Student Loan Hardship Discharge




In re No. 98-44422 JS

Adv. No. 98-4690 AJ

CHAD E.PERTH, and Chapter 7


Debtors. /







Defendant. /


By this adversary proceeding, plaintiffs Chad E. Perth ("Chad") and Nenita Perth ("Nenita"), the above debtors, seek to discharge their student loan debts owing to defendant Texas Guaranteed Student Loan Corporation ("Texas"), on the grounds that repayment would /////


impose an "undue hardship" within the meaning of Bankruptcy Code

§ 523(a)(8)(B)(1)


The debt at issue (the "Debt") is in the principal sum of $45,791, which amount accrues interest at the annual rate of 9%, plus past due accrued interest in the sum of $17,845 (as of September 1998), for a total debt of $63,636. The court holds that the Debt is dischargeable herein. The parties agree that although the Bankruptcy Code does not define "undue hardship", the meaning of the term is governed by the ninth circuit's decision in In re Pena, 155 F.3d 1108 (9th Cir. 1998). Pena adopted the three-part test articulated in In re Brunner, 46 B.R. 752, 753 (S.D.N.Y. 1985), aff'd, 831 F.2d 395 (2d Cir. 1987). Pena, 155 F.3d at 1114. Under this test, the debtor must first establish that she:

cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents if forced to repay the loans.

Pena, 155 F.3d at 1111 (quoting Brunner, 831 F.2d at 396).

Next, the debtor must show 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." Id. Finally, the debtor must have made "good faith efforts to repay the loans." Id.

A. Minimal Standard of Living Test

The first issue is whether the debtors could maintain a "minimal" standard of living for themselves and their dependents if they were forced to repay the Debt. Pena, 155 F.3d at 1111. In applying this test, the court may not grant a partial discharge of the Debt, even if the court were to find that some partial payment might be feasible. In re Taylor, 223 B.R. 747 (9th Cir. BAP 1998); see also In re Brown, 227 B.R. 540, 547-48 (Bankr. S.D. Cal. 1998).

Here, the evidence was in conflict as to whether the debtors' income and expenses would permit them to repay any portion of the Debt. The debtors live with three children, whose ages are 5, 8, and 22. A fourth child, age 14, requires special care, and lives at a boarding school. Chad is responsible for supporting two additional children, ages 11 and 14, who reside in San Bernardino County. Chad is presently paying the County of San Bernardino the monthly sum of $406 for their current support, plus an additional $100 per month to repay a debt in the sum of approximately $12,000 for past due child support. Chad originally owed the County over $24,000 for child support, but in June 1998, the County agreed to forgive approximately $12,000 of this support debt, based on Chad's inability to repay it.

The debtors incurred the Debt to fund the cost of court reporting school. Chad did not finish his training, and currently works as a computer network administrator. Nenita finished, but was not able to pass the court reporting test after numerous attempts. She is currently employed by the University of California as an administrative assistant.

The debtors' schedules I and J show that as of May 12, 1998, the date of their chapter 7 petition, their combined, net monthly income of $4,304 was not sufficient to meet their scheduled monthly living expenses of $4,504 (which expense amount does not include any sums for repayment of the Debt).

After the petition, the debtors enjoyed an increase in their combined, net monthly income. The most recent pay stubs show that Nenita earns a gross monthly income of $3,295 and a net monthly income (after deduction of various amounts for taxes, insurance, and payments into a retirement plan) of $2,530. Chad's recent pay stubs show that he earns a current gross income of $3,230 and a net income (after deduction of various sums for taxes, insurance, and child support) of $1,966. Thus, the debtors' current, combined, gross, monthly income is approximately $6,525.

Texas contends that when the expenses that are deducted from the debtors' paychecks are added to the additional expenses that the debtors scheduled, the total is $5,884, and that the debtors therefore have the monthly sum of $641 ($6,525 - $5,884) or more(2) available for repayment of the Debt. Texas also contends that some of the debtors' paycheck deductions are for discretionary items such as life insurance and retirement plan payments, totaling, $250 and $43 per month, respectively, and that the debtors could use these funds for Debt repayments.

The debtors contend that the expense figures they scheduled were minimum, conservative figures, and that they do not have any surplus income to use for Debt repayments. They also contend that their expenses have increased since the date of the filing. Further, debtors claim that their budget in Schedule J makes no allowance for contingencies. For example, the debtors point out that one of the two cars that they need for transportation to and from work is over 13 years old, and paid for, and argue that they will therefore need to finance another car, and pay for additional insurance, in the near future.

The court agrees with the debtors. Initially, the court rejects Texas's argument that the debtors' life insurance and retirement contributions should not be considered as valid expenses. The mere fact that they are discretionary, rather than mandatory, does not mean that they are not legitimate expenses for purposes of § 523(a)(8). Moreover, the amounts do not appear to the court to be unreasonable. Finally, five minor children rely on the debtors' income for their support, and the debtors' life insurance contributions therefore appear to be a prudent investment under the circumstances.

The court also agrees that the debtors will need to purchase or lease another vehicle, with related insurance, in the near future, which would probably cost them an additional $250 - $300 per month. Therefore, even if the court were to assume that the debtors' expenses have not risen since the petition date, the debtors would still have only approximately $400 - $450 available each month to cover unanticipated emergencies and to repay Debt(3).

It follows that even if the debtors will never have an emergency expenditure that is not in their budget, the debtors could not possibly pay off the Debt at the rate of $400 per month. Interest at 9% per annum on the principal of $45,791 accrues at the rate of $4,121 per year. Thus, if the debtors were to pay Texas $400 per month, principal would only reduce at the rate of $679 per year (12 X $400 = $4,800 per year paid; $4,800 paid - $4,121 annual interest = $679 per year principal reduction). At this rate, the debtors would need over 67 years to repay the principal of $45,791(4).

The debtors actual prospects for repaying the Debt are probably even worse: if the debtors were to begin payments of $400 per month, and if Texas applied these payments, first to accrued and past due interest, then it would take the debtors some 45 months to repay the outstanding past due interest of $17,845. But, during this 45 months, more than $15,400 in additional interest would have accrued on the outstanding principal of $45,791. It would therefore take a very long time before principal reductions would even begin.

In short, based on presently available information, and the debtors' current financial condition, it would be virtually impossible for the debtors to ever repay the Debt. If the debtors were forced to payoff this Debt within a reasonable time (or for that matter, within their lifetimes), then, they could not maintain a minimal standard of living. The debtors have therefore satisfied the first prong of the Pena test. See In re Brown, 227 B.R. 540, 545 (Bankr. S.D.Cal. 1998).

B. Condition Likely to Persist

Texas next contends that the debtors' ability to repay the Debt will increase as the number of children they must support decreases. Although this may be true, it is also true that the debtors' children will require support for many more years before any increased ability to pay may occur. Of the five minor children that the debtors are currently responsible for supporting, the two youngest children, ages 8 and 5, will presumably reside with the debtors for at least the next ten to thirteen years.

Chad's obligation to support the children in San Bernardino County will not completely terminate for at least another seven years. Also, Chad's past due support obligation to the County may continue after his ongoing support obligation ends when the children turn 18.

One other additional factor, the future earnings benefit of the education received, also weighs in favor of the debtors. Neither debtor is employed, or appears likely to be employed, as a court reporter. No additional evidence was presented in court indicating that either debtor has a significant likelihood of enjoying increased earnings from other sources that would enable them to repay the Debt.

Additional circumstances clearly exist limiting the debtors' ability to make future payments on the Debt. Thus the second prong of the Pena test is satisfied.

C. Good Faith

Texas next argues that the debtors' failure to make any student loan payments prevents them from satisfying the third prong of the Pena test. The court disagrees.

The debtors testified that payments initially became due on the Debt in 1991. Because the debtors were unable to make payments at that time, they requested, and the lender granted, a deferment of the loan payments.(5) The lender continued granting the debtors' requests for deferment every three to six months until the bankruptcy filing.

In Brunner, the court found that the debtor failed to establish good faith because she "filed for discharge within a month of the date for the first payment of her loans came due, . . . . made virtually no attempt to repay, [and never] requested a deferment of payment, a remedy open to those unable to pay because of prolonged unemployment." Pena, 155 F.3d 1114 (quoting Brunner, 46 B.R. at 758 (alteration in Pena)). In Pena, the court found that the debtors had exhibited good faith where they made some payments, received a 90-day deferment, and then filed bankruptcy. See id.

Here, the debtors filed their bankruptcy case approximately seven years after payments first came due. Never having had the means to make any payments, the debtors continually requested and received deferments. The debtors have satisfied the third prong of the Pena test by exhibiting good faith in working with their lender to receive deferments on the student loans, rather than simply defaulting on the payments or filing bankruptcy as soon as they realized that they could not repay the Debt.

For the foregoing reasons, the court will issue its judgment discharging the Debt.

Date: August 19, 1999


Edward D. Jellen

United States Bankruptcy Judge

1. Bankruptcy Code § 523(a)(8) has been amended for bankruptcy cases filed after October 7, 1998. Higher Education Amendments of 1998, P.L. No. 105-244, 112 Stat. 1581 (1998). Section 523(a) (8)(B), as in effect for cases filed on or before October 7, 1998, provides:

(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt--

. . . .

(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or non-profit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless--

. . . .

(B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; . . .

All further section references herein are to the United States Bankruptcy Code, 11 USC § 101 et. seq., as in effect for cases filed on or before October 7, 1998.

2. The 22 year old son contributes approximately $55 per month toward household expenses, which, using Texas's methodology, would increase the debtors' income available for debt repayment to approximately $700 per month.

3. The debtors' budget states that the family medical expenses are $30 per month, which would be an average of $6 per person, per month for the five family members in residence. The court has no evidence as to whether the debtors' medical insurance and the additional $30 per month is sufficient for the family's needs, although the budgeted item seems quite low.

4. Using a hypothetical payment of $450 per month results in $45,791 being repaid after 36 years.

5. Sallie Mae Servicing Corporation, Texas's predecessor as holder of the student loans, granted the deferments. FILE IS ALSO AVAILABLE IN PDF FORMAT,