In a bad-facts-make-bad-law situation, the Southern District of New York affirmed the denial of student loan discharge where the chapter 7 debtor sought to have his religious contributions deducted from his income, and, unfortunately, in so holding, the district court went beyond the bankruptcy court holding to add some unpleasant dicta of its own. In re Lozada, No. 18-11643 (S.D.N.Y. June 12, 2019).
Rafael Lozada had a law degree but, having failed the bar in his first and only attempt, never practiced law. Nevertheless, he was employed in skilled, well-paying jobs until 2014. He was sixty-five years old and owed almost $339,000 in student loans at the time he filed for bankruptcy. He received a general discharge then filed an adversary complaint seeking to discharge his student loan debt as undue hardship under section 523(a)(8). The bankruptcy court declined to adopt a per se rule that religious charitable donations could not be considered in student loan discharge cases, but found that, under the totality of the circumstances, Mr. Lozada did not meet any of the three prongs of the Brunner test for undue hardship.
The court took the following facts into consideration. In the five years prior to filing, Mr. Lozada and his wife paid approximately $100,000 in religious charitable contributions. They also received over $16,000 in tax refunds, and, in 2015, Mr. Lozada inherited $30,000, none of which was used to repay his student loans. He stopped seeking employment in 2015 and he and his wife lived off $5,942 in social security income. Of that amount, his expenses, not including his religious charitable contributions, totaled $4,499. In addition to living expenses, the Lozadas moved from their home in the Bronx for which they paid $867 per month to a new apartment at $2,500 per month, rented an apartment in Florida in 2016 and 2017 for $1,100 per month, at regularly at restaurants, made financial gifts to their adult children, and paid a weekly allowance to their granddaughter.
On appeal, the district court found no error. In a general discussion that did not bode well for the debtor, the district court began with the observation that, in its various amendments to student loan discharge laws, Congress sought to combat “increasing abuse of the bankruptcy process that threatened the viability of educational loan programs.” The court then turned to the proper treatment of religious tithing in calculation of a debtor’s ability to pay his student loans, citing three options: 1. Inclusion of the contributions as an expense (at least to the extent they do not exceed the 15% allowed under the Religious Liberty and Charitable Donation Protection Act of 1998), 2. Exclusion of the contributions as an expense, or 3. Applying a totality of circumstances test under which the contributions would be one of those circumstances.
The court noted that while Congress specifically referenced the RLCDPA in other sections of the Bankruptcy Code, it did not mention it in the context of student loan discharge. The court agreed with the reasoning in In re Ritchie, 254 B.R. 913 (Bankr. D. Idaho 2000), that Congress’s failure to include section 523(a)(8) in the provisions to which the RLCDPA applies, indicates that charitable religious contributions, even de minimis contributions, are not to be considered in the student loan context. Having stated this definitive rule, however, the court went on to find that the bankruptcy court’s context-specific determination that Mr. Lozada’s expenses were unreasonable was not error.
The court also found that Mr. Lozada’s reliance on the First Amendment and the Religious Freedom Restoration Act of 1993 was in vain. Without in-depth reasoning, the court found RFRA inapplicable and inconsistent with the subsequent RLCDPA legislation. As far as the First Amendment is concerned, the court found that the bankruptcy court correctly held section 523(a)(8) to be a religiously neutral law that does not offend the constitution.
The court turned to application of the three Brunner prongs, finding that the Mr. Lozada failed to meet any of them. With respect to his ability to maintain a minimal standard of living, the court found that his excess income (including his wife’s income and not deducting the charitable contributions) was $1,443. The court found that even if Mr. Lozada tithed 10% of his income he would still have enough to pay, $826.15 toward his student loans, which was the amount he would be liable for under an income-contingent repayment program. The court simply stated, “The practical consequence of these expenses is that the requirement to participate in an income-based repayment program with a payment of $826.15 per month would not impose an undue hardship.”
With respect to the second prong—whether the debtor’s inability to pay is likely to persist—the court found that Mr. Lozada, at 67 years old, had not presented sufficient evidence that his health and employment prospects would continue to deteriorate such that he would be unable to obtain employment.
As to the third prong—good faith effort to repay—the court was persuaded that Mr. Lozada had not met his burden when considering that he had not sought work for three years, had not paid any of this tax refunds or inheritance toward his student loans, and had not minimized his expenses. Where the bankruptcy court found the availability of an income-contingent plan was not dispositive, it found it to be a relevant factor in the consideration of good faith, and the district court went beyond that to state that “potential downstream tax consequences of entering a loan forgiveness program were not relevant to its present analysis.”
Dispensing with the oral argument scheduled the next day, the court affirmed on briefs.
