Opinion
Case No. 02-40709-7, Adversary No. 02-7089
April 22, 2004
MEMORANDUM AND ORDER
This matter is before the Court on Plaintiffs Adversary Complaint (Doc. 1), which seeks a determination that repayment of the student loan debt owed to the Defendant, Educational Credit Management Corporation ("ECMC"), would constitute an undue hardship and, therefore, that the debt is dischargeable pursuant to 11 U.S.C. § 523(a)(8). The Court conducted a trial on this matter, reviewed all the evidence submitted in this case, and is now prepared to rule. The Court has jurisdiction to hear this matter.
All future statutory references are to the Bankruptcy Code, 11 U.S.C. § 101, et seq., unless otherwise specified.
28 U.S.C. § 1334 and 28 U.S.C. § 157(b)(2)(I) (core proceeding).
I. FINDINGS OF FACT
Based upon the evidence presented at trial, the Court makes the following findings of fact:
1. Debtors filed for protection under Chapter 7 of the Bankruptcy Code on March 26, 2002, then filed this adversary proceeding seeking the discharge of student loan debt on the basis that repaying such debt would constitute an undue hardship.
2. Although both Debtors, Dana Quarles and Barbara Norris, who are married, are listed as plaintiffs in this lawsuit, only Barbara Norris, who is now known as Barbara Quarles, is obligated to pay the student loan debt at issue in this case.
Because Barbara Quarles is the only party with student loan debt at issue in this case, she will be referred to as "Debtor" in this opinion. Although Dana Quarles is also a Debtor in the underlying bankruptcy case, he will not be referred to as such for purposes of this adversary proceeding.
Because Barbara Quarles is the only party with student loan debt at issue in this case, she will be referred to as "Debtor" in this opinion. Although Dana Quarles is also a Debtor in the underlying bankruptcy case, he will not be referred to as such for purposes of this adversary proceeding.
3. Ms. Quarles incurred the student loan debt while obtaining a bachelor and masters degree in the area of social work. In addition, Ms. Quarles incurred a student loan debt in order to fund one semester of work toward obtaining her Ph.D, which degree she never completed due to her mental illness.
4. Although it unnecessary to discuss in detail in this Order what events led to Ms. Quarles' mental illness, the Court finds that Ms. Quarles proved that she suffers from, and has for some time suffered from, Type I Bi-Polar Disorder, Dissociative Disorder (formerly known as Mutliple Personality Disorder (MPD)), and Post Traumatic Stress Syndrome.
5. The testimony from two expert witnesses, Dr. Bellows, a psychologist, and Dr. Console, a psychiatrist, established that Ms. Quarles' mental illness is quite severe and renders her unable to engage in any meaningful employment over any significant period of time. Ms. Quarles may be able to work a few hours, or possibly even a few days, at a time, but would not, to a reasonable degree of medical certainty, be able to consistently work over a period of weeks or months.
6. Although neither expert witness wished to testify that Ms. Quarles' mental health would never improve or that her inability to work would continue for the rest of her life, both experts agreed that there is no reason to believe any significant improvement is likely in the foreseeable future. It appeared to the Court that neither expert believed Ms. Quarles likely had such a capacity, given the likely causation, duration and degree of her mental illness, but did not want to convey to Ms. Quarles, who was present in the courtroom during their testimony, that they did not believe she could improve, or that further therapy would be hopeless. Dr. Console opined that Ms. Quarles would not be able to work for at least the next five years, but declined to predict her situation beyond that point. Defendant produced no medical evidence to contradict the testimony from Debtor's medical experts.
Given the testimony concerning Ms. Quarles' inability to work in any meaningful capacity for the foreseeable future, the Court is curious why Debtor did not seek a medical discharge for the student loans. The Court recognizes that Debtors' counsel may have explored this option and in his judgment determined that seeking an undue hardship discharge was more appropriate or beneficial under the facts of this case, or may have been unaware that such an option existed. However, the Court takes this opportunity to urge all attorneys to pursue available non-judicial remedies, such as a medical discharge of student loans, prior to engaging in judicial proceedings, which are usually more expensive and time consuming. In making this statement, the Court is not, in any way, ruling that the facts of this case are sufficient to meet the requirements for a medical discharge of student loans; that issue is not before it. Rather, the Court is simply trying to encourage counsel to review all available options to potentially save litigation costs.
Given the testimony concerning Ms. Quarles' inability to work in any meaningful capacity for the foreseeable future, the Court is curious why Debtor did not seek a medical discharge for the student loans. The Court recognizes that Debtors' counsel may have explored this option and in his judgment determined that seeking an undue hardship discharge was more appropriate or beneficial under the facts of this case, or may have been unaware that such an option existed. However, the Court takes this opportunity to urge all attorneys to pursue available non-judicial remedies, such as a medical discharge of student loans, prior to engaging in judicial proceedings, which are usually more expensive and time consuming. In making this statement, the Court is not, in any way, ruling that the facts of this case are sufficient to meet the requirements for a medical discharge of student loans; that issue is not before it. Rather, the Court is simply trying to encourage counsel to review all available options to potentially save litigation costs.
7. Ms. Quarles receives approximately $1,121 per month in the form of Social Security Disability Insurance payments. This is her sole source of income.
In her bankruptcy schedules dated March 26, 2002, Debtor indicated her Social Security benefit was $1,079 a month. Between date of filing and trial, her benefits had increased by $42/month, probably representing an approximate 2% cost of living increase per year.
In her bankruptcy schedules dated March 26, 2002, Debtor indicated her Social Security benefit was $1,079 a month. Between date of filing and trial, her benefits had increased by $42/month, probably representing an approximate 2% cost of living increase per year.
8. Mr. Quarles receives approximately $1,517 per month in net income from his employment. He has a high school diploma and has attended some college. His work history includes various jobs ranging from car salesman, to counselor for troubled children, to his current job as a customer support representative at Tele-Tech, a telemarketing company.
9. Mr. Quarles' physical health has recently been problematic, in that he was very recently diagnosed with and has been treated for cancer, including two surgeries and radiation treatment. He has incurred over $9,200 in post-petition medical bills as a result of that illness, and lost wages while being treated for this illness. Debtors' Schedule J provided no amount for repayment of these debts.
10. The Debtors currently live with Ms. Quarles' mother and share some of their living expenses with her. The Debtor's mother is approximately 85 years old. Despite her own deteriorating health, including high blood pressure, a heart condition, and compression fractures in her back and neck, her mother works approximately twelve hours per day, seven days per week. It is simply unknown how much longer she will be able to contribute significantly to the household expenses.
11. Debtor's mother was forced to file a bankruptcy petition, herself, as she had co-signed some of the business debt that Debtor had incurred before her own business failed. She drives a nine year old car, and her house is fully encumbered, because she encumbered the house with mortgages to assist Debtor with her business before it failed.
12. There is little likelihood that Debtor will receive any significant inheritance, because she has four siblings with whom any inheritance would be shared and because her mother has few assets, as at least a partial result of her own bankruptcy.
13. The Debtors initially claim that their monthly living expenses total approximately $2,573. However, testimony at trial showed that this number is not completely accurate, at least based on medication expense documentation. The evidence at trial showed that the Debtor had overstated her monthly medical expenses by $120, but understated her car expense by $360 a month. Therefore, the Court finds that both Debtors' actual monthly expenses, at the time of the trial on this matter, were $2,813, against joint monthly income of approximately $2600.
14. Debtor testified, and this Court accepts, that the reason for this overstatement of medical expense is due to the fact that although she needs the medications she included in her expenses, she has foregone renewals of back pain prescriptions because she has insufficient assets to fill both those prescriptions and her anti-depressant medications, which she has deemed more critical. She has chosen to endure the back pain in order to have funds to pay for the medication that keeps her mentally stable. Her medical expenses would essentially match the amount claimed in Exhibit K if she actually filled all her required prescriptions, which number at least six different prescribed medications. That would increase the monthly household deficit to approximately $330, rather than $213.
15. The medical experts corroborated that Ms. Quarles sometimes does not even take her anti-depressant medications as prescribed, because of her lack of funds, and that it makes it more difficult to treat Ms. Quarles when she "self-adjusts" her medication regimen.
16. Debtor, at the time of trial, had recently learned that in the near future, she would be required to purchase a "Medi-gap" policy at the cost of $170/month. There is no provision for this amount in the budget before the Court.
17. ECMC contends that, when analyzing the Debtor's financial situation, the Court should consider that these Debtors will be paying off their car loan within the next year and that the $360 per month used to pay for that nine year old car (1995 Riviera) will be eliminated within the next year. The Court finds that this $360 car payment is not included in Exhibit K, which was used by the Court when determining the Debtor's current monthly expenses, and has been added to the monthly expenses to arrive at the $2,813 number in paragraph 13, above.
18. Debtor owes approximately $47,800 in priority taxes, which were not discharged in this bankruptcy, and for which she was, at time of trial, receiving collection notices for immediate repayment. Debtors' budget provides no amounts for repayment of these taxes, or the interest that will accumulate thereon until paid.
II. CONCLUSIONS OF LAW
The Bankruptcy Code creates a presumption that student loans are non-dischargeable in the absence of undue hardship to the debtor or the debtor's dependents. The Debtor has the burden of proving that the student loan is dischargeable.
See In re Lindberg, 170 B.R. 462 (Bankr. D. Kan. 1994).
The Tenth Circuit recently adopted the three-part Brunner test for analyzing whether a debtor has shown that his or her student loan debt should be discharged because it would cause undue hardship. Under this test, a debtor must prove:
Educational Credit Management Corp. v. Polleys (In re Polleys), 356 F.3d 1302, 1309 (10th Cir. 2004) (holding that the Tenth Circuit would adopt three-prong test established by Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987)).
(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself or her dependents if forced to repay the loans;
(2) that additional circumstances exist indicating 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.
Id. at 1307.
Id. at 1307.
Under this test, if the court finds the debtor has failed to prove any of these three elements, the inquiry ends and the student loan is not dischargeable. As noted recently by the Tenth Circuit Bankruptcy Appellate Panel, the Tenth Circuit "makes it clear that it disdains `overly restrictive' interpretations of this test, and concludes that it should be applied to `further the Bankruptcy Code's goal of providing a `fresh start' to the honest but unfortunate debtor[.]'"
Id.
Alderete v. Educational Credit Management Corporation, B.A.P. No. NM-02-089, slip op. at 9 (B.A.P. 10th Cir., April 16, 2004).
The first prong of the Brunner test requires Debtor to demonstrate "more than simply tight finances." The Court requires more than temporary financial adversity, but typically stops short of utter hopelessness. "A minimal standard of living includes what is minimally necessary to see that the needs of the debtor and [her] dependants are met for care, including food, shelter, clothing, and medical treatment." Further, a court should also be hesitant to impose a spartan life on family members who do not personally owe the underlying student loan, particularly when those family members are children.
See Innes v. State of Kansas, et al. (In re Innes), 284 B.R. 496, 504 (D. Kan. 2002).
Id.
Id.
Windland v. United States Dept. of Education (In re Windland), 201 B.R. 178, 182-83 (Bankr. N.D. Ohio 1996).
The second prong of the Brunner test, which requires that additional circumstances exist indicating that the Debtor will be unable to repay the loans and maintain a minimal standard of living for a significant portion of the repayment period, "properly recognizes that a student loan is viewed as a mortgage on the debtor's future." However, the Debtor need not show a "certainty of hopelessness." Instead, the Court must take a realistic look into the Debtor's circumstances and the Debtor's ability to "provide for adequate shelter, nutrition, health care, and the like."
Polleys, 356 F.3d at 1310 (internal quotations omitted).
Id.
Id.
The third prong of the Brunner test requires the Court to determine if the Debtor has made a good faith effort to repay the loan "as measured by his [or] her efforts to obtain employment, maximize income and minimize expenses." The inquiry into a debtor's good faith "should focus on questions surrounding the legitimacy of the basis for seeking a discharge." A finding of good faith is not precluded by a debtor's failure to make a payment. "Undue hardship encompasses a notion that a debtor may not willfully or negligently cause his own default, but rather his condition must result from factors beyond his control."
In re Innes, 284 B.R. at 510.
In re Polleys, 356 F.3d at 1310.
In re Innes, 284 B.R. at 510.
In re Faish, 72 F.3d 298, 305 (3rd Cir. 1995).
III. ANALYSIS
A. Debtor cannot maintain a minimal standard of living if forced to repay the loans.
The first element Debtor must prove in order to show that repaying her student loans would create an undue hardship is that she cannot maintain, based on current income and expenses, a "minimal" standard of living for herself or her dependents if forced to repay the loans. The parties have raised two issues regarding this prong of the Brunner test. First, the parties disagree on whether the Court should include all, or at least a portion, of the Debtor's husband's and mother's income in the analysis. Second, there was disputed testimony concerning the Debtor's actual current monthly expenses.
In re Polleys, 356 F.3d at 1307.
1. The Court will not consider Debtor's mother's income.
ECMC contends that because Debtor lives with her mother, and they share some expenses, that her mother's income should be included when determining whether the Debtor can repay her student loans and still maintain a minimal standard of living. In support of this contention, ECMC relies upon In re Archibald, wherein the court included the substantial income of the debtor's live-in boyfriend in the first prong of the Brunner analysis.
280 B.R. 222 (Bankr. S.D. Ind. 2002).
In Archibald, the debtor was approximately 46 years old and had been living with her boyfriend for approximately four years. The boyfriend made $90,000 a year and apparently paid all of the household expenses other than the cable bill and some of the food bills (the debtor paid approximately $375 total towards household expenses). The Archibald court correctly refused to ignore the boyfriend's income given the substantial effect it had on the debtor's lifestyle and living expenses.
The Court finds that the facts of this case are clearly distinguishable from those in Archibald. First, the Court believes that including a live-in boyfriend's income is completely different than including a parent's income in the Brunner analysis. In including the live-in boyfriend in Archibald, the court impliedly recognized that he had essentially taken on the role of a spouse when it came to the financial affairs involving himself and the debtor. It is very reasonable to expect a spouse, or in certain circumstances a live-in boyfriend or girlfriend, will contribute to the debtor's monthly expenses and, therefore, free up funds to be used to repay the student loan. In fact, that is precisely what was taking place in Archibald. However, the Court does not expect an elderly, ill parent to assume such a role without evidence to establish that the parent is regularly and substantially contributing to the debtor's monthly living expenses, similar to the role played by a spouse.
Second, Debtor's mother is approximately 85 years old and is not in good health. She suffers from high blood pressure, has a heart condition, and compression fractures in her back and neck. According to Debtor, her mother's current income is based upon working approximately twelve hours per day, seven days per week. Although the Court certainly hopes the Debtor's mother will continue living for a long time, the Court cannot ignore the very real possibility (if not probability) that any financial assistance the Debtor may be receiving or could receive from her mother is not likely to continue for a significant period of time.
Finally, plaintiff nor defendant ECMC presented evidence that established what exact financial relationship exists between the Debtor and her mother. The Court heard no evidence of the amount of the mother's net disposable income that could be contributed to the relationship. There was evidence of the mother's income, but less evidence of her expenses. There was testimony that the mother's monthly medical expenses were $500-700 per month. Thus, the Court is unable to determine precisely how much the mother could contribute, even if the mother's health and age were not dispositive, which they are. For all these reasons, the Court denies ECMC's request that the Court consider the Debtor's mother's income when determining whether the Debtor can repay her student loans. 2. Even if the Court included 100% of Debtor's husband's income when determining whether Debtor can repay the student loans while still maintaining a minimal standard of living, there would be insufficient income in light of existing debt.
The majority of courts have held that a non-debtor spouse's income should be considered when deciding whether a debtor can afford to repay student loans. This Court agrees and has considered Mr. Quarles' income in this case. The problem for ECMC is that there realistically exists no disposable income from either Mr. Quarles or the Debtor that can be used to repay the student loans because of the existence of a rather minimal standard of living, coupled with post-petition and non-discharged priority tax debt. Even if the Court chose to, in effect, use 100% of Debtor's spouse's income to repay all his wife's obligations, including the student loans and her non-discharged tax obligations, the fact of the matter is that there is insufficient income to pay these debts while maintaining a minimal standard of living.
See, e.g., In re Barron, 264 B.R. 833 (Bankr. E.D. Tex. 2001); In re Dolan, 256 B.R. 230 (Bankr. D. Mass. 2000); and In re White, 243 B.R. 498 (Bankr. N.D. Ala. 1999) (citing approximately 50 cases following this approach).
Evidence presented at trial showed that Debtor incurred, mostly as a result of her failed business, over $47,000 in non-dischargeable tax debt, for which Debtor is currently being billed by taxing authorities. The bills demand payment in full and threaten a levy on assets. Mr. Quarles also incurred large post-petition medical bills, $9,200 of which had been rejected for repayment by his insurance company and which was the subject of some dispute at the time of trial.
Even if the taxing authorities, hypothetically, allowed Debtor to repay the $47,000 over 10 years, without interest, Debtor would have almost a $400/per month repayment obligation for that tax debt, alone. With joint income of only $2600 a month, and joint expenses of $2813, which includes nothing for the tax obligation or the post-petition medical expenses, and does not take into account the upcoming additional monthly expense of $170 for "Medi-gap" insurance, there is simply no money available for repayment of the student loans in question, even if 100% of Mr. Quarles' income is used for this analysis.
Schedule J showed $2,573 in expenses, but Debtor had not included their $360/month car payment, making their true expenses $2933 a month. If one subtracts the $120/month in medical bills for which Debtor had no documentation, and ignores that the reason for not spending that $120 is because of lack of income, and then one adds at a minimum $400/month for tax payments, obviously, there is no income available, from either Debtor or her husband, to make any payments whatsoever on the student loans.
Congress called, without exception, for the non-discharge of tax debts such as those Debtor incurred in her business, and for which she is personally liable, or will be, as a trust fund officer of the failed business. 11 U.S.C. § 523(a)(7). Conversely, Congress did allow for the possible discharge, under limited circumstances, of student loan debt. Thus, when a Debtor has insufficient income or resources to repay both a nondischargeable tax debt and a potentially dischargeable student loan debt, this Court must follow the will of Congress when holding, for this analysis, that the tax debt should be paid, out of disposable income, prior to the student loan.
3. The Debtor cannot afford to repay her student loans, even when including all of Mr. Quarles' income, and excluding the income of the Debtor's mother.
The parties have disputed the amount of monthly living expenses of Debtor and her spouse. The Court agrees with ECMC that of the $516 claimed by the Debtor for monthly medical expenses, only $395 was supported by the evidence. The evidence showed, however, that Debtor was selectively not filling required prescriptions, even some for anti-depressants, which her physicians obviously had found were medically necessary, because she did not have available income to do so. Accordingly, the Court does not believe this family actually has $120 extra income with which to pay the student loan.
Furthermore, the Court rejects ECMC's assertion that the Court should also consider the fact that the Debtor will be paying off her car within the next year, which would theoretically free up $360 per month to repay on this student loan. This argument is rejected because Debtor's vehicle is now nine years old, thus suggesting it will need to be repaired and/or replaced within the foreseeable future, and because the budget does not include amounts for repayment of the nondischargeable tax debt or the post-petition medical expenses.
There was debate concerning whether the car is scheduled to be paid off within the next year, or whether the payments will extend closer to two years. However, the Court finds such a dispute to be immaterial to the outcome of this matter.
B. The Debtor's current situation is likely to continue for a significant portion of the repayment period of the loans.
The second prong of the Brunner test requires the Debtor to show "that additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period of the student loans." The Court finds the Debtor met her burden with regard to this prong of the Brunner test.
In re Polleys, 356 F.3d at 1307.
The Debtor suffers from severe psychological problems. The Court heard testimony from two expert witnesses, Dr. Bellows and Dr. Console, both of whom confirmed the Debtor's mental illness, and both of whom currently treat Debtor for her mental illness. In addition, Dr. Bellows and Dr. Console both testified that the Debtor is unable to work at this time, and that they are unsure when, or if, she will ever be able to engage in meaningful employment in the future. This is due to the combination diagnosis she carries (type I Bipolar mood disorder, dissociative disorder and post-traumatic stress disorder).
At this time, it does not appear that the Debtor will be able to re-enter the workforce for several years, if ever. As a result, the Debtor will almost certainly be reliant upon her Social Security Disability payments and her husband's income. There is nothing in the record to indicate that either of these two sources of funds is likely to increase in any significant amount during the repayment period of these loans. To the contrary, the Social Security Disability payments will almost certainly not increase other than for adjustments based upon the cost of living. In addition, her husband's limited education, work history, and his own significant health problems show that a substantial increase in his salary is also not likely.
The Court also does not see a significant reduction in the Debtor's monthly living expenses in the foreseeable future. As noted above, the expiring car loan is not really at issue, because this Court agrees with Judge Pusateri, in In re Innes, that even if the car would soon be paid off, to completely deduct that payment from the Debtor's monthly expenses ignores the fact that the nine year old car will almost certainly need to be replaced at some point in the near future. Furthermore, because of the age of the car, there will likely be an increase in maintenance costs for the aging car until it is replaced. Debtor's budget allowed only $50 for transportation costs, and given the current price of gasoline, there is likely nothing in the budget for maintenance costs, when they inevitably arise.
Innes v. State of Kansas, et al (In re Innes), Adv. No. 95-7104 at 12 (Bankr. D. Kan. Dec. 22, 2000).
As also noted above, at the time of trial, Debtors were making no payments toward exceedingly large non-dischargeable tax debt, and had no resources to do so. Similarly, Mr. Quarles was making no payment towards his post-petition medical expenses, and there is no room in their budget for these expenses, or for the upcoming $170/month Medi-gap expense.
ECMC also claimed that Mr. Quarles' child support payments will end in the coming years, freeing up money to repay Debtor's student loans. The Court, however, notes that these payments are not scheduled to end for almost four years (assuming there is no interest charged on the arrearage), and thus would not provide a substantial benefit to the Debtor for a significant portion of the repayment period. And, with the extensive other debt that this family has no apparent means to repay, even if the child support ended in three years, there will not be excess income to repay this student loan.
The Court finds the Debtor has proven that additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period of the student loans. Therefore, the second prong of the Brunner test has been met.
C. The Debtor has made a good faith effort to repay the loans.
As noted by the Tenth Circuit in Polleys, the inquiry into a debtor's good faith "should focus on questions surrounding the legitimacy of the basis for seeking a discharge." The third prong of the Brunner test requires the Court to determine if the debtor has made a good faith effort to repay the loan "as measured by his [or] her efforts to obtain employment, maximize income and minimize expenses." A finding of good faith is not precluded by the Debtor's failure to make a payment. "Undue hardship encompasses a notion that the debtor may not willfully or negligently cause his own default, but rather his condition must result from factors beyond his control." "Good faith will exist under Polleys when a debtor's unfortunate financial or personal circumstances are the result of factors beyond his or her reasonable control."
In re Polleys, 356 F.3d at 1310.
In re Innes, 284 B.R. at 510.
Id.
In re Faish, 72 F.3d 298, 305 (3rd Cir. 1995).
In re Alderete, B.A.P. No. NM-02-089, at 12.
The Court finds that Debtor has made a good faith effort to repay her loans. The Debtor sought and obtained gainful employment at various points in her life, including owning and operating a successful business for a short time, until her mental illness caused her to be unable to maintain the pace of that business. The Debtor has made efforts to work, but she was unable to perform even part-time work, such as at the laundry where her mother also works, due to her mental health.
The Court finds that Debtor's appearance before this Court seeking a discharge of these student loans is not a result of any bad faith on her part, and she has clearly not willingly or recklessly placed herself in this position. Clearly, the Debtor's inability to repay these student loans is as a result of factors beyond her control.
ECMC contends that the Debtor's failure to enter into the William D. Ford repayment program shows a lack of good faith. The William D. Ford repayment program would provide the Debtor with an opportunity to repay her student loans over a period of twenty-five years, with her payments being set as a percentage of her annual income. At the end of the repayment period, the remaining balance of the student loans would be forgiven. According to the evidence presented at trial, the Debtor's current monthly payment under this plan would be approximately $126.70 per month. Debtor and her husband, even if 100% of his income was included in the analysis, do not have sufficient income to pay even this amount.
The Court recognizes the importance of the William D. Ford program, but finds that it is nothing more than a factor to be considered when determining whether a debtor has made a good faith effort to repay student loans. A rejection of the income contingent repayment plan is not, in and of itself, sufficient to show a lack of good faith on the part of the Debtor. Furthermore, given the rather extreme facts of this case, the Court finds that the Debtor's rejection of the income contingent repayment plan offered by the William D. Ford program does not show a lack of good faith on her part.
See In re Swinney, 266 B.R. 800, 806 (Bankr. N.D. Ohio 2001) (stating "it is a difficult, although not necessarily an insurmountable burden for a debtor who is offered, but then declines the government's income contingent repayment program, to come to this Court and seek an equitable adjustment of their student loan debt").
As discussed above, the Debtor's income is not likely to increase significantly in the future. As a result, there is no reason to believe that the Debtor's payments would increase greatly from the $126.70 currently proposed (other than to reflect a nominal increase as her Social Security Disability payments increase based upon cost of living increases). At the time of the hearing, the Debtor owed approximately $37,661 on her student loans, and they were subject to a 4.25% annual rate of interest. Based upon these numbers, payments of $126/month would be insufficient to even retire the interest that would accrue on her student loans each year.
As a result, she would likely have, at a minimum, the entire current balance remaining on her student loan debt at the conclusion of the repayment plan, which would then be forgiven by the lender. Unfortunately, the forgiveness of this debt, which would likely come when Debtor was over 65 years old, would be a taxable event for the Debtor, leaving her with a significant tax liability to pay at that time.
See In re Adler, 300 B.R. 740, 746 (Bankr. N.D. Cal. 2003) (holding that it is undisputed that debt forgiveness constitutes taxable income pursuant to 26 U.S.C. § 61(a)(12)).
There was no evidence presented that at that time, Debtor would have any financial ability, at all, to pay such a liability.
In addition to the tax consequences of the income contingent repayment plan, there are other factors that justify Debtor's decision not to seek assistance from the William D. Ford program. If the Debtor were to enter into this program, she would face the prospect of having her student loans haunt her, with an ever-increasing balance due, for the next twenty-five years. The length of the proposed repayment, combined with the Debtor's already fragile mental state and her precarious financial condition, would undoubtedly create added stress to the Debtor. Ordinarily, this added stress would not be a justification for refusing to participate in the repayment program, as most debtors incur some stress surrounding their bankruptcy. However, Dr. Bellows and Dr. Console both testified that added stress in the Debtor's life contributes to, if not exacerbates, her severe mental problems. This is not the typical debtor who has difficulty dealing with stress, but rather a mentally ill debtor who is significantly harmed by added stress.
Cf. In re Reynolds, 303 B.R. 823, 838-41 (Bankr. D. Minn. 2004) (holding that the consideration of the stress created by repaying the student loans and its effect on debtor's mental illness was appropriate in determining whether repayment of the loans constituted an undue hardship).
Given the unique facts of this case, the Court finds the Debtor's failure to take part in the William D. Ford income contingent repayment plan does not prove Debtor is acting in bad faith. Because Debtor has shown that she has made good faith efforts to maximize her income and minimize her expenses, including failure to refill pain and even anti-depressant medications because of insufficient income, the Court finds she has made a good faith effort to repay the student loans. Therefore, the third prong of the Brunner test has been met.
IV. CONCLUSION
The Court finds that repayment of this Debtor's student loan debt would constitute an undue hardship and it will, therefore, order that her student loans are discharged pursuant to § 523(a)(8). The Debtor cannot, based on her current income and expenses, afford to repay this debt while maintaining a minimal standard of living. In addition, Debtor's financial condition with relation to repaying the student loans is likely to continue for a significant portion of the repayment period, based upon the Debtor's inability to work for the foreseeable future. Finally, the Court finds that the Debtor has made a good faith effort to repay the student loans, despite her failure to enter into the William D. Ford income contingent repayment plan. Having met all three of the prongs of the Brunner test, the Debtor is entitled to a discharge of her student loans.
IT IS, THEREFORE, BYTHIS COURT ORDERED that judgment shall be entered on behalf of the Plaintiff in this adversary proceeding. Debtor's student loan debts at issue in this matter are discharged pursuant to 11 U.S.C. § 523(a)(8).
IT IS FURTHER ORDERED that the foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by F.R.Bankr.P. 9021 and Fed.R.Civ.P. 58.
IT IS SO ORDERED.