Summary
refusing a bright-line test that precluded the debtors' felony convictions from obtaining an undue hardship discharge, and finding good faith on behalf of one of the debtors nonetheless
Summary of this case from Promisco v. U.S. Dep't of Educ. (In re Promisco)Opinion
No. 01-82174, Adv. No. 01-8068
May 3, 2002
OPINION
This case is before the Court for decision after trial on the Complaint filed by the Debtors, DOUGLAS E. KOLL and HEIDI K. KOLL (DEBTORS), to determine the dischargeability of their student loan obligations to the UNITED STATES DEPARTMENT OF EDUCATION (DEPT. OF EDUCATION).
FINDINGS OF FACT
DOUGLAS and HEIDI were married in May, 1992, and have three children. DOUGLAS attended Illinois State University majoring in chemistry and later transferred to Western Illinois University, where he studied biology. He left school in 1991, not having graduated, laden with $16,000 in student loans. In 1992, HEIDI graduated from Western Illinois University with a degree in social work, also having incurred significant student loans. DOUGLAS first worked for a marketing firm and later a hospital in a computer related capacity. In 1994, he was hired by Caterpillar where he worked until 1998, earning $19 per hour when he was forced to quit because of a back injury. After graduation, HEIDI worked for the Guardian Angel Home for a brief period, and the county health department, before deciding to pursue a career in child welfare. She worked for Catholic Social Services for three and one-half years, earning $26,000.
HEIDI made a few payments on her loan after graduation, whereas DOUGLAS made only one payment. In the spring of 1992, both DEBTORS were unemployed and they applied for and received a deferment of their student loans. When HEIDI'S attempt to extend the deferment was denied, she attempted to work with the lender, but they could not come to terms. The lender or collection agencies periodically contacted the DEBTORS in an attempt to collect the loans. In 1997, HEIDI inquired concerning the Income Contingent Repayment Program but was advised that she did not qualify because she had no income.
In 1998, DOUGLAS pled guilty to two counts of theft and one count of burglary. HEIDI pled guilty to charges of burglary, theft and several counts of check fraud. The DEBTORS were ordered to pay restitution in the amount of $26,000. Both DEBTORS served time in jail. After her release, the DEPT. OF EDUCATION contacted HEIDI, requesting that she pay $6,000 on her student loan, agreeing to accept payments of $600 per month. At that time she was working in a department store, making only $7 per hour. She again inquired concerning the Income Contingent Repayment Program, but the DEPT. OF EDUCATION would not take her restitution obligation into consideration.
At the time of trial, the DEBTORS were separated and living apart, with no intention of reconciliation. DOUGLAS is unemployed and living with a friend who provides for his support. He last worked in 1999, making $4,000, as a supervisor for Anderson Financial Network. HEIDI and the three children, ages 7, 6, and 4, live with DOUGLAS' mother. With the help of a friend, HEIDI was hired by the Central Illinois Agency on Aging, where she assists nurses in discovering ways for patients to pay for medication. Her current salary is $21,000, and her monthly take-home pay is approximately $1,600. Among her current expenses are restitution payments in the amount of $400; day care of $150; transportation expenses of $300 (including a car payment of $201); rent of $200; utilities of $100; telephone of $50; clothing of $150.00; laundry and dry cleaning expenses of $75; food of $600; and automobile insurance of $60.00. HEIDI receives assistance of $300 toward day care expenses and health care is provided for the children through a state program at a cost of $5 per child.
While HEIDI testified to certain of these expenses, the remaining expenses were taken from her Schedule J. She testified that her expenses were accurately portrayed on that listing.
DOUGLAS testified that when he left school in 1991, he owed approximately $16,000 and that when he worked for Caterpillar in the mid to late 1990's, he owed about $20,000. He believes he still owes that same amount. He denied, on cross examination, that the balance was actually $13,000. The only evidence in the record of the current balance due of DOUGLAS' student loan is his testimony. Based on that testimony, the Court will consider that the current balance owed by DOUGLAS on his student loan is $20,000.
HEIDI testified that she originally had two student loans that, at some unspecified time, were consolidated into a single loan owed to the DEPT. OF EDUCATION. She testified that she believes the balance of the consolidated loan is between $17,000 and $20,000. In the absence of any other evidence of the loan amount, and construing this uncertainty against her, the Court will consider, for the purpose of this analysis, that the current balance due on HEIDI'S student loan is $17,000.
ANALYSIS
In order to obtain a discharge of a student loan as creating an undue hardship on the debtor or the debtor's dependents, the Seventh Circuit Court of Appeals requires the debtor to demonstrate:
1. That the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for [himself] and [his] 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.
3. That the debtor has made good faith efforts to repay the loans.
Matter of Roberson, 999 F.2d 1132 (7th Cir. 1993) (adopting the three part test set by the Second Circuit in Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 1987), the "Brunner test"). The DEBTORS bear the burden of proving all three prongs of the Brunner test by a preponderance of the evidence. In re Elmore, 230 B.R. 22, 26 (Bankr.D.Conn. 1999). Because the DEBTORS are separated, and the student loans of each debtor are individual, not joint, obligations, the Brunner test will be applied individually to each DEBTOR.
Under the first prong, the debtor must show that he or she cannot maintain, based on current income and expenses, a minimal standard of living if forced to repay the student loan. This analysis calls for an evaluation of the debtor's present standard of living based upon the lifestyle attributes which appear from the record and a determination whether the forced repayment of the student loan obligation will preclude the debtor from maintaining a minimal standard of living. In re Barron, 264 B.R. 833 (Bankr.E.D.Tex. 2001).
The DEPT. OF EDUCATION does not seriously contest that both DEBTORS meet the first prong of the Brunner test. It is apparent to this Court that if HEIDI, having the sole responsibility for their three children, was forced to repay her student loan, she would be unable to maintain a minimal standard of living for herself and the children. Her monthly expenses of $2,100 exceed her net monthly income of $1,600. DOUGLAS, not having been employed for two and one-half years, currently has no ability to pay his student loan.
The second prong of the Brunner test requires the DEBTORS to show that their inability to pay their student loans will likely continue for a significant portion of the repayment period of the student loans. Unfortunately, the record is devoid of any evidence of the term of the loans. Neither DEBTOR gave any testimony on this critical point and the loan documents were neither offered nor admitted into evidence. Ten years have passed since the loans first came due in 1992. In the absence of any evidence as to the length of the loans, however, the Court is unable to determine what portion of the repayment term has already elapsed. Since the DEBTORS bear the burden of proof, the Court will construe this uncertainty against them and presume that the term of each loan has not expired and will not expire for at least ten more years. The DEPT. OF EDUCATION argues that the Court should consider the term of the loans to be twenty-five years since that is the maximum term under the Income Contingent Repayment Program. However, neither DEBTOR has entered that voluntary program and the program's outside limit for extending the term of certain student loans has no relevance here.
The primary dispute under the second element of the Brunner test centers around the DEBTORS' criminal convictions and the future effect they may have upon the DEBTORS' employment opportunities. Both DOUGLAS and HEIDI testified that when they disclose their felony convictions to a prospective employer, their chances of getting the position are eliminated. HEIDI'S degree in social work and her past work experience in child welfare will be of little or no use because her criminal record will prevent her from working with children. She does, however, hold a steady, though not lucrative, job, that enables her to support herself and her children and that provides health insurance for herself and her children at minimal expense. She has sought better paying jobs, but her felony conviction is a severe impediment. It is likely that she will continue to work in her current position for the foreseeable future. There is no evidence that she will receive anything more than cost of living raises. With the financial responsibility of raising three young children, with no support from her husband, and getting by only with the assistance of her mother-in-law, the Court finds that her present inability to pay her student loan is likely to persist for the foreseeable future, encompassing a substantial portion of the remaining repayment period of her loan.
DOUGLAS, on the other hand, is currently unemployed and has not worked for two and one-half years. He subsists through the beneficence of a friend, with whom he resides. He blames his inability to find a job almost entirely on his felony conviction. In 1998, he pled guilty to charges of theft and burglary and spent ten and one-half months in jail for stealing some Hummel figurines and a car. There is no evidence of any other criminal record in his background.
The Seventh Circuit recently addressed the dischargeability of a student loan by a debtor who, like DOUGLAS here, claimed that a felony conviction contributed to his inability to earn a living in Goulet v. Educational Credit Management Corp., 284 F.3d 773 (7th Cir. 2002). There, the fifty-five year old debtor, with $76,000 in student loans, had suffered a felony conviction for possession of cocaine. He had earned only $1,490 in 2000 and although employed as a realtor at the time of trial, had made no sales and had no listings. Divorced and living with his mother and in arrears on his child support obligation, the debtor contended that his age, the large amount of his debt, an alleged alcohol and substance abuse problem, and his felony conviction created substantial barriers to his ability to repay his student loans.
The bankruptcy court agreed with the debtor and ruled that the student loans were dischargeable as an undue hardship. Affirming the district court's reversal, however, the Seventh Circuit concluded that the bankruptcy court erred in holding that the debtor's circumstances rose to the level of those additional, exceptional circumstances necessary to satisfy the second prong of the Brunner test. Specifically, the court was not persuaded by the debtor's contention that his alcoholism and felony conviction made it impossible for him to find work. 284 F.3d at 779. Being much younger, with a smaller student loan burden and no addiction or other significant impairment, DOUGLAS' circumstances are not nearly as severe as those of the debtor in Goulet.
DOUGLAS is thirty-three years old, relatively healthy and quite intelligent. Although he did not complete his degree, he studied chemistry and biology in college. In addition to working as a laborer, he has experience in the area of computer technology and, most recently, as a supervisor in the financial services industry. DOUGLAS is not a recidivist criminal. He made one serious mistake in judgment and has justly suffered the consequences. His felony conviction does not, however, render him permanently unemployable. Though he testified that he has been looking for work to no avail, the Court is not convinced that he will be unable to find work in the near future. He may have to reenter the job market at a lower rung on the ladder than he would prefer, or in a non-career field in order to reestablish his trustworthiness, but there is no reason to believe that an individual with his characteristics will remain unemployed indefinitely. Like the court in Goulet, this Court is unpersuaded that the felony conviction makes it impossible for DOUGLAS to find work.
DOUGLAS contends that even if and when he finds work, it is likely to be at a low wage position, which will not enable him to make payments on his student loan, particularly in light of his nondischargeable restitution debt and his child support responsibilities. Although that may be a reasonable presumption initially, the evidence does not persuade the Court that that will be the case in the longer run.
Based on the record before the Court, the Court concludes that DOUGLAS has failed to prove that his current inability to pay his student loan is likely to persist for a significant portion of its repayment period. Having failed to carry Brunner's second prong, DOUGLAS' complaint fails and his student loan will not be discharged at this time as an undue hardship. It is not necessary to address whether DOUGLAS made a good faith effort to repay his student loans.
Under the final Brunner prong, HEIDI must show that she has made a good faith effort to repay her loan, measured by her efforts to "obtain employment, maximize income, and minimize expenses." Roberson, 999 F.2d at 1136. The evidence supports the conclusion that HEIDI has done exactly that. She has found full-time employment despite her criminal record and, under the circumstances, has maximized her income, while providing health insurance and day care for her children. She has minimized her expenses as well, by living with her mother-in-law and by taking advantage of the state programs available to her for inexpensive health insurance and child care subsidies.
The evidence is also unrefuted that HEIDI made some payments after the loan came due while struggling to make ends meet. She requested and received at least one deferment and was denied a requested extension. She also had at least two discussions with the lender about the Income Contingent Repayment Program but was told, initially, that she did not qualify because she was unemployed and, later, that her restitution payments would not be taken into account. The record leads this Court to conclude that HEIDI made a good faith effort to repay her student loans.
The DEPT. OF EDUCATION contends that permitting HEIDI to discharge her loans sends the wrong message by rewarding a felon at the expense of honest, law-abiding taxpayers. Relying on Roberson, the DEPT. OF EDUCATION argues that a debtor's inability to pay must be due to factors beyond the debtor's control and that criminal conduct is a voluntary choice. HEIDI'S situation is not one, however, where she is currently making lifestyle choices that unnecessarily increase her expenses or suppress her income. Cf., e.g., In re Block, 273 B.R. 600 (Bankr.W.D.Mo. 2002) (debtor created his own undue hardship by electing to teach at a small college for lesser salary, when he had the credentials and ability to obtain a higher paying position at a larger institution). Although her criminal conviction has had, and will continue to have, an adverse effect on her earning power, that is now merely one of many characteristics that bear on her employability. This Court will not adopt a bright line test that precludes debtors with a criminal conviction from obtaining an undue hardship discharge, when otherwise warranted. As the court pointed out in In re Williams, 1999 WL 1134772 (Bankr.E.D.Pa. 1999), the Seventh Circuit in Roberson did not hold that the debtor's convictions for drunk driving precluded a determination that the debtor made a good faith effort to repay his loan, but affirmed the bankruptcy court's ruling deferring payment for two years with the opportunity to seek further review if his situation did not improve.
Based on the record before the Court, the Court finds that HEIDI has carried her burden to prove each of Brunner's three prongs. A separate Order will be entered determining her student loan debt to be dischargeable.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED as follows:
1. The relief requested by the Plaintiff, DOUGLAS E. KOLL, that his student loan obligation to the U.S. DEPARTMENT OF EDUCATION be determined to be dischargeable as an undue hardship pursuant to 11 U.S.C. § 523(a)(8), is DENIED, and the debt is determined to be nondischargeable.
2. The relief requested by the Plaintiff, HEIDI K. KOLL, that her student loan obligation to the U.S. DEPARTMENT OF EDUCATION be determined to be dischargeable as an undue hardship pursuant to 11 U.S.C. § 523(a)(8), is GRANTED, the debt is determined to be dischargeable, and she is granted a discharge of the debt under 11 U.S.C. § 727.