Larson v. United States Ex Rel. Department of Education (In Re Larson)Larson v. United States Ex Rel. Department of Education (In Re Larson)
MEMORANDUM OPINION
This matter comes before the Court on an adversary proceeding brought by the plaintiff, Dale Larson (“Mr. Larson” or the “Plaintiff’), against the defendant, U.S. Department of Education (the “Department”), seeking a determination that the debt owed by Mr. Larson to the Department (the “Student Loan”) is dischargea-ble under 11 U.S.C. § 523(a)(8). For the reasons set forth herein, the Court finds in favor of the Plaintiff that the Student Loan is dischargeable.
A. JURISDICTION AND PROCEDURE
The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
B. FACTS AND BACKGROUND
The following facts and procedural history are taken from the Debtors’ Complaint to Determine Dischargeability of Student Loans, the Department’s Answer and Affirmative Defenses to the Complaint, and from the testimony and evidence presented and admitted at the evidentiary hearing held on February 25, 2010, including the joint Stipulations filed by the Plaintiff and the Department in connection therewith.
Mr. Larson is currently 58 years old. He attended Waubonsee Community College in Sugar Grove, Illinois from 1969 to
Mr. Larson funded his educational costs at DeVry through student loans arranged ■by DeVry. On April 2, 2000, he consolidated his unpaid student loans, which had a balance of $37,250 at the time, through a consolidated loan (the “Student Loan”) from the United States Department of Education (the “Department”) under the Federal Direct Consolidation Loan Program. At that time, he elected to repay his student loans under the income contingent repayment plan (“ICRP”) offered under the Federal Direct Consolidation Loan Program. Under the ICRP, the payment due each month varied based on annual income, and if the borrower’s income was below a certain level, there was no required payment. Also under the ICRP, if the borrower complied with the plan, after 25 years any outstanding principal and interest would be cancelled. Between October and December 2000, Mr. Larson made three monthly payments of $261 each, and in May 2002, he was credited with a payment of $1,526. He has made no other payments on the Student Loan, but there is no indication that he was required to make any other payments under the ICRP. Because of accrued interest, as of December 5, 2009, the balance on the Student Loan was $67,231.68.
In 1999, Mr. Larson and his brother, Kurt, inherited the title to the house he currently lives at in Batavia, Illinois, from his father. In February 2001, Mr. Larson purchased his brother’s interest in the house for $75,000, which he funded with a mortgage loan of $76,000. In May 2002, Mr. Larson refinanced the mortgage, borrowing $90,000. In October 2003, he refinanced it again, borrowing $105,000. In May 2004, he refinanced it, borrowing $131,000. In November 2004, he refinanced the mortgage, borrowing $150,000. Therefore, each time he refinanced the mortgage, he borrowed an additional $15,-000-$25,000. Mr. Larson was unclear how he used these surplus loan proceeds. He recalled using some of the money to replace the roof on the house, some to remodel a bathroom to fix a mold problem, and some to repair or replace the boiler and dishwasher. As of the petition date in April 2008, the Debtors estimated the value of their house as of that date as $170,000 and the mortgage debt on the house as of that time as $159,000.
In early 2004, Mr. Larson suffered a heart attack, which required a quadruple bypass surgery. After the surgery, his doctors discovered that his kidneys had failed. They began dialysis in February 2004, which continued until February 2007, when he received a kidney transplant. His medical conditions appear to have stabilized, but he continues to need extensive medicines and check-ups. He takes several types of insulin for his diabetes, a blood thinner and other medications for his heart condition, several forms of anti-rejection medicine related to his kidney transplant, as well as pain medication. He also has to regularly see cardiologists and other specialists for his diabetes and in connection with his kidney transplant, as well as doctors in connection with his vision problems.
Mr. Larson lives with his wife, who is his sole dependent. In 2008 or 2009, his brother began living with the Larsons after his divorce, but did not pay them rent. Mr. Larson makes $14.10 per hour at Ni-cor, or $1724 per month. From this, $229 is deducted for taxes and social security, $156 for health insurance, $35 for dental insurance, and $27 for life insurance. He also has $86 per month deducted to contribute to a 401(k) plan, for which Nicor makes a 90% matching contribution. Currently, his 401(k) balance is around $7,500. He began making 401(k) contributions in 2005. In 2007, he borrowed $750 from the 401(k), but was able to pay back the loan in installments out of his subsequent paychecks. He also receives $1,241 in monthly social security disability payments, and his wife receives $760 in disability payments and is unemployed. Therefore, after withdrawals, his family’s monthly take-home in income and disability payments is $3,192.00.
Mr. Larson itemized his and his wife’s average monthly expenses as $3,261.00. 1 Their main expense is the mortgage, which is $1,394 per month. Medical expenses were listed at $280 per month. The Debtors listed veterinary expenses and dog care as $120 per month, but this is reasonable since Mr. Larson has a guide dog because of his blindness. Cigarettes are listed at $40 per month, but the Debtor indicated that his wife had cut this down from $150 from the time of the petition in April 2008. Recreation was listed as $108 per month. The Debtors also listed that they make charitable contributions of $80 to their church and listed $76 for “Lion Club.” Mr. Larson clarified that the $76 consists of $12 in dues, plus expenses he allocates to his participation in the Batavia Lion’s Club: $25 in transportation to get to and from meetings and activities and a monthly average of $39 for the cost to maintain a personal computer. He has to have a personal computer to perform his duties as vice president of the club, and in July will become president of the Batavia branch. Mr. Larson also indicated that his computer is more expensive than usual because he needs specialized equipment and software to accommodate his visual impairment.
C. DISCUSSION
Under Section 523(a)(8), educational loans are presumptively nondis-chargeable unless a Debtor can demonstrate that excepting such debt from discharge “will impose an undue hardship on the debtor and the debtor’s dependents.” 11
U.S.C.
§ 523(a)(8) (West 2010). There is no dispute that the Stu
I. MINIMAL STANDARD OF LIVING
For the first prong of the test, the court looks at the debtor’s current monthly income and expenses for himself and his dependents, but should disregard “expenses that are not necessary, and, if eliminated, that would provide funds that could be directed toward repayment of the loan.”
Clark v. U.S. Dep’t of Educ. (In re Clark),
The Plaintiff listed a combined average monthly income for Mr. Larson and his wife as $3,192, and average monthly expenses of $3,261, not including any payments towards the Student Loan. As asserted and without modifying their current budget, the Debtors would have no income to use towards repayment of the loan, and would in fact have an average monthly shortfall of $69. Mr. Larson testified that he and his wife currently have less than $500 in savings, and that at no time in the last five years did his annual income exceed his annual expenses.
The Department argued that certain of the Debtors’ expenses are not necessary within the standard for Section 523(a)(8)
The Department also noted that neither the costs in connection -with the Lion’s Club, nor the charitable contributions to his church were listed on the Debtors’ original Schedule I. However, the Court does not believe this was an intentional omission or that the omission means that the Debtors only recently began donating or participating in the club. The Debtors’ more recent estimate of expenses simply seems more detailed and more accurate than the original schedule. For example, the original schedule listed “entertainment” as “0,” which, while admiral, also seems implausible. The original schedule also did not list certain items such as “trash removal” or “lawn & garden,” which were included in the more recent estimate, but which the Court does not believe were new expenses. Given the Debtors’ longstanding health issues, it is unlikely that they only recently found themselves needing to hire someone to help with the lawn. More likely, their experience going through a bankruptcy case has made them more attuned to their expenses and better at estimating and listing expenses and assets accurately. Overall, their more recent expense figures seem more realistic, if not still conservative.
a. Religious Donations
The Religious Liberty and Charitable Donation Protection Act of 1997 modified Section 548 and Section 1325(b)(2)(A) of the Bankruptcy Code to exclude charitable contributions made to a qualified religious organization in an amount up to 15 percent of a debtor’s gross income from avoidance as a fraudulent transfer and from the definition of “disposable income” for purposes of plan confirmation in a Chapter 13 case, but the RLCDPA made no change to Section 523(a)(8). Courts are split on whether Congress’s silence was intentional, and what effect if any, the amendment to the other sections should have on analysis under Section 523(a). Some courts have held that the intentional exclusion means that such religious donations are
per se
non-necessary expenses for purposes of Section 523(a).
See, e.g., Fulbright v. U.S. Dep’t of Educ. (In re Fulbright),
b. Recreation
The Department also raised an objection to Mr. Larson’s expenses in connection with the Lion’s Club as an unnecessary expense. However, even under the minimal standard of living test, “[pjeople must have the ability to pay for some small diversion or source of recreation, even if it is just watching television or keeping a pet.”
In re McLaney,
c. 401 (k) Contributions
The Department also argued that the amount deducted from Mr. Larson’s wages for 401(k) contributions are not necessary, and could be used towards loan repayment. Like religious donations, courts have split on whether 401(k) contributions should be excluded
per se
for “minimal living standard analysis.” For example, in
Perkins v. Penn. Higher Educ. Assistance Agency,
the court stated that “401 (k) contributions generally are not regarded as reasonably necessary for the support or maintenance of a debtor and thus may be considered as available income from which a debtor seeking a § 523(a)(8) undue hardship discharge could use to repay an educational loan.”
However, given Mr. Larson’s age, minimal accumulated savings, meager income in comparison with his expenses, and the fact that his employer matches 90% of his contributions, as well as the relatively small amount of his contributions and the frugal nature of the rest of his budget, the Court will find, based on these particular circumstances, that the Debtors’ ability to make the current 401(k) contribution does not mean that the Debtors would be able to maintain a minimal living standard if they ceased the contributions and instead made payments on the Student Loan. The Court notes that it is not holding that the category of reasonably necessary expenses includes 401(k) contributions. Rather, the Court’s determination is based on two factors: the Debtors’ overall ‘belt-tightening,’ and concern that the Debtors have understated their likely future expenses.
Just as a court should not be “in the business of deciding which recreational activities are acceptable and which are not” so long as the overall total spent on discretionary expenses is frugal,
In re Vargas,
By the Defendants’ logic, a debtor living well below the poverty level would be denied a discharge if the debtor, by foregoing a reasonable level of expenditure on clothing, spent part of his income on what would be considered luxury items, for example, cable or going out to dinner. A debtor whose income is insufficient to meet a minimal standard of living, taking into account the level of expenditures necessary for that purpose, ought not be denied a discharge of student loan debts based on the creditor’s finding some item of expenditure that could be deemed a non-necessity. The Brunner test ought not be turned in that fashion into a game of “gotcha” based on viewing certain expenditures in isolation, wearing blinders that disregard the debtor’s needs in a global fashion.
Moreover, even though the Debtors have listed a monthly contribution of $86 per month, it is unlikely that this demonstrates that the Debtors can afford to make payments on the Student Loan. For example, even their current budget demonstrates a monthly deficit of $69, which is nearly equal to the amount currently contributed. Therefore, to a certain extent, the contribution is not really coming out of Mr. Larson’s income, but is coming out of his meager savings. Moreover, the average monthly expenses the Debtor has estimated for variable expenses, such as home maintenance, medical expenses, and even utilities, seem so conservative that the Court wonders how the Debtors could manage if any unexpected expense or decrease in income arose, particularly in light of the Debtors’ recent history of medical problems and necessary home repairs.
See, e.g. McLaney,
d. Additional Sources of Income
The Department also argued that the Debtors’ income should be adjusted to reflect their tax refund. Since 2004 the Debtors have received federal tax refunds ranging from $128 to $1,166, and the Department estimated that the Debtors would receive a tax refund of around $900 for the year 2009. It is true that the Debtors’ estimated budget did not include this income, but as mentioned above, the budget also likely does not reflect potential unexpected costs and expenses that are nonetheless likely to occur in the future. So, while a $900 annual tax refund would increase the Debtors’ average monthly income by $75, such adjustment does not impact the Court’s opinion that the Debtors’ future expenses are unlikely to exceed their income. Therefore, even considering the tax refund as a source of income, the Court believes that the Debtors will not have future income which could be devoted to repayment of the Student Loan without adversely impacting their ability to maintain a minimal standard of living.
e. The Income Contingent Repayment Plan
Finally, the Defendant argued that, because Mr. Larson is on an income-contingent repayment plan, even if the Debtors have minimal income, compliance with the repayment terms of the plan will not cause the Debtors undue hardship. Because Mr. Larson elected the income-contingent plan, he only has to make payments in an annual amount equal to 20% of the excess of his Adjusted Gross Income over the amount stated in the Department of Health and Human Services’ poverty guidelines for a family of his size.
See
34
Section 523(a)(8) places the discretion to determine the dischargeability of student loans with the bankruptcy judge, who “must not turn to the ICRP as a substitute for the thoughtful and considered exercise of that discretion.”
Durrani,
They would bear an emotional and a social toll. One of the fundamental policy goals of bankruptcy is to give a ‘fresh start’ to “honest but unfortunate” debtors.
See, e.g., Grogan v. Gamer,
II. ADDITIONAL CIRCUMSTANCES TO INDICATE THE DEBTOR’S STATE OF AFFAIRS WILL PERSIST
A debtor must demonstrate that his inability to pay is not just a temporary
Such standard is met here. Mr. Larson works only 28 hours per week, but is unable to work more hours. He testified that his doctors would not permit him to work more than 28 hours per week for health reasons. Nor is he likely to find a higher paying job. Due to his visual impairment, he stated that he feels fortunate to have the job that he does. Additionally, the Debtors’ health problems are not of a short-term nature and are unlikely to change for the better in the future. Although Mr. Larson had a kidney transplant and his heart condition has stabilized, there is no reason to believe he will regain his vision in the future, and he could have potential relapses or complications from his heart condition or diabetes, or could suffer other medical conditions. For most of the medicines he takes, he indicated that he will have to take them indefinitely. While Mr. Larson gets annual raises, at the same time the Debtors have to struggle with increasing costs of living. While the future is always unknowable, there are no foreseeable prospects for a change in circumstances that would increase the Debtors’ ability to repay the Student Loan.
III. GOOD FAITH ATTEMPT TO REPAY
Under the “good faith” prong, the debtor’s financial distress cannot be of his or her own creation.
In re Clark,
Here, Mr. Larson’s health problems only began after he had borrowed the initial student loan and had begun classes. He was suffering diabetes before starting school, but did not begin to lose his vision until two years later. It was five years later that he completely lost his sight. His kidney failure and quadruple by-pass were seven years after that. Therefore, it was unlikely that he knew at the time he borrowed the funds that he would be unable to complete his education or be unable to repay the loans. And, his inability to do so was caused by external forces, such as unanticipated medical conditions. There are similarly no indications that his financial distress or bankruptcy were “self-imposed” or caused by excessive spending.
Mr. Larson chose the most flexible repayment plan that was offered. Neither party discussed the payment history of the initial loan, but he made three payments of $261 each in late 2000 on the consolidated loan, and was credited with another payment in May 2002. While this is a low number of payments over ten years, it is likely that he was not required to make any other payments during that time because of the repayment plan. The Depart
The Department noted that there were several times during the life of the Student Loan when Mr. Larson had cash, and implied that he should have used the money to repay the loan. First, the Department noted that Mr. Larson bought his brother’s interest in the house they inherited for $75,000 in February 2001. But, he took out a mortgage on the house to make that payment. Mr. Larson should not have been forced to borrow from one lender to pay another. Moreover, it is likely that the mortgage lender would not have lent the funds unless Mr. Larson’s brother released his interest in the house. The Department also noted that Mr. Larson refinanced the mortgage several times between 2002 and 2004, in each case refinancing for an amount $14,000 — $25,000 greater than the prior initial balance. With respect to the November 2004 refinancing, the Department demonstrated that Mr. Larson received a cash distribution of around $13,000. But, there is no indication that he was obligated under the repayment plan to use any such borrowed funds to repay the Student Loan. Nor is there any indication that he used any of the funds on luxuries or non-necessary expenses. Mr. Larson could not recall in detail how the various borrowed funds were used, but testified that he used at least some of the funds to repair the house’s roof, to replace the boiler and dishwasher, and to remodel one of the bathrooms to fix a mold problem. Additionally, at least several of the refinancings took place around the same time that he had severe medical emergencies, including his quadruple by-pass surgery and his kidney failure requiring dialysis. Therefore, the Court holds that the Debtors have demonstrated a good faith attempt to repay the Student Loan.
D. CONCLUSION
For the foregoing reasons, the Court finds in favor of the Plaintiff and declares the Student Loan dischargeable.
THEREFORE, IT IS ORDERED that the foregoing constitutes findings of fact and conclusions of law as required by Fed. R.Civ.P. 52(a) and Fed. R. Bankr.P. 7052. A separate order shall be entered pursuant to Fed. R. Bankr.P. 9021 giving effect to the determinations reached herein.
Notes
. In the Debtors’ original Schedule I filed in April 2008 with their bankruptcy petition, they listed monthly expenses as $2,514.00, with a monthly net income of $418. However, the difference from now appears to largely stem from a scrivener’s error, in which the food expense in the original schedule was listed as "$40” instead of "$400.” Since the April 2008 petition, the Debtors’ average monthly income has increased by about $250, and ignoring the scrivener's error, average monthly expenses have increased by about $300.