Conner v. U.S. Department of Education & Educational Credit Management Corp. (In re Conner)Conner v. U.S. Department of Education & Educational Credit Management Corp. (In re Conner)
OPINION DENYING PLAINTIFF’S REQUEST FOR A HARDSHIP DISCHARGE PURSUANT TO 11 U.S.C. § 523(a)(8) AND DISMISSING PLAINTIFF’S COMPLAINT
Plaintiff, Patricia M. Conner, filed a voluntary petition under Chapter 13 of the Bankruptcy Code on January 17, 2012. On November 19, 2013, Plaintiff filed an adversary proceeding against multiple defendants, including the United States Department of Education and Educational Credit Management Corporation. The relief sought by Plaintiffs complaint is a discharge of her student loan debt pursuant to 11 U.S.C. § 523(a)(8). On November 17, 2014, this Court held a trial on Plaintiffs Complaint. At the conclusion of the trial, the Court requested post-trial briefs. Based on the testimony at trial
I.
FACTUAL BACKGROUND
Plaintiff, Patricia M. Conner, is a full-time employee of the Detroit Public School system. She is sixty-one years old and the single parent of an adopted teenage daughter. Commencing in 1992, Plaintiff obtained loans from various lenders for the purpose of attending Wayne State University. Between 1992 and 2006, Plaintiff obtained 13 loans from the Michigan Higher Education Assistance Authority (MHEAA) and other lenders. The loans were subsequently transferred to Home Banc. The original guarantor on these loans was the Michigan Guaranty Authority (MGA), an arm of the MHEAA. As of October 22, 2014, the balance owed on the loans guaranteed by MGA was $101,193.71. (Defendants’ Exhibit A).
Between November 1, 1996 and August 29, 2003, Plaintiff obtained thirteen additional student loans. These loans were direct student loans obtained from the United States Department of Education. The principal amount disbursed was $86,482. (Defendants’ Exhibit YY, paragraph 7). Plaintiff never made a voluntary payment on these debts and made involuntary payments totaling $2,526.28. (Affidavit of Michael liles, Senior Loan Analyst for the Department of Education, Defendants’ Exhibit YY). As of October 29, 2013, the unpaid principal and “capped” interest owed by Plaintiff on her direct student loans was $113,553.19. (Defendants’ Exhibit BBB).
Over the years, Plaintiff obtained multiple deferments to delay collection of her student loan obligations. With regard to the loans guaranteed by MGA, the defer
With regard to the direct student loans owed to the United States Department of Education, the only payments made by Plaintiff were involuntary administrative garnishments in 2011 and 2012. The total amount of these involuntary payments was $2,526.28. (Affidavit of Michael Ules, Senior Loan Analyst for the Department of Education, Defendants’ Exhibit YY).
On January 17, 2012, Plaintiff filed a voluntary petition under Chapter 13 of the Bankruptcy Code. On May 9, 2012, Plaintiff converted her Chapter 13 case to a Chapter 7 case. On August 15, 2012, Plaintiff obtained a discharge. (Docket No. 67). On August 20, 2012, Plaintiffs Chapter 7 case was closed. On October 30, 2013, this Court entered an order granting Plaintiffs Motion to Reopen her-Chapter 7 case. The purpose of reopening the case was to allow Plaintiff to file an adversary proceeding seeking discharge of her student loan debt. On November 19, 2013, Plaintiff filed an adversary proceeding against the United States Department of Education, the Michigan Guaranty Agency, Wayne State University, Nelnet, ACS, DCS Diversified Collection Services, Inc., and Performant Recovery, Inc. Plaintiff is representing herself in this adversary proceeding.
On February 2, 2014, this Court entered an Order Dismissing Plaintiffs Complaint as to Diversified Collection Services and Nelnet because those parties were not properly served. At a hearing on February 4, 2014, the Court held that loans originally serviced or held by Home Banc, the Michigan Guaranty Agency, and ACS, had been transferred to ECMC upon the filing of Plaintiffs bankruptcy case. The Court denied Plaintiffs Motion for Entry of Default Judgment as to those parties and allowed ECMC to substitute into the case as a Defendant.
On June 5, 2014, this Court entered an Order requiring the Plaintiff to complete and submit to Defendants: (1) Income-Based/Pay As You Earn/Income-Contingent Repayment Plan Request (hereinafter “Application for Income-Based Payment Plan”); and (2) Employment Certification for Public Service Loan Forgiveness (hereinafter “Application for Public Service Loan Forgiveness”). Income based repayment plans were created by federal legislation to provide student loan debtors with a realistic monthly payment schedule so as to avoid causing debtors undue financial hardship. The statute requires the Department of Education to calculate the debtor’s monthly payment based on the student loan debtor’s income and family size.
In July and early August 2014, Plaintiff completed nn Income-Based Repayment Plan Application, an Application for Public Service Loan Forgiveness, and an a Federal Loan Consolidation Application and submitted all three applications to counsel for Defendants. (Defendants’ Exhibit III, KKK and LLL). On August 15, 2014, Plaintiff sent a letter to FedLoan Servicing, the entity processing Plaintiffs applications and advised FedLoan Servicing that she was cancelling her Federal Loan Consolidation - Application. (Defendant’s Exhibit MMM). As a result of Plaintiffs withdrawal of her Federal Loan Consolidation Application, the Department of Education was unable to process her Income-Based Repayment Plan Application and her Application for Public Service Loan Forgiveness. (Declaration of Michael liles, Defendants’ Exhibit YY, ¶ 16). If Plaintiff had allowed the Federal Loan Consolidation Application to be processed, her monthly payments under an Income-Based Repayment Plan were estimated to be approximately $268.00 per month. (Declaration of Michael Hies, Defendants’ Exhibit YY, ¶ 17).
On November 17, 2014, this Court held a trial on Plaintiffs Complaint seeking discharge of her student loan debt. Prior to commencement of the trial, the Court held a final pre-trial conference in chambers. The purpose of the in-chambers conference was two fold: (1) given the parties mistrust of each other, the Court hoped that an in-chambers conference might facilitate a settlement; and (2) if settlement was not possible, the Court hoped to narrow the issues for trial. The parties could not reach a settlement and trial commenced at approximately 11:00 a.m. Plaintiff called three witnesses: Dr. Eric Ayers, Kathleen Frederiksen, and herself. Plaintiff also submitted exhibits, labeled Exhibits 1 through 12. All of Plaintiffs exhibits were admitted into evidence. The Defendants presented no witnesses. However, Defendant ECMC introduced exhibits labeled as Exhibits A through K, and all of those exhibits, except for Exhibit B, were admitted into evidence. Defendant United States Department of Education introduced exhibits labeled as Exhibits AA-OOO. All Defendant Department of Education’s exhibits were admitted into evidence except for Exhibits JJ, KK, LL, PP, RR, SS, TT, and UU. In addition, three exhibits, which contained the notes taken by the Court during its in-chambers final pretrial conference, were admitted into evidence as Joint Exhibits 1-3.
Based on evidence introduced at trial, Plaintiffs income is generated from both her wages and a subsidy she receives for having adopted a daughter. Plaintiff has been employed by the Detroit Public Schools for sixteen years. (Docket No. 73, Plaintiffs Answers to Interrogatories, No. 4A.). Plaintiffs income from her employment for the past several years has been relatively consistent. Plaintiffs income for years 2009 through 2013 is as follows:
2009 $50,317 $47,609
2010 $45,358 $42,671
2011 $52,188 $49,438
2012 $41,539 $41,289
2013 $45,255 $45,005
(See Defendants’ Exhibits AA — EE). Plaintiff has not yet filed her 2014 income tax return, but her gross income for 2014 was $50,568.00. (Plaintiffs Exhibit 3).
In addition to her income from wages, Plaintiff receives a monthly adoption subsidy in the amount of $890.09. This adoption subsidy will be paid to Plaintiff for an additional two and one-half years, and will terminate when her daughter reaches age 18. The adoption subsidy is not included in Debtor’s adjusted gross income. (See Defendants’ Exhibits AA-EE, and Joint Exhibit 1).
In 2014, Plaintiffs monthly take home income, between her wages and her adoption subsidy was $5,104. Debtor took the following deductions from her wages:
Wage Deduction Amount
payroll taxes $849.00
health insurance premium $247.00
deduction for a health care spending account $192.00
supplemental life insurance $21.00
disability insurance -$15.00
universal life $26.00
group accident $39.00
group critical illness insurance $44.00
pre-paid legal services $15.00
“life lock” $14.00
legal expense $10.00
mandatory union dues $81.00
mandatory teacher certification license $5.00
Total $1,558.00
Debtor’s monthly expenses in 2014, were as follows:
Expense Amount
rent $1,042.00
mandatory rental insurance $38.00
electricity $52.00
gas $51.00
telephone and internet $274.00
automobile insurance $305.00
vehicle repairs ' $231.00
gas ’ $315.00
food $537.00
house expenses $66.00
uninsured medical expenses and coinsurance $112.00
non-compensated teacher expenses $21.00
personal care products and services $55.00
additional educational costs for daughter $10.00
religious donations $20.00
At the conclusion of the trial, the Court requested post-trial briefs. Plaintiffs post-trial brief and supplemental pleadings are docketed at Docket No. 181 and 187. Defendant ECMC’s post-trial brief is docketed at Docket No. 188. Defendant United States Department of Education’s post-trial brief is docketed at Docket No. 189.
II.
ANALYSIS
Plaintiff seeks to discharge her student loan debt pursuant to 11 U.S.C. § 523(a)(8). 11 U.S.C. § 523(a)(8) provides that student loan debts are nondischargeable absent a showing of undue hardship by the debtor. Specifically the statute provides:
(a) A discharge under section 727 ... of this title does not discharge an individual from any debt—
(8) for an educational ... loan made, insured or guaranteed by a governmental unit ... unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor’s dependents ...
11 U.S.C. § 523(a)(8).
While the Bankruptcy Code does not define “undue hardship,” case law from this district has made it clear that difficulty in repaying a student loan does not in and of itself constitute undue hardship. In In re Healey,
Total $3,129.00
It is beyond peradventure that requiring repayment of the student loans in the instant case (and for that matter, in almost any case), imposes a “hardship” on the debtor. It is more difficult and expensive to honor an obligation than to disregard it, and reimbursement often means that financial resources will either be tight or not available at all for other discretionary activities. However, the fact that a debtor’s budget may be tight for the foreseeable future is the norm rather than the exception. The question for this court to consider is thus not whether payment of the loans constitute a hardship (it certainly does), but instead whether that hardship is undue. The phrase “undue hardship” is not defined by the Bankruptcy Code, however the. existence of the modifier “undue” indicates that Congress deemed “garden-variety” hardship or “unpleasantness” as an insufficient excuse for a discharge of student loans. Indeed, as one would expect by using common sense, there is a strong legislative policy against allowing the discharge of student loans in bankruptcy.
In re Healey,
The Sixth Circuit has also provided significant guidance as to how to evaluate undue hardship for purposes of 11 U.S.C. § 523(a)(8). See, Tirch v. Pennsylvania Higher Educ. Assistance Agency (In re Tirch),
In Tirch, the Sixth Circuit adopted the three part test set forth in Brunner v. New York State Higher Educ. Services Corp.,
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;
(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) that the debtor has made good faith efforts to repay the loans.
Tirch,
Plaintiff bears the burden of affirmatively proving all three prongs of the Brunner test. If a debtor fails to satisfy any one of these requirements, the bankruptcy court’s inquiry must end there, with a finding of no dischargeability. Cheesman v. Tennessee Student Assist. Corp. (In re Cheesman),
A. Debtor Could Maintain a Minimal Standard of Living for Herself and Her Dependent If Required to Repay Her Student Loans.
The first prong of the Brunner test requires this Court to determine whether Plaintiff has sufficient income, after the payment of expenses, to maintain a minimal standard of living for herself and her dependent. Given the size of Plaintiffs student loan debt (at least $213,000), and her age (61), it might seem obvious that requiring Plaintiff to pay this debt in full would cause Plaintiff and her daughter “undue hardship”. However, Plaintiffs total debt is not the correct measure of debt for purposes of determining “undue hardship”. With income based repayment plans, student loan debtors are only required to pay what their income allows for ten years. If all payments are made, the balance of the loan is written off. Therefore, the relevant inquiry for purposes of evaluating “undue hardship” is whether Plaintiff could make the monthly payment as required by an income-based repayment plan.
Based on Plaintiffs own figures, her monthly income in 2014 was $5,104 (wages of $4,214 plus an adoption subsidy of $890). Allowing Plaintiff payroll deductions for payroll taxes ($849), health insurance premium ($247), health care spending account, ($192), supplemental employee life ($21), disability insurance ($15), group universal life ($26), group accident insurance ($39), group critical illness insurance ($44), prepaid legal services ($15), life lock ($14), legal expense ($10), mandatory union dues ($81), and mandatory teacher certification fee ($5), Plaintiff had total monthly payroll deductions in 2014 of $1,558,
Based on Plaintiffs undisputed income and reasonable expenses, the Court finds that Plaintiff has $417.42 available to make payments on her student loan debt. Given that the Department of Education would have fixed Plaintiffs monthly payment at approximately $267 if Plaintiff had completed the Income-Based Repayment Plan process, the Court finds that Plaintiff could make an appropriate payment on her student loans and maintain a minimal standard of living for herself and her daughter.
Plaintiffs response is that her expenses consistently exceed her income and, therefore, she cannot make a payment on her student loan debt. Plaintiff has filed many pages of receipts and bills to support her argument that she has insufficient income to repay her student loans. While Plaintiffs documents could possibly demonstrate that Plaintiffs expenses exceed her income each month, that fact does not satisfy the first prong of the Brunner test. Plaintiff must demonstrate that she cannot maintain a minimal standard of living if required to make a student loan payment. In the context of a student loan discharge case, the expenses set forth above allow Plaintiff to maintain a minimal standard of living. In fact, many courts have held that cell phones, cable, internet and recreational expenses are not part of a minimal standard of living. In re Hart,
Plaintiffs most compelling argument is that her medical expenses are significantly higher than those represented on Plaintiffs Exhibit 3, and that those expenses are so high that they completely eliminate Plaintiffs ability to make a payment on her student loan debt. The Court finds this argument unpersuasive. Plaintiff has medical insurance which covers her and her dependant daughter. To the extent that insurance does not cover Plaintiffs daughter, her daughter’s medical expenses are fully covered by Medicaid. (Transcript, p. 48). In considering Plaintiffs out of pocket medical expenses, Plaintiff
B. Plaintiff Cannot Demonstrate That Her Financial Situation Is So Hopeless That She Is Unable to Make Payments on Her Student Loans.
The second prong of the Brunner test requires that student loan debtors demonstrate that an inability to make payments on their student loan debt is likely to persist for a substantial portion of the repayment period. The dischargeability of student loans should be based upon the “certainty of hopelessness, not- merely a present inability to fulfill financial commitment.” Oyler,
As discussed above, Plaintiff is fully employed as a teacher for the Detroit Public School system. She has regular monthly income, and that income is sufficient to make a payment on her student loan debt and maintain a minimal standard of living for herself and her dependent. Plaintiff, however, argues that she is eligible for retirement in March 2015 and that, once she retires, her income will be reduced so greatly that she will be unable to make a payment on her student loan debt. Plaintiff also argues that the monthly adoption subsidy will end in two .and one-half years, reducing her income even further.
The Court finds that the fact that Plaintiffs income may decrease in March of 2015 is insufficient to demonstrate a certainty of hopelessness. Plaintiff is able to work and is capable of continuing to work in the future. If her income decreases in 2015, it is because Plaintiff chooses to retire early, not because she has been forced out of employment. Many courts that have addressed age within an undue hardship context have denied discharge on facts similar to the facts of the instant case. See, Jones v. Bank One Texas,
In addition, when a student loan ' debtor is alleging a certainty of hopelessness based on the debtor’s medical condition, the second prong of the Brunner test requires that “the debtor must precisely identify her problems and explain how her condition would impair her ability to work in the future.” Tirch,
Courts have also identified what is not an undue hardship. See, Educational Credit Management Corp. v. Ross,
In the instant case, Plaintiffs medical conditions do not prevent her from working. She is currently working and may continue to do so for many more years. Her physician, Dr. Ayers, testified that while Plaintiff has many chronic physical conditions, those conditions are all manageable with the appropriate medication. (See, Dr. Ayers testimony, Transcript, pp. 28, 33). If Plaintiff retires, her income might decrease to a point that Defendants cannot obtain even a minimal repayment of the debt owed to them. Based on the relevant case law however, the fact that Plaintiffs income may decline is insufficient to establish that Plaintiffs financial condition is so hopeless that she satisfies the second prong of the Brunner test.
C. Plaintiff Has Not Made a Good Faith Effort to Repay Her Student Loans.
The third prong of the Brunner test requires that Plaintiff demonstrate that she has made a good faith effort to repay her student loans. Many courts have held that student loan debtors who make little or no effort to repay student loans cannot
Courts have also held that the fact that, for some portion of a loan repayment period, a debtor was able to obtain deferments or forbearance agreements is not sufficient to demonstrate a good faith effort to repay. Spence v. Educational Credit Mgmt. Corp.,
In the instant case, Plaintiff obtained loans from 1992 to 2006. With respect to Defendant ECMC, it is undisputed that Plaintiff owes $101,193.71. (Defendants’ Exhibit A). The only payments ever made to Defendant ECMC were made by way of involuntary garnishment, followed by nine monthly payments necessary to stop the involuntary garnishment and obtain an additional deferment of collection. (Defendants’ Exhibit G).
With respect to Defendant Department of Education, while there may be some disagreement between Plaintiff and Defendant as to the actual amount of interest owed by Plaintiff, it is undisputed that Defendant Department of Education disbursed student loans in the amount of $85,482 between November 1, 1996 and August 29, 2003. It is also undisputed that a significant amount of interest has accrued on the loans owed to the Department of Education. Plaintiff has never made a single voluntary payment on her Department of Education loans. (See Declaration of Michael liles, Defendants’ Exhibit YY, ¶ 11 and Transcript, p. 181.)
This Court finds that Plaintiffs failure to make a single voluntary payment on her student loan obligation, outside of the nine required to obtain a further deferment, does not demonstrate the level of good faith required to obtain a discharge of her student loan debt. Furthermore, the Sixth Circuit has held that a student loan debtor’s failure to avail themselves of programs which could assist them in repaying their student loans demonstrates a lack of good faith sufficient to deny discharge. Tirch,
Based on the Tirch decision, and because this Court believed it was in Plaintiffs best interest, the Court ordered Plaintiff to complete the documents necessary for the Department of Education to provide Plaintiff with an income based repayment plan. (See “Order Denying
This Court finds that Plaintiffs failure to make any voluntary payments on her student loan debt (except for the nine payments required to obtain an additional deferment) combined with her steadfast refusal to participate in a process which would have required income based repayments in exchange for potential total forgiveness of debt should Plaintiffs income fall below the poverty guidelines, demonstrates a lack of good faith. Therefore, Plaintiff cannot satisfy the third prong of the Bru/nner test.
III.
CONCLUSION
To obtain á discharge of a student loan under 11 U.S.C. § 523(a)(8), Plaintiff has the burden of proving all three prongs of the test set forth in Brunner v. New York State Higher Education Services Corp.,
Notes
. All exhibits referred to in this Opinion are the exhibits admitted into evidence at trial.
. The United States Department of Education is the final guarantor of loans guaranteed by MGA. In the event of a discharge of student loans guaranteed by MGA, the Department of Education, rather than MGA, is required to reimburse the lender for the amount of the discharged debt.
. Defendant Department of Education asserts in its answer to Plaintiff's interrogatories that Plaintiff owes $126,413.58 as of May 9, 2014 on her direct student loans. While this figure may be accurate, it is not clear how Defendant Department of Education arrived at this balance. The evidence does not clearly explain the calculation of interest between October 29, 2013 and May 9, 2014. For this reason, there may be a fact question as to the exact amount of interest owed. However, a determination of the exact amount of interest owed to date is not necessary for a determination of whether Plaintiff is entitled to a discharge, nor is it relevant to a determination of an amount Plaintiff could pay based solely on her income. The exact amount of interest owed is only relevant to the total amount of Plaintiff's student loan debt. The Court notes that even if Plaintiff owes the amount of interest reflected on Exhibit BBB (which would be the lowest of any amount owed), Plaintiff's debt to both Defendants exceeds $214,746.50, an amount she will never realistically be able to pay.
. The amount of the student loan debt, itself, is not considered.
. Defendants argued at trial that many of these payroll deductions are not mandatory
. The income, withholding, and expenses listed above are taken directly from Plaintiff's Exhibit 3. To the extent that the numbers set forth above differ from the numbers on Plaintiff's Exhibit 3, it is because, where monthly payments vary month to month, the Court annualized the total payments by adding them up and divided that number by 12. The Court then rounded those numbers to the nearest dollar.