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

Decision Date16 October 2020
Docket NumberCase no. 19-12869-t7,Adv. no. 19-1085-t
CourtU.S. Bankruptcy Court — District of New Mexico

Before the Court is Defendant's motion for summary judgment on Debtor's student loan "undue hardship" discharge complaint. Based on Debtor's discovery responses, Defendant asks for a judgment that her student loans are nondischargable. The matter has been fully briefed and argued. The Court finds that Debtor's original theory of undue hardship, i.e., that the potential income tax consequences of future debt forgiveness create the hardship, fails. Defendant is entitled to a summary judgment on that point. However, Debtor's response to the summary judgment motion raises a genuine issue whether she can afford the monthly loan payments. As a result, the balance of Defendant's motion must be denied.

A. Facts.

The following facts are undisputed:1

In 2002 Debtor enrolled at Thomas M. Cooley Law School in Lansing, Michigan. After completing 87 of the 90 credits required to graduate, Debtor's GPA was 2.0. In her final semester her GPA fell to 1.9, and she was academically dismissed. Debtor never returned to law school. Since 2006, Debtor has worked as a paralegal. Her law school education has been relevant to her work.

Debtor paid for law school by taking out "Stafford Loans," which are insured by the United States Department of Education. In total, Debtor borrowed $90,928.60 under this program. The loans have accrued interest; when she filed this proceeding, Debtor's loan balance was $114,640.90.

In 2006 Debtor enrolled in the Department's Income-Based Repayment Plan (the "IBRP"), which allows her to make monthly payments at a reduced rate based on her discretionary income. Debtor has made monthly loan payments under her IBRP for 14 years.2 If Debtor continues to make the required monthly payments, the outstanding unpaid balance of her student loans will be forgiven in 11 years.

Debtor works for a local law firm. Debtor had gross income of $41,496 in 2017 and 2018. Her gross income on the petition date was about $43,680 a year. Under her IBRP, Debtor is required to pay $259.84 a month on her student loan debt.

Debtor is 53 years old. She has no dependents. She drives a 2005 Nissan Xterra worth about $1,000. She lives with her parents, who are in their 80s, in a house owned by them. Debtor does not pay rent. She pays her own household expenses. Debtor's parents own a strip mall whichgenerates income of $7,500 a month. Debtor expects to inherit one-fourth of her parents' estate someday.

Debtor filed this chapter 7 case on December 15, 2019. Her schedules I and J reflect monthly income of $2,732.20 and monthly expenses of $3,018.50, for a net monthly income of negative $286.30.

The chapter 7 trustee filed a "no asset" report on January 29, 2020. Debtor received a discharge on March 26, 2020. The bankruptcy case was closed the same day.

Debtor commenced this proceeding on December 16, 2019, seeking to discharge her student loan debt. She asserts:

15. It is likely, based on [Debtor's] economic situation, education, and skills, that even after making payments over twenty-five years the balance will continue to grow and remain significant (approximately $145,500.00 in 2031) and forgivingness after twenty-five years of payments will have substantial tax liability (approximately $47,600.00).
. . . .
20. Her income-based repayment plan is not substantial enough to ever pay off her student loans and the balance due continues to grow. The income-based repayment plan places [her] at a disadvantage because she will never be able to make headway against the debt.
21. So long as [she] remains responsible for these loans she will never be able to afford her own home or reasonably support herself.
22. Excepting the loans from discharge would impose an undue hardship upon [her].

In discovery, Debtor answered certain interrogatories as follows:

Interrogatory No. 2: State fully all facts upon which you base your claim of undue hardship, including identifying all persons who you believe will suffer undue hardship and identify the hardship suffered by those persons, if your student loan debt is not discharged.
Answer: I have twelve federal student loan debts attributed towards my law school education. The original loan total was $90,928.60. Because I am on income-basedrepayment the current projected total loan balance . . . is $116,389.47. With interest accruing on the loans, I will never be able to repay those loans in my lifetime.
My monthly income-based repayment amount is $259.84. My standard, non-income based repayment amount would be $1,064.28 per month—almost 50% of my net monthly income. The monthly income-based payment amount, in and of itself, does not present a hardship.3 The total loan balance, the fact that it will never be paid in full, and ultimately will be forgiven in approximately 11 years, will result in a substantial tax liability. In 11 years, I will be 64 years of age and approaching retirement. This presents an undue hardship on me.
No matter what the income-based repayment plan might be, the plan payment . . . is never going to be enough to amortize the debt or make a significant dent in the growing balance[] owed.
. . . .
Interrogatory No. 7: State the maximum amount you believe you could pay per month toward your student loans without such payment imposing an undue hardship on you or your dependents, and describe in detail how you calculated this figure.
Answer: $259.84—This number is based on the calculations provided by Nelnet4 pursuant to my 2019 application for income-based repayment.

ECMC moved for summary judgment on July 14, 2020, arguing that Debtor's interrogatory responses show that Debtor's student loan debt does not impose an undue hardship.

In response, Debtor submitted an affidavit stating, inter alia, "My average monthly expenses have routinely exceeded my net income since 2010" and "While I have been paying my student loans continuously since 2006, given my current income levels and expenses, continued payment will be a hardship for me." Debtor also relied on her response to a request for admission that "repaying Your Student Loan Debt under Your Income-Based Repayment Plan does not impose an undue hardship." Debtor denied the request. Finally, Debtor referred to her schedules I and J, which show negative monthly income.

Debtor also filed a motion asking to amend her interrogatory responses. She wants to amend the italicized portion of her answer to interrogatory no. 2 to state: "the monthly income-based payment amount calculated by Nelnet, in and of itself, does present a hardship when you consider it in totality along with the rest of my current monthly expenses[.]" She seeks to amend her response to interrogatory no. 7 to state: "Even if I removed the Nelnet payment from my current monthly expenses, I would still have more outgoing in expenses than I have money coming in through income."

More recently, Debtor has asked to be allowed to amend her complaint to allege that the monthly payments are an undue hardship.

B. Summary Judgment Standards.

Summary judgment is appropriate where "there is no genuine dispute as to any material fact," thereby entitling the moving party to judgment as a matter of law. Fed. R. Civ. P. 56(a). "A dispute is genuine when the evidence is such that a reasonable jury could return a verdict for the nonmoving party," and a fact is material when it "might affect the outcome of the suit under the governing substantive law." Bird v. West Valley City, 832 F.3d 1188, 1199 (10th Cir. 2016) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, (1986)). In ruling on a motion for summary judgment, the Court is required to "view the facts and draw reasonable inferences in the light most favorable to the party opposing the . . . motion." Scott v. Harris, 550 U.S. 372, 378 (2007).

C. The IBRP.

Federal student loan regulations are codified in 34 C.F.R. § 685 et seq., titled the "William D. Ford Federal Direct Loan Program." Contained in Subpart B-Borrower Provisions is§ 685.208(m), titled "Income-based repayment plan." Specific regulations for IBRPs are found in § 685.221.5

Under the regulations, two primary benefits of a IBRP are readily apparent: the monthly payments can be substantially lower than the contract rate, § 685.221(b)(1), and after the borrower completes the 25-year repayment plan, the unpaid debt is forgiven. § 685.221(f). It is a very generous program, one that could never be offered by a private lender.

Debtor has taken advantage of the program. Without it, her monthly payment would be about $1,064.28. Under her IBRP, that amount was reduced more than 75%, to $259.84. If she continues with the IBRP, Debtor's unpaid loan balance (which she estimates would then be about $145,500) will be forgiven in 11 years.

D. Income Tax Consequences of Debt Forgiveness.

There is a potential downside to completing an IBRP and having a student loan forgiven. Under the Internal Revenue Code, the general rule is that discharge of indebtedness is a form of gross income. 26 U.S.C. § 61(a)(11). Thus, if a borrower completes a 25 year IBRP and has $100,000 of debt forgiven, she would have an additional $100,000 in taxable income. At a 28% tax rate (for example), she would owe an additional $28,000 in federal income taxes.

A relevant exception to the general rule is that "[g]ross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if . . . the discharge occurs when the taxpayer is insolvent." 26 U.S.C. § 108(a)(1)(B). Solvency is determined immediately before the dischargeof indebtedness. 26 U.S.C. § 108(d)(3); Bui v. Comm'r of Internal Revenue, 2019 WL 2193420, at *5 (Tax Court). The excluded amount cannot exceed the amount by which the...

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