Leading Cases: Student Loans
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Background: Chapter 7 Debtor filed an adversary proceeding seeking an “undue hardship” discharge of her student loans held by Tennessee Student Assistance Corporation (TSAC), a state entity. TSAC brought a motion to dismiss the complaint for lack of jurisdiction, asserting its sovereign immunity under the Eleventh Amendment. The Bankruptcy Court denied the motion, holding that 11 U.S.C. § 106(a) abrogated TSAC’s sovereign immunity. TSAC filed an interlocutory appeal, and the Bankruptcy Appellate Panel of the Sixth Circuit affirmed, 262 B.R. 412 (6th Cir. B.A.P. 2001). TSAC appealed to the Sixth Circuit Court of Appeals, which affirmed, holding that the Bankruptcy Clause of the Constitution, U.S. Const., Art. 1, § 8, cl. 4, provides Congress with the necessary authority to abrogate state sovereign immunity in 11 U.S.C. § 106(a). 391 F.3d 755, 767 (6th Cir. 2003). The U.S. Supreme Court granted certiorari, 539 U.S. 986, 124 S.Ct. 45 (2003), to determine whether the Bankruptcy Clause grants Congress the authority to abrogate state sovereign immunity from private suits.

Holding: The Supreme Court held that an adversary proceeding to determine the dischargeability of a student loan debt is not a suit against a State for purposes of the Eleventh Amendment. In so holding, the Supreme Court affirmed the Sixth Circuit Court of Appeals and remanded the case without reaching the question on which certiorari was granted.

• The discharge of a debt by a Bankruptcy Court is an in rem proceeding.
• A Bankruptcy Court has exclusive jurisdiction over a debtor’s property, wherever located, and over the debtor’s estate.
• A Bankruptcy Court’s in rem jurisdiction allows it to adjudicate a debtor’s discharge claim without in personam jurisdiction over the state.
• States, whether or not they choose to participate in the proceeding, are bound by a Bankruptcy Courts’s discharge order no less than other creditors.
• Where a Bankruptcy Court’s jurisdiction over the res is unquestioned, the exercise of its in rem jurisdiction to discharge a debt does not infringe state sovereignty.
• The service of a summons and complaint in the adversary proceeding does not infringe on state sovereignty, because it does not seek to establish in personam jurisdiction, and because the service of a summons in a discharge proceeding is indistinguishable in practical effect from a motion.
  

Walker v. Educ. Credit Mgmt. Corp., 650 F.3d 1227 (8th Cir. Aug. 18, 2011)

Background: Debtor was a married 42-year-old mother of five elementary-aged children, including two autistic sons.  Prior to her marriage, Debtor had incurred student loans to attend college and five years of medical school.  Debtor was involuntarily dismissed from the medical school program.  Debtor later married a police officer and worked briefly as a school psychologist and pharmacy technician, but was unable to maintain even part-time employment due to her husband’s revolving work schedule and the needs of her young children, particularly her two sons with autism.  Debtor’s monthly household expenses exceeded monthly net income by over $1,500.  Expenses included monthly payments for a home equity loan used to build a screened deck, and an automobile loan for a new Chevrolet Suburban automobile.  Debtor filed an adversary proceeding seeking to discharge approximately $300,000 in student loan debt.  The Bankruptcy Court held that excepting the student loan debts from discharge would impose an undue hardship on the debtor, and the loans were therefore dischargeable under 11 U.S.C. § 523(a)(8).  The BAP affirmed.  ECMC appealed, contending 1) the Bankruptcy Court erred in considering the Debtor’s circumstances at the time of the 2008 trial and not the time of her 2004 discharge in determining undue hardship; 2) the Debtor did not prove undue hardship by a preponderance of the evidence and the Bankruptcy Court supplemented gaps in the record by making impermissible inferences about Debtor’s financial resources and expenses, and 3) the Bankruptcy Court erred in finding Debtor’s household expenses were “modest and commensurate” with a minimal standard of living.

Holding:  The Eighth Circuit affirmed.

• The determination of whether excepting a debtor’s student loan debt for undue hardship is reviewed de novo on appeal.  Findings of fact on which this legal conclusion is based are reviewed for clear error and will not be overturned unless the appellate court, after reviewing the entire record, is left with the definite and firm conviction that a mistake has been made. 
• The debtor has the burden of establishing undue hardship by a preponderance of the evidence.
• Undue hardship is assessed by applying the totality-of-circumstances test, which considers (1) the debtor’s past, present, and reasonably reliable future resources; (2) a calculation of the reasonable living expenses of the debtor and her dependents; and (3) any other relevant facts and circumstances surrounding the particular bankruptcy.
• It was not clear error for the Bankruptcy Court’s undue hardship analysis to include the Debtor’s financial condition from the time of her 2004 Chapter 7 discharge through the commencement in 2008 of her adversary proceeding.
• The method of calculating Debtor’s income did not substitute assumptions or speculation for reasonably reliable facts or give undue weight to potential future changes in Debtor’s circumstances, so was not clearly erroneous.
• A debtor’s income may be used to satisfy reasonable and necessary expenses.  To be reasonable and necessary, a debt must be commensurate with the debtor’s resources.
• If a debtor’s reasonable financial resources will sufficiently cover payment of the student loan debt, while allowing for a minimal standard of living, the debt should not be discharged.
• Each undue hardship case must be examined on its unique facts and circumstances surrounding the particular bankruptcy.
• As to the reasonableness of Debtor’s monthly payments of $850 for her husband’s new SUV and $224 for the addition of a screened deck to her home, the Court recognized that Debtor’s minimal standard of living must account for her large family and the special needs of her two autistic children, and noted that even without these payments, Debtor’s income would not realistically allow her to meet her minimum payment under the Income Contingent Repayment Plan.

Background:  Debtor was a healthy 43-year-old, unmarried, non-custodial parent of two young children from different relationships. Debtor held a law degree, but his legal career consisted of brief periods of employment as a judicial clerk and solo practitioner, and frequent periods of unemployment. Debtor was currently employed by a temporary legal services firm and earning a career high of $48,000 per year.  Debtor owed approximately $364,000 in student loan debt at the time of the Bankruptcy Court trial to determine student loan dischargeability. The Bankruptcy Court held that repayment of the student loans constituted undue hardship under 11 U.S.C §523(a)(8). 366 B.R. 908 (Bankr. D. Minn. 2007). Educational Credit Management Corp. (“ECMC”), the holder of $304,000 in federally guaranteed student loans, appealed.  The District Court affirmed the Bankruptcy Court’s opinion discharging the student loan debt in its entirety.  ECMC appealed the District Court decision.

Holding: The Eighth Circuit reversed the District Court decision and remanded the case with directions to enter an order declaring that the student loan debts to ECMC are not discharged.

• Under 11 U.S.C. § 523(a)(8), debts for educational loans “made, insured or guaranteed by a governmental unit,” may not be discharged unless “excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor’s dependents.”
• Eighth Circuit applies “totality of circumstances” test in determining undue hardship under 11 U.S.C. § 523(a)(8).  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.
• Undue hardship is a question of law reviewed de novo.
• Subsidiary findings of fact on which legal conclusion of undue hardship is based are reviewed for clear error.
• Debtor has burden of proving undue hardship by preponderance of the evidence.
• If debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt while allowing for a minimal standard of living, the debt should not be discharged.
• Bankruptcy Court committed clear error by using inflated income tax rate which underestimated Debtor’s monthly net income, and by overestimating Debtor’s reasonable and necessary living expenses.
• Sheer magnitude of student loan debt should rarely be the determining factor in undue hardship analysis.
• Where size of student loan debt is the principle basis for a claim of undue hardship, repayment plans authorized by Congress, such as the Income Contingent Repayment Plan (ICRP), become more relevant to the “totality-of-circumstances” test for undue hardship.

In re Reynolds, 425 F.3d 526 (8th Cir. 2005), cert. denied by 127 S.Ct. 46 (2006)
Background: Chapter 7 Debtor was 32 years old, married with three teenage step-children, and a law school graduate. Debtor’s student loan indebtedness exceeded $142,044.55 at the time of trial. Debtor was diagnosed by several different mental health professionals as having one or more of the following conditions: major depression, panic and anxiety disorder, and borderline personality disorder. Debtor began experiencing symptoms of mental illness as early as junior high school. Since graduating from law school in 1995, Debtor had been unable to obtain substantial employment in the legal field, and had worked primarily in clerical and secretarial positions. Debtor viewed her financial situation, particularly her large educational loan burden, as a “major stressor” which triggered her depressive illness. Debtor and her spouse owned minimal assets. They had a monthly income surplus of $700.00. Bankruptcy Court granted undue hardship discharge (303 B.R. 823) and Appellants appealed. District Court affirmed Bankruptcy court ruling and Appellants appealed.

Holding: Affirmed. No error in the bankruptcy court's holding that excepting the student loans from the discharge would cause an undue hardship.

• Determination of undue hardship under 11 U.S.C. §523(a)(8) is a question of law to be reviewed de novo.
• Bankruptcy Court’s factual findings are reviewed under the clearly erroneous standard.
• The test for undue hardship in the Eighth Circuit is the totality of the circumstances test, which considers the following factors: (1) the debtor’s past and present financial resources, and those the debtor can reasonably rely on for the future, (2) the reasonable necessary living expenses of the debtor and the debtor’s dependents, and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.
• Subordinating financial circumstances for non-pecuniary ones under the totality of circumstances test should be reserved only for the extraordinary case, where the potential of non-pecuniary hardship is manifest, palpable, and of great magnitude.
• Existence of student loan debts constituted a major stressor on debtor which impacted not only her future health, but her future financial situation. “Where the evidence shows that financial obligations are likely to undermine a debtor's health, which in turn will affect the debtor's financial outlook, such facts and circumstances should be taken into account…We will not adopt an interpretation of "undue hardship" that causes the courts to shut their eyes to factors that may lead to disaster, both personal and financial, for a suffering debtor.”
• “While it is true that the income and expenses of husband and wife are combined for the purpose of examining a household's finances, it does not seem proper, in the circumstances where the debtor and non-debtor spouse have contributed about equally to the family income and expenses, to attribute the entire surplus to the debtor in favor of the debtor's creditors.” (Concurring opinion).

Background: Chapter 13 debtors prevailed on adversary proceeding in Bankruptcy Court to discharge student loan debt. District court reversed, ruling that the adversary proceeding was not ripe for adjudication. Debtor appealed.

Holding: The Eighth Circuit affirmed the District Court’s decision that the proceeding was not ripe for adjudication.

• The factual question under 11 U.S.C. §523(a)(8) is whether undue hardship exists at the time of discharge, not at the time that the adversary proceeding is commenced.
• Proceedings under 11 U.S.C. §523(a)(8) should take place close to the discharge date “so that the court can make its determination in light of the debtor’s actual circumstances at the relevant time.”
• The possible accrual of interest payments while adjudication is deferred does not prejudice the Debtor and is insufficient to justify premature adjudication of the issue.

Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003).

Background: Debtor was a 39-year-old single mother of a 10-year-old child. Debtor lived in the basement of her parents’ home, and worked nine months out of the year while she pursued an additional degree. Debtor was being treated for a medical condition. Her monthly income exceeded her expenses by an amount ranging from about $60-$330 per month. The Bankruptcy Court found undue hardship, and the B.A.P., reviewing the case for “clear error,” affirmed. 271 B.R. 322.

Holding: The Eighth Circuit REMANDED the case to the B.A.P. for a de novo review of the Bankruptcy Court’s undue hardship determination.

• The bankruptcy court's decision as to whether a debtor's student loans would impose an "undue hardship" under 11 U.S.C. § 523(a)(8) is a question of law, because the determination requires a conclusion regarding the legal effect of the Bankruptcy Court's findings as to the debtor's circumstances. Such a legal conclusion is subject to de novo review. NOTE: This standard of review set forth by the Eighth Circuit differs from the pre-Long decisions in this circuit which discuss the standard of review for undue hardship determinations. UNDUE HARDSHIP DETERMINATIONS MUST NOW BE REVIEWED DE NOVO.
• The Court reaffirmed the totality-of-the-circumstances test as set forth in Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews ), 661 F.2d 702, 704 (8th Cir. 1981), as the proper standard for the bankruptcy court to apply in § 523(a)(8)actions. "In evaluating the totality-of-the-circumstances, our bankruptcy reviewing courts should consider: (1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case."
• "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. Certainly, this determination will require a special consideration of the debtor's present employment and financial situation--including assets, expenses, and earnings--along with the prospect of future changes--positive or adverse--in the debtor's financial position."

Upon remand, the B.A.P. reviewed the Bankruptcy Court’s findings “de novo” and reversed the Bankruptcy Court. Long, 292 B.R. 635. The B.A.P. noted that the Debtor demonstrated no inability to work full time despite her medical condition, that Debtor’s monthly surplus was sufficient to make her student loan payments, and that under the Creditor’s Income Contingent Repayment Plan, any unpaid balance would be forgiven after 25 years. Id

Rose v. U.S. Dep’t of Educ., et al. (In re Rose), 187 F.3d 926, 42 Collier Bankr. Cas.2d 899, 34 Bankr. Ct. Dec. 1046, 137 Ed. Law Rep. 885, Bankr. L. Rep. P 77,977 (8th Cir. 1999).

Background: Debtors sought to discharge student loans in a Chapter 7 bankruptcy proceeding. Both the bankruptcy court and the district court on appeal ruled that the Missouri Student Loan Program (MSLP) had waived the right to claim sovereign immunity through the filing of proofs of claim to recover on some of the loans. The bankruptcy court also ruled that Debtors' loans were dischargeable under 11 U.S.C. § 523(a)(8) because of undue hardship, and the district court remanded that issue for further consideration. The MSLP filed an interlocutory appeal with the Eighth Circuit on the issue of sovereign immunity.

Holding: The Eighth Circuit AFFIRMED the district court’s holding that MSLP waived its Eleventh Amendment immunity with regard to its claims for which it had filed proofs of claim, and REMANDED for further proceedings on whether the student loan debts were dischargeable.

• A district court’s denial of a motion to dismiss based on Eleventh Amendment immunity is reviewed de novo.
• Submission of a proof of claim by a state is sufficient to waive any immunity which it otherwise might have had respecting the adjudication of the claim.
• Creditor’s submission of proofs of claims in the bankruptcy case waived its immunity in related adversary proceedings required to adjudicate the dischargeability of those claims.

Groves, et al. v. LaBarge (In re Groves, et al.), 39 F.3d 212 (8th Cir. 1994).

Background: Three Debtors appealed the district court judgment affirming bankruptcy court orders denying confirmation of their proposed Chapter 13 plans. The issue was whether a plan that proposes to separately classify and fully repay nondischargeable student loans discriminates unfairly against other unsecured creditors who will receive only partial repayment of their dischargeable claims.

Holding: The Court of Appeals AFFIRMED the district court and the bankruptcy court, holding that nondischargeability of student loan debt was not, without more, sufficient justification for according substantially different treatment to student loan versus other unsecured debt.

• A debtor may "designate a class or classes of unsecured claims [for purposes of repayment] but may not discriminate unfairly against any class so designated." 11 U.S.C. § 1322(b)(1).
• The debtor bears the burden of proving that the proposed classification does not discriminate unfairly.
• A plan that proposes to separately classify and fully repay nondischargeable student loans discriminates unfairly against other unsecured creditors who will receive only partial repayment of their dischargeable claims.
• Nondischargeability of student loan claims, by itself, does not justify substantial discrimination against other, dischargeable unsecured claims in a chapter 13 plan.
• Whether a chapter 13 plan could classify unsecured student loan debt separately from the debtor’s other unsecured debt is primarily a question of statutory construction, to be reviewed de novo by the Court of Appeals.
• A bankruptcy court order denying confirmation of a Chapter 13 plan without dismissing the bankruptcy case is not a “final order” from which an appeal may lie.

U.S. Dep’t of Health & Human Servs. v. Smith, 807 F.2d 122, 55 USLW 2330, 15 Collier Bankr.Cas.2d 1405, 15 Bankr.Ct.Dec. 610, 36 Ed. Law Rep. 560 (8th Cir. 1986).

Background: The issue was whether Debtor’s financial obligation incurred under the Physician Shortage Area Scholarship Program (“PSASP”), 42 U.S.C. § 295g-21 (Supp. V 1975), was a debt “for an educational loan” under 11 U.S.C. §523(a)(8), and as such not dischargeable in bankruptcy. Both the bankruptcy court and the district court held that the Debtor’s PSASP scholarship was not a “loan” and, therefore, was dischargeable. The government appealed.

Holding: The Court of Appeals REVERSED the district court and the bankruptcy court, holding that the physician-debtor’s financial obligation incurred under the PSASP was a “debt . . . for an educational loan” and hence not dischargeable.

• The Bankruptcy Code does not define "educational loan". Under well established definitions, however, Debtor’s PSASP scholarship constituted a "loan", since he agreed to reimburse the United States if he failed to practice in a physician shortage area.
• Although a strained construction of the language of PSASP arguably may be said to give rise to certain ambiguities as to whether a PSASP scholarship is a loan, the legislative history shows beyond doubt that Congress intended § 523(a)(8) of the Bankruptcy Code to make nondischargeable those debts incurred under programs such as PSASP.

Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 63 A.L.R. Fed. 563, 5 Collier Bankr.Cas.2d 307, 8 Bankr.Ct.Dec. 358, Bankr. L. Rep. P 68,369 (8th Cir. 1981).

Background: Debtor obtained a student loan in order to attend a local vocational school and study nursing. The debtor successfully completed two quarters of study when she learned that she had Hodgkin's Disease. At the time of the discharge proceedings, Debtor was thirty-six years old, divorced, received no alimony, had no support obligations, and no dependents. Debtor’s disease was in remission but there was a possibility that she would suffer a relapse. The Bankruptcy Court granted the hardship discharge, and Creditor appealed.

Holding: The Eighth Circuit Court of Appeals VACATED the judgment and REMANDED the case to the Bankruptcy Court, because the record lacked information regarding the Debtor’s necessary living expenses. The Eighth Circuit instructed the Bankruptcy Court to examine the Debtor’s reasonable living expenses and determine whether Debtor would be able to repay her student loan out of the balance of her estimated income less reasonable living expenses.

• The Andrews court’s analysis for determining “undue hardship” is now referred to as the “totality of circumstances” test, which continues to be the prevailing test for “undue hardship” in the Eighth Circuit. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). The test requires an analysis of: the debtor’s past, present, and reasonably estimated future resources; the reasonable necessary living expenses of the debtor and her dependents; and other facts and circumstances surrounding that particular case.
• Debtor’s disease is a relevant factor in the determination of undue hardship, since serious illness often requires expensive treatment and medication, and may affect an individual’s ability to work.

Sederlund v. Educ. Credit Mgmt. Corp.  (In re Sederlund), 440 B.R. 168 (8th Cir. BAP 2011)

Background: Forty-two-year-old debtor single debtor with no children or dependents and no physical or cognitive disabilities sought an undue hardship discharge of her student loan debt.  After earning a BA in psychology, Debtor consolidated her student loans totalling $16,649.70 and made payments of approximately $11,800 over a twelve-year period.  Thereafter, Debtor ceased making payments and received forbearances and economic hardship deferments from the holders of the student loans.  At the time of trial, Debtor owed approximately $47,000 in student loan debt.  Debtor lived with her boyfriend, who paid more than half of the household expenses.  She never held a job in her field of study, but had been employed at various law firms and in the food service industry.  Debtor also had periods of unemployment.  Following a trial, the Bankruptcy Court entered judgment in favor of Defendant, finding the student loans were not dischargeable because the Debtor had failed to prove undue hardship under 11 U.S.C. § 523(a)(8).  Debtor appealed to the Bankruptcy Appellate Panel (BAP).

Holding: The BAP affirmed the decision of the Bankruptcy Court.

• The Eighth Circuit applies the totality-of-the-circumstances test in evaluating undue hardship in student loan cases.  Under the totality-of-the-circumstances test, a court 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.”  440 B.R. at 171 (quotations omitted).      
• A debtor bears the burden of proving undue hardship by a preponderance of the evidence.
• “[I]f 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.  Id. (quoting Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 526, 531 (8th Cir. 2005)).
• In conducting the undue hardship analysis, the Bankruptcy Court properly considered the financial contributions to household living expenses made by Debtor’s long-time, live-in boyfriend. 
• Debtor’s voluntary underemployment precluded her from proving she was entitled to an undue hardship discharge.
• Debtor’s ability to make payments under an Income Contingent Repayment Plan was a factor to be considered in evaluating the totality of Debtor’s circumstances.

Background: Debtor obtained a bachelor’s degree in business administration with a major in finance. Debtor is divorced, 31 years old, and is the custodial parent of two children, ages eleven and six. Debtor receives no child support, because the father of her children is unemployed, living with family, and without the means to pay her. Debtor is to undergo an unspecified surgery in the near future. Debtor works 32 hours per week in the admissions department of a medical center. She continues to search for work in her field but has so far been unsuccessful. Debtor’s expenses exceed her gross monthly income by $214. The Bankruptcy Court determined that Debtor’s student loans were dischargeable under 11 U.S.C. §523(a)(8). Defendant appealed.

Holding: The Bankruptcy Appellate Court affirmed the Bankruptcy Court decision.

• Determinations of dischargeability under 11 USC §523(a)(8) implicate two standards of review. The ultimate determination of whether excepting a student loan debt from discharge will impose an undue hardship is reviewed de novo, but the subsidiary factual findings underpinning the undue hardship analysis are reviewed for clear error.
• Bankruptcy court’s finding that Debtor could not afford to make monthly payments of $13.03 under an Income Contingent Repayment Plan (ICRP) was not clearly erroneous, because Debtor’s expenses exceeded her gross monthly income.
• Bankruptcy court’s determination that Debtor’s future financial resources will be insufficient to enable to repay her student loan debt was supported by evidence in the record, including Debtor’s past earning history, her ties to her geographical area where her relatives provide free daycare, and the low likelihood that Debtor will receive child support in the future.
• Availability of an Income Contingent Repayment Plan is a factor to be considered in determining undue hardship, but it is not determinative.
• Unlike the inquiry required under the ICRP, determination of undue hardship under 11 USC §523(a)(8) requires a case-by-case analysis of a debtor’s income in relation to her reasonable expenses.
• The availability and terms of the ICRP should not be given undue weight under the totality of circumstances analysis, because the ICRP serves a fundamentally different purpose than the discharge provisions (and exceptions thereto) of the Bankruptcy Code.

(Judge Schermer concurrence): Disagrees with majority’s assessment that the ability to afford payments under the ICRP is merely a single factor among many to be considered in the student loan discharge context. If a debtor’s budget demonstrates the debtor can afford payments under the ICRP, continued liability on the student loans does not create an undue hardship. In the present situation, however, Debtor’s budget does not permit payment of the amount that would be due under the ICRP, nor does the Debtor face any prospect which would permit repayment in the reasonably foreseeable future, and the student loans are therefore dischargeable under 11 USC §523(a)(8).

Background: Debtor held a master’s degree in nursing and was employed in that profession after obtaining her degree. Debtor made timely payments on her student loans for a period of five years, and then defaulted on her obligations. Shortly after defaulting, debtor negotiated an income contingent repayment plan and made regular payments under the plan for approximately two years. At that time, the Department of Education (DOE) informed the Debtor it was reviewing her case and requested information concerning Debtor’s financial situation. The DOE claimed Debtor failed to provide the requested information, and demanded that Debtor begin making significantly larger monthly payments. Debtor attempted to provide additional information and negotiate another income contingent repayment plan, but negotiations failed. During this time, Debtor underwent surgery to alleviate severe pain in her lower back. The surgery was unsuccessful, and the Social Security Administration (SSA) determined that Debtor was 100% permanently disabled. Debtor retired from her nursing job due to her disablility. Debtor receives social security disability and federal pension payments. Debtor’s spouse suffers from multiple mental and physical conditions, and is also classified by the SSA as 100% permanently disabled. Debtor’s spouse receives both social security disability income and VA disability income. It is undisputed that neither Debtor nor her spouse will be able to obtain employment in the future, due to their respective disabilities. At the time Debtor filed the adversary complaint to discharge her student loan obligations, the balance including penalties and interest totaled $64,233.89. The bankruptcy court held that requiring the Debtor to repay her student loan obligations would constitute an undue hardship under 11 U.S.C. §523(a)(8), and found that her student loan debt was discharged.

Holding: The Bankruptcy Appellate Panel affirmed the bankruptcy court.

• The determination of undue hardship under 11 U.S.C. §523(a)(8) is a question of law to be reviewed de novo.
• A bankruptcy court’s subsidiary factual findings underpinning its undue hardship analysis are subject to the clearly erroneous standard of review.
• Under the clearly erroneous standard of review, an appellate court may only upset a trial court’s finding if, after reviewing the complete record, the appellate court is left with a definite and firm conviction that the finding is incorrect. The mere fact that evidence in the record would support the opposite result is not sufficient to disturb the bankruptcy court’s factual findings.
• Debtor has the burden of proving by a preponderance of the evidence that excepting her student loan debt from discharge would impose an undue hardship.
• The test for undue hardship in the Eighth Circuit is fact intensive and requires an examination of the totality of circumstances. The bankruptcy court should consider the following factors: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependents’ reasonably necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.
• Generally a bankruptcy court must include the non-borrowers spouse’s income in its undue hardship analysis; however, Debtor produced uncontroverted evidence that her spouse’s disability income was not available to pay Debtor’s student loan debt.
• The totality of the circumstances test does not require a bankruptcy court to examine Debtor’s expenses on a line-by-line basis and reduce expenses which are not reasonable or necessary. Rather, bankruptcy court is only required to examine whether Debtor’s total monthly expenses are reasonable and necessary given the particular facts and circumstances of the case.
• Debtor’s significant reduction in her living expenses, as well as Debtor’s unique circumstances, were factors supporting the bankruptcy court’s finding that Debtor’s overall expenses were reasonable and necessary.
• A debtor’s ability or inability to take advantage of an income contingent repayment program is not determinative of undue hardship under 11 U.S.C. §523(a)(8); rather, it is simply one of the many factors the bankruptcy court should consider.
• The flexible totality of the circumstances test allows the bankruptcy court to examine non-economic factors in appropriate cases.
• Non-economic factors which the bankruptcy court properly considered in its undue hardship analysis included: Debtor’s good-faith effort to negotiate an income contingent repayment plan, Debtor’s payment history on her student loans while she was employed, and Debtor’s complete and permanent disability which prevented her from increasing her income through no fault of her own.

Background: Debtor is a 51-year-old divorced woman with no dependents. Debtor graduated with a degree in art education and was employed as an art teacher. During the summer months, Debtor did not have a paying job, and provided free child care for her grandchildren. At the time of the trial to determine whether Debtor’s student loan should be discharged, Debtor owed nearly $70,000 in student loan obligations. The Bankruptcy Court found that if the Debtor’s student loan payment were eliminated from her budget, her net monthly income would be sufficient to make payments under the William D. Ford Consolidation Program. Nevertheless, the Bankruptcy Court determined that repayment of the student loan would impose an undue hardship on the Debtor, and discharged the student loan debt. Creditor appealed.

Holding: The Bankruptcy Appellate Panel for the Eight Circuit reversed the Bankruptcy Court’s decision, and found that the Debtor’s student loan obligation did not impose an undue hardship on the Debtor.

• A Bankruptcy Court’s determination of undue hardship is reviewed de novo.
• Debtor bears the burden of proving that excepting her student loans from discharge pursuant to 11 U.S.C. §523(a)(8) of the Bankruptcy Code would result in an undue hardship.
• The test for undue hardship “requires an inquiry into the totality of circumstances with special attention to the debtor’s past, current, and reasonably reliable future financial resources; the reasonable necessary living expenses of the debtor and the debtor’s dependents; and any other relevant facts and circumstances unique to the particular bankruptcy case.”
• Debtor has a duty to maximize her income.
• Where a debtor has future monthly income sufficient to make payments on her student loan under a student loan consolidation program, while still allowing for a minimal standard of living, the debt should not be discharged.
  

Background: Debtor was 42 years old and worked 40 hours per week as a teacher/caregiver for toddlers at a private school with a high percentage of special needs students. Debtor held a degree in early childhood education, and had completed most of the coursework for a masters degree in early childhood special education. Debtor shared a one-bedroom apartment with her boyfriend. At the time of trial, the Debtor owed nearly $90,000 in student loans. Creditor argued that Debtor was underemployed, and that repaying her student loans would not impose an undue hardship if she were to obtain a second job or a higher paying position. The Bankruptcy Court found that excepting Debtor’s student loans from discharge would impose an undue hardship on her, and that the Debtor’s student loans should therefore be discharged.

Holding: The Bankruptcy Appellate Panel reversed, holding that the Debtor’s current income was sufficient to make payments under the Income Contingent Repayment Program, and that no reasonably reliable evidence existed to show that Debtor’s financial circumstances would change in the near future. Therefore, no undue hardship existed and Debtor’s student loan was not dischargeable.

• A bankruptcy appellate panel reviews de novo the bankruptcy court’s determination of undue hardship under 11 U.S.C. 523(a)(8).
• The test for undue hardship in the Eighth Circuit is the totality of circumstances. In applying this test, a court must consider: (1) the debtor’s past, current and reasonably reliable future financial resources; (2) the reasonable necessary living expenses of the debtor and the debtor’s dependents; and (3) the other relevant facts and circumstances unique to the particular case.
• Debtor whose income was sufficient to make payments on her student loan showed no reasonably reliable evidence that her financial circumstances would change in the near future.

Ford v. Student Loan Guarantee Foundation (In re Ford), 269 B.R. 673 (B.A.P. 8th Cir. 2001).

Background: Sixty-two-year-old debtor owed over $73,000 in student loan debt after obtaining a Bachelor of Arts degree and attending one year of law school. The debtor had no net disposable income, and suffered from an arthritic condition that necessitated frequent breaks, preventing her from working for more than four or five hours per day. The Bankruptcy Court found that repaying the loan would cause an undue hardship for the debtor, and declared the debt to be nondischargeable. The SLGF appealed.

Holding: The B.A.P. AFFIRMED bankruptcy court’s decision to grant an “undue hardship” discharge.

• To determine whether debtor is entitled to “undue hardship” discharge of student loan obligations, bankruptcy court must apply the Eighth Circuit’s “totality of circumstances” test, and consider: (1) the debtor's past, current and reasonably reliable future financial resources; (2) the debtor’s and his/her dependents’ reasonable necessary living expenses; and (3) any other relevant facts and circumstances in particular bankruptcy case.
• The debtor has the burden of demonstrating “undue hardship” by a preponderance of the evidence.
• Debtor's failure to make voluntary payments against the debt and her neglect in pursuing forbearance or deferment options were relevant but not determinative factors in the totality of circumstances test for undue hardship.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Svoboda v. Educational Credit Management Corp. (In re Svoboda), 264 B.R. 190, 155 Ed. Law Rep. 553 (B.A.P. 8th Cir. 2001).

Background: Debtor was a healthy 38-year-old mother with a three-year-old son. Debtor obtained a bachelor's degree in elementary education with a certification for teaching children with learning disabilities. At the time of trial, Debtor owed over $17,000 in student loan debt, and was employed as an elementary school teacher working with children who have learning disabilities. To maintain her employment, Debtor was required to obtain a masters degree within the next four years. Upon obtaining her masters degree, she would receive an immediate salary increase of approximately $3,000.00 per year. While obtaining her masters degree, Debtor could defer payment of her student loan obligation, and was eligible to obtain a forgivable loan or subsidy because she would be getting her masters degrees in a field where there was a critical teacher shortage. Debtor’s monthly income slightly exceeded her monthly expenses.

The Bankruptcy Court found that repayment of the student loan obligation at issue would not create an undue hardship. Debtor filed a motion to "set aside" the bankruptcy court's judgment on the grounds that she had not received a support payment from her estranged husband. The Bankruptcy Court denied the motion, and Debtor appealed the Bankruptcy Court’s judgment and the denial of her motion.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court’s holding that Debtor was not entitled to an “undue hardship” discharge of her student loan debt.

• The Eighth Circuit test for “undue hardship” under §523(a)(8) is the “totality of the circumstances” test, requiring an analysis of: (1) the debtor's current and future financial resources; (2) the necessary, reasonable living expenses of the debtor and the debtor’s dependents; and (3) any other relevant facts or circumstances unique to the particular case.
• The debtor bears the burden of proving “undue hardship” by a preponderance of the evidence.
• Decisions on motions to alter or amend judgment are reviewed under an “abuse of discretion” standard. The Bankruptcy Court’s denial of Debtor's motion to alter or amend its earlier judgment was not an abuse of discretion, because the motion, which was based on a missing support payment from Debtor’s estranged husband, simply “rehashed” a factor that the Bankruptcy Court had already considered in entering its original judgment.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

McCormick v. Diversified Collection Services, Inc., (In re McCormick), 259 B.R. 907 (B.A.P. 8th Cir. 2001).

Background: Bankruptcy court found that Debtor was not entitled to and “undue hardship” discharge of her student loan debt. Debtor appealed.

Holding: The B.A.P. AFFIRMED the bankruptcy court’s decision, because the debtor failed to provide the appellate court with a transcript of the trial

• A determination of “undue hardship” under 11 U.S.C. §523(a)(8) is based on the “totality of the circumstances,” with a particular analysis of: (1) the debtor’s past, present, and reasonably reliable future financial resources, (2) a calculation of the debtor’s and her dependants’ reasonable, necessary living expenses, and (3) any other relevant facts and circumstances surrounding a particular case.
• Debtor bears the burden, both in terms of production of evidence and of persuasion, of proving an “undue hardship” by a preponderance of the evidence.
• The B.A.P. would not consider evidence that was not submitted to the trial court.
• The discharge exception based on the age of a debtor’s student loans, previously available under a prior version of the Bankruptcy Code, did not apply to Debtor, who filed her chapter 7 petition two months after the effective date of the amendment.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Related decision: 8th Cir. 9/7/2001 unpublished affirmance of above BAP decision.

Cline v. Illinois Student Loan Assistance Assoc. (In re Cline), 248 B.R. 347, 143 Ed. Law Rep. 928 (B.A.P. 8th Cir. 2000).

Background: Thirty-four-year-old single debtor with no dependents held a bachelor’s degree in psychology and sociology from and a master's degree in sociology. The balance on her student loan debt exceeded $53,000. Although Debtor was employed in her field as a caseworker, her income was modest. Debtor tried unsuccessfully to work in positions with higher pay, but those positions involved more stress than she could handle. The Bankruptcy Court found that the Debtor’s student loan was dischargeable on the basis of undue hardship. ISLAA appealed.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court’s discharge of the debtor’s student loan debt on the basis of undue hardship.

• The test for undue hardship is the totality of circumstances, with particular attention to the debtor’s current and future financial resources, to the necessary and reasonable living expenses of the debtor and the debtor’s dependents, and to any other facts unique to the particular bankruptcy case.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Andresen v. Nebraska Student Loan Program, Inc., (In re Andresen), 232 B.R. 127, 41 Collier Bankr.Cas.2d 1147 (B.A.P. 8th Cir. 1999).

Background: Debtor had a disability which made it unlikely that her income would increase at any time in the future. The child support received by Debtor for her son’s care would be eliminated when he soon reached the age of majority. Debtor’s minor daughter had medical problems which generated “extraordinary” expenses. The Bankruptcy Court granted hardship discharge for two of the debtor’s three student loans, and found that Debtor could pay the third loan without undue hardship.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court.

• The “undue hardship” exception to nondischargeability applies to each student loan individually and not to the aggregate obligation of cumulative student loan debt. The Bankruptcy Court did not grant Debtor a “partial discharge” of her student loan debt when it granted an “undue hardship” discharge for two of the Debtor’s three student loans. The express language of 11 U.S.C. §523(a)(8) refers to a student loan, an overpayment, or any obligation; the Code does not refer to a debtor’s sum of student loans.
• The “totality of the circumstances” test established by the Eighth Circuit in Andrews, 661 F.2d 702 (8th Cir. 1981), is the proper test for “undue hardship.” This test requires an analysis of (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) calculation of the debtor’s and his dependents’ reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding that particular bankruptcy case.

NOTE: The “clear error” standard of review used in this case is not correct, due to the 8th Circuit’s recent Long decision. See, Long v. Educational Credit Management Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003). Under Long, an “undue hardship” determination under 11 U.S.C. §523(a)(8) is a question of law, because “[i]t requires a conclusion regarding the legal effect of the Bankruptcy Court’s findings as to [the Debtor’s] circumstances. Questions of law are reviewed de novo.” Id, at 553.

Johnson v. Missouri Baptist College (In re Johnson), 218 B.R. 449 (B.A.P. 8th Cir. 1998).

Background: Debtor executed a promissory note to obtain credit for tuition, books and other expenses. Debtor defaulted on the note and filed a Chapter 13 bankruptcy petition. The College filed a complaint to determine whether the debt qualified as a student loan under 11 U.S.C. §523(a)(8). The Bankruptcy Court determined that the debt to the College was a nondischargeable student loan under that provision, and Debtor appealed.

Holding: The B.A.P. AFFIRMED the Bankruptcy Court’s holding that the College’s extension of credit to its student debtor constituted a “loan” within the meaning of the discharge exception for student loan debt, despite the fact that though no money had actually changed hands.

• The debtor signed a promissory note to evidence her debt, and by allowing the debtor to attend class without pre-payment, the college was in effect “advancing” the funds or credits to debtor’s student account.
• The debtor’s promise to remit the cost of tuition to the college in exchange for an opportunity to attend classes created a debtor-creditor relationship.