Educational Credit Management Corp. v. Polleys, No. 02-8059.

Citation356 F.3d 1302
Decision Date04 February 2004
Docket NumberNo. 02-8059.
PartiesEDUCATIONAL CREDIT MANAGEMENT CORPORATION, assignee of USA Group Loan Services, Inc., Defendant-Appellant, v. Nancy Jane POLLEYS, Plaintiff-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

Scott M. Browning and Craig R. Welling, Rothgerber, Johnson & Lyons, L.L.P., Denver, CO, for Appellant.

Stephen R. Winship, Winship & Winship, P.C., Casper, WY, for Appellee.

Before KELLY, HENRY, and LUCERO, Circuit Judges.

PAUL KELLY, JR., Circuit Judge.

Plaintiff-Appellee Nancy Jane Polleys sought a bankruptcy court discharge of federally guaranteed student loans. Defendant-Appellant Education Credit Management Corporation ("ECMC") is a non-profit 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 discharged the loans. The district court affirmed. ECMC now appeals. We have jurisdiction pursuant to 28 U.S.C. § 1291 and we affirm.


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 accounting financed with student loan funds. She has not repaid any amount on these loans. Her loans were later consolidated, and at the time of trial had a balance of approximately $51,000; repayment would require $420 per month over a period of 20 years. Aplt.App. 187.

Ms. Polleys was previously employed as an accountant. In 1994, she worked for one year in that capacity and earned $33,000. 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. Polleys 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. Aplt.App. 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 various 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., 831 F.2d 395, 396 (2d Cir.1987), and concluded that Ms. Polleys was not entitled to a discharge.


Section 523(a)(8) provides that an educational loan is not dischargeable in bankruptcy unless "excepting such debt from discharge ... 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), 124 F.3d 1201, 1206 (10th Cir. 1997). Whether a debtor's student loans would impose an "undue hardship" under 11 U.S.C. § 523(a)(8) is a question of law. Woodcock v. Chemical Bank, NYSHESC (In re Woodcock), 45 F.3d 363, 367 (10th Cir.1995). It requires a conclusion regarding the legal effect of the bankruptcy court's findings as to the debtor's circumstances, and is therefore reviewed de novo. Id.; see also Long v. Educ. Credit Mgmt Corp. (In re Long), 322 F.3d 549, 553 (8th Cir.2003) (collecting cases).

A. Undue Hardship Standard

The bankruptcy code does not define "undue hardship," nor 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, 1995 WL 499511, at *2 (10th Cir. Aug.23, 1995), we noted that undue hardship is something more than inconvenience or doing without luxuries, stating that "the discharge of a student loan should be based upon an inability to earn and not simply a reduced standard of living."

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, 232 B.R. 127, 137 (B.A.P. 8th Cir.1999). Congress itself had little to say on the dischargeability of student loans. The phrase "undue hardship" was lifted verbatim from the draft bill proposed by the Commission on the Bankruptcy Laws of the United States. The Commission noted that the reason for the Code provision was a "rising incidence of consumer bankruptcies of former students motivated primarily to avoid payment of educational loan debts." Report of the Comm'n on the Bankr.Laws of the United States, H.R. Doc. No. 93-137, Pt. II § 4-506 (1973), reprinted in Collier on Bankruptcy, App. Pt. 4(c) at 4-710 (15th ed. rev.2003) [hereinafter Commission Report]. Upon graduation, the typical student has little or no non-exempt property that can be distributed to creditors, but may have substantial future earning potential. Section 523(a)(8) was designed to remove the temptation of recent graduates to use the bankruptcy system as a low-cost method of unencumbering future earnings.

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,1 a time period that "gives the debtor an opportunity to try to meet his payment obligation." Id. at 4-711. After five years, the exception would be lifted in recognition of the fact that "in some circumstances the debtor, because of factors beyond his reasonable control, may be unable to earn an income adequate both to meet the living costs of himself and his dependents and to make the educational debt payments." Id. During the first five years, however, a student loan could only be discharged if its payment would impose an "undue hardship" on the debtor.

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 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.


The various courts of appeals that have applied the undue 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., 831 F.2d 395, 396 (2d Cir. 1987). See United States Dep't of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir.2003); Hemar Ins. Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir.2003); United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1114 (9th Cir.1998); Penn. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 306 (3d Cir.1995); Cheesman v. Tenn. Student Assistance Corp. (In re Cheesman), 25 F.3d 356, 359-60 (6th Cir. 1994); In re Roberson, 999 F.2d 1132, 1135-36 (7th Cir.1993). The Eighth Circuit has instead adopted a totality of the circumstances test in determining undue hardship. See Andrews v. S.D. Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 704 (8th Cir.1981); see also In re Long, 322 F.3d at 554.

The three-part Brunner test requires the debtor to prove:

(1) that the debtor cannot maintain, based on current income and...

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