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The Debtor filed a Chapter 7 bankruptcy on July 20, 2018 and received a discharge on February 1, 2019.
On December 26, 2019 the Debtor/Plaintiff filed an adversary complaint against Navient, Allied Interstate, Financial Asset Management System, Great Lakes Higher Education, Pioneer Credit Recovery Inc, c/o Sallie Mae USA Funds, and USA Funds to discharge her student loan debt. Defendant-Intervenor, Education Credit Management Corporation (“ECMC”), filed a motion for summary judgment (the “Motion”), which Plaintiff opposed.
Plaintiff is 47 years old, single, has no dependents and lives alone in an apartment. She owns no real estate or vehicle. Her highest education is high school. She has some serious medical issues which have caused her problems maintaining steady employment.
In 2007 Plaintiff took out a loan to attend a 2-year online program to a certification. She withdrew due to her health.
The total balance of the debt owed to ECMC is approximately $29,892.38.
Plaintiff has net monthly earnings in the amount of $2,562.83. She earns about $1,366.33 per month net from a part time job. Her parents also give her $1,196.50 per month (by covering certain expenses like rent etc.) Her expenses total $2,311.08 which leave her with approximately $251.75 per month in disposable income.
ECMC’s motion for summary judgment alleges that the Plaintiff cannot satisfy the first prong of the dischargeability test in Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395 (2d Cir. 1987). To satisfy the first prong the debtor must prove that she cannot maintain, based on current income and expenses, a minimal standard of living for herself if forced to repay the loans. ECMC argues that the Plaintiff’s disposable income shows an ability to repay the student loans.
ECMC argues that there is no reason the court should not consider financial support received by a debtor for purposes of Brunner. ECMC cites several cases where courts have considered such support. And, in each of these cases, the court found that the debtor(s) could not maintain a minimal standard of living even with the charity of others. See, e.g., Marshall v. Student Loan Corp. (In re Marshall), 430 B.R. 809, 814 (Bankr. S.D. Ohio 2010); Brown v. Sallie Mae, Inc. (In re Brown), 442 B.R. 776, 782 (Bankr. Colo. 2010); Grawey v. Ill. Student Asst. Comm. (In re Grawey), No. 01-8010, 2001 WL 34076376, at *3 (Bankr. C.D. Ill. Oct. 11, 2001); Kirchhofer v. Direct Loans (In re Kirchhofer), 278 B.R. 162, 167 (Bankr. N.D. Ohio 2002); Yapuncich v. Montana Guar. Student Loan Program (In re Yapuncich), 266 B.R. 882, 890-92 (Bankr. D. Mont. 2001); Maulin v. Salliemae (In re Maulin), 190 B.R. 153, 155-56 (Bankr. W.D.N.Y. 1995). But none of these cases involved a debtor who, like Plaintiff, may only be able to repay her loans and maintain a minimal standard of living by relying heavily on the charity of others.
Hutsell at 6-7.
Plaintiff argued that money received as charity should not be counted as current income.
Plaintiff claims that charitable support should not be considered when determining whether a debtor can meet the first Brunner prong. A debtor’s ability to maintain a minimal standard of living, Plaintiff argues, should focus solely on the individual debtor’s ability, without consideration of charity given to the debtor by the debtor’s parents or a third party. Plaintiff also argues that, for purposes of federal IDR plans, a debtor’s “adjusted gross income,” which excludes gifts from third parties, is used. 34 C.F.R. § 682.215 (addressing IDR plans for FFEL Program loans); 34 C.F.R. § 685.221 (addressing IDR plans for William D. Ford Federal Direct Loan Program loans); see also 26 U.S.C. § 61(a) (defining “gross income”); 26 U.S.C. § 62(a) (defining “adjusted gross income”); 26 U.S.C. § 102(a) (excluding “gifts” from “gross income”). Thus, Plaintiff argues, this definition of income, to the extent it excludes gifts from third parties, should guide the court’s analysis for purposes of Brunner.
Hutsell at 7. The Bankruptcy Court agreed with the Plaintiff’s argument. First the Court determined that the Plaintiff’s parents charitable are not similar to a non-filing spouse’s income.
Several courts have found that a non-debtor spouse’s income must be included for purposes of Brunner, reasoning that the spouse has a legal obligation to support the debtor. See, e.g., Miller v. Sallie Mae, Inc. (In re Miller), 409 B.R. 299, 313 (Bankr. E.D. Pa. 2009) (finding that it was “entirely appropriate” for purposes of Brunner to consider the income of debtor’s spouse since spouse had “a legal duty to provide for her support.” (citations omitted)); see also Gill v. Nelnet Loan Servs. (In re Gill), 326 B.R. 611, 626 (Bankr. E.D. Va. 2005) (citing White v. U.S. Dep’t of Educ. (In re White), 243 B.R. 498, 510 (Bankr. W.D. Va. 1995)). But that reasoning does not apply in this case, since Plaintiff’s parents have no legal obligation to provide for her.
Hutsell at 7. The Court then rejected the use of the Bankruptcy Code’s definition of income as being inconsistent with Brunner. The Court noted that under Section101(10A) the Plaintiff’s income includes “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents. . . .” 11 U.S.C. § 101(10A)(B)(i).
Clearly, under this broad definition, the support from Plaintiff’s parents would be included as CMI. But Brunner was decided in 1987, long before the passage of BAPCPA, and bankruptcy courts are not obligated to use a debtor’s income and expenses as stated on the debtor’s means test or schedules in student loan dischargeability actions. See, e.g., Pierson v. Navient (In re Pierson), No. 17-3096, 2018 Bankr. LEXIS 3106, at *9, 10 (Bankr. N.D. Ohio Oct. 4, 2018) (utilizing debtor’s income and expenses at time of trial even though expenses decreased after petition date); see also Rule 4007 (a debtor may file a student loan dischargeability action at any time). Therefore, there is no indication that courts should utilize the Bankruptcy Code’s definition of CMI when determining whether a debtor satisfies the first prong of Brunner.
Hustsell at 8. The Court contrasted the Bankruptcy Code definition of income with that of the IRS and the requirements to obtain an Income-Driven Repayment plan.
By way of comparison, the Internal Revenue Code defines “gross income” as “all income from whatever source derived . . . .” 26 U.S.C. § 61(a). However, “[g]ross income does not include the value of property acquired by gift . . . .” 26 U.S.C. § 102(a) (emphasis added); see also Commissioner v. Duberstein, 363 U.S. 278, 285-86 (1960) (whether a transfer is a “gift” depends on the intention of the transferor). Under this definition, which is narrower than the Bankruptcy Code’s definition of CMI, the support from Plaintiff’s parents may constitute a gift and thus be excluded from her gross income. In addition, Plaintiff correctly points out that, for purposes of a federal IDR plan, Plaintiff’s “adjusted gross income,” which excludes gifts from her parents, would be used. 34 C.F.R. § 682.215; 34 C.F.R. § 685.221; 26 U.S.C. § 62(a).
Hutsell at 8-9. The Court concluded that the Brunner standard does not include a punitive requirement to include income from charity.
The concept of a “minimal standard of living” requires a certain degree of financial independence and control. Thus, a debtor’s receipt of charity from a third party who is under no legal obligation to provide such support should generally not be considered income for purposes of Brunner, when, without such support, the debtor cannot maintain a minimal standard of living and repay her loans. To hold otherwise would be to pin on Brunner a punitive standard not contained therein. See, e.g., Rosenberg v. N.Y. State Higher Educ. Servs. Corp., 610 B.R. 454, 458 (Bankr. S.D.N.Y. 2020) (explaining that “[t]he harsh results that often are associated with Brunner are actually the result of cases interpreting Brunner.”).
Hutsell at 9. The Court denied ECMC’s motion for summary judgment.
- This case is an extension of the principle that the Brunner test should not include punitive standards first discussed at Rosenberg v. N.Y. State Higher Educ. Servs. Corp., 610 B.R. 454, 458 (Bankr. S.D.N.Y. 2020). For a discussion of this case click here: Bankruptcy Court Discharges Student Loans, Labels “Certainty of Hopelessness” Standard a “Myth” and Not Supported by In re Brunner.
- The Court rejected the Bankruptcy Code’s definition of income in favor of the IRS’s definition and the definition used in determining IDR repayment plans.
- Bankruptcy courts are not obligated to use a debtor’s income and expenses as stated on the debtor’s means test or schedules in student loan dischargeability actions.
A copy of the opinion is here: In re Hutsell opinion