In July, this blog explored the Second and Ninth Circuit’s application of the “undue hardship” test under 11 U.S.C. § 523(a)(8), which states that student loan debt is presumptively non-dischargeable. To refresh, in those circuits, a debtor claiming “undue hardship” must show, by a preponderance of evidence: (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. Hedlund v. Educational Resources Institute, No. 12-3258, 2013 WL 2232325, at *2-3 (9th Cir. May 22, 2013); In re Traversa, 444 F. App’x 472, 474, (2d Cir. Oct. 28, 2011). As discussed in the prior post, Hedlund may represent a shift by the courts toward applying the undue burden standard less stringently.
A recent opinion from the Bankruptcy Appellate Panel for the Eighth Circuit appears to follow that shift. In re Conway, 495 B.R. 416 (B.A.P. 8th Cir. 2013). There, the appellate panel reversed and remanded the bankruptcy court’s determination that a debtor’s student loan debt was not dischargeable. The Eighth Circuit, however, uses a “totality-of-circumstances” test to determine whether a debtor has shown undue hardship:
Reviewing courts must consider the debtor’s past, present, and reasonably reliable future financial resources, the debtor’s reasonable and necessary living expenses, and “any other relevant facts and circumstances.” The debtor has the burden of proving undue hardship by a preponderance of the evidence. The burden is rigorous. “Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt—while still allowing for a minimal standard of living—then the debt should not be discharged.”
In re Conway, 495 B.R. at 419 (citing Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775, 779 (8th Cir. 2009)).
The debtor in Conway had fifteen separate student loans with National Collegiate Trust (“NCT”). She owed a total of $118,579.66, which included interest, to NCT. After graduating from college in 2005, the debtor worked as a loan sales analyst, but she lost her job two years later. She then took various temporary office positions for five months before finding permanent employment. She lost that job after nine months and then found work as a part-time waitress and at a bank. At the time of the appellate panel’s decision, the debtor worked two part-time jobs as a restaurant server, and earned a monthly income between $1,379.97 and $2,040.36, which fluctuated with the seasons. The bankruptcy court had found that her reasonably reliable future financial resources were sufficient to repay her debt because she possessed well-developed writing and reasoning skills, and that she had “at least 30 years left to navigate the job market.”
The appellate panel, however, concluded that courts could not rely on assumptions or speculation. Courts must rely instead on the facts in the record. In the eight years following the debtor’s graduation from college, her annual income never exceeded $25,000.00. The appellate panel further found that the debtor was not intentionally underemployed. Indeed, the debtor sent out over 200 applications, was laid off twice for no fault of her own, and was never unemployed for a significant period of time. With respect to the debtor’s disposable income, the appellate panel concluded that it fluctuated between $300.00/month to negative $357.00/month, both of which were well below the $846.16/month she owed to NCT. The appellate panel also rejected the bankruptcy court’s finding that the debtor could reduce her out-of-pocket medical expenses by finding a job with medical benefits because courts cannot engage in speculation.
The debtor’s indebtedness to NCT, however, was not a single obligation. Rather, the debtor owed a total of $118,579.66 across fifteen separate student loans, with the monthly obligations on each loan ranging from $39.63 to $98.58. Where multiple loans are involved, each loan must be analyzed separately. The appellate panel concluded that the bankruptcy court erred by failing to conduct a loan-by-loan analysis. Accordingly, the appellate panel remanded the case for the bankruptcy court to make that determination.
Since the decision was rendered less than a month ago, it is unclear if the appellate panel’s decision will survive any potential appeal. But the appellate panel’s decision in Conway and the Ninth Circuit’s decision in Hedlund may reflect a shift by the federal courts to apply the undue burden less stringently in order to alleviate the burden of high student loan debt.
