Educational Credit Management Corp. v. Jesperson

Decision Date08 July 2009
Docket NumberNo. 07-3888.,07-3888.
Citation571 F.3d 775
PartiesEDUCATIONAL CREDIT MANAGEMENT CORPORATION, Claimant-Appellant, v. Mark Allen JESPERSON, Debtor-Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

A.L. Brown, argued, St. Paul, MN, for appellant.

Monica Lynn Clark, argued, Douglas Paul, on the brief, Minneapolis, MN, for appellee.

Before LOKEN, Chief Judge, BYE and SMITH, Circuit Judges.

LOKEN, Chief Judge.

Mark Allen Jesperson, a recently licensed Minnesota attorney, petitioned for Chapter 7 bankruptcy relief in October 2005 and commenced this core proceeding against his student loan creditors, seeking an undue hardship discharge of substantial student loan debts, which would otherwise be non-dischargeable under 11 U.S.C. § 523(a)(8). The bankruptcy court concluded that Jesperson's student loan debts "constitute an undue hardship ... and are accordingly discharged." In re Jesperson, 366 B.R. 908, 919 (Bankr.D.Minn.2007). The district court affirmed. Creditor Educational Credit Management Corporation (ECMC) appeals this final judgment. The issue, as we perceive it, is whether a recent law school graduate who is reasonably likely to be able to make significant debt repayments in the foreseeable future, and who qualifies for the Department of Education's twenty-five year Income Contingent Repayment Plan, is entitled to an undue hardship discharge because, as the bankruptcy court put it, it is unlikely that his "shockingly immense" student loan debts will be totally repaid and therefore, "without the relief of discharge now, the debtor would, in effect, be sentenced to 25 years in a debtors' prison without walls." 366 B.R. at 916, 918. Reviewing the determination of undue hardship de novo, we reverse. See In re Long, 322 F.3d 549, 553 (8th Cir.2003) (standard of review).


Section 523(a)(8) of the Bankruptcy Code provides that debts for educational loans "made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit," may not be discharged unless "excepting such debt from discharge ... would impose an undue hardship on the debtor and the debtor's dependents." Federal government student loan programs began in 1958. In 1973, to curb perceived abuses, the Commission on the Bankruptcy Laws of the United States recommended that "educational loans be nondischargeable unless the first payment falls due more than five years prior to the petition." H.R. Doc. No. 93-137 (1973), reprinted in B App. Collier on Bankruptcy, pt. 4(c), at 4-432 (15th rev. ed.2008). Congress enacted this recommendation in the Bankruptcy Reform Act of 1978. Pub.L. No. 95-598, § 523(a)(8), 92 Stat. 2549, 2591 (1978), codified at 11 U.S.C. § 523(a)(8). In 1990, Congress lengthened from five to seven years the period beyond which government-assisted student loans became automatically dischargeable. Pub.L. No. 101-647, § 3621, 104 Stat. 4789, 4964-65 (1990), amending 11 U.S.C. § 523(a)(8)(A). Then, in the Higher Education Amendments of 1998, Congress eliminated this time limitation, making "undue hardship" the only exception to non-dischargeability. Pub.L. No. 105-244, § 971(a), 112 Stat. 1581, 1837 (1998).

We apply a totality-of-the-circumstances test in determining undue hardship under § 523(a)(8).1 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." Long, 322 F.3d at 554. 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." Id. at 554-55. 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." In re Reynolds, 425 F.3d 526, 531 (8th Cir.2005).


When this case was tried in February 2007, Jesperson was forty-three years old, in good health, and unmarried, with two sons from different relationships living with their mothers. He began college in 1983, attended three schools over the next eleven years, and graduated from the University of Minnesota-Duluth in 1994. He began law school in 1996, changed schools in 1997, completed his legal education in 2000, and passed the bar on his first attempt in February 2002. At the time of trial, he owed ECMC $304,463.62 in principal, interest, and collection costs on eighteen student loans, and he owed Arrow Financial Services $58,755.26 on seven other student loans. He has never repaid any part of any loan.

The bankruptcy court found that Jesperson's "record of work experience is besmirched by a patent lack of ambition, cooperation and commitment." 366 B.R. at 911. After passing the bar, Jesperson was hired as a judicial clerk on the island of Saipan, then as an attorney with Alaska Legal Services, and then as a legal temporary with Kelly Services, Inc. He quit each job for a variety of personal reasons. Several months after leaving Kelly, he began work for another placement agency, Spherion Professional Services. At the time of trial, he was working on a project that paid $25 an hour. He was one of only ten lawyers Spherion retained out of a pool of sixty. He testified at trial:

Q It's true, Mr. Jesperson, that you think this debt should just go away, isn't that true:

A Yes.

Q And even if you had, Mr. Jesperson, an extra $500 per month, you don't think you should have to put that towards your student loans, do you?

A No.

Based on gross monthly income of $4,000, Jesperson stipulated that he was likely in the 33% combined federal and state income tax bracket. Using this inflated tax rate, the bankruptcy court found that his current after-tax income was $2680 per month. Use of the inflated tax rate was clear error. Arguably, Jesperson's failure to make a good faith estimate of his applicable tax rate means that he failed to prove undue hardship. Alternatively, a reasonable estimate of the combined rate for gross income of $48,000 would be 17.5%, producing after-tax net income of $3300 per month rather than $2680 per month. The bankruptcy court estimated Jesperson's "basic necessary monthly expenses" as $2857—$1000 for housing, $1000 for child support, $325 for food, $142 for auto maintenance and insurance, $250 for gasoline, and $140 for parking. 366 B.R. at 912. However, Jesperson testified at trial that he lived rent free with his brother, expected to pay his brother $500 per month, and was looking for an apartment. Estimating his basic necessary monthly housing expense at $1000 per month, rather than $500, was clear error. A debtor making a good faith effort to repay loans would continue to live with his brother to save money. While Jesperson is under a court order to pay $500 per month to support his elder son, he testified he has never made a full monthly payment. He does not owe child support for the younger son, but occasionally pays $200-$400 to the mother of this son, and feels an obligation to pay $500 to support each child.

Based on these estimates, the bankruptcy court concluded that "Jesperson's current surplus is at best a trifle and more likely a fiction." 366 B.R. at 918-19. This was clear error. A court may not engage in speculation when determining net income and reasonable and necessary living expenses. See, e.g., In re Rose, 324 B.R. 709, 712 (8th Cir. BAP 2005). To be reasonable and necessary, an expense must be "modest and commensurate with the debtor's resources." In re DeBrower, 387 B.R. 587, 590 (Bankr.N.D.Iowa 2008). On this record, it is apparent that the court underestimated Jesperson's monthly net income and overestimated his reasonable and necessary living expenses in concluding he has no current surplus from which student loans could be repaid. Compare In re Ekenasi, 325 F.3d 541, 548 (4th Cir.2003). A reasonable estimate would be a surplus of approximately $900 per month.


Jesperson's young age, good health, number of degrees, marketable skills, and lack of substantial obligations to dependents or mental or physical impairments weigh in favor of not granting an undue hardship discharge. See, e.g., Oyler v. Educ. Credit Mgmt. Corp., 397 F.3d 382, 386 (6th Cir.2005); In re Gerhardt, 348 F.3d 89, 92-93 (5th Cir.2003); Goulet v. Educ. Credit Mgmt. Corp., 284 F.3d 773, 779 (7th Cir.2002); In re Burton, 117 B.R. 167, 170 (Bankr.W.D.Pa.1990). Thus, on this record, the only reason he has even a colorable claim of undue hardship is the sheer magnitude of his student loan debts. While the size of student loan debts relative to the debtor's financial condition is relevant, this should rarely be a determining factor:

it would be perverse to allow the debtor to benefit from [his] own inaction, delay and recalcitrance by automatically granting discharge simply because the debt is a sizeable one. This, of course, would benefit those who delay and obstruct the longest and could encourage other students to follow the [same] course.

United States v. Kephart, 170 B.R. 787, 792 (W.D.N.Y.1994).

When the size of the debts is the principal basis for a claim of undue hardship, the generous repayment plans Congress authorized the Secretary of Education to design and offer under the William D. Ford Federal Direct Student Loan Program become more relevant to a totality-of-the-circumstances undue hardship analysis. See Student Loan Reform Act of 1993, Pub.L. No. 103-66, tit. IV, § 4021, 107 Stat. 312, 341, codified at 20 U.S.C. § 1087e(d); 34 C.F.R. § 685.208. The most generous plan is the Income Contingent Repayment Plan ("ICRP"), which permits an eligible borrower to make "varying annual repayment amounts based on the income of the borrower,...

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