Lead Opinion
' Plаintiff-Appellee Nancy Jane Polleys sought a bankruptcy court discharge of federally guaranteed student loans. Defendant-Appellant Education Credit Management Corporation (“ECMC”) is a nonprofit company and fiduciary of the Department of Education that is charged with collecting such loans. It now holds these loans. Ms. Polleys initiated an adversary proceeding in bankruptcy, contending that the loans were dischargeable because payment of them would impose an undue hardship within the meaning of 11 U.S.C. § 523(a)(8). The bankruptcy court agreed and dischаrged the loans. The district court affirmed. ECMC now appeals. We have jurisdiction pursuant to 28 U.S.C. § 1291 and we affirm.
Background
At the time of trial, Ms. Polleys was a 45-year old single mother of a teenaged girl. In 1993, she obtained a degree in
Ms. Polleys was previously employed as an accountant. In 1994, she worked for one year in that capacity and earned $83,000. She had a job in public accounting in 1997, earning $13,771. According to Ms. Polleys, she was laid off from that job when the employer realized she was taking antidepressant medication and she asked for too much help. Ms. Polleys also tried self-employment, but could only get small bookkeeping jobs that paid less than $400 per month.
Since 1997, Ms. Polleys’s annual income has been as high as $16,000 and as low as $3,000. Through August 2000, she earned minimum wage while employed at a greenhouse until she was laid off. Recently, Ms. Polleys and her daughter have lived on about $9,800, obtained from child support and two or three part-time jobs. Ms. Pol-leys receives $400 per month in child support payments.
Ms. Polleys .and her daughter live in a rental property owned by her parents and pay no rent or utilities. She has a 1993 Subaru, which has significant body damage, but owns very little other property and no real property. Her budget contains no funds for emergencies. She qualifies for food stamps, and her income is below the federal poverty guidelines, as it was in the year before trial. Aplt.App. at 48, 128-29. Although her daughter is eligible for Medicaid, Ms. Polleys herself has no health insurance. She expects to receive unemployment compensation at some point in the future.
Ms. Polleys is apparently in good physical health, but she has been diagnosed with and continues to suffer from a psychological condition known as “cyclothymic disorder.” She was once involuntarily committed. ApltApp. at 32, 168. Ms. Polleys is currently prescribed Serzone, an antidepressant, twice a day. Aplt.App. at 132. Her mental health condition also apparently resulted in a suicide attempt. Aplt.App. at 24-27, 30-31, 159. She has ongoing expenses for her vаrious medical and psychological conditions. Aplt.App. at 132-32.
On appeal, ECMC argues that the district court and the bankruptcy court not only selected the wrong standard for an undue hardship discharge, but also applied it incorrectly. Rather than relying upon a “totality of the circumstances” test, ECMC argues that the courts should have looked to the three-part test in Brunner v. New York State Higher Education Services Corp.,
Discussion
' Section 523(a)(8) provides that an educational loan is not dischargeable in bankruptcy unless “excepting such debt from dischargе ... will impose an undue hardship on the debtor and the debtor’s dependents.” While this court is obliged to accept the bankruptcy court’s undisturbed findings of fact unless they are clearly erroneous, we review de novo conclusions as to the legal effect of those findings. United States v. Richman (In re Talbot),
A. Undue Hardship Standard
The bankruptcy code does not define “undue hardship,” nоr has the Tenth Circuit designated a test for the .determination of the term. In an unpublished decision, Cuenca v. Department of Education, No. 94-2277,
The court in Cuenca found that the debtor earned $36,000 per year, his wife did not work, he was not burdened with a number of old debts, and that he had derived a benefit from his education. In refusing to discharge the debtor’s student loan, the court stated, “Mr. Cuenca’s income is not at or below poverty level. Many families would be envious of his annual income.” Id.
In enacting § 523(a)(8), Congress was primarily concerned about abusive student debtors and protecting the solvency of student loan programs. See In re Andresen,
These bankruptcies contravened the general policy that “a loan ... that enables a person to earn substantially greater income over his working life should not as a matter of policy be dischargeable before he has demonstrated that for any reason he is unable to earn sufficient income to maintain himself and his dependents and to repay the educational debt.” Id. The Commission implemented this policy by recommending the delay of dischargeability for five years,
The Commission noted that in order to determine whether nondischargeability of the debt will impose an “undue hardship,”
the rate and.amount of his future resources should be estimated reasonably*1307 in terms of ability to obtain, retain, and continue employment and the rate of pay that can be expected. Any unearned income or other wealth which the debtor can be. expected to receive should also be taken into account. The total amount of income, its reliability, and the periodicity of its receipt should- be adequate to maintain the debtor and - his dependents, at a minimal standard of living within their management capability, as well as to pay the education debt.
Id.
The various courts of appeals that have applied the unduе hardship provision of § 523(a)(8) have adopted two tests. Most circuits have adopted a version of the Second Circuit’s three-factored test in Brunner v. New York State Higher Education Services Corp.,
The three-part Brunner .test requires the debtor to prove:
(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 circúm-stances 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 debt- or has made good faith efforts to repay the loans. ''
The facts' in Brunner weighed heavily against the debtor, and thus the court refused to discharge the student loan. The debtor was not disabled or elderly and had no dependents. She was also skilled and well educated. She did not recount to the court any specific Jobs that she had sought and been refused, and did not attempt to find a job outside of her chosen field of work. She only had $9,000 of student loan debt, but two months prior to the bankruptcy hearing, she withdrew $2,400 from her savings to buy a'car. Moreover,' she filed for discharge within a month of the' date the first payment of the loans came due, made virtually no attempt to repay, and did not request a deferment of payment. Brunner v. N.Y. State Higher Educ. Svcs. Corp. (In re Brunner),
These applications show that an overly restrictive interpretation of the Brunner test fails to further the Bankruptcy Code’s goal of providing a “fresh start” for the honest but unfortunate debtor, Stellwagen v. Clum,
Under the Eighth Circuit’s “totality of the circumstances” test for undue hardship, bankruptcy courts should consider:
(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. Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of thе student loan debt-while still allowing for a minimal standard of living-then the debt should not be discharged.
Id. at 554-55 (citations omitted).
Relevant factors that different courts consider when examining the totality of circumstances of a debtor’s situation include, but are not limited to, whether the debtor has made a good faith effort to negotiate a deferment of payment; whether the hardship will be long-term; whether the debtor has made any payments of the student loans; whether a debtor is permanently or temporarily disabled; whether the debtor has tried to maximize income and minimize expenses; whether the debt- or has an ability to obtain gainful employment in her area of study; and the ratio of the student loan to the total indebtedness. See Lawson v. Hemar Serv. Corp. of Am. (In re Lawson),
According to the Eighth Circuit, the totality of the circumstances test is a “less restrictive approach” than the Brunner test. Long,
On the other hand, it is not necessarily true that a totality of circumstances analysis of each debtor’s situation avoids the harshness of the Brunner analysis. Under this standard, courts may choose from a multitude of factors and apply any combination of them to a given case, suggesting that just about anything the parties may want to offer may be worthy of consideration. As a result, it has an unfortunate tendency to generate lists of factors that should be considered — lists that grow ever longer as the case law develops. See, e.g., In re Smither,
An ad hoc, totality-of-the-circumstances approach has been justified as more in accordance with legislative intent. See, e.g., Wilson v. Mo. Higher Educ. Loan Auth.,
We do not read Brunner to rule out consideration of all the facts and circumstances. Under the first aspect of Brunner, the bankruptcy court is to inquire about whether the debtor can maintain a minimal standard of living while repaying the debt. This evaluation necessarily entails an analysis of all relevant factors, including the health of the debtor and any of his dependents and the debtor’s education and skill level. The second Brunner factor similarly requires an analysis of all the facts and circumstances that affect the debtor’s future financial position. Finally, the good faith part includes an analysis of the debtor’s situation in order to determine whether he has made a good faith attempt to repay the loan by maximizing income and minimizing expenses.
We therefore join the majority of the other circuits in adopting the Brunner framеwork. However, to better advance the Bankruptcy Code’s “fresh start” policy, and to provide judges with the discretion to weigh all the relevant considerations, the terms of the test must be applied such that debtors who truly cannot afford .to repay their loans may have their loans discharged. Additionally, we think that the good faith portion of the Brunner test should consider whether the debtor is acting in good faith in seeking the discharge, or whether he is intentionally creating his hardship.
The first part of Brunner — that the debtor cannot maintain a minimal standard of living while repaying the student loan debt — comports with the legislative policy behind § 523(a)(8), that student loans “should not as a matter of policy be dis-
The second Brunner element, which requires 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, properly recognizes that a student loan is “viewed as a mortgage on the debtor’s future.” Id. However, in applying this prong, courts need not require a “certainty of hopelessness.” Instead, a realistic look must be made into debtor’s circumstances and the debtor’s ability to provide for adequate shelter, nutrition, health care, and the like. Importantly, “courts should base their estimation of a debtor’s prospects on specific articulable faсts, not unfounded optimism,” and the inquiry into future circumstances should be limited to the foreseeable future, at most over the term of the loan. Robert F. Salvin, Student Loans, Bankruptcy, and the Fresh Start Policy: Must Debtors Be Impoverished to Discharge Educational Loans?, 71 Tul. L.Rev. 139, 197 (1996).
Finally, an inquiry into a debtor’s good faith should focus on questions surrounding the legitimacy of the basis for seeking a discharge. For instance, a debt- or who willfully contrives a hardship in order to discharge student loans should be deemed to be acting in bad faith. Good faith, however, should not be used as a means for courts to impose thеir own values on a debtor’s life choices.
B. Did Ms. Polleys Establish Undue Hardship?
Normally, we would remand for the bankruptcy court to apply the test we announce today. Such a remand is unnecessary because the bankruptcy court’s factual findings are sufficiently complete to decide the undue hardship issue.
ECMC apparently does not dispute the bankruptcy court’s implicit finding that Ms. Polleys satisfied the first part of the Brunner test, that she cannot maintain a minimal standard of living while repaying the student loan debt. As the bankruptcy court found, Ms. Polleys “has no discretionary income, lives at the largesse of her рarents, and is unemployed.” Bankr.Ct. Opin. at 4.
ECMC argues that Ms. Polleys cannot satisfy the second Brunner part— that circumstances indicate that her state of affairs is likely to persist for a significant portion of the repayment period of the student loans — because she cannot prove that she has a medical disability. ECMC, however, ignores the bankruptcy court’s extensive findings of Ms. Polleys’s emotional health. The court found that Ms. Polleys “suffers from debilitating emotional problems which, though counterproductive, are obviously out of her control.” Id. Moreover, “medication was necessary for her to function, but that medication affected her memory and communication skills negatively.” Id. Ms. Polleys’s “inability to hold a job due to emotional outburst and a low tolerance for stress is not a problem of her own making, but affects her ability to earn more than a nominal living.” Id. This condition is “likely to persist into the foreseeable future, and even with a modest improvement in income [there is] no way that Ms. Polleys can repay $51,000 plus accruing interest.” Id.
The fact that Ms. Polleys stipulated that she “has no medical or physical condition that prevents her from retaining work” does not carry the day for ECMC. D. Ct. Opin. at 5. Ms. Polleys did not stipuláte that she has no'' medical condition that affects her ability to work or earn a substantial income. The bankruptcy' court found just the opposite and its findings are not clearly erroneous.
More fundamentally, although ECMC argues that “typically, prospective undue hardship is proven- by medical disability,” Aplt. Br. at 25 (emphasis addеd), the cases do not suggest .that a permanent medical disability is any kind of prerequisite to discharging a student loan debt. In In re Cheesman,
Additionally, ECMC’s reliance on In re Brightful,
Finally, the facts indicate that Ms. Polleys is seeking to discharge her student loan debt in good faith. ECMC admits that the good faith inquiry requires determining whether a debtor’s circumstances are the result of “factors beyond her reasonable control.” Aplt. Br. at 30. However, ECMC bases its claim of lack оf good faith only on (1) the fact that Ms. Polleys has never made a single payment on her student loans, and (2) her decision to leave a good paying job and move to Wyoming to live with her parents.
First, the failure to make a payment, standing alone, does not establish a lack of good faith. See In re Coats,
Moreover, the good faith part can be satisfied by a showing that Ms. Polleys is actively minimizing current household living expenses and maximizing personal and professional resоurces. In re Woodcock,
Finally, there is no indication that Ms. Polleys is “attempting to abuse the student loan system by having [her] loans forgiven before embarking on lucrative careers in the private sector.” Cheesman,
AFFIRMED.
Notes
. After the enactment of the Higher Education Amendments of 1998, Pub.L. No. 105-244, 112 Stat. 1837 (1998), student loan debts are no longer automatically dischargeable after five years. Thus, only the "undue hardship” exception to nondischargeability currently exists. See infra note 2.
. It should also be noted that the Bankruptcy court decision to which the Brunner undue hardship test applied was based on the Bankruptcy Code as it existed in 1985, which still provided for an automatic discharge for five-year-old student loans that could not. be repaid. See Brunner,
In 1998, however, the Higher Education Amendments of 1998 eliminated the automatic dischargeability of student loans, leaving only the undue hardship exception to nondis-changeability. The repeal of the five-year dis
Concurrence Opinion
concurring.
Every month milliоns of young Americans who have' availed themselves of the type of student loan program at issue here faithfully make their payments. It is beyond dispute that the level of sacrifice required to make these payments is' a great one; many no doubt make such payments even when they consider the burden an “undue hardship.” It is important that the student loan program operate free of the cynicism that would infest the system if a disparate standard for discharge of loans would develop, leaving some students enduring the hardship of making loan payments while others are frеed of their commitment on a floating standard. Because this case appears to be exceptional, I concur in the result reached by my esteemed colleagues.
I write, separately because I disagree with the majority’s adoption of Brunner’s second prong, which requires “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.” Brunner v. New York State Higher Educ. Servs. Corp.,
As to the- first issue, I am concerned that the majority opinion fails to enunciate a clear standard to measure “undue hardship” when a debtor asserts a medical disability as evidence. I would replace
Thе “reasonable medical probability” standard is not a novel one; in fact, it is ubiquitous in other contexts in both federal and state law. See, e.g., St. Anthony Hosp. v. U.S. Dep’t. of Health and Human Servs.,
With respect to the issue of duration of the circumstances, the majority requires that the disability last for a “significant period of the loan.” It is my view that “significant period” is not sufficiently defined and is likely to lead to inconsistent outcomes. I would therefore reject this subjective inquiry and instead require an objective standard for determination of the duration requirement, leaving it to the medical experts to declare whether the disability will or will not extend for the duration of the loan. What is needed is legislation which excuses the payment of loans during pеriods of disability; however, in the absence of such legislation, bankruptcy courts ought to discharge student loans only when the medical record is clear that the disability involved is an enduring one.
Of course, factors other than medical disability can and should be taken into consideration in making the ultimate decision as to whether a debtor’s circumstances constitute “undue hardship” and warrant the discharge of a loan. To the extent that the decision is based on a medical disability determination, however, those medical factors should be based on objective rather than subjective criteria.