Court Plays ‘Whack-A-Mole' With Debtor's Student Loans

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By Diane Davis

Dec. 28 — A debtor must repay four of her student loans to National Collegiate Trust even though she believes that repayment will cause her a hardship, but the remaining 11 loans are dischargeable, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit held Dec. 21.

Judge Thomas L. Saladino concluded that the bankruptcy court properly reviewed a complete year of debtor Chelsea Ann Conway's income and expense records, adjusting some of the expenses, and concluded that the debtor had the ability to repay some of her student loans.

The bankruptcy court used the most recent time period for which it had complete income and expense figures, the BAP said.

Although the debtor argued that repayment of the four loans would cause her a hardship, the bankruptcy court didn't abuse its discretion in denying the debtor's motion to make additional findings and amend the judgment.

“A decision on the dischargeability of student loan debts will nearly always be akin to a judicial version of ‘Whack-A-Mole” because a debtor's income and expenses are seldom static. Life is like that,” the BAP said.

The bankruptcy court recognized that the debtor's income and expenses varied greatly from month to month, but appeared more steady when viewed year to year, the BAP said.

Loans and Layoffs

Chelsea Conway graduated in 2005, with a bachelor's degree in media communications. Between 2003 and 2006, Conway entered into 15 separate student loans with National Collegiate Trust (NCT) with a total original balance of $70,100. She also incurred additional student loan obligations to Key Bank NA and Sallie Mae/SLM Corp.

In 2005, Conway began working full time as a loan sales analyst, but was laid off in 2007, and began working part-time in temporary office positions. She obtained another full-time job in December 2007, but was laid off in 2008, and again began working part-time. By April 2009, she was working part-time as a waitress.

The debtor filed for Chapter 7 protection in December 2009. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.

Chapter 7 Discharge

The debtor received a discharge the following March. Then in December 2011, she moved to reopen her case and initiated an adversary proceeding against NCT, Key Bank, and Sallie Mae to have her student loans discharged.

Key Bank and Sallie Mae were dismissed from the proceeding after stipulating that their debts were dischargeable. The bankruptcy court, however, found that the debtor's NCT loans were not an undue hardship under Bankruptcy Code Section 523(a)(8) and therefore they should not be discharged. Conway appealed to the BAP.

The BAP reversed and remanded to the bankruptcy court to determine whether the debtor's present disposable income, if any, over the course of an entire year is sufficient to service any of the individual loan payments due to NCT (25 BBLR 1190, 8/29/13).

Court Found Disposable Income

After the bankruptcy court reviewed the debtor's income and expenses for the period of November 2013 through October 2014, the court held that the debtor's monthly disposable income was $170.30, with which she could make payments on four of the student loans without undue hardship. The remaining 11 loans were dischargeable.

Income, Expenses Changing

The debtor appealed to the BAP, arguing that the bankruptcy court made erroneous factual findings when it chose “so-called arbitrary dates to calculate her disposable income.” According to the debtor, she informed the court in December 2014, that she had been laid off from one of her jobs and that her health insurance and other student loan payments would be increasing, but the court chose a cut-off date of October 2014, to artificially inflate the disposable income calculation and create an undue hardship for her.

According to the BAP, the bankruptcy court chose the November 2013 through October 2014 time frame because it was the most recent 12-month period for which complete income and expense information was available.

Reviewed ‘Totality of Circumstances.'

The bankruptcy court noted the anticipated increase in health insurance and federal student loan payments, but declined to base its decision on what were then speculative numbers, the BAP said. According to the BAP, the bankruptcy court examined the “totality of Ms. Conway's circumstances,” including her “reasonably reliable future financial resources.”

The Eighth Circuit relies on the “totality of the circumstances” test rather than Brunner‘s three factors based on Brunner v. New York State Higher Education Service Corp., 831 F.2d 395 (2d Cir. 1987), according to research conducted by Bloomberg BNA.

To establish undue hardship under Brunner, the debtor must show the following: “(1) that the debtor cannot maintain, based on current income and expenses, a ‘minimal' standard of living for herself and her 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; and (3) that the debtor has made good faith efforts to repay the loans,” according to Bloomberg Law: Bankruptcy Treatise.

“Determination of undue hardship is an inherently discretionary one that takes into account the circumstances at the relevant time,” the BAP said. Courts aren't equipped to revisit a nondischargeability determination every time a debtor's circumstances change or it would wreak havoc with the concept of the finality of a court order, the BAP said.

Judges Robert J. Kressel and Anita Louise Shodeen joined the opinion.

Debtor/appellant Chelsea A. Conway, represented herself; Melinda J. Maune of Martin Leigh PC, St. Louis, Mo., represented the defendant/appellees National Collegiate Trust and First Marblehead Corp. Inc. d/b/a as National Collegiate Trust.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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