parent. Allyson lives with Brooks but was expected to move out in May, 2008. By court order, Brooks is required to pay $60 per month in child support arrearages totaling $6,892.
Brooks was the victim of sexual abuse during her childhood and during her adulthood. She has been diagnosed with alcohol dependence, depression, post-traumatic stress disorder, and irritable bowel syndrome. 1 Brooks has received in-patient treatment for her mental illnesses and addiction eight times over her lifetime. She underwent in-patient treatment during 1999, in approximately August of 2000, and from January 2003 to mid-February 2003. Brooks first sought alcohol dependence treatment at age 27. She has a history of alcoholic relapse, with a total of six relapses. These relapses have occurred periodically in approximately 1993,1999, winter of 2001 or early spring of 2002, early 2003, 2004, and from late 2007 to early 2008. As of the date of trial, Brooks’ most recent relapse was on February 21, 2008, two days after being deposed in this matter. She attributes the relapse to stress from the court case.
Brooks has days when she can function well and days when she cannot function because of her mental illnesses. She credibly testified to and demonstrated memory loss. She currently attends Alcoholics Anonymous at least once per week, is planning to seek counseling, and intends to make an appointment with a psychiatrist for appropriate medication therapy. Brooks recently underwent a Rule 25 chemical dependency evaluation which recommended in-patient treatment.
Brooks also has a significant history of convictions for Driving Under the Influence (DUI). The parties stipulated to four convictions for DUI in Minnesota in 1998, 2001, 2003, and 2004. Her most recent conviction in 2004 was at the felony level. Brooks was incarcerated for two and a half years as a result of the felony conviction, and was released to probation on August 21, 2006.
The Social Security Administration (SSA) determined Brooks disabled as of January 1, 1997. SSA determined that she was eligible for Supplemental Security Income disability benefits in July of 2002.
b. The Debtor’s Employment and Education History
Brooks has not been employed since 2001. She earned a bachelor’s degree in psychology from the University of Minne
Brooks has applied for two positions in recent years: at Target and at Shopko during 2007 and 2008. She did not receive either position. Brooks believes her felony conviction prevents employment in her field, and she has not sought employment in her field since her release from prison in 2006. Brooks has been working with a job counselor through the Social Security disability program, but has not found employment through that service.
The record unequivocally demonstrates that Brooks is not capable of obtaining or maintaining consistent employment. Even temporary or part-time employment is out of Brooks’ reach because of her disability, mental illnesses, frequent alcoholic relapses and in-patient hospitalizations, and the triggering effect of stress. While she has taken limited action in pursuit of employment, her disability and mental health problems present fundamental obstacles to obtaining and maintaining a job.
c. The Debtor’s Income and Expenses
Brooks’ sole source of income is her disability benefit. The parties stipulated that her monthly net income from these benefits, based on the most recent tax year, is $1,086. She has no savings.
Brooks claims monthly expenses as follows:
Rent (no utility payments) $ 370.00
Auto Insurance — Liability Only $ 62.00
Auto Gasoline and Oil $ 80.00
Auto Repairs $ 30.00
Auto License $ 3.00
Food $ 275.00
Clothing $ 26.00
Laundry and Dry-Cleaning $ 15.00
Telephone (cellular) $ 130.00
Medical Beyond Insurance $ 126.00
N ewspapers/Magazines $ 6.00
Entertainment $ 5.00
Misc./Cosmeties/Toiletries/Supplies $ 10.00
Cigarettes $ 100.00
Child Support Arrearages $ 60.00
Social Security Recapture $ 50.00
Probation Fees $ 10.00
Total $1,346.00
ECMC challenges Brooks’ expenses for food, cellular telephone, and cigarettes as unreasonable luxury expenses. The Court finds all but the cigarettes to be reasonable necessary living expenses presently and for the foreseeable future, and concludes that likely increases to her basic minimal expenses are to be reasonably expected.
Excepting the cigarette expense, Brooks’ monthly expenses are reasonable and necessary living expenses. She spends $275 on food for herself and her adult daughter, whom she believed would soon be moving out. However, $275 per month is almost certainly an understatement of the actual cost of food for two people. The Court finds that $275 per month for food for one person, or $8.87 per day in a 31-day month, is reasonable.
Brooks’ monthly phone expense of $130 per month is also reasonable. She signed a two-year contract for a cellular telephone for both herself and her 15 year-old daughter. The contract determines the monthly bill, and Brooks cannot cancel the contract without losing her deposit. The expense is not unreasonable given the circumstances.
Eliminating the cigarette expense reduces Brooks’ monthly living expense to $1,246. With monthly income of $1,086, she has a monthly deficit of $160. She has no surplus from which to pay any portion of her educational loans. Even if Brooks’ expenses were reduced on the items ECMC challenges, such that her phone expense was $50 per month, food was $200 ($6.45 per day), and cigarettes eliminated, Brooks’ expenses would be $1,091 per month, still $5 in excess of her income.
d. The Debtor’s Educational Loans Held by the Defendant
Brooks’ educational loans are the result of her enrollment in a master’s degree program at Saint Cloud State University in Saint Cloud, Minnesota. There are six separate loans. Brooks has not consolidated the loans; however, both parties treated the loans as consolidated and neither submitted evidence of what her payments would be for each loan individually. Brooks has no surplus income with which to pay any amount in any event.
The six loans are:
Amount Daily Disbursement Amount Owed as of Interest Loan_Date_Disbursed_April 30, 2008_Accrual
01_May 13,1998_$ 2,156.00_$ 3,907.73_
02_July 10,1998_$ 3,515.00_$ 6,371.17_
03_July 14, 2998_$ 592.00_$ 1,112.78_
04_June 14,1999_$ 3,168.00_$ 5,954.11_
05_Jan. 11,1999_$ 8,500.00_$14,668.28_
06_Jan. 11,1999_$ 413.00_$ 776.10_
Total_$18,344.00_$32,790.17_$6.71
Brooks made approximately two payments of $157 each on one or more of these loans several years ago. She has not made payments since that time.
The Income Contingent Repayment Program (ICRP) is a loan repayment program for educational loans consolidated under the William D. Ford Program. The ICRP was implemented by Congress through its enactment of 34 C.F.R. § 685.209. The plan allows individuals owing on student loan obligations to make payments of the lesser of: (1) a percentage of the amount the borrower would repay over 12 years; or (2) twenty percent of the difference between the debtor’s adjusted gross income (AGI) and the Federal Poverty Guideline (FPG). 34 C.F.R. § 685.209(a). The amount owed is determined annually based on the debtor’s most recent AGI. 34 C.F.R. § 685.209(a)(5). Under the plan, a debtor may pay nothing. At the end of the 25 year repayment period, the unpaid portion of the debt, including accrued interest, is forgiven. 34 C.F.R. § 685.209(c)(4)(iv). Brooks was not aware of her eligibility for this program until she was deposed for this case by ECMC.
ECMC relies entirely on Brooks’ eligibility for the ICRP in its argument that she faces no undue hardship in excluding her student loan obligations from discharge. ECMC has determined that Brooks would pay $43.86 monthly under the ICRP, twenty percent of the difference between her income ($1,086 per month) and the FPG for a single person with no dependents. This payment does not cover the monthly interest on Brooks’ student loans. Unpaid interest would continue to accrue over time as she made these payments. At the end of twenty-five years, the unpaid balance (including accrued interest) would be discharged, potentially subjecting Brooks to tax liability in that year. Twenty-five years from now, Brooks will be seventy-three years old.
II. DISCUSSION
a. Dischargeability of Education Loan Debts
11 U.S.C. § 523(a)(8) states in relevant part:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt&emdash;
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependants, for&emdash;
(A)(i) an educational benefit overpayment or loan ... or (ii) an obligation to repay funds received as an educational benefit ... or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
The debtor has “the burden to show undue hardship by a preponderance of the evidence.”
Jesperson v. U.S. Dep’t of Educ., et al. (In re Jesperson),
b. Undue Hardship in the Eighth Circuit
The statute does not define “undue hardship.”
In re Reynolds,
To determine undue hardship, the Eighth Circuit has adopted a totality of the circumstances test.
In re Reynolds,
The court considers three factors: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.”
Id.
at 554, citing
Andresen v. Neb. Student Loan Program (In re Andresen),
i. The Debtor’s Past, Present, and Future Income
Brooks currently earns income solely through her Social Security Supplemental Income disability benefits. She has not earned income through employment since 2001. In its trial brief, ECMC relies heavily on
Frech
to argue that a debtor must show that he or she has “done everything possible” to maximize income.
N.D. State Bd. of Higher Educ. v. Frech (In re Frech),
Under the totality of the circumstances test, the court must consider any “significant earning capacity” of the debtor.
Collins v. Educ. Credit Mgmt. Corp, et al. (In re Collins),
Brooks has only applied for two jobs since 2007. However, the evidence in this
ii. The Debtor’s Reasonable Necessary Living Expenses
Living expenses are reasonable when they are “modest and commensurate with the debtor’s resources.”
DeBrower v. Pa. Higher Educ. Assistance Agency, et al. (In re DeBrower),
A debtor’s living expenses are necessary when they play a “primary causal role in the provision and maintenance of the minimal standard of living.”
Race v. Educ. Credit Mgmt. Corp., et al. (In re Race),
Brooks’ monthly expenses are both necessary and reasonable. ECMC challenges the monthly cellular telephone expense of $130. A cellular telephone is not a luxury when it is a debtor’s only phone, as it is in this case.
Pollard v. Superior Cmty. Credit Union (In re Pollard),
ECMC also challenges Brooks’ monthly food expense of $275.
3
A survey of cases in the Eighth Circuit regarding food expenses shows a wide range of reasonableness. See e.g.,
Powers v. Sw. Student Serv. Corp., et al. (In re Powers),
ECMC appropriately challeiiges Ms. Brooks' cigarette expenses. Cigarettes are not a reasonable necessary living expense. In re Williams,
iii. Other Relevant Facts and Circumstances
The third part of the totality of circumstances test requires the court to examine all other relevant facts and circumstances in the case.
In re Long,
The Debtor’s Mental Health
Courts should examine the effect of a debt on the health and well-being of a debtor separately from its effect on future employment and income opportunities.
In re Reynolds,
Brooks has experienced periodic and regular alcoholic relapses as well as in
The Income Contingent Repayment Program (ICRP)
Bankruptcy courts in all of the circuits have grappled with the ICRP since its implementation. In the 6th Circuit, failure to enroll in the ICRP goes to the good faith component of the
Brunner
test, but is not dispositive.
In Re Barrett,
The Eighth Circuit has yet to specifically decide the issue. District courts throughout the circuit have treated the ICRP differently, but the weight of authority is to treat the ICRP as one factor of many in the totality of the circumstances test.
4
In re Lee,
There are a number of reasons why a debtor’s eligibility for ICRP and the minimal payments under that program are not dispositive under a totality of the circumstances inquiry. First, the ICRP and the Bankruptcy Court have differing purposes and goals.
“... [T]he availability and terms of the ICRP should not be given undue weight under the totality of the circumstances analysis because it serves a fundamentally different purpose than the discharge provisions (and exceptions thereto) of the Bankruptcy Code. A survey of the legislative history behind legislation related to the ICRP indicates that its primary goal is to assist borrowers in avoiding default. In contrast, the Bankruptcy Code serves to provide a fresh start to ‘honest but unfortunate debtors,’ most of whom have already defaulted on their obligations (including student loans).” [citations omitted]
In re Lee,
To argue the ICRP prevents undue hardship for all debtors is to argue that making any payment is as good as paying down the debt.
5
See e.g.
In re Lee,
“... what the Eighth Circuit said in Long is: ‘[l]f the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt — while still allowing for a minimal standard of living — then the debt should not be discharged.’ Long,322 F.3d at 554-555 (emphasis added). The Eighth Circuit did not say nonpayment, or zero payment, or payment toward accumulating interest only on the debt. This Court understands that by ‘payment of the student loan debt,’ the Court of Appeals meant what it said, that is, payment of the underlying outstanding debt itself.”
In re Strand,
Because of the differing purposes, the economic evaluations undertaken by ICRP administrators and Bankruptcy Court judges differ significantly. Section 685.209 requires ICRP administrators to place debtors on the lesser of two payment plans: the twenty percent or the twelve year. 34 C.F.R. § 685.209(a)(2)(i)-(ii). The debtor’s circumstances are not relevant; only the amount of the monthly payments is considered in choosing the plan.
Id.
“Under the ICRP, a debtor is
presumed
to have the ability to pay 20% of the difference between her adjusted gross income and the poverty level for her family size ... In contrast, a bankruptcy court engages in a case-by-case analysis of a debtor’s income in relation to her reasonable expenses.”
In re Lee,
The ICRP’s use of the FPG as a baseline for determining “discretionary income” also stands in sharp contrast to the totality of the circumstances inquiry. 34 C.F.R. § 685.209(a)(3). Numerous courts in the Eighth Circuit have affirmed that “minimal standard of living” is not determined dispositively by the FPG. See
In re Berscheid,
Most important, the bankruptcy court’s duty to determine undue hardship for individual debtors and their dependents remains unchanged in 11 U.S.C. § 523(a)(8).
In re Lee,
Drawbacks of the ICRP
Some debtors may benefit significantly from participation in the ICRP, avoiding default until their financial situation improves. However, the program does have drawbacks the Court must consider in the totality of the circumstances test. When a debtor’s payments are less than the monthly interest amount, the interest continues to accrue; the debt in
For the above reasons, this Court follows the weight of the authority in this circuit and holds that the ICRP is only one of many factors for consideration under the Eighth Circuit’s well-established totality of the circumstances test. Eligibility for the ICRP is not dispositive and must be considered in light of each individual debtor’s unique situation.
Brooks and the ICRP
Brooks has no surplus income with which to repay the educational loan debt. Excepting the debt from her general discharge would result in undue hardship. The ICRP does not improve the situation. Under the ICRP, based on twenty percent of the difference in Brook’s income from her disability benefits, she would have a monthly payment of $43.86. Brooks currently has a monthly deficit of $160. Even reducing the categories ECMC challenges, Brooks has a monthly deficit of $5 per month. Brooks’ expenses are reasonable, and she does not have the necessary surplus to make the ICRP payments, regardless of her position vis-a-vis the FPG.
Even if Brooks could make the ICRP payments, her student loan debt would still pose an undue hardship because she would never be able to reduce the debt and would not get a fresh start. Were Brooks to make payments of $43.86 per month on her educational loan debt, presently in excess of $32,789.89, her debt would grow over the twenty-five year repayment period according to the following table:
Interest Required Payment (monthly) made Balance— Payment # (at 7.5%) (monthly) $32,790.17 Year
12 $204.06 $43.86 $34,712.57 1
24 $216.03 $43.86 $36,778.61 2
36 $220.23 7 $43.86 $38,895.05 3
48 ’ $220.23 $43.86 $41,011.49 4
60 $220.23 $43.86 $43,127.93 5
72 $220.23 $43.86 $45,244.37 6
84 $220.23 $43.86 $47,360.81 7
96 $220.23 $43.86 $49,477.25 8
108 $220.23 $43.86 $51,593.69 9
120 $220.23 $43.86 $53,710.13 10
132 $220.23 $43.86 $55,826.57 11
144_$220,23 $43.86 $57,943.01 12
156 $220.23 $43.86 $60,059.45 13
168 $220.23 $43.86 $62,175.89 14
180 $220.23 $43.86 $64,292.33 15
192 $220.23 $43.86 $66,408.77 16
204 $220.23 $43.86 $68,525.21 17
216 $220.23 $43.86 $70,641.65 18
228 $220.23 $43.86 $72,758.09 19
252 $220.23 $43.86 $76,990.97 21
264 $220.23 $43.86 $79,107.41 22
276 $220.23 $43.86 $81,223.85 23
288_$220.23 $43.86 $83,340,29 24
300 $220.23 $43.86 $85,456.73 25
Not only would Brooks not retire the debt, she would never make a meaningful payment on her loan obligation. In fact, the debt would simply continue to grow over the twenty-five year period as interest accrues. By the end of the repayment period, the debt would be nearly three times as large. The ICRP may be useful to some debtors by allowing them to avoid default until their financial situation improves and they are again able to pay down the debt. Brooks is not such a debtor. Her disabilities and persistent inability to maintain consistent employment augur an indefinitely continuing inability to make meaningful payments on her debt. In light of Brooks’ circumstances, the educational loan presents an undue hardship, with or without the ICRP.
III. CONCLUSION
The student loan exception to discharge was put in place by a Congress concerned that recent graduates would have student loans discharged before embarking on a lucrative career. Brooks is not the type of debtor Congress was attempting to thwart. Brooks’ income is not likely to increase in the foreseeable future, her expenses are reasonable, and she has no surplus income. In addition, the stress of the loan will negatively affect her mental health and sobriety to real and meaningful ongoing detriment. Even if she were able to make the payments dictated by the ICRP, Brooks would never make a dent in her student loan debt. The debt would continue to increase until it was finally discharged, potentially leaving her with an extreme tax liability at age seventy-three. The record demonstrates by a preponderance of the evidence that, under the totality of the circumstances analysis, excluding Brooks’ education loan obligations from discharge would impose undue hardship.
IV. DISPOSITION
IT IS HEREBY ORDERED:
1. Julie Ann Brooks’ student loan debts constitute an undue hardship for purposes of 11 U.S.C. 523(a)(8) and are accordingly discharged as part of the general discharge entered in her main bankruptcy case 07-31702.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Notes
. The majority of the evidence in this case was presented through Ms. Brooks’ testimony. The Court finds that she testified credibly and truthfully.
. In
Freeh,
the maximization element was part of the court's inquiry into good faith under the
Brunner
test.
In re Frech,
. In its trial brief, ECMC argues that Brooks’ food expense is unreasonable because it is higher than the Federal Department of Agriculture baseline poverty level for food expenses. Reliance on federally determined poverty levels is seriously misplaced. Just as the FPG is not dispositive for reasonable expenses overall, federal guidelines on poverty food expenses is not dispositive in this inquiry.
. Some bankruptcy courts in the circuit have taken extreme positions regarding the ICRP as either dispositive or completely irrelevant. See e.g.,
May v. Tex. Higher Educ. Coordinating Bd., et al. (In re May),
. For a discussion of the difference between merely making payments on the debt and making payments toward paying down the debt, see Terrence L. Michael and Janie M. Phelps, Judges?! —We Don’t Need No Stinking Judges!!!, 38 Tex. Tech L.Rev. 73, 104-5 (2005-2006).
. That ICRP administrators consider undue hardship eradication a fait accompli is evident from the ICRP calculator webpage, which states: "The income contingent repayment plan gives you the flexibility to pay your loan(s) without undue financial hardship.” (emphasis added) (http://www.ed.gov/offices/ OSFAP/DirectLoan/RepayCalc/dlentry2.html last accessed 03/09/2009).
. 34 C.F.R. § 685.209(c)(5) states that unpaid interest is capitalized until the outstanding principal is ten percent greater than the principal amount when the debtor’s monthly payments are less than the accrued interest. Brooks’ liability would reach this amount in the middle of Year 2, at $35,237.21. Interest continues to accrue thereafter but is not capitalized.