Debtors whose Financial Situation Improved Substantially after their case was Appealed and Remanded, and who did Not live a “Spartan” Lifestyle, Failed the Brunner “Undue Hardship” Test

Debtors whose Financial Situation Improved Substantially after their case was Appealed and Remanded, and who did Not live a “Spartan” Lifestyle, Failed the Brunner “Undue Hardship” Test

The Court  has now conducted two trials on whether Debtors’ (George and Melanie) sizeable student loan debt is eligible for discharge under 11 U.S.C. § 523(a)(8)1 as an undue hardship. After the first trial, the Court discharged Debtors’ student loan debt based on findings that Debtors were not then able to maintain a minimal standard of living, additional circumstances existed that indicated that inability was likely to persist for a significant portion of the repayment period, and Debtors had made a good faith effort to repay their student loans. Debtors’ student loan creditor appealed that decision, and the appellate court vacated this Court’s order and judgment, and remanded the case for further proceedings.

The Court has now held a second trial, focusing specifically on Debtors’ potential earning capacity, the term of repayment of Debtors’ loan, and the repayment options available to Debtors to restructure their student loan debt.

Debtors filed their pro se Chapter 7 bankruptcy petition more than 6 years ago. At about the same time, they also filed a pro se adversary proceeding seeking discharge of their student
loan obligations.

Creditor Educational Credit Management Corporation (“ECMC”) was substituted as the
correct party in Debtors’ adversary case, and after the appropriate discovery was undertaken, the Court held a trial of the matter in September 2013. The Court then entered judgment for Debtors, finding Debtors’ consolidated student loan should be discharged as an undue hardship under § 523(a)(8). ECMC appealed the decision to the District Court.

On appellate review, the District Court vacated this Court’s judgment and remanded Debtors’ case. The District Court concurred that Debtors were not able to currently maintain a
minimal standard of living, because George had been laid off from his employment and “was
bringing in next to no income to support the family” and, therefore, Debtors’ budget “was
significantly in the red.”

Regarding whether these circumstances would persist in the future, the District Court found that this Court had not considered whether George’s unemployment was likely to persist, and had not computed the accurate repayment period. And finally, regarding Debtors’ good faith, the District Court determined that the record indicated Debtors’ repayment under the IBR without considering George’s unemployment, and therefore remanded for “further consideration and clarification of the impact of the IBR.”

Upon remand, the parties again undertook discovery. The Court held a second trial in
August 2017. At the second trial, the Court learned that Debtors’ income had increased fairly
significantly: Melanie was now a billing supervisor with the same employer and received an
hourly pay rate that had doubled since the first trial and a net income of $3640.43 per month.
George had also been hired at the Department of Veterans Affairs as a biller where he had
worked for the last 2 years and 3 months. Debtors’ combined net income was now $6189.64 per month and had been stable for some time. Melanie testified that the family’s expenses had also increased, however, to a total of $6234 per month, leaving them with a negative balance of $44.36 each month.

The current balance on Debtors’ consolidated student loan is $93,599.10, with a 30 year
repayment plan. Melanie testified that she did not believe an income contingent payment plan
was appropriate for Debtors, regardless of whether it was the IBR or the newer Revised Pay As
You Earn Plan (“REPAYE”), because Debtors would probably have a large tax bill at the end of
the 20 year repayment term associated with those plans when they would be at or near retirement age. Debtors are currently in their 40s, as George is 43 and Melanie is 41 years old. Debtors monthly payments based on their current household size and income would be $315.09 per month under the IBR and $210.06 per month under REPAYE.

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