In re: Michele D. Walker, Debtor; Michele D. Walker, Plaintiff - Appellee v. Sallie Mae Servicing Corp., SLM Education Credit Finance Corporation, Zwicker & Associates, P.C., Kohn Law Firm, S.C., and Sallie Mae, Inc., Defendants; Educational Credit Management Corporation, Defendant - Appellant
No. 09-6022
United States Bankruptcy Appellate Panel FOR THE EIGHTH CIRCUIT
Submitted: February 24, 2010 Filed: April
Before SCHERMER, FEDERMAN, and SALADINO, Bankruptcy Judges.
Appeal from the United States Bankruptcy Court for the District of Minnesota
Educational Credit Management Corporation appeals from the Order of the Bankruptcy Court1 finding Debtor Michele D. Walker’s student loans to be dischargeable as an undue hardship pursuant to
I. PROCEDURAL BACKGROUND
Debtor Michele D. Walker filed a Chapter 7 bankruptcy petition on April 2, 2004, and received her discharge on July 12, 2004. Three years later, on August 15, 2007, she filed an adversary proceeding seeking to discharge $300,000 in student loan debt as an undue hardship under
II. FACTUAL BACKGROUND
In its Memorandum Opinion, the Bankruptcy Court made extensive findings as to the circumstances surrounding Michele’s incurring the student loans, as well as her current family situation. We need not repeat all of those facts in such detail here. To summarize, however, Michele received her bachelor’s degree in 1989, and then attended medical school in the hopes of becoming a psychiatrist, but was unable to pass the boards and was dismissed from medical school in 1995. After working for a couple of years as a pharmacy technician and substitute teacher, she entered a master’s degree program relating to psychology in 1997. She received her master’s degree in school psychology in 2000.
Meanwhile, Michele got married in 1996. Her husband, Troy Walker, is a police officer for the Minneapolis police department and also moonlights as an off-duty security officer. Michele and Troy have five children - the first child born in 1998, one set of twin sons born in May 2000, and a second set of twins born in October 2001.
In 2002, Michele obtained a full-time post-graduate internship as a school psychologist with the Minneapolis Public Schools, earning $16 to $17,000 per year. However, due to the demands of her young family, and budgetary restrictions in the school district, she was unable to continue with that position on a permanent basis after the 2003-2004 school year.
In 2003, both of the twin boys born in 2000 were diagnosed with autism.
In 2004, the Walkers moved from Minneapolis to Hudson, Wisconsin, where they now live. Michele attempted to get a job with the school district in Hudson, and attempted to work as a pharmacy technician in Wisconsin, but for a number of reasons, including caring for the children, the costs of daycare, and Troy’s demanding work schedules, she has not worked for a third-party employer since 2004. She did, however, continue to try to further her education even past that point. In 2007, she enrolled in an associate’s degree program toward licensure as a registered
By the time of trial in 2008, all five of the children were in school. The two autistic sons, then eight years old, attended school on a mainstreamed basis for most of the school day. They had also been accepted into the Wisconsin Early Autism Project, a state funded program of intensive therapy for children with autism. These therapy sessions are done at the home, for eight hours a day each on Saturday and Sunday, plus an additional nine to nineteen hours per week on weekday afternoons. One of the parents must be present when the therapy is done. In addition, Michele spends an average of two hours to prepare the boys for the visit. She also must be available during regular school hours to respond to calls from school personnel, in case one of the boys has a “meltdown” at school. She must be able to respond quickly to such episodes in order to avoid as much disruption at the school as possible.
As stated, Michele filed a Chapter 7 petition on April 2, 2004, and she received her discharge on July 12, 2004. Between 2004 and 2007, the Walkers’ combined gross income, which came almost exclusively from Troy’s employment as a police and security officer, ranged from $59,261 to $67,639. In 2007, which was after Michele received her discharge, but before she filed this adversary proceeding, Troy purchased a $40,000 new Chevrolet Suburban. Previously, the Walkers had incurred a $50,000 home equity loan in the fall of 2005, using $30,000 of the proceeds to build a screened-in deck on their home. Michele filed this adversary proceeding to discharge her student loans on August 15, 2007.
III. STANDARD OF REVIEW
“Undue hardship ‘is a question of law which we review de novo. Subsidiary findings of fact on which the legal conclusion is based are reviewed for clear error.’”3
IV. DISCUSSION
A. Subject Matter Jurisdiction / Collateral Attack on the Discharge Order
Dischargeability of student loans is governed by
As stated above, Michele did not seek a determination that her student loans were dischargeable until three years after the general discharge order was entered in her bankruptcy case in 2004. ECMC’s
applies here due to time limitations and other reasons, ECMC asserts that the Court lacked subject matter jurisdiction to discharge the student loans.
At the outset, this is not a subject matter jurisdiction issue. Perhaps ECMC couches it as a jurisdictional issue because, it concedes, it did not raise the issue before the Bankruptcy Court,8 and subject matter jurisdiction can be raised at any time. Indeed, Travelers Indemnity Company v. Bailey does not consider jurisdiction, but instead deals with a collateral attack on a prior order. Similarly, here, the issue is whether the adversary proceeding was an attempt to collaterally attack the 2004 discharge order. Although Michele’s argument that it is improper to raise this issue for the first time on appeal is thus well-taken, we will nevertheless address the merits of ECMC’s argument that the Court lacked the authority to enter the order discharging the student loan debt.
Fundamentally, ECMC’s argument confuses the distinction between entry of a general order of discharge pursuant to
Contrary to ECMC’s assertion, the Bankruptcy Code and Rules provide sources of authority, other than Rules 59 and 60, for the Bankruptcy Court here to have determined the student loan dischargeability action after the discharge order was entered. Specifically,
A complaint other than under
§ 523(c) may be filed at any time. A case may be reopened without payment of an additional filing fee for the purpose of filing a complaint to obtain a determinationunder this rule.11
In contrast, a complaint to determine the dischargeability of a debt under
ECMC asserts that “at any time” in Rule 4007 means “at any time before discharge is entered.” We disagree. Had that been the intent of the rule, the rule could have said that. Moreover, if that had been the rule’s meaning, the next sentence in the rule, allowing the reopening of a case to seek a discharge of student loans without payment of fees, would be meaningless. In sum, we read the rule to mean what it plainly says, namely, that a complaint requesting the determination of dischargeability of student loans under
Hence, Rule 4007 expressly provides on-going authority for bankruptcy courts to adjudicate student loan dischargeability actions after a discharge order is entered, and a debtor need not rely on Rules 59 and 60 to obtain such an adjudication. Rule 4007 reflects the reality of bankruptcy practice. Debtors who file Chapter 7 cases generally seek discharge of other debts apart from student loans. To provide eligible debtors the opportunity to get a fresh start and move on with their lives, the Code and Rules impose quick deadlines for the holding of the debtor’s meeting of creditors,14 and the entry of a general discharge order if no creditor objects within sixty days after the first date scheduled for the meeting of creditors.15 ECMC’s argument, if accepted, would mean that a debtor would be required to either litigate the dischargeability of its student loan to judgment within that sixty day period, or seek a delay of its discharge as to all other debts. While there may be other procedural or substantive impediments to a debtor bringing a student loan dischargeability case after the discharge has been entered (such as ripeness, mootness, or laches, for example), we find no Rule or Code-based time limitation at all as to when a bankruptcy court may adjudicate the dischargeability of student loans.16
Without question, Travelers confirmed that bankruptcy court orders have finality and cannot be collaterally attacked.18 And, as stated above, a student loan is not discharged until there is a determination that it is dischargeable under
Recently, in United Student Aid Funds, Inc. v. Espinosa, the Supreme Court held, in a Chapter 13 case, that a discharge order was not void for purposes of Rule 60(b)(4), and that the debtor’s student loans were discharged through the general discharge order, even though the bankruptcy court had not made an express determination of undue hardship.20 Because it was decided after briefing and oral argument in this case, ECMC did not cite to it. Nevertheless, we mention here that Espinosa was a Chapter 13 case in which the discharge order followed the completion of all payments under a confirmed plan which had expressly provided for discharge of the debtor’s student loans. In other words, the discharge order in Espinosa was “final” on the issue of whether the student loans had been discharged because it could be viewed in conjunction with the order confirming a plan which had provided for the discharge of the student loans.21 Because this is a Chapter 7 case, and thus the Bankruptcy Court here had not issued a separate order addressing the
We conclude that the general discharge order in Michele’s bankruptcy case was not a “final order” on the issue of dischargeability of the student loans in the sense that Travelers contemplates. Thus, Michele’s attempt to have her student loans discharged was not an improper collateral attack against that discharge order.
Indeed, not only are debtors permitted to seek a discharge of their student loans after a general discharge has been granted, the Seventh and Second Circuits have both suggested that debtors are permitted to reopen their cases to seek a discharge of their student loans based on a post-discharge change in circumstances.22 The District Court for the Eastern District of Michigan has gone even further and held that
B. Changed Circumstances and Reconsideration Under Rules 59 and 60
That said, as ECMC points out, we have held that Rules 59 and 60 do indeed apply in student loan cases where the bankruptcy court has made an actual determination of undue hardship and one of the parties seeks reconsideration of such a determination.26 Further, we held in In re Woodcock
We view our decision in Woodcock to be consistent with Roberson, Brunner, and Sobh because it arose from a distinguishable context. We emphasize here the distinction between seeking a determination regarding dischargeability based on changed circumstances, and seeking reconsideration of a prior determination of dischargeability. The debtor in Woodcock was proceeding under a Rule 60(b) motion for relief from an order finding that there was no undue hardship and, as we very pointedly stated in that case, was essentially arguing that the bankruptcy court had gotten it wrong the first time.28 In other words, instead of arguing that his
circumstances had changed such that he was now able to demonstrate undue hardship, he was arguing that the passage of time proved that he had been right all along that he would not find a suitable job. We concluded that the determination of nondischargeability was not subject to collateral attack based on an argument that the debtor’s circumstances had not improved, as opposed to an argument that the circumstances had changed. Thus, while Rules 59 and 60 apply when a party asks the court to reconsider a determination of dischargeability as was the case in Woodcock, they do not apply when there has either been no express determination of dischargeability or when the circumstances have changed since a prior determination of nondischargeability.
ECMC asserts that this conclusion results in piecemeal litigation of dischargeability. However, as discussed above, the Bankruptcy Code and Rules give student loans special treatment, including treating undue hardship as a fluid concept. Allowing debtors an opportunity to attempt to make student loan payments post-discharge after other debts are wiped away, without fear of losing the ability to bring a dischargeability action until the debtor is eligible to file a new bankruptcy case, is a desired result. ECMC also points out that a student loan creditor might be harmed if, for example, it incurs post-discharge collection costs only to be subject to a subsequent dischargeability action, but such harm could be a basis for a laches or other defense in the later dischargeability action. Indeed, ECMC raised a laches argument before the Bankruptcy Court in this case, but it does not argue in this appeal that the Bankruptcy Court erred in rejecting that defense.29
C. The Finding of Undue Hardship
1. The Relevant Time of Determination
ECMC next argues that the evidence did not support a finding of undue hardship. On that point, ECMC first asserts that the Bankruptcy Court erred in looking at Michele’s circumstances both at the time of the discharge in 2004, and at the time of trial in 2008. ECMC asserts that the only relevant time period was the time of the discharge in 2004, and that the Court should have limited its analysis to the circumstances as they existed at that time. This follows from ECMC’s prior contention that the student loan determination needed to be made prior to entry of the 2004 discharge order. At the same time, ECMC argues that the Bankruptcy Court should have given more weight to the Walkers’ post-discharge loans for an SUV and deck addition. In any event, since we have concluded that a debtor can bring a student loan case after discharge, and based on changed circumstances, it necessarily follows that the court may, and should, consider those circumstances existing at the time of trial.
In arguing that the relevant time was the time of discharge in 2004, ECMC focuses on the language in Bender v. ECMC, which was a Chapter 13 case, in which the Court of Appeals for the Eighth Circuit said that the factual question in a student loan case is “whether there is an undue hardship at the time of discharge, not whether there is an undue hardship at the time a
However, squarely faced with ECMC’s basic premise here - that a debtor must bring a dischargeability action before the general discharge order is entered and, thus, the only relevant time is the time of discharge - it is important to examine the contexts in which Bender and Woodcock were decided. Bender was a Chapter 13 case, and the issue there was ripeness. The debtor in that case sought a determination of dischargeability of her student loans early in her Chapter 13 case, and the Eighth Circuit essentially said that the issue was premature. Although some
under its plan, for which debtors may be given up to five years to do so.34 Since many Chapter 13 cases fail before obtaining a general discharge, an earlier undue hardship determination could be a waste of time. In addition, as the Eighth Circuit noted, a Chapter 13 debtor remains protected by the automatic stay while the case is pending, so the student loan creditor may not seek to enforce its debt in another court. However, those rationales do not apply in a Chapter 7 case such as this one. Once a general discharge order is entered, a student loan creditor whose debt has not yet been discharged is no longer barred by the automatic stay from taking enforcement action.
Woodcock was a Chapter 7 case, but, as discussed above, it involved a Rule 60 motion in which the debtor sought reconsideration of determination that had, in fact, been made at the time of the discharge. Hence, for purposes of reconsidering that determination on the allegation that it had been wrongly decided, it would have been improper to look at events occurring subsequent to the decision. In other words, the reviewing court could not use the benefit of hindsight to analyze the bankruptcy court’s decision made at the time of discharge. Thus, the focus in Woodcock was properly determined to be at the time the action was brought which, in that particular case, happened to be around the time of discharge.
When considering the contexts in which Bender and Woodcock were decided, we do not view it to be the law in this circuit that, when a Chapter 7 debtor seeks to discharge a student loan after the discharge has been entered, the bankruptcy court is limited to the circumstances existing at the time of discharge. As one court has observed, most cases do not even discuss what the appropriate date is in making the determination of whether a student loan is dischargeable, and instead simply assume that the circumstances at the time of trial will be used as the basis for deciding whether repayment of the loan will be an undue hardship.35 In fact, we did so in the case of In
re Andresen,36 and the Eighth Circuit recently did so in Educational Credit Management Corporation v. Jesperson.37
Based on the foregoing, the Bankruptcy Court did not err when it considered Michele’s circumstances as they existed at the time of trial.
2. The Evidence of the Circumstances at the Time of Trial
The Eighth Circuit has adopted a totality-of-the-circumstances test in evaluating undue hardship in student loan cases:
We apply a totality-of-the-circumstances test in determining undue hardship under
§ 523(a)(8) . Reviewing courts must consider the debtor’s past, present, and reasonably reliable future financial resources, the debtor’s reasonable and necessary living expenses, and “any other relevant facts and circumstances.” The debtor has the burden of proving undue hardship by a preponderance of the evidence. The burden is rigorous. “Simply put, if 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.”38
a. Gross Income
The parties stipulated that the Walkers’ gross household income in 2007 was $67,939.39 This income came solely from Troy’s employment.40 The Bankruptcy Court concluded that, due to the family situation, Michele is not reasonably able to work outside the home at this point. Although no expert testified about how long this situation would last, the Court found it unlikely that Michele will be able to work at least until the older twins reach the age of majority, and perhaps even past that point, given the uncertainty about their future, Michele’s continual absence from the
workforce, and the increasing staleness of her education. The evidence
Despite the stipulation that annual gross income in 2007 was $67,939, the Bankruptcy Court calculated the Walkers’ gross income at $5,700 per month (or $68,400 per year), based on their 2007 tax return and W-2s from Troy’s police job. Suggesting that the Bankruptcy Court engaged in some speculation in arriving at this figure, particularly as to the extra income from Troy’s second job, ECMC suggests that the record does not support this finding. However, in view of the fact that the parties stipulated to the gross income amount, it was unnecessary for the Court to make the separate calculations as to that figure. Based on the stipulated gross annual amount of $67,939, the Walkers’ monthly gross income was $5,661.58.41
b. Net Income
Then, using the Walkers’ actual federal and state tax liability for 2007 (as opposed to withholdings from Troy’s paychecks), the Court averaged the taxes over twelve months, and arrived at a monthly tax obligation of $372. We find no error in calculating the Walkers’ tax obligations in this manner. Indeed, when the evidence suggests that the debtor is under- or over-withholding, as was the case here,42 it is a particularly appropriate method for making a determination as to tax liability.
As to other withholdings from income, the Bankruptcy Court found that Troy’s paystubs from his police job showed that he had $934.10 per month in other regular payroll deductions for items such as retirement, deferred compensation, medical insurance, life insurance, and pension. ECMC did not assert that any of these deductions were inaccurate or improper at the time of trial. ECMC points out that Michele did not introduce paystubs from Troy’s moonlighting job and asserts that the Court was thus required to “speculate” that there were no payroll deductions from that job. Similarly, there had been no evidence that FICA was deducted from any of his paychecks, and so the Court again “speculated” that there were none. Those conclusions were not speculation, however. Rather, Michele had the burden of proving deductions from income and offered no proof of deductions, other than those shown on the police paychecks. The Bankruptcy Court, therefore, correctly concluded that there were no other deductions, a conclusion that actually works in ECMC’s favor. Thus, when added to the averaged (actual) tax obligations, the Bankruptcy Court held that the withholdings from Troy’s paychecks totaled $1,306.10 per month. This was not clearly erroneous. Deducting that from gross income of $5,661.58, Troy had $4,355.48 in net monthly income for 2007.43
c. The Amount of Expenses
The Bankruptcy Court arrived at a monthly expense amount, as of the time of trial, in the amount of $5,913, based on a household budget supplied by Michele. With one exception for an expense for “special services copays” which no longer existed by the time of trial (and was therefore removed from the calculation), the
d. The Reasonableness of the SUV and Deck and the Walkers’ Ability to Pay an ICRP
ECMC asserts that the Bankruptcy Court erred in finding that two of the listed expenses were reasonable and necessary for Michele’s support. Specifically, in the fall of 2005, which was after Michele had received her discharge, Troy took out a $48,000 second mortgage and used a portion of the proceeds to build a $30,000 screened-in deck on their house.44 The monthly payment on the second mortgage is $373.52. And, in 2007, Troy purchased a new $40,000 “fully loaded” Chevrolet Suburban, when Troy already owned three cars.45 The monthly payment on the SUV is $850.
In the Eighth Circuit, in order to be reasonable and necessary under
rather than lack of job skills, and he has not made payments on his student loan debt despite the ability to do so.”48
In addition, the Eighth Circuit Court of Appeals confirmed in Jesperson that the Income Contingent Repayment Program for student loans, which is available to Michele, is a factor to be considered in evaluating the totality of the debtor’s circumstances:
[U]ndue hardship under
§ 523(a)(8) continues to require separate analysis under which, in this circuit, the ICRP is “a factor” to consider in evaluating the totality of the debtor’s circumstances. However, a student loan should not be discharged when the debtor has “the ability to earn sufficient income to make student loan payments under the various special opportunities made available through the Student Loan Program.”49
Although some question remains as to the weight to be given to the ability to make an ICRP payment following Jesperson,50
ECMC first asserts that a luxury vehicle and large deck with combined payments of over $1,200 per month is not modest and commensurate in light of the Walkers’ resources. In addition, ECMC correctly points out that the payment on the SUV alone is greater than what Michele’s payment would be under the ICRP.51
The Bankruptcy Court conceded that, viewed in isolation, the SUV and deck expenditures might not be reasonable under the totality of the circumstances approach. Nevertheless, in a detailed discussion of the Walkers’ family and marital situation, the Court concluded that these expenses were reasonable and necessary under the particular circumstances of the case. We need not decide here whether the Bankruptcy Court erred in those findings, nor is it necessary for us to discuss the weight to be given the ability to make the ICRP following Jesperson, because the Walkers’ income is insufficient to make the ICRP payment, or any payment on the student loans, even if they were not incurring the SUV and second mortgage expenses.
As stated above, the uncontroverted evidence was that the Walkers’ monthly expenses, which included the SUV and second mortgage payment, totaled $5,913. If the SUV and second mortgage payments are removed, their expenses total $4,689.48 per month. Their monthly net income is $4,355.48. Thus, the Walkers operate at a deficit of $334 per month, even without considering those expenses. ECMC’s counsel suggested at the hearing that there was no evidence that the Walkers were not making the SUV and second mortgage payments and, thus, they must be coming up with the money somewhere to make them. If they can come up with the money to make those payments, ECMC argues, they should be required to come up with the money to make the ICRP. However, there was no evidence to rebut the actual numbers relating to the Walkers’ income and expenses, and the numbers show that the Walkers are unable to make the ICRP payments notwithstanding the SUV and second mortgage payments.
As a result, while we acknowledge, as the Bankruptcy Court did, that attempting to discharge a large amount of student loans, while enjoying a new SUV and deck addition may seem troublesome to the casual observer, the reality of the Walkers’ budget is that Michele cannot afford to make any payments on her student loans and still maintain a minimal standard of living for herself and her family. That circumstance, based on the evidence offered, is highly likely to continue for many years, regardless of whether the Walkers are able to keep the house and SUV, or not. Therefore, the Bankruptcy Court did not err in finding the student loans to be dischargeable under
V. CONCLUSION
For the foregoing reasons, the Bankruptcy Court had the authority to determine the dischargeability of Michele D. Walker’s student loans. Further, the Bankruptcy Court did not err in finding that requiring Michele to repay her student loans would impose an undue hardship on her and her dependents and, therefore, that such debts are dischargeable