Student Loan Debtor's Case Remanded For Loan-by-Loan Undue Hardship Analysis

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By Stephanie M. Acree

A bankruptcy court's determination that a Chapter 7 debtor's student loans were not an undue burden was clearly erroneous, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit held Aug. 21 (Conway v. Nat'l Collegiate Trust (In re Conway), B.A.P. 8th Cir., No. 13-6016, 8/21/13).

Judges Thomas L. Saladino, Robert J. Kressel, and Anita L. Shodeen found that the debtor did not have reasonably reliable future financial resources and reversed and remanded the bankruptcy court's decision that the student loans were not dischargeable.

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. Conway filed for Chapter 7 protection in December 2009 and 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. However, the bankruptcy court found that Conway's NCT loans were not an undue hardship pursuant to Section 523(a)(8) of the Bankruptcy Code and therefore they should not be discharged. Conway appealed to the BAP.

Future Income Potential
Under Section 523(a)(8), student loans are not dischargeable unless they impose an “undue hardship” on the debtor, which the debtor bears the burden of proving by a preponderance of the evidence. While “undue hardship” is not defined by the Bankruptcy Code, the BAP said that in the Eighth Circuit, a “totality of the circumstances” test is used. The BAP said that this test has three factors, which are: (1) the debtor's past, present, and reasonably reliable future financial resources; (2) the debtor's reasonable and necessary living expenses; and (3) any other relevant facts and circumstances.

Conway stipulated that her income, which fluctuates due to seasonal hours of operation at one of her jobs, was between $1,379 and $2,040 in 2012. She argued that her income was unlikely to increase in the future and testified that despite sending out more than 200 job applications she had been unable to find full-time employment commensurate with her education level. However, the bankruptcy court found the debtor to be “articulate, poised, intelligent, and quite capable” and concluded that she had ample to time to find the financial resources to pay NCT in the future.

Facts Over Speculation
The BAP disagreed with the bankruptcy court's assessment of Conway's reasonably reliable future income. The BAP said that it was clear from the record that Conway had never made much more than $25,000 a year despite graduating eight years ago and despite her “diligent efforts to find higher paying work.” The BAP also disagreed with the bankruptcy court's conclusion that Conway has $300 a month in disposable income. The BAP said that because Conway's income fluctuates, she has as much as $300 of disposable income in some months, but none in others. The court also found that the $846 minimum monthly principal and interest payment due to NCT was substantially higher than the alleged $300 of disposable income. The court also noted that Conway had no further deferment or loan restructuring options available on the 15 loans.

The BAP said that while it was possible Conway would earn more income in the future, there was “no evidence to support that possibility” and the BAP said it would not “substitute assumptions or speculation for reasonably reliable facts.” Therefore, the BAP found that the bankruptcy court's determination that Conway had reasonably reliable future financial resources to pay off the debt was clearly erroneous.

Loan-by-Loan Analysis
Regarding living expenses, the BAP said that Conway's living expenses were “modest and commensurate with her resources.” The BAP also noted that NCT did not argue otherwise on appeal and instead based its arguments solely on Conway's future income potential.

The BAP noted that NCT had argued Conway's income was sufficient for at least a partial repayment of her loans. While there is no case law in the Eighth Circuit to support the partial discharge of a student loan, the BAP said that it might be possible to discharge some of NCT's 15 separate loans rather than all of them. The BAP said that under Andresen v. Nebraska Student Loan Program Inc. (In re Andresen), 232 B.R. 127 (B.A.P. 8th Cir. 1999), when there are multiple loans involved, a separate undue hardship analysis for each loan is “required.”

The BAP concluded that because the bankruptcy court had failed to do a loan-by-loan analysis, the case should be remanded to the bankruptcy court to determine if Conway's disposable income was enough to service any of the NCT loans.

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