In re Nascimento

• Decision Date: 16 September 1999
• Docket Number: BAP No. EC-98-1938-MeRBa. Bankruptcy No. 97-22098-C-7. Adversary No. 98-2369.
• Citation: 241 BR 440
• Parties: In re Sheryl Lynn Fuller NASCIMENTO, Debtor. United Student Aid Funds, Inc., Appellant, v. Sheryl Lynn Fuller Nascimento, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

241 B.R. 440 (1999)

In re Sheryl Lynn Fuller NASCIMENTO, Debtor United Student Aid Funds, Inc., Appellant, v. Sheryl Lynn Fuller Nascimento, Appellee.

BAP No. EC-98-1938-MeRBa. Bankruptcy No. 97-22098-C-7. Adversary No. 98-2369.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted July 22, 1999.

Decided September 16, 1999.

COPYRIGHT MATERIAL OMITTED

Philip J. Rhodes, Sacremento, CA, for appellant.

Franklin W. King, Orangevale, CA, for appellee.

Before MEYERS, RUSSELL and BAUM,¹ Bankruptcy Judges.

OPINION

MEYERS, Bankruptcy Judge.

I

After a trial, the court entered judgment in favor of the Debtor and determined that the student loan obligation owing to the Appellant was not excepted from the discharge under § 523(a)(8).

We REVERSE AND REMAND.

II FACTS

The Debtor is a 40 year old veterinarian. She consolidated several student loans in 1994, which totaled $85,855 by the time of trial. This sum included accrued interest but not collection costs. At the beginning of the trial, the lender irrevocably reduced the balance to $65,000 at 5% interest and then at closing argument further reduced the amount to $55,000 at 5% interest. The repayment period for the consolidation loan was 25 years, until the year 2020. The resulting payment is $362 per month to amortize the reduced loan amount over 20 years or $434 per month if amortized over 15 years.

Since the consolidation loan was funded in early 1995, the Debtor testified that she made two payments — one of "two hundred something" dollars and the other of "four hundred something" dollars.

The Debtor's monthly income is $3,798. After taxes and health insurance, her net monthly income is $2,649.² The Debtor has been employed at an animal hospital for two years. She testified that she has been out of school for five years and she is an associate veterinarian. She expects to receive insignificant raises in the future, probably just enough to cover the increase in the cost of living. The court found that "the prospects for significant changes in that income are negligible. The nature of the veterinary business, as the debtor has testified, is such that that is basically the going rate of pay for veterinarians who are employees in the Sacramento geographic area. And I will note from my own experience in other cases that that is consistent with numbers that I have seen in other cases."

Her monthly expenses, which the court determined to be reasonable, total $2,552, leaving her an excess of $97 per month ($197 if one excludes the payment on another student loan from her expenses). She itemized the following monthly expenses:

                   Rent:                  $500
                   Telephone:             $100
                   Food:                  $250
                   Clothing:              $120
                   Laundry/Dry Cleaner    $ 80
                   Medical & Dental:      $170  (including weekly visits to the
                                                chiropractor)
                   Transportation:        $ 80
                   Recreation:            $ 50
                   Life Insurance:        $ 15
                   Car Insurance:         $139
                   Car Payment:           $325
                   Student Loan:          $100  (University of Missouri)
                   Child Support:         $400
                   Prof. License          $ 33  (for the states of Mo., Nv & Ut)
                   Prof. Dues             $ 50  (California)
                   Continuing Ed.         $ 75
                   Hairdresser            $ 65
                

The child support is for the Debtor's 15 year old son. The Debtor raised him as a single parent for years without receiving or seeking support from her ex-husband. In September 1998, her son moved to Missouri with his father and plans to stay there. The Debtor's ex-husband has no income other than an unidentified amount of state disability payments.

The brief trial took place on December 18, 1998, with the Debtor as the only witness. At the time of trial, the ex-husband had applied for payments through a program for Aid to Families with Dependant Children. The Debtor had been contacted by a representative of the program and informed that they intend to seek child support from her. The Debtor hoped to negotiate a payment of $400 per month with the state of Missouri, but provided evidence that under California law, she could be required to pay between $540 and $619 per month, depending on the amount of her ex-husband's income. During opening statement, the Debtor's attorney indicated that it may be as much as two years before the court actually sets the amount she will pay for support.

The Debtor testified that her son was an above average student and had planned for some time to go to college. As a result, she believes that her obligation to provide support for her son will not end after three years when he reaches the age of eighteen.

The Debtor admitted that she could repay $20,000 of the student loan, but not the entire amount sought by the creditor. The court concluded that it was left with a choice of discharging all of the obligation or none of it based on the holding of In re Taylor, 223 B.R. 747, 753 (9th Cir. BAP 1998). The court concluded that to require the Debtor to repay the entire reduced balance³ of $55,000 at 5% per annum would constitute an undue hardship under § 523(a)(8). The court acknowledged that the precise amount of support would be determined by a court of competent jurisdiction, but that $400 was certainly a reasonable approximation of what a court would determine to be owed.

The rest of the court's analysis and oral findings are:

And, in assessing the undue hardship issue, taking into account the income that is identified and the prospects of the debtor over the long term and adjustments to expenditures that may be expected over the long term, certainly there will come a point at which child support obligation is no longer accruing; nevertheless, there may still be an unpaid reimbursement obligation that is nondischargeable in any form of bankruptcy that the debtor will still owe and be stuck with the interstate collection procedures on its so-called AFDC reimbursement obligation based on the assigned debt that I referred to at the outset. So it\'s not altogether clear that all child support obligations will fall out of the picture to the extent that she is not actually paying $400 per month right now. She may, in the long run, have to pay over a period of eight or ten years to get that paid off. It\'s conceivable that could happen.

So, with those factors in mind, the question that now is before me is whether $55,000 at five percent per annum is a debt that would constitute — the payment of which would impose an undue hardship for the debtor. In thinking about the analysis, there\'s very little law that, frankly, is very helpful in how one considers it. I — what I do is: I project in my own mind what the debtor\'s likely ability will be to make a significant dent in this debt over a period of 10 or 12 years.

I am persuaded by a preponderance of the evidence, and the burden of proof is on the plaintiff and, I believe, the plaintiff\'s testimony, that this debt is — the repayment of this debt would be an undue hardship, because I am persuaded that she would not be able to pay a substantial portion of the $55,000 during a reasonable period of time.

I appreciate the debtor concedes that she can pay $20,000. Perhaps she could. In my judgment, that\'s not enough of a dent, in terms of the all-or-nothing analysis I\'m required to make, and so the statute has evolved in a way that leads to a result that is, I think, by definition, harsh to all parties. That\'s the way Congress has elected to do it. It may be the law of unintended consequences, but that\'s my conclusion and the application in this case.

So the debt is determined to be discharged . . . by the discharge that the debtor received under Section 727 of the Bankruptcy Code.

Appellant contends that the court erred in two significant areas. First, the court improperly determined how long the Debtor's child support obligation would prevent her from making payments on her student loan obligation. Second, the court applied an incorrect standard to decide whether the Debtor's inability to maintain a minimal standard of living is likely to persist for a significant portion of the repayment period.

III STANDARD OF REVIEW

The bankruptcy court's findings of fact are reviewed under a clearly erroneous standard. In re Pena, 155 F.3d 1108, 1110 (9th Cir.1998). Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).

The bankruptcy court's application of the legal standard to decide whether a student loan debt is dischargeable as an undue hardship is reviewed de novo. In re Taylor, 223 B.R. 747, 750 (9th Cir. BAP 1998).

IV DISCUSSION

The Court of Appeals has adopted the "Brunner Test" to determine whether a student loan should be excepted from the bankruptcy discharge as an undue hardship. In re Pena, 155 F.3d 1108, 1112 (9th Cir.1998), citing In re Brunner, 831 F.2d 395 (2d Cir.1987). The Brunner Test has three parts which the court must consider before deciding whether to except a student loan from discharge. The Debtor bears the burden of proving:

1) That she cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans;

2) That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

3) That the debtor has made good faith efforts to repay the loans. Pena, 155 F.3d at 1111.

The Court of Appeals noted that "neither Congress nor this court has defined the term `undue hardship' in section 523(a)(8)(B). However, the existence of the adjective `undue' indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans . . ." Id. (Citations omitted). The "second prong...