Fern v. Fedloan Servicing (In re Fern)

• Decision Date: 22 June 2016
• Docket Number: Bankruptcy No. 14–00168,Adversary No. 14–09027
• Citation: 553 B.R. 362
• Parties: In re: Sara J. Fern, Debtor. Sara J. Fern, Plaintiff, v. Fedloan Servicing, U.S. Department of Education, and Pennsylvania Higher Education Assistance Agency Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Iowa

553 B.R. 362

In re: Sara J. Fern, Debtor.Sara J. Fern, Plaintiff

v.Fedloan Servicing, U.S. Department of Education, and Pennsylvania Higher Education Assistance Agency Defendants.

Bankruptcy No. 14–00168

Adversary No. 14–09027

United States Bankruptcy Court, N.D. Iowa.

Signed June 22, 2016

Stuart G. Hoover, Dubuque, IA, for Plaintiff.

US Attorney-CR Cedar Rapids, for Defendant.

FedLoan Servicing, pro se.

Pennsylvania Higher Education Assistance Agency, pro se.

RULING ON DISCHARGEABILITY OF STUDENT LOANS

THAD J. COLLINS

, CHIEF BANKRUPTCY JUDGE

This matter came before the Court for trial in Dubuque, Iowa. Stuart Hoover appeared for Debtor Sara Fern. Marty McLaulghin appeared for the United States Department of Education (“the Department”). The parties submitted post-trial briefs. This is a core proceeding under 28 U.S.C. § 157(b)(I)

.

STATEMENT OF THE CASE

Debtor owes over $27,000 in student loans. Through various types of deferment and forbearance, she has never made a payment on that debt. Debtor argues that not discharging the student loans would impose an undue hardship on her and her three children. Debtor argues that her financial resources and expenses are minimal and that she is unable to repay the loans without undue hardship. Debtor argues that she is unable to get credit for other loans because of her student loan obligations. Debtor testified that the debt is a mental and emotional burden.

The Department argues that repayment under an income- or earning-based repayment plan would not impose an undue hardship on Debtor. At her current income and filing status, Debtor would make “payments” of $0 a month under such plans. The Department argues that, whatever her income and expenses, $0 a month payments could not be an undue hardship. The Department also argues that, under such plans, the loans would be reported as current on her credit report.

For the reasons that follow, the Court finds that not discharging Debtor's student loans would cause an undue hardship. The student loans are dischargeable.

STATEMENT OF THE FACTS

Debtor is 35 years old. She is a single mother of three dependent children ages 16, 11, and 3. The fathers of the children do not assist financially or pay their court ordered child support. Debtor has attempted to collect child support from each of the childrens' fathers but those attempts have been fruitless.

Debtor has worked at Focus Services, LLC for 6 years. Her take home pay is $1,506.78 a month. Debtor testified that this job is flexible and works well for her and her family. For example, Debtor may leave work to care for a sick child.

Debtor testified that she has no unnecessary expenses. Debtor receives $368 a month in food stamps, down from $440 at time of filing. Debtor and her children have lived in their current place for 2 years. Debtor pays $141 a month in rent and receives $538 in rental assistance. Debtor has no savings or assets.

Debtor regularly lives at a deficit. Until recently, she relied on loans from her mother to make ends meet. She uses her tax refund and earned income credit to pay her mother back and to try to pay bills that accrued during the year.

Debtor's mother retired last year and is no longer be able to assist with regular loans. Debtor does not know how she will be able to make it financially without her mother's assistance. In particular, Debtor's car has 134,000 miles on it and is need of repair. It will probably need to be replaced in the near future. Debtor needs her car to get to work. Her 16 year old daughter may be able to start working to help out financially, but would need a car to do so. Debtor has been unable to get appropriate financing to buy a car.

Debtor took out her first student loans in 2002–2005. She attended school to become an accounting clerk. Debtor was unable to complete one of the required classes after two attempts and did not finish the course of study. Debtor accrued about $15,000 in loans for this education. The most recent account statement shows the principle balance of these loans had grown to $19,848.20 because of her inability to pay.

Around 2007, Debtor decided to go back to school. She attended Capri College to become an esthetician. Debtor accrued about $5,300 in loans for this education. Debtor completed this course of study. The most recent account statement shows the principal balance has grown to $7,069.47 because of her inability to pay.

Debtor completed the esthetician licensing requirement. She began work as an esthetician, renting space at Jamaica Me Tan Salon & Spa. When working at Jamaica Me Tan Salon & Spa, she had to find her own clientele. She was unable to build up sufficient clientele to support her family. She stopped working at Jamaica Me Tan Salon & Spa after two months. Since then, her license has expired. Debtor testified that renewing her license would require taking classes and paying fees. Debtor testified that she cannot afford that expense.

After quitting work at Jamaica Me Tan Salon & Spa, Debtor worked at various call centers and BioLife until getting her current job at Focus Services, LLC. Debtor testified that she has casually looked at job postings online but has not applied for or seriously pursued other employment in the last three years. Debtor testified that she regrets going to school and does not plan to go back.

Debtor has never made a payment on any of her student loans. The loans have always been in deferment or forbearance. As a result, Debtor has never been delinquent on the loans, never in default, and has never missed a payment.

Debtor testified that she would need to make $45,000 to $50,000 a year before she would be able to make payments on her student loans. Debtor testified that the debt is an emotional burden on her as she tries to raise her children. She feels like she cannot, or will never be able to, get ahead with the student loans hanging over her. Debtor testified that her student loans have hurt her credit score such that she is unable to get loans. Debtor testified that she was denied a loan 6 years ago because of her credit. Debtor has not attempted to get a loan since that time. Apart from the student loans, Debtor has had no other significant debt in the last ten years. Debtor testified that, in the past, she has been able to get loans only because her mother has cosigned.

Debtor testified that the loans are an emotional burden. She testified that the debt is always on her mind, and the fact that it is always growing causes her more stress. Debtor testified that she would like to repay the loans, but doesn't think she will ever be able to.

Chris Bolander, a loan analysis for the Department, testified that Debtor would benefit from participating in an “income-based repayment” plan. Mr. Bolander testified that there were at least two such repayment plans available to Debtor that would not require payments given her current family size and income.

Income Based Repayment (“IBR”) determines monthly payment based on family size and annual income. Under IBR, a borrower's monthly loan payment will never exceed more than 15% of the amount by which their adjusted gross income exceeds 150% of the poverty line for the relevant family size and state. After 25 years of making the appropriate IBR payments, the balance of the debt is canceled, even if little or no part of the debt has been paid.

Under IBR, for Debtor and her three dependents, her adjusted gross annual income would need to be at least $36,970 before she had to begin making any payments. If Debtor had two dependents, Debtor would need to earn more than $30,730 a year to begin making payments. If Debtor had only one dependent, Debtor would need to earn more than $24,000 a year to begin making payments.

Pay As You Earn (“PAYE”) is another option. PAYE bases payment on 10% of discretionary income above 150% of the poverty rate. Any balance remaining after 20 years is canceled, again no matter how much or how little has been paid.

Mr. Bolander testified that, from his review of Debtor's loan file and financial statements, she would qualify for both of these programs. He also testified that, assuming no change in Debtor's family size or income, her payment under either plan would be $0 right now. Mr. Bolander testified that completing either of these plans (IBR or PAYE) would fulfil Debtor's obligation to the Department, even if she paid little or nothing. For both plans, she would be required to certify her income and family status each year.

Mr. Bolander also testified about the effect of these programs on a borrower's credit report. He testified that, even though payments may be $0, the credit report would show that Debtor is current. He testified that borrowers on income-based repayment plans who are current are not noted in credit reports as being delinquent or in default.

CONCLUSIONS OF LAW AND ANALYSIS

The Bankruptcy Code sets out the standard that a debtor must meet to discharge their student loans:

A discharge ... does not discharge an individual debtor from any debt ... unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents , for ... an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution....

11 U.S.C. § 523(a)(8) (2012)

. The Bankruptcy Code does not define “undue hardship.” Schulstadt v. United States Dep't of Educ. (In re Schulstadt), 322 B.R. 863, 866 (Bankr.N.D.Iowa 2005). In the Eighth Circuit, courts apply a “totality-of-the-circumstances” test to determine whether excepting student loans from discharge would “impose an undue hardship.” Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir.2003) ; see also id. (noting that the Eighth Circuit first adopted this test in Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702 (8th Cir.1981) ).

This approach is ...