Case No. 01-20008, Adversary Proceeding No. 03-2097.
December 22, 2004
Thomas J. Farrell, Esq., Hunt Leibert Chester Jacobson, P.C., Hartford, CT, Counsel for Plaintiff-Debtor.
R. Richard Croce, Esq., Rocky Hill, CT, Counsel for Defendant Connecticut Student Loan Foundation.
Elizabeth J. Austin, Esq., Gwen P. Weisberg, Esq., Pullman Comley, LLC, Hartford, CT, Counsel for Defendant Educational Credit Management Corp.
MEMORANDUM OF DECISION
Claudia Kathleen Curiston ("the debtor"), on January 1, 2001, jointly filed a pro se Chapter 7 bankruptcy petition with her late husband, William Frederick Curiston, who died on April 8, 2001. The debtor subsequently received a discharge and the no-asset case was closed on June 6, 2001. The court, after notice and a hearing, on March 26, 2003, granted the debtor's motion to reopen the case, and, on October 8, 2003, the debtor filed her complaint against Educational Credit Management Corporation ("ECMC") and Connecticut Student Loan Foundation ("CSLF") seeking discharge of her otherwise nondischargeable government insured or guaranteed student loans in accordance with the "undue hardship" exception in Bankruptcy Code § 523(a)(8). The outstanding balances on the student loans, including interest accruals to July 21, 2004, the date the trial commenced, were $58,046.26 to ECMC and $17,013.92 to CSLF.
11 U.S.C. § 523, Exceptions to discharge, provides in relevant part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt — . . .
(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents;
Hearings were held on July 21 and 28, 2004, when the court heard oral testimony only from the debtor and M. Sue Chenoweth, Psy.D., the debtor's treating psychologist, and received into evidence a number of documents pertaining to the debtor's income, expenses and medical history. The debtor and the defendants thereafter submitted memoranda of law in support of their positions. The defendants contend that the debtor is not entitled to an "undue hardship" discharge of her student loans because (1) she is not maximizing her income by working full-time, and (2) she has not sought to repay the student loans under an Income Contingent Repayment Plan ("ICRP") available under the William D. Ford Direct Loan Repayment Program. Under the ICRP, the debtor's monthly payments over a 25 year repayment period are based on her income and are capped at 20% of the amount by which her income exceeds the Poverty Guidelines established by the U.S. Department of Health and Human Services. Durrani v. Educational Credit Mgmt. Corp. (In re Durrani), 311 B.R. 496, 500 (Bankr. N.D.Ill. 2004). For the current year, the minimum monthly payment so calculated by ECMC for amounts owed it by the debtor is $175.75. (Ex. 4.) CSLF has not provided the minimum payment for its student loans to the debtor. If all payments are made in accordance with the ICRP for 25 years, the outstanding balance then remaining is forgiven.
The 2004 poverty level for a family of one is set at $9,310 per year, or $775.83 per month. 69 Fed. Reg. 7336 (Feb. 13, 2004).
Whether student loan repayment would impose an "undue hardship" on the debtor is necessarily a fact-sensitive determination and the parties, accordingly, presented extensive evidence concerning several aspects of the debtor's circumstances, including her medical history, education, employment history and living expenses. The following background summarizes those circumstances.
A. Medical/Disability History
The debtor is a fifty-eight year-old widow with a diagnosis of Post-Traumatic Stress Disorder ("PTSD"), attributable to incidents in her childhood and adolescence, who exhibits symptoms of severe anxiety exacerbated by stress. In addition, the debtor has, since 1989, suffered from physical symptoms of unknown etiology which impair her ability to walk and her balance. The Social Security Administration determined that the debtor "became disabled on March 15, 1992" and was entitled to monthly disability benefits. (Ex. N.) Following the death of the debtor's husband in 2001, the Social Security Administration determined that she was entitled to an additional monthly benefit as a disabled widow. (Ex. N.) In 2003, the debtor received a total of $12,168 from these programs.
B. Education and Employment History
The debtor has two adult children from a previous marriage, which ended in divorce in 1974. From 1968, when her first child was born, until 1978, the debtor was not employed outside the home. The debtor, who had dropped out of high school, earned her high school equivalency diploma in 1978 and an associate degree in secretarial science from Tunxis Community College in 1981. From 1978 until 1992, when she was found to be disabled, the debtor had held, and was fired from, several secretarial positions, none of which lasted longer than 13 months.
The debtor began taking courses, on a part-time basis, at Central Connecticut State University in 1987. She continued to do so until 1994, at which time she transferred her existing credits and enrolled at St. Joseph College from which she received a baccalaureate degree in social work in 1997. During this time, the debtor was receiving Social Security disability benefits and required the use of a wheelchair to attend her classes. She testified that she received a great deal of assistance from her then-retired husband who, in addition to doing "all the cooking, all the cleaning, all the shopping," accompanied her to school and assisted her with her wheelchair. (Tr. at 93.) The debtor attended the University of Connecticut from 1997 until 1999, earning a Masters in Social Work ("M.S.W.") degree.
The debtor, after receiving her M.S.W. degree in 1999, actively sought employment as a part-time social worker. After a number of unsuccessful job interviews with different social service providers, the debtor received and accepted an offer from Asian Family Services ("A.F.S.") in early 2002. The debtor was hired as a part-time employee to work approximately 21 hours per week at the rate of $17.85 per hour (approximately $1,600 per month). The debtor's monthly benefits from Social Security continued for almost a year, `the trial work period," after which time, the Social Security Administration notified her that the benefits would cease as of January, 2003 because of her "substantial work," but noting that she had "an extended period of eligibility" through September, 2005, during which "we restart payments for any month(s) your work is not substantial if your health problems still meet our rules." (Ex. N.)
The debtor continues to work at A.F.S., but, as a result of the agency's loss of grant money, she was laid off as an employee in October, 2003, and has been working since that time for A.F.S. as an independent contractor, receiving $19 per client hour. She receives no additional pay for time spent attending meetings or completing paperwork, and must pay both the employer and the employee share of Social Security taxes (a total of 15.3% of income, as a "self-employed" individual rather than 7.65% as an employee). She presently works three days per week and grosses an average of about $1,000 per month. (Ex. N.)
The debtor lives in a rental apartment with her elderly mother ("the mother") who suffers from schizophrenia and Parkinson's disease. The mother, who is awaiting placement at a nursing home, presently contributes $450 per month towards expenses.
Two different schedules of expenses were entered as exhibits — one (Ex. K) prepared in the summer of 2003 and another (Ex. 2) prepared in early 2004. The expenses from both exhibits are shown in Appendix I and range from $2,454 (Ex. K excluding student loan repayments) to $2,517 (Ex. 2).
Subsequent to the preparation of these exhibits, the debtor's rent increased to $750, in accordance with the terms of her lease; she has completed the instalment payments towards the security deposit on her apartment; and she has reduced her cable television service to the "basic" plan. ECMC has proposed that the debtor further reduce her expenses by eliminating her health club membership ($34/month) and life insurance policy ($42/month). ECMC also notes that the debtor has only a few remaining monthly instalment payments of $96 for the 1992 car she purchased in 2003. Even taking into account all of these potential adjustments, the debtor's projected expenses, also shown in Appendix I, are in excess of $2,000 per month and include no provision for contingencies or retirement.
The burden of proof in a § 523(a)(8) proceeding on the issue of undue hardship rests on the debtor, Borrero v. Connecticut Student Loan Foundation (In re Borrero), 208 B.R. 792, 795 (Bankr. D.Conn. 1996). In the Second Circuit, existence of undue hardship is determined according to the three-part test announced in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987):
(1) debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loan;
(2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and
(3) the debtor has made good faith efforts to repay the loan.
A. Minimal Standard of Living
On the basis of the testimony and evidence presented, the court finds the debtor's expenses are reasonable and not excessive, comprised almost entirely of expenses for shelter, food, transportation and medical care.
Although ECMC has suggested that the debtor consider moving to a less expensive apartment, the debtor has testified that she "couldn't handle" the stress of moving from her home of 28 years. (7/28 Tr. at 33.) In addition, the court notes that the debtor's mother is presently living with her and contributes $450 per month towards household expenses. If the debtor were to move to a smaller apartment when her mother is moved to a nursing home, any decrease in rent is likely to be offset by the loss of the mother's contribution. Even with the further reductions in expenses proposed by ECMC (eliminating the life insurance and the health club fees), the debtor's current monthly income, $1,000 (before taxes) plus a contribution of $450 from her mother, is insufficient to support her frugal lifestyle, producing a shortfall of over $900 per month. Although the debtor's car payments of $96 per month will end in a few months, her budget provides no allowance for repairs or eventual replacement of her twelve year old, high mileage car.
B. Additional Circumstances
The defendants argue that the debtor is required to maximize her earnings by seeking full-time employment. The defendants' argument that the debtor could find full-time employment with the Connecticut Department of Children and Families ("D.C.F.") ignores the debtor's testimony that she had in the past applied and interviewed for such a position, but did not receive an offer (Tr. at 122); that the debtor, who has difficulty walking, was told that the position would require climbing stairs or carrying a child; and that Dr. Chenoweth testified that she would have serious misgivings about the debtor's ability to handle a job with D.C.F. because of the necessity of dealing with trauma on a daily basis. (Tr. at 45.)
The defendants also contend that the debtor, having obtained an associate degree in secretarial science in 1981, could supplement her present income by obtaining a second part-time job as a secretary. Not only does this argument ignore that the debtor's 1981 office skills may be outdated due to the changes in office technology over the intervening years, but also the debtor's testimony that she was previously unsuccessful in that field, having been repeatedly fired from such positions between 1978 and 1992. (Tr. at 85.)
The debtor suffers from PTSD, becomes easily overwhelmed by stress and suffers from a number of physical symptoms, especially with regard to balance and walking. The debtor testified that, although she loves her work at A.F.S., she is easily fatigued and is not able to work full-time. The debtor's health has improved somewhat, making it possible for her to work part-time rather than continue to receive Social Security disability payments, and her psychologist has testified that, with long-term treatment, her prognosis is "fair to good" (Tr. at 31). However, given the debtor's current age and the long duration of her ailments, the court finds it more likely than not that the debtor will remain unable to work a full-time schedule in the foreseeable future. The debtor testified that her hope is that A.F.S.'s funding will be restored and that she can return to her prior status as a part-time employee, possibly with a slight increase in her hourly rate upon completion of her licensing requirements. Even under such a best case scenario, it is unlikely that the debtor's income will be sufficient to provide more than her basic necessities. Furthermore, unlike a young, healthy graduate about to embark on a long, lucrative career, the debtor is presently 58 years old and has no retirement savings, making it very likely that her future income over the 25-year repayment period requested by the defendants (at the end of which the debtor will be 83 years old) will decrease rather than increase.
C. Good Faith Efforts
In evaluating whether the debtor has satisfied the third requirement of Brunner, a good faith effort to repay the debt, courts generally look to the debtor's efforts "to obtain employment, maximize income and minimize expenses." In re Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993). The court finds that the debtor has satisfied this requirement.
The defendants contend that by not working full-time the debtor has failed to make such a good faith effort. The court concludes otherwise. The debtor has provided ample evidence that she suffers from both psychological and physiological conditions that prevent her from working full-time. She provided expert and uncontradicted testimony from her treating psychologist that she suffers from PTSD, that she suffers from anxiety and has difficulty keeping up with her part-time workload. In addition, although providing no definitive diagnosis of her physical symptoms, the medical records of the debtor's consultations with numerous doctors confirm that they have caused her significant problems for years. The debtor provided copies of her correspondence from the Social Security Administration, establishing that her medical conditions so impaired her ability to work that she qualified for Social Security disability and disabled widow benefits, which she relinquished as a result of voluntarily entering the work force.
The court has already determined that the debtor is unable to support a minimal standard of living on either her current or expected future income without taking into account payments for her student loans, but notes that, during the trial work period when she was working, but remained eligible to collect Social Security benefits as well, the debtor did make a number of payments on her loans from CSLF and that she had several times applied for and received deferments from Sallie Mae Foundation on the loans presently assigned to ECMC.
The defendants argue that the debtor's failure to apply for an ICRP evidences a lack of good faith. A debtor's failure to participate in an ICRP does not necessarily imply a lack of good faith, particularly where, as here, doing so would appear futile in light of the debtor's particular circumstances. See, e.g. Porrazzo v. Educational Credit Mgmt. Corp. (In re Porrazzo), 307 B.R. 345, 351 (Bankr. D.Conn. 2004) (Mere existence of ICRP does not mean an application is necessary to satisfy the good faith requirement of Brunner.);Johnson v. Educational Credit Management Corp. (In re Johnson), 299 B.R. 676, 682 (Bankr. M.D.Ga. 2003) (Failure to participate in ICRP does not prove bad faith, especially where application would be futile because debtor has no funds to make any payment.)
Because the debtor's income exceeds the poverty guidelines, she would be required to make minimum payments on her student loans under an ICRP for the next twenty-five years, despite the court's conclusion that she cannot afford to do so. Not only would the ICRP consign the debtor barely eking out a minimal living to even further privation for another 25 years, but forgiveness of the student loan balance and the accrued interest thereon at the end of the 25 years can, unlike a discharge under the Bankruptcy Code, give rise to a sizeable tax burden, not dischargeable in a subsequent bankruptcy. See, e.g. Berscheid v. Educational Credit Mgmt. Corp. (In re Berscheid), 309 B.R. 5, 13 (Bankr. D.Minn. 2002) ("[ICRP] is a program which dooms a debtor to perpetual indebtedness for student loan obligations. Unless [the debtor] significantly increases [her] income, [s]he would go to [her] grave either indebted to ECMC or, if not, indebted to the IRS on the tax burden incurred when ECMC forgives the unpaid loan."); Thomsen v. Dept. of Educ. (In re Thomsen), 234 B.R. 506, 514 (Bankr. D.Mont. 1999) ("Debtors would simply exchange one huge nondischargeable debt for educational loans for another in the form of nondischargeable income taxes."); In re Durrani, 311 B.R. at 508 (quoting Thomsen). Thus, the debtor's hopes for a "fresh start" under the Bankruptcy Code would continue, even at age 83, to elude her.
The existence of such programs does not deprive a bankruptcy court of its right or obligation under the Bankruptcy Code to determine the dischargeability of student loans. In re Porrazzo, 307 B.R. at 351 ("Such a result would nullify [§ 523(a)(8)] and the legislative intent it serves."); In re Johnson, 299 B.R. at 682 (If Congress had intended the question of dischargeability of student loans to be delegated to a nonjudicial entity . . . it could have provided for such.")
In accordance with the foregoing discussion, the court concludes that the debtor has proved, by the preponderance of the evidence, that she has complied with each of the requirements of the Brunner test for "undue hardship" under § 523(a)(8). A judgment will enter that the debtor's student loan indebtedness to CSLF and ECMC are discharged.
APPENDIX I DEBTOR'S EXPENSES
Proposed Expenses Item Exhibit 2 Exhibit KWith Cuts Proposed by ECMC Rent 700 650 750 Electricity Heat 185 150 150 Phone 55 56 55 Cable TV 46 43 9 Home Repairs 45 150 45 Food 340 400 340 Clothing 10 30 10 Laundry 20 25 20 Medical/Dental 150 125 125 Transportation 130 160 130 Recreation 10 50 10 Charity 5 10 5 Insurance-Renter's 9 12 9 Insurance-Life 42 43 0 Insurance-Health 240 103 103 Insurance-Auto 53 52 52 Insurance-Prof.Liability 30 30 Taxes-Auto 5 5 Tax Preparation 15 Est. for Fed.Income Tax 309 40 153 Auto Loan Payments 96 100 0 Security Deposit Payments 75 Health Club 37 34 0 Miscellaneous 35 Professional Ass'n Dues 16 16 Haircuts Personal Care 25 25 Professional Books 25 0 Cards, Gifts, Misc. 30 10 ____ ____ ____ Total 2517 2454 2052 Exhibit K reflects the debtor's expenses as of early fall, 2003, while she was in employee status at A.F.S.
Exhibit 2 reflects the debtor's expenses as of spring, 2004, and includes her self-Employment (Social Security) tax of 15.3%.
Projected Expenses represent the court's estimate of the debtor's minimum expenses taking into account the defendant's proposed cutbacks.