Hardship Test Supports Discharge of Student Loan

Posted by NCBRC - September 23, 2013

The Bankruptcy Appellate Panel for the Eighth Circuit found that there was insufficient evidence of the student loan debtor’s “reasonably reliable future” income to support the bankruptcy court’s finding that her student loan was nondischargeable. Conway v. National Collegiate Trust (In re Conway), No. 13-6016 (Aug. 21, 2013). After receiving her chapter 7 discharge Ms. Conway reopened her bankruptcy and filed an adversary proceeding against National Collegiate Trust (NCT) seeking discharge of her student loan under section 523(a)(8). Over a three year period, Ms. Conway received 15 student loans through NCT totaling $70,100.00. At the time of the reopened bankruptcy proceeding, debtor’s loan debt with interest came to $118,579.66. Over the course of the loans, Ms. Conway paid $5,734.38 to NCT. Ms. Conway had a work history of various office positions which were either temporary or from which she was laid off. At the time of this action, she held two jobs waitressing, earning approximately $1,737.25 per month. The bankruptcy court found that although Ms. Conway’s current income was insufficient to make the loan payments, it was reasonable to suppose that she could obtain employment that would provide enough income to make the payments. Therefore, she was not entitled to a hardship discharge.

Reviewing the case for clear error and concluding that a “definite and firm conviction that a mistake has been made,” the BAP reversed.

The Eighth Circuit applies a three-part “totality of the circumstances” test to the question of dischargeability of student loans under which a court must consider 1) the debtor’s past, present, and reasonably reliable future financial resources, 2) the debtor’s reasonable and necessary living expenses, and 3) other relevant facts and circumstances. Under this test, the debtor has the burden of proving undue hardship by a preponderance of the evidence. “The burden is rigorous. Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt – while still allowing for a minimal standard of living – then the debt should not be discharged.” Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775, 779 (8th Cir. 2009).

The lower court relied on the first prong of the test in its determination that the debtor was not entitled to a hardship discharge. The BAP, on the other hand, found that the stipulated evidence supported her contention that, with her degree in media communications, she was unlikely to get a job paying more than she was earning as a waitress. She had sent out over 200 applications and had been laid off from the two full-time jobs she had managed to obtain over the previous eight years. Although the bankruptcy court found that Ms. Conway was intelligent, articulate and poised enough to be well-placed to navigate the job market for the thirty years or so that she would be in it, the BAP was not convinced. It found that despite Ms. Conway’s diligent efforts to find employment she had never earned more than she was currently earning as a restaurant server and, therefore, there was no reason to presume that her future employment prospects were brighter. The evidence showed that Ms. Conway’s income was far less than the amount needed to make the monthly payments on the loans and that all deferment and restructuring options were foreclosed. Though there was a possibility that Ms. Conway could be more gainfully employed in the future, past history did not support a finding of “reasonably reliable future financial resources.” The BAP said, “We will not substitute assumptions or speculation for reasonably reliable facts.”

NCT did not challenge the reasonableness of Ms. Conway’s expenses.

Finally, the court rejected NCT’s argument that the debtor had the resources to repay “at least part” of the loans. All 15 loans were treated by NCT as a single loan and the court found that, even though some courts permitted “partial discharge,” it did not have authority under the provisions of the Bankruptcy Code to grant partial discharge of a student loan. Having said that, however, the BAP noted that where there are separate loans, a court has an obligation to determine the dischargeability of each loan individually. As the record suggested that NCT’s loans should be treated separately, the court remanded to the bankruptcy court to make a determination as to the debtor’s ability to repay any of the loans to NCT.

On September 19th, NCT filed an appeal to the Eighth Circuit Court of Appeals.

The test applied in this case is different from that applied in other recent student loan cases. The Seventh and Ninth Circuits apply the three-part “Brunner” test under which the debtor must show that she: 1) cannot maintain a minimal standard of living for herself and her dependents if forced to repay the loans, 2) that additional circumstances exist that tend to indicate that this condition is likely to persist for a significant portion of the life of the loan, and 3) that she has made a good faith effort to repay the loan. Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987). See Hedlund v. ECMC, No. 12-35258 (9th Cir. May 22, 2013) (considering the proper standard of review with respect to the element of good faith); Kreiger v. ECMC, No. 12-3592 (7th Cir. Apr. 10, 2013) (finding “certainty of hopelessness” satisfied the Brunner test); Roth v. ECMC, No. 11-1233 (B.A.P. 9th Cir. Apr. 16, 2013) (majority finding that Brunner test supported discharge and dissenting opinion advocating discarding Brunner test).

Conway opinion


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