Stevenson v. Educ. Credit Mgmt. Corp. (In re Stevenson)

Decision Date02 April 2021
Docket NumberCase no. 19-12869-t7,Adv. no. 19-1085-t
CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico

Before the Court is Debtor's complaint for an "undue hardship" discharge of her student loans. Defendant Educational Credit Management Corporation (ECMC), the guarantor of the loans, opposes the relief sought. After a trial, the Court concludes that excepting Debtor's student loans from discharge will not impose an undue hardship.

A. Facts.1

Debtor is 54 years old, single, and has no children or dependents. In 1998 she graduated from St. Lawrence University in Canton, New York, with a Bachelor of Science in Psychology. As an undergraduate, Debtor borrowed approximately $37,000 in "Stafford loans," which are insured by the United States Department of Education (the "DOE"). From 1998 to 2019 Debtorwas enrolled in an income contingent repayment plan ("ICRP") that allowed her to pay $160 to $170 a month until the end of the repayment term. Having satisfied the requirements of that ICRP, Debtor now owes nothing on her undergraduate loans.

In 2002 Debtor enrolled at the Thomas Cooley Law School in Lansing, Michigan. After completing all but the last quarter of her coursework, Debtor was academically dismissed. She never went back to law school.

Debtor paid for law school by taking out $90,928.60 in Stafford loans. In 2006, Debtor enrolled in a 25-year ICRP for her law school loans. She has made the required monthly payments for the past 15 years. Her current ICRP payment is $259.84 a month. If she continues making the payments the outstanding balance will be forgiven in about 10 years. At present the loan balance, which continues to accrue interest, is about $119,000. Under current tax laws, forgiveness of the outstanding balance (which Debtor estimates will be $121,000 at the end of the repayment period) would be taxable gross income. 26 U.S.C. § 61(a)(11).2 Debtor's tax liability on the debt forgiveness would be about $28,500.3

After law school, Debtor moved to Albuquerque and began working as a paralegal. Except for a 7-8-month gap in employment in 2013-2014, Debtor has worked as a paralegal for the past 15 years. Currently she is the office manager and senior paralegal at an Albuquerque law firm. Her salary is about $41,000 a year. Although it is stressful at times, Debtor is good at and likes her job.She does not anticipate leaving. Every indication is that Debtor will be able to continue working full time and maintain or raise4 her income.

Debtor has 75% hearing loss in both ears. She uses hearing aids and she is a lip reader. Her hearing likely will not improve. Sometimes Debtor's hearing loss makes it difficult for her to communicate with her colleagues. As a one-time benefit, her employer bought her the hearing aids she now uses. Debtor has medical and dental insurance through her employer. Other than needing some dental work, Debtor is in good health.

Debtor drives a 2005 Nissan X-Terra with a salvage title, worth about $500. The vehicle needs cosmetic repairs but generally is in good working order.

Debtor has a 401k account worth about $24,000 and a Merrill Lynch account worth about $9,200. Her parents give her $500 every Christmas.

Debtor lives with her parents in a nice house, owned by them, in an affluent Albuquerque neighborhood. She does not pay rent. Debtor assists her parents, who are in their 80s, by doing yardwork and helping around the house.

Debtor would prefer to live alone. She testified that while the ICRP payment is "manageable," she cannot afford her own place. However, there is no evidence that Debtor's current living arrangement is unworkable. Indeed, as her parents age Debtor may need to live with them to help out.

Debtor is one of four children. Eventually, Debtor likely will inherit one quarter of her parents' estate, which is worth about $4 million.

Debtor filed this chapter 7 case on December 15, 2019. She received a discharge on March 26, 2020.

Debtor filed this proceeding on December 16, 2019, seeking an "undue hardship" discharge for her student loan debt. Her initial theory was that, because her ICRP payment was so low, her loan balance was increasing over time, creating an undue hardship. The Court granted partial summary judgment in favor of ECMC on that theory, but allowed Debtor to amend the complaint. See In re Stevenson, 2020 WL 6122749, at *6 (Bankr. D.N.M). Debtor filed an amended complaint, asserting that her monthly ICRP payment is an undue hardship.

Debtor relies on her bankruptcy schedule J, which lists the following monthly expenses:

Phone and Internet
Food and Housekeeping
Clothing, laundry, dry cleaning
Personal Care
Medical/Dental Expenses
Car Insurance
Personal Secured Loan Repayment
Health and Dental Insurance
Student Loan Repayment
FirstMark Bar Loan

The FirstMark bar loan was an $11,000 loan from a private lender to cover the costs of preparing for and taking the bar exam. It is not a nondischargeable student loan. Having received a chapter 7 discharge, Debtor is no longer obligated to make that payment.

Likewise, the "personal secured loan repayment" expense is discretionary. In May 2018, Debtor borrowed $17,500, at 4.5% interest, from her friend Robert Custer. Debtor signed a promissory note granting Custer a security interest in her 2005 Xterra and various valuables (lead crystal, sterling silver, porcelain figurines, jewelry, ivory netsukes, antique books and bibles, andivory portraits). Custer filed a UCC financing statement reflecting his lien on the Xterra and the valuables, which he later amended to delete the Xterra.5 According to the promissory note, Debtor's repayment obligation is $399 per month. If Debtor continues paying the Custer loan, which she intends to do, the debt will be fully paid in May 2021.

Debtor lives somewhat frugally—she does not go to movies, cuts her own hair, and buys new clothes and shoes only when necessary. She only occasionally eats out during the work week, and she never goes out to dinner. On the other hand, Debtor spends $1,200 a month for "food and housekeeping supplies." This includes about $600 a month for beer and cigarettes. For entertainment, Debtor plays games on her phone, at an average monthly cost of about $170.6 Debtor shops online for discretionary items at a varying monthly cost.

B. Repaying Student Loans Through an Income-Contingent Repayment Plan.

The William D. Ford Federal Direct Loan Program, enacted in 1994, is codified at 20 U.S.C. § 1087a-h. 20 U.S.C. § 1087e(d) provides in part:

(d) Repayment plans.
(1) Design and selection.
Consistent with criteria established by the Secretary [of Education], the Secretary shall offer a borrower of a loan made under this part a variety of plans for repayment of such loan, including principal and interest on the loan. The borrower shall be entitled to accelerate, without penalty, repayment on the borrower's loans under this part. The borrower may choose--
(A) a standard repayment plan, consistent with subsection (a)(1) of this section and with section 1078(b)(9)(A)(i) of this title;
(B) a graduated repayment plan, consistent with section 1078(b)(9)(A)(ii) of this title;
(C) an extended repayment plan, consistent with section 1078(b)(9)(A)(iv) of this title, except that the borrower shall annually repay aminimum amount determined by the Secretary in accordance with section 1078(b)(1)(L) of this title;
(D) an income contingent repayment plan, with varying annual repayment amounts based on the income of the borrower, paid over an extended period of time prescribed by the Secretary, not to exceed 25 years . . . .

The statute makes clear that ICRPs "repay" student loans just as the standard, graduated, and extended repayment plans do.

C. The Undue Hardship Standard.
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).

In re Jesperson, 571 F.3d 775, 778 (8th Cir. 2009).

Section 523(a)(8)7 now provides that student loans are excepted from discharge unless the debtor proves that "excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor's dependents[.]"

A debtor seeking to discharge government-guaranteed educational loans thus faces a difficult burden, because she must show that not discharging the debt would impose an undue hardship. Congress, however, neither defined 'undue hardship' nor provided standards for what it entails. . . . Nonetheless, the ordinary meaning of 'undue' gives us clear guidance. 'Undue' generally means 'unwarranted' or 'excessive.' See The Random House Dictionary of the English Language 2066 (2d ed. 1987). Because Congress selected the word 'undue,' the required hardship under § 523(a)(8) must be more than the usual hardship that accompanies bankruptcy. Inability to

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