In re Frushour

Citation433 F.3d 393
Decision Date30 December 2005
Docket NumberNo. 04-2553.,04-2553.
PartiesIn re Sandra Jane FRUSHOUR, Debtor. Educational Credit Management Corporation, Plaintiff-Appellant, v. Sandra Jane Frushour, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

Julie K. Swedback, Educational Credit Management Corporation, St. Paul, Minnesota, for Appellant. Bernard Joseph Podurgiel, Cambridge, Massachusetts, for Appellee.

Before WILKINSON and WILLIAMS, Circuit Judges, and HAMILTON, Senior Circuit Judge.

Reversed by published opinion. Judge Wilkinson wrote the opinion, in which Judge Williams joined. Senior Judge Hamilton wrote an opinion concurring in part and dissenting in part.


WILKINSON, Circuit Judge.

A debtor in bankruptcy cannot discharge government-guaranteed educational loans through the normal channels. Congress instead protected the financial integrity of the student-loan program by precluding a debtor from discharging these loans unless the debtor would endure an "undue hardship" in remaining obligated to repay them. See 11 U.S.C. § 523(a)(8) (2000). The bankruptcy court held that the debtor in this case satisfied the undue hardship requirement, and the district court affirmed.

We hold that the debtor failed to prove undue hardship both because she provided no exceptional circumstances over and above her present inability to pay her debt, and because she failed to seriously consider loan consolidation measures that would greatly reduce her current payments. Congress sought to ensure repayment of educational loans through its use of the term "undue" and the courts are obligated to follow its imperative. We accordingly reverse the judgment of the district court.


The debtor, Sandra Jane Frushour, filed for bankruptcy on December 24, 2003, to discharge her debts under Chapter 7 of the Bankruptcy Code. See 11 U.S.C. § 701 et seq. Frushour owed $12,148.70 in student-loan debt as of March 14, 2004. The original principal on this debt was $11,688. The debtholder, Educational Credit Management Corporation (ECMC), is a non-profit corporation that administers government-guaranteed student loans. On March 2, 2004, Frushour filed an adversary complaint against ECMC to discharge her student-loan debt as an undue hardship under 11 U.S.C. § 523(a)(8). Both parties agree that § 523(a)(8) is the relevant provision for Frushour's student loans.

At the time of the adversary proceeding, Frushour was in her forties and had a seven-year-old son for whom she received no child support. She had gone to college for several years with the help of her student loans. Between 1986 and 1993 she attended the University of South Carolina Coastal Carolina College, California State University, and Long Beach City College. She was an arts major at Coastal Carolina and obtained an associate's degree with an emphasis in tourism from Long Beach City College in 1993.

Frushour has been employed in a variety of different jobs since she obtained her degree in 1993. She worked in restaurant management in California from 1994 to 2000. Specifically, she managed a high-end tourist restaurant, the Queen Mary, in Long Beach, and continued in a similar line of work in Huntington Beach. During Frushour's first few years in restaurant management, she made between $18,000 and $20,000 per year. After her son was born, however, she made significantly less money per year, between $7,000 and $10,000. In 2000, Frushour decided to move to Florida. She obtained a Florida real estate license, and worked in the resort sales industry. Frushour made approximately $20,000 in 2000 and $15,000 in 2001. Sadly, however, tourism sales declined after the events of September 11, 2001. Frushour thus moved again.

This time, she decided to return to South Carolina to be with her ailing sister and aging mother. She started her own company, and has been self-employed ever since. Frushour specializes in interior design and decorative painting, returning to her goal of working in the arts and using the art education that she received at Coastal Carolina. In her current capacity, Frushour provides architects and interior designers with artistic backdrops for walls. She is her own marketer, through cold calls and referrals, and does the artistic work herself. In 2002, she made approximately $7,395, and in 2003 her income increased to $10,771.

Frushour's living situation at the time of the adversary proceeding was anything but desirable. Her expenses exceeded her income, even excluding the loan repayments. She earned a gross income of $998 and a net income of $918 per month. Her expenses were $1,022 per month. These monthly expenses included $300 for food, $200 for rent, $100 for clothing, $95 for cable and Internet, $75 for electricity, $75 for transportation, $66 for telephone, $61 for car insurance and taxes, and $50 for water and sewer. Frushour had no childcare costs because she regularly worked from home. She also had no expenses for medical insurance and she drove a used Volvo with over 250,000 miles on it.

Frushour has repaid her student loans on an inconsistent basis. She was obligated to start making payments in 1994, but she was able to obtain forbearance until July 1998. As a result, she started making loan repayments in August 1998. She made about twenty-three consistent payments from that time until approximately June 2000. The record is ambiguous as to the exact amount of these payments, but it was either $113.41 or $189 per month. She has not made payments on her own initiative since 2000. Nonetheless, the IRS seized her 2002 tax refund of $1,905 and applied it to her student loans. Frushour believes that it may have done the same in 2003, since she has yet to receive her tax refund of $910 for that year either.

After Frushour filed this complaint to discharge her student-loan debt, ECMC brought to her attention that she qualified for several consolidation plans through the William D. Ford Direct Loan Program, the federal program that makes available educational loans. One of these plans is income contingent. Under this plan, a debtor's payment is twenty percent of the difference between her gross income and the federal poverty guidelines for her family size. See 34 C.F.R. § 685.209(a)(2)-(3) (2004). If Frushour consolidates under this plan, she would have a payment of between zero and five dollars per month unless her income increased. She would be obligated to make payments for twenty-five years, but at the end of that period her remaining debt would be discharged. Id. § 685.209(c)(4)(iv). If her income level rises such that she would have to make larger payments, she could switch to a fixed-payment plan. Id. § 685.210. She refused to participate in any of these consolidation plans because she stated they were not right for her and she wanted a fresh start.

The bankruptcy court discharged Frushour's student-loan debt because it held that she proved an "undue hardship" under 11 U.S.C. § 523(a)(8). It applied a three-part test first adopted by the Second Circuit to determine whether she did so. See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir.1987) (per curiam). The Brunner test requires a debtor to show that (1) she cannot maintain a minimal standard of living and repay the loans, (2) additional circumstances exist that illustrate she will not be able to repay the loans for a substantial part of the repayment period, and (3) she attempted to repay the loans in good faith. Id. The bankruptcy court held that she proved all three factors.

The district court affirmed. As to the first prong, it noted that Frushour maximized her income and minimized her expenses, but her expenses still exceeded her income. With regard to the second, it held that given her employment history, she was not likely to make more money in the future. Further, she had testified that she anticipated more expenses for her son, as he grew older, and for her worn automobile, as it required additional repair. It also noted that she has no health care or money for home maintenance, and she would likely have to direct any increased income to these needs. Finally, the district court held that Frushour satisfied the final prong because, although she did not accept a loan consolidation plan, she paid the loans during years when her income was greater than it currently is.


Before reaching the merits of this case, we must resolve a dispute over the appropriate standard of review. We review directly the bankruptcy court's decision. Banks v. Sallie Mae Servicing Corp. (In re Banks), 299 F.3d 296, 300 (4th Cir.2002). All agree that we review the bankruptcy court's legal conclusions de novo and its factual findings for clear error. Id. Dispute arises, however, over whether we review the ultimate determination of undue hardship under a de novo or clearly erroneous standard.

Whether a debtor has met the undue hardship standard is a legal conclusion that is based on the debtor's individual factual circumstances. It is thus a mixed question of law and fact. As we have explained in a related context, these types of questions are reviewed "under a hybrid standard, applying to the factual portion of each inquiry the same standard applied to questions of pure fact and examining de novo the legal conclusions derived from those facts." U.S. Dep't of Health & Human Servs. v. Smitley, 347 F.3d 109, 116 (4th Cir.2003) (internal quotation marks omitted) (reviewing de novo the bankruptcy court's legal conclusion that a debtor met the "unconscionable" standard required to discharge a Health Education Assistance Loan). Several of our sister circuits have reached the same conclusion in the undue hardship context. See, e.g., Tirch v. Pa. Higher Educ. Assistance Agency (In re Tirch), 409 F.3d 677, 680 (6th Cir.2005); U.S. Dep't of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir.2003...

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