In re Bryant, Bankruptcy No. 85-01125S

• Citation: 72 BR 913
• Decision Date: 30 April 1987
• Docket Number: Adv. No. 86-1269S,85-03945K and 86-03862S,86-1042S and 86-1020S.,Bankruptcy No. 85-01125S
• Parties: In re Randy Lewis BRYANT, Debtor. Randy Lewis BRYANT, Plaintiff, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant. In re Mary GAMBLE, Debtor. Mary GAMBLE, Plaintiff, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant. In re Paul PINE, Debtor. Paul PINE, Plaintiff, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

72 B.R. 913 (1987)

In re Randy Lewis BRYANT, Debtor.

Randy Lewis BRYANT, Plaintiff, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant.

In re Mary GAMBLE, Debtor.

Mary GAMBLE, Plaintiff, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant.

In re Paul PINE, Debtor.

Paul PINE, Plaintiff, v. PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY, Defendant.

Bankruptcy Nos. 85-01125S, 85-03945K and 86-03862S, Adv. Nos. 86-1269S, 86-1042S and 86-1020S.

United States Bankruptcy Court, E.D. Pennsylvania.

April 30, 1987.

Michael Donahue, Chester, Pa., for debtor/plaintiff.

K. Kevin Murphy, PHEAA, Harrisburg, Pa., for defendant/PHEAA.

Horace A. Stern, Philadelphia, Pa., trustee.

William Schaps, Philadelphia, Pa., trustee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION

The issue before the Court in all three (3) of these Chapter 7 adversarial proceedings is the dischargeability of student loans on the grounds of undue hardship pursuant to 11 U.S.C. § 523(a)(8)(B). The Court has consolidated the resolution of these proceedings for reasons of efficiency and judicial economy. The happenstance of three cases with the identical legal issue being ripe for determination in such proximity of each other also presents the Court with an opportunity to develop broad principles for deciding such matters, which can be applied in not only these three cases, but in future similar matters. We hold that, for the purposes of § 523(a)(8)(B), "undue hardship" exists (1) Where the debtor has net income which is not substantially greater than federal poverty guidelines, because a debtor so living perforce is unable to maintain a minimal standard of living and make payments on student loans; or (2) Where the debtor has income substantially above the aforesaid poverty guidelines, but there is a presence of "unique" or "extraordinary" circumstances which render it unlikely that the debtor will be able to repay his or her student loan obligations. Applying these tests, this Court finds that the student loan obligations of Debtors Bryant and Gamble are dischargeable under § 523(a)(8)(B), but that the student loan obligations of Debtor Pine is not dischargeable under that provision.

In light of the fact that the instant decision will dispose of three proceedings, which we have consolidated for resolution only, we have altered the usual order in drafting our Opinion. We shall first discuss the pertinent legal issues in a General Discussion, then present Findings of Fact, Conclusions of Law and a brief Discussion in each individual case.

B. GENERAL DISCUSSION

In each of the cases sub judice, the Debtors filed adversarial complaints against the Pennsylvania Higher Education Assistance Agency (hereinafter referred to as "PHEAA") to determine the dischargeability of each of their respective student loans, pursuant to 11 U.S.C. § 523(a)(8)(B).

PHEAA is a guarantor of each of the aforementioned loans, and has objected to the discharge of these obligations under that provision. The Debtors specifically invoke that portion of § 523(a)(8)(B) which provides that governmentally guaranteed or insured educational loans on which the loan payments became due within five years of the debtor's bankruptcy filing may be discharged only where ". . . excepting such debt from discharge . . . will impose an undue hardship on the debtor and the debtor's dependents."¹

There is no definition of "undue hardship" in the Code. Rather, this determination is left to the courts, many of which have held that a court must examine each factual situation and decide each case on its own merits. See In re Birden, 17 B.R. 891 (Bankr.E.D.Pa.1982); In re Clay, 12 B.R. 251 (Bankr.D.Iowa 1981). An examination of the myriad of cases on this issue reveals, we submit, the lack of any attempt to formulate a relatively simple objective test by which to measure "undue hardship" which we find is necessary to us in making consistent decisions in this area.²

The test which we propose strives to place the element of objectivity into the process of decision-making in this area. We propose, as a starting position, to analyze the income and resources of the debtor and his dependents in relation to federal poverty guidelines established by the United States Bureau of the Census and determine the dischargeability of the student loan obligation on the basis of whether the debtor's income is substantially over the amounts set forth in those guidelines or not. If not, a discharge will result only if the debtor can establish "unique" and "extraordinary" circumstances which should nevertheless render the debt dischargeable. If the debtor's income is below or close to the guideline, the lender can prevail only by establishing that circumstances exist which render these guidelines unrealistic, such as the debtor's failure to maximize his resources or clear prospects of the debtor for future income increases. We feel that such a test will decrease, if not eliminate, the resort to the unbridled subjectivity which seems to pervade many of the decisions in this area.

We arrive at this test by analyzing the purpose of § 523(a)(8)(B), as indicated in the Report of the Commission on the Bankruptcy Laws of the United States, H.R.Doc. No. 137, 93rd Cong., 1st Sess., II, 140, 141 (Appendix 2) (1973), which stated as follows:

in order to determine . . . `undue hardship\'; . . . the rate and amount of the debtor\'s 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 capacity, as well as to pay the educational debt (emphasis added).

Thus, Congress desired that debtors who were not able to maintain a minimal standard of living should be discharged of their student loan obligations, per § 523(a)(8)(B). That is what our test measures.

We are certainly not alone in making the inquiry of whether the debtor's income is sufficient to maintain a minimal standard of living and to pay the student loans in a § 523(a)(8)(B) analysis. See, e.g., In re Frech, 62 B.R. 235 (Bankr.D.Minn.1986); In re Marion, 61 B.R. 815 (Bankr.W.D.Pa. 1986); and In re Johnson, 5 B.C.D. 532 (Bankr.E.D.Pa.1979). However, we do recognize that no previous court decision has, like us, made this inquiry quite so fundamental to the determination of whether undue hardship exists in any given case as we intend to do in applying our test.

A question presented at the outset is: What is the definition of "a minimal standard of living?" While it is unlikely that this phrase requires, in all cases, that a debtor be living below the federal poverty guideline in order to meet the undue hardship standard, we hold that where the debtor's gross income is at, near or below the federal poverty guidelines, that would fulfill the meaning of "minimal standard of living," see In re Keenan, 53 B.R. 913 (Bankr.D.Conn.1985); Johnson, supra, 5 B.C.D. at 544, and hold that perforce a debtor so economically situated is not able to make payments on any student loans and that hence student loans of such debtors must be ipso facto dischargeable on the basis of undue hardship.

Although not of record in any of the three cases sub judice, this Court will take judicial notice of the "Preliminary Estimate of Poverty Thresholds in 1986" published by the Bureau of the Census, January 22, 1987, and of the federal poverty guidelines published in Volume 52, Number 34, page 5340 of the Federal Register on February 20, 1987. See Federal Rules of Evidence 201(b); Mitchell v. Rose, 570 F.2d 129, 132 n. 2 (6th Cir.1978), rev'd on other grounds, 443 U.S. 545, 99 S.Ct. 2993, 61 L.Ed.2d 739 (1979) (court may take judicial notice of census figures). Federal Regulations provide that the Department of Health and Human Services issue and update poverty income guidelines on an annual basis, which guidelines are used as an eligibility criterion by a number of federal assistance programs. 52 Fed.Reg. 5340 (February 20, 1987). "The poverty guidelines are a simplified version of the poverty thresholds used by the Bureau of the Census." Id. Both the poverty guidelines and the thresholds vary according to the size of the family and hence take into consideration the issue of the dependents or the unit of which the debtor is a dependent. The thresholds and the guidelines are updated each year by factoring in the change in the average annual Consumer Price Index. Id. The 1987 federal poverty income guideline for one person, in all states except Alaska and Hawaii, is $5,500.00.³

We believe that use of the federal poverty guidelines to determine undue hardship is appropriate because it is an objective test. Furthermore, since these poverty guidelines are used as eligibility criterion for federal assistance programs, it appears obvious that such income levels are viewed as being bare subsistance levels which cause such persons to be deemed incapable of affording to pay for certain necessary services. Thus, we feel comfortable in concluding that such persons cannot afford to repay governmentally-guaranteed student loans. The only revision which we will make is utilizing "net income" rather than "gross income" of the debtor in applying this test. Since the poverty-guideline figures are, in our view, extremely grim, see page seven and note three supra, we feel that doing so is a very slight dispensation, and one that is the most faithful to our desire to evaluate the resources actually available to the debtor.⁴

The Court believes that this simple test complies with Congressional intent to deal with a perceived abuse by those seeking to discharge governmentally guaranteed...