Hornsby, In re, s. 96-6320

• Citation: 144 F.3d 433
• Decision Date: 09 June 1998
• Docket Number: 96-6321,Nos. 96-6320,s. 96-6320
• Parties: 40 Collier Bankr.Cas.2d 313, 126 Ed. Law Rep. 643, Bankr. L. Rep. P 77,711 In re: Steven Lynn HORNSBY; Teresa Lynn Hornsby, Debtors. TENNESSEE STUDENT ASSISTANCE CORPORATION, Appellant, v. Steven Lynn HORNSBY; Teresa Lynn Hornsby, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 433

144 F.3d 433

40 Collier Bankr.Cas.2d 313, 126 Ed. Law Rep. 643,

Bankr. L. Rep. P 77,711

In re: Steven Lynn HORNSBY; Teresa Lynn Hornsby, Debtors TENNESSEE STUDENT ASSISTANCE CORPORATION, Appellant, v. Steven Lynn HORNSBY; Teresa Lynn Hornsby, Appellees.

Nos. 96-6320, 96-6321.

United States Court of Appeals Sixth Circuit.

Argued by Appellant March 18, 1998 Submitted by Appellees March 18, 1998 Decided June 9, 1998.

Teresa C. Azan (argued and briefed), Office of the Attorney General for the State of Tennessee, Tax Division, Bankruptcy Unit, Nashville, TN, Charles W. Burson, Office of the Attorney General, Nashville, TN, for Appellant.

Albert B. Merkel (briefed), Merkel & Tabor, Jackson, TN, for Appellees.

Before: KENNEDY and SILER, Circuit Judges; COHN, District Judge. ^*

OPINION

COHN, District Judge.

This is a bankruptcy appeal. Chapter 7 debtors Steven and Teresa Hornsby sought discharge of approximately $30,000 of student-loan debt. The Tennessee Student Assistance Corporation (TSAC), which had guaranteed the loans, opposed discharge. The bankruptcy court determined that the Hornsbys' student loans should be discharged pursuant to 11 U.S.C. § 523(a)(8)(B) ¹ because repayment of the loans would constitute an undue hardship. After a remand for a specific finding as to whether the Hornsbys' financial circumstances were likely to improve, the district court ultimately affirmed the bankruptcy court's decision that the student loans should be discharged.

On appeal, TSAC asserts that the Hornsbys' financial situation is not so exceptional to entitle them to discharge of their student loans. For the following reasons, we will reverse.

I.

Steven and Teresa Hornsby are married and have three young children. On May 25, 1993, the Hornsbys filed a voluntary Chapter 7 petition. The Hornsbys had by that date accumulated more than $30,000 in debt, stemming almost entirely from student loans. The Hornsbys initiated an adversary proceeding to obtain a discharge of their student loans on grounds of undue hardship.

After conducting a dischargeability hearing, the bankruptcy court made the following findings of fact with respect to the Hornsbys' debt. The Hornsbys were college students from 1987 until 1992, during which time they applied for and received fourteen student loans. Ultimately, Steven received five and Teresa received six subsidized Guaranteed Student Loans in principal amounts averaging approximately $2000; Steven also received two supplemental, or unsubsidized, educational loans, while Teresa received one such loan, in principal amounts ranging from $1000 to $2000. ² TSAC, which is a nonprofit corporation created to administer student assistance programs in Tennessee, guaranteed the loans. The Hornsbys attended a succession of small Tennessee state colleges. Both studied business and computers, but neither graduated. Although the Hornsbys received several deferments and forbearances on the loans, they ultimately defaulted prior to making any payments. At the time of the dischargeability proceeding, interest had accumulated on the loans such that Steven was indebted to TSAC for $15,058.52 and Teresa was indebted to TSAC for $18,329.15.

The bankruptcy court first concluded that the Hornsbys were not capable of paying their student loans and maintaining a minimal standard of living. At the time of the dischargeability proceeding, Steven was working for AT & T in Dallas, Texas; he made $6.53 per hour, occasionally working limited overtime hours. Teresa was employed by KinderCare Learning Center. Although she had begun work in Tennessee, she had transferred to become the director of a child-care facility in Dallas, Texas. Teresa was earning $17,500 per year with medical benefits at the time of the hearing. In monthly net income, Steven earned approximately $1083.33 and Teresa earned $1473.33, amounting to $2556.66 of disposable income per month.

The Hornsbys' reported monthly expenses came to $2364.90. The Hornsbys therefore operated with a monthly surplus of $191.76 to $280.43, depending on whether Steven earned overtime for a particular month. TSAC argued that the Hornsbys did not "tighten their belts." The bankruptcy court found the Hornsbys' expenses to be reasonable. For example, the Hornsbys sold a car and incurred debt to purchase a newer used car, which then resulted in even more repair expenses. Although the bankruptcy court conceded that the new-car expenditure might have been ill-advised, the bankruptcy court found that they purchased the car in the good-faith belief that it would decrease their expenses. The Hornsbys also moved from Tennessee to Texas, thereby increasing their monthly rental expense by $200. The bankruptcy court found nothing wrong with the move, determining that while it was more expensive to live in Texas, the move was necessitated by a need for greater job security. TSAC further challenged the Hornsbys' relatively high bills for telephone use, electricity, meals eaten out, and cigarettes, which the bankruptcy court did not directly address.

Finally, TSAC argued that the Hornsbys' income well exceeded the standard for a family of five established in the Poverty Guidelines of the Department of Health and Human Services for 1993 and 1994. In 1995, the bankruptcy court acknowledged, the Hornsbys' projected income would exceed $36,000, while the 1995 poverty guideline for a family of five was $17,710. ³ Without elaboration, the bankruptcy court stated that it was well aware of the discrepancy but that the Hornsbys had understated their expenses. At the hearing, Steven had testified that, on four occasions over the past year, he had been unable to pay all bills because of unexpected expenses. The bankruptcy court therefore concluded that the Hornsbys could not pay their loans and maintain a minimal standard of living and, further, that their circumstances were not likely to improve. The bankruptcy court also found that the Hornsbys had acted in good faith: although they had not made payments toward the loans, they had exercised all deferment and forbearance options. The bankruptcy court ordered a discharge of student-loan debt totaling $33,387.67.

TSAC appealed the bankruptcy court's decision to the district court, which affirmed with respect to the Hornsbys' present inability to repay the loans but found that the bankruptcy court had impermissibly shifted the burden to TSAC in analyzing the Hornsbys' future prospects. The district court remanded the case for further findings as to the likelihood of the Hornsbys' financial situation improving. On remand, the bankruptcy court made additional findings of fact, chiefly finding that the earning capacity of Steven and Teresa Hornsby was likely to remain relatively constant for many years. Although the Hornsbys' day-care expenses might disappear over time, the bankruptcy court found that any additional money saved would not be significant. On appeal, the district court affirmed the bankruptcy court's findings.

II.

A decision that student loans impose an undue hardship "is a question of law subject to de novo review." Cheesman v. Tennessee Student Assistance Corp. (In re Cheesman ), 25 F.3d 356, 359 (6th Cir.1994), cert. denied, 513 U.S. 1081, 115 S.Ct. 731, 130 L.Ed.2d 634 (1995). The factual findings underlying the decision will be set aside only if clearly erroneous--in other words, if we are "left with the definite and firm conviction that a mistake has been committed." See United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948); see also FED. R. BANKR.P. 8013 ("Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.").

III.

A.

The dischargeability provision at issue, § 523(a)(8), was enacted to prevent indebted college or graduate students from filing for bankruptcy immediately upon graduation, thereby absolving themselves of the obligation to repay their student loans. See Cheesman, 25 F.3d at 359 (citing Andrews University v. Merchant (In re Merchant ), 958 F.2d 738, 740 (6th Cir.1992)). ⁴ Thus a debtor who has student loans which became due fewer than seven years before filing for bankruptcy must repay the loans unless she demonstrates that repayment would constitute an undue hardship. See 11 U.S.C. § 523(a)(8)(B). Congress has not defined "undue hardship," leaving the task to the courts. Courts universally require more than temporary financial adversity and typically stop short of utter hopelessness. See Robert F. Salvin, Student Loans, Bankruptcy, and the Fresh Start Policy: Must Debtors Be Impoverished to Discharge Educational Loans?, 71 TUL. L.REV. 139, 149-53 (1996).

Courts have chiefly compensated for lack of a definition by devising tests to measure undue hardship. See id. at 149. Declining to adopt any one test, we instead look to many factors. See Cheesman, 25 F.3d at 359; see also Rice v. United States (In re Rice ), 78 F.3d 1144, 1149 (6th Cir.1996). ⁵ We have considered the three factors set forth in Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395 (2d Cir.1987) (per curiam), which is the test that has been most widely applied:

One test requires the debtor to demonstrate "(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 ...; and (3) that the debtor has made good faith efforts to repay the loans."

Cheesman, 25 F.3d at 359 (quoting Brunner, 831 F.2d at 396). ⁶ A bankruptcy court might also consider, among other things, "the amount of the debt ... as well as the rate at which interest is accruing" and "the...