Roberson, Matter of

Decision Date20 July 1993
Docket NumberNo. 92-2103,92-2103
Parties29 Collier Bankr.Cas.2d 561, 84 Ed. Law Rep. 937, Bankr. L. Rep. P 75,366 In the Matter of Jerry L. ROBERSON, Debtor. Appeal of ILLINOIS STUDENT ASSISTANCE COMMISSION.
CourtU.S. Court of Appeals — Seventh Circuit

Roland W. Burris, Mark E. Wilson (argued), Office of Atty. Gen., Civ. Appeals Div., Chicago, IL, for Illinois Student Assistance Com'n.

David F. Black (argued), UAW-Chrysler Legal Services Plan, Belvidere, IL, for Jerry L. Roberson.

Before CUMMINGS and KANNE, Circuit Judges, and MIHM, Chief District Judge. *

KANNE, Circuit Judge.

In 1976, the debtor, Jerry Roberson, graduated from high school and enlisted in the United States Army. After serving for three years as a power generator/equipment repairman and operator, he opted for a career change. Upon receiving his honorable discharge in 1979, Mr. Roberson enrolled in Kishwaukee Community College, from which he received an associate of science degree in industry and technology in 1982. In the fall of 1983, Mr. Roberson enrolled at Northern Illinois University and, in the spring of 1986, earned a bachelor of science degree in industrial technology. Mr. Roberson financed his education at Kishwaukee and at Northern Illinois with $9,702 in student loans that were guaranteed by the Illinois Student Assistance Commission.

While attending Northern Illinois, Mr. Roberson began working as an automobile assembler at Chrysler Corporation in 1984. His employment at Chrysler continued after his graduation, apparently because his wages as an assembler exceeded those of any job that his degree in industrial technology would enable him to immediately obtain. He earned approximately $33,000 at Chrysler in 1988, and another $30,000 in 1989.

Mr. Roberson's life began to fall apart in 1990. In January, he received his second conviction for driving under the influence of alcohol, resulting in the loss of his driver's license. He was laid off at Chrysler in February; in April his marriage was judicially dissolved. The divorce judgment ordered him to pay $121.60 a week in child support and awarded possession of the marital residence and automobile to his former wife. Without steady employment, Mr. Roberson's income plummeted to only $6,000 for that year, leaving him unable to pay his creditors.

On September 28, 1990, he filed his voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330. At the time of filing, he had an estimated $680 in total monthly expenses and no monthly income. Mr. Roberson reportedly possessed approximately $18,357 in assets and over $34,000 in debts.

In connection with his bankruptcy proceedings, Mr. Roberson filed a complaint against the Student Assistance Commission on April 9, 1990, requesting discharge of the unpaid balance on his student loans. While government guaranteed student loans generally may not be discharged in bankruptcy, 11 U.S.C. § 523(a)(8)(B) permits the discharge of such loans when failure to do so would "impose undue hardship on the debtor and the debtor's dependents." 1 After conducting a hearing on the issue, the bankruptcy court determined that the failure to discharge the student loans would not inflict "undue hardship" on Mr. Roberson. Consequently, the bankruptcy court declined to discharge the student loans, but did order a two-year deferment in the payment of such loans to allow Mr. Roberson to financially recover. Upon Mr. Roberson's appeal, the district court reversed the bankruptcy court's decision and discharged the student loans. 138 B.R. 885 The Commission filed a timely notice of appeal, presenting us with the issue of whether Mr. Roberson's circumstances warrant discharge of his student loans under the undue hardship exception of § 523(a)(8)(B).

Before addressing how the failure to discharge the student loans would affect Mr. Roberson, we must ascertain the meaning of "undue hardship" under § 523(a)(8)(B). Such an inquiry constitutes a question of law subject to de novo review. See Matter of Newman, 903 F.2d 1150, 1152 (7th Cir.1990). The Bankruptcy Code does not define "undue hardship," and, although numerous lower courts have applied § 523(a)(8)(B), little appellate court precedent interpreting the term exists. In addressing the undue hardship exception, both the bankruptcy court and the district court applied the three-pronged test articulated in In re Johnson, 5 Bankr.Ct.Dec. 532 (Bankr.E.D.Pa.1979):

(1) Mechanical Test: The court must ask: Will the debtor's future financial resources for the longest foreseeable period of time allowed for the repayment of the loan be sufficient to support the debtor and his dependent[s] at a subsistence or poverty standard of living, as well as to fund repayment of the student loan?

* * * * * *

(2) Good Faith Test: Here, the court asks two questions:

(a) Was the debtor negligent or irresponsible in his efforts to minimize expenses, maximize resources or secure employment?

(b) If "yes," then would lack of such negligence or irresponsibility have altered the answer to the mechanical test?

* * * * * *

(3) ... Policy Test: The court must ask: Do the circumstances--i.e., the amount and percentage of the total indebtedness of the student loan and the employment prospects of the petitioner indicate:

(a) That the dominant purpose of the bankruptcy petition was to discharge the student debt, or

(b) That the debtor has definitely benefitted financially from the education which the loan helped to finance?

Id. at 544. 2

We decline the lower courts' and Mr. Roberson's invitation to adopt the Johnson test, and instead, for the reasons discussed below, adopt the undue hardship test set forth by the Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir.1987) (per curiam).

"[U]ndue hardship" requir[es] a three-part showing (1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for [himself] and [his] 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.

Id. at 396.

The first prong of Brunner requires an examination of the debtor's current financial condition to see if payment of the loans would cause his standard of living to fall below that minimally necessary. Bankruptcy courts have routinely applied this requirement as the bare minimum to assert a claim of "undue hardship" warranting discharge of student loans. See, e.g., In re Ipsen, 149 B.R. 583, 585-86 (Bankr.W.D.Mo.1992). Student loans "should not as a matter of policy be dischargeable before [the debtor] 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." Comm'n on the Bankruptcy Laws of the United States, Report, H.R.Doc. No. 137, 93d Cong., 1st Sess., Pt. II, at 140 n. 15 (1973). In light of the heightened standard for dischargeability of student loans, an examination into the debtor's ability to maintain a minimal standard of living comports with common sense. Brunner, 831 F.2d at 396. This test should serve as the starting point for the § 523(a)(8)(B) inquiry since information regarding the debtor's current financial situation generally will be concrete and readily obtainable; only if the debtor meets this test should a court examine the other two Brunner requirements.

The second prong of the Brunner test properly recognizes the potential continuing benefit of an education, and imputes to the meaning of "undue hardship" a requirement that the debtor show his dire financial condition is likely to exist for a significant portion of the repayment period. As the proponents of a higher standard for dischargeability recognized:

[E]ducational loans are different from most loans. They are made without business considerations, without security, without cosigners, and rely[ ] for repayment solely on the debtor's future increased income resulting from the education. In this sense, the loan is viewed as a mortgage on the debtor's future.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 133 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6094. Accordingly, "the dischargeability of student loans should be based upon the certainty of hopelessness, not simply a present inability to fulfill financial commitment." In re Briscoe, 16 B.R. 128, 131 (Bankr.S.D.N.Y.1981). Upon graduation, the student borrower's outstanding student loans often will dwarf his assets. Even though in the long run a government financed education may generate substantial returns, if steady employment is not immediately forthcoming bankruptcy provides an attractive means by which the student may eliminate frustrating and burdensome student loan payments. "Requiring evidence not only of current inability to pay but also of additional, exceptional circumstances, strongly suggestive of continuing inability to repay over an extended period of time, more reliably guarantees that the hardship presented is 'undue.' " Brunner, 831 F.2d at 396.

Upon the debtor's satisfaction of the first two requirements for discharge, the court should examine the third prong of the Brunner test--whether the debtor has made a good faith effort to repay his loans. While our nation is hailed as the land of opportunity, few would dispute that higher education provides a vehicle to travel many of the roads to financial prosperity. In recognition of the role education plays in the pursuit of the value of equal opportunity, Congress made student loans available to those who otherwise may not have been able to receive adequate financing of a college education from private lenders. With the receipt of a government-guaranteed education, the student assumes an...

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