Educational Credit Management Corporation v. Metz

          MEMORANDUM AND ORDER

          JOHN W. BROOMES UNITED STATES DISTRICT JUDGE

         Educational Credit Management Corporation (“ECMC”) appeals the order and judgment of the bankruptcy court determining that repayment of the accrued interest on the student loan debt owed by debtor Vicky Jo Metz would constitute an undue hardship, and therefore was dischargeable under 11 U.S.C. § 523(a)(8). Metz filed a cross appeal asserting that it was error to discharge only the accrued interest and contends that discharge of the full debt is compelled by § 523(a)(8). The parties have fully briefed the issues in the appeal.^[1] (Docs. 8, 11, 14.) Additionally, movants National Association of Consumer Bankruptcy Attorneys, National Consumer Bankruptcy Rights Center, and National Consumer Law Center seek to file an amicus brief. (Doc. 12.) The motion to file an amicus brief is GRANTED. Having reviewed the record and the applicable law, the bankruptcy court's order and judgment are AFFIRMED.

         I. Appellate Jurisdiction

         ECMC has elected to have the appeal heard by this court. 28 U.S.C. § 158(c)(1).^[2] The appeal was timely filed by ECMC, and the bankruptcy court's order is “final” within the meaning of 28 U.S.C. § 158(a)(1). See Fed. R. Bankr. P. 8001-8002.

         II. Standard of Review

         This court functions as an appellate court when reviewing a bankruptcy court's decision. The court reviews the “bankruptcy court's legal determinations de novo and its factual findings under the clearly erroneous standard.” In re QuVIS, Inc., 469 B.R. 353, 365 (D. Kan. 2012) (citations omitted). Therefore, any factual findings by the bankruptcy court regarding Metz's financial situation are reviewed for clear error and whether those findings result in undue hardship under § 523(a)(8) is reviewed de novo. “A finding of fact is clearly erroneous if it is without factual support in the record or if, after reviewing all of the evidence, the court is left with the definite and firm conviction that a mistake has been made.” In re Yellow Cab Co-op. Ass'n, 132 F.3d 591, 597 (10th Cir. 1997). If there are “two permissible views of the evidence, the fact finder's choice between them cannot be clearly erroneous.” In re Blinder, Robinson & Co., 124 F.3d 1238, 1241 (10th Cir. 1997) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985)).

         III. Statement of Facts^[3]

         Vicki Metz attended community college from 1989 to 1991. She earned 50 credits but no degree. During that time, she borrowed $16, 613.73 in various types of student loans. Metz consolidated her loans in 1994. At some point, the consolidated loan was assigned to ECMC. Since the consolidation, Metz has paid a total of $14, 789.02 toward the loan; $13, 060.75 through chapter 13 administration. The interest rate on her loan is 9%. As of July 1, 2018, the loan balance was $67, 277.88.

         Metz was 59 at the time of the trial before the bankruptcy court (August 2018). Metz is single and has no dependents. She works as a community health worker for Sunflower Health Services, which is a subsidiary of Centene Management Corporation. Centene provides aging and disability services to the State on a contractual basis. Metz has been employed for a significant number of years. Prior to her current position, Metz worked for the Kansas Department of Aging and Disability Services as a senior care administrator. Before that, she spent 19 years working at the Kansas Department of Transportation. Metz routinely receives merit raises during employment. She testified at trial that she expected to receive a merit raise for 2018 and has received several raises in prior years.

         When Metz filed her chapter 13 case in 2012, her scheduled gross monthly income was $3, 500. That is now $3, 800. She has also increased her other expenditures. Her insurance premiums have increased from $89 to $213. Metz also borrowed from her 401(k) plan and, between repayment of that loan and regular retirement contributions, she contributes about $310 monthly toward retirement. Metz's monthly take home pay is presently $2, 430. Her expenses are currently $2, 323. This amount is slightly higher than the amount scheduled in 2012. The difference was determined to be due to higher cable tv bills, slightly higher car payments, and car and renter's insurance premiums. Metz withholds $772 each month for income taxes, which is $206 higher than the amount withheld in 2012. Metz has consistently received tax refunds. The past three tax years resulted in refunds of $939, $1, 067, and $1, 135. Metz's rent is $550 and her car payment is $313. Metz has included $400 a month for food and reasonable amounts for utilities. After utilizing Metz' figures, she has $107 of disposable income after her stated expenses. (Def. Exh. H.)

         Metz has filed three separate chapter 13 cases. Her first case was filed in 2001 and later converted to chapter 7 in 2006. She proposed a $100 monthly payment on her student loan and ended up paying $4, 717 during the first case. She then filed a second chapter 13 shortly after the discharge of her first case. Her chapter 13 plan was confirmed and later completed in December 2011. She then filed her third action in 2012. In her last two cases, she proposed that her student loan debt be paid pro rata with other unsecured creditors. Her payment was approximately $154 per month in her last case. (Tr. at 55.) ECMC received $4, 112 in the second case and, in the third, $4, 230.

         Metz is eligible to consolidate her loan under a variety of income-based payment options (“income-based payment plans”). (Def. Exh. U.) Those plans include an Income Contingent repayment plan (“ICRP”), an Income-Based repayment plan (“IBR”), or the Revised Pay as You Earn plan (“REPAYE”). Metz has not applied for payment under the income-based payment plans. The regulations provide a formula under which the payments are calculated under the various plans. Depending on the plan, the payments would be based on Metz's adjusted gross income and whether her income was above or below the federal poverty level. See 34 C.F.R. § 685.208(k). The evidence at trial provided that the payment options available included monthly payments from $203 to $508. The payments would be as follows: $203.53 under REPAYE; $305.30 under IBR; and $508.23 under ICRP. (Def. Exh. U.) The bankruptcy court determined that none of these payments would result in Metz being able to fully repay the balance due over a 25-year repayment period. Under the regulations for the income-based payment plans, after the applicable time period, either 20 or 25 years, the remaining balance on the loan is forgiven. At that time, a taxpayer may be subject to income taxes based on the amount forgiven.

         Metz testified that she did not apply for the income-based payment plans because she did not believe that she could afford the monthly payment under any of the plans. (Tr. at 54.) Metz also testified that she was concerned about the amount of interest that would accumulate over the loan under the income-based payment plans. (Tr. at 22.) Metz sought a discharge of her entire student loan debt. (Doc. 5-3, Complaint to Determine Dischargeability.)

         IV. Analysis

         Under the relevant statute, a debtor will not receive a discharge “for an educational ... loan made, insured or guaranteed by a government unit, ” “unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents[.]” 11 U.S.C. § 523(a)(8). To determine whether an undue hardship exists, the Tenth Circuit applies the following three-part test articulated in Brunner v. New York State of Higher Education Services:

(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.

Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1307 (10th Cir. 2004) (quoting Brunner, 831 F.2d 395, 396 (2nd Cir. 1987)).

         “If the court finds against the debtor on any of the three parts, the inquiry ends and the student loan is not dischargeable.” Id. Although the Tenth Circuit has adopted the Brunner test, it has cautioned that “to better advance the Bankruptcy Code's ‘fresh start' policy, and to provide judges with the discretion to weigh all the relevant considerations, the terms of the test must be applied such that debtors who truly cannot afford to repay their loans may have their loans discharged.” Id. at 1309. The Brunner test does not “rule out consideration of all the facts and circumstances.” Id. In this case, the bankruptcy court discharged the accrued interest on the loan based on its finding that failure to discharge the accrued interest would impose an undue hardship on Metz. Although the bankruptcy court concluded that Metz could pay the monthly payment under an ...