446 F.3d 938
In re Lorna Kaye NYS, Debtor,
Educational Credit Management Corporation, Appellant,
v.
Lorna Kaye Nys, Appellee.
Educational Credit Management Corporation, Appellant,
v.
Lorna Kaye Nys, Appellee.
No. 04-16007.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted February 15, 2006.
Filed April 26, 2006.
1
Debtor-Appellee Lorna Kaye Nys ("Nys") filed an
adversary complaint in bankruptcy court to have her student loans
discharged under 11 U.S.C. § 523(a)(8). The trial court found from the
evidence that Nys's current income is "not nearly enough to pay off her
student loans," and that it "is the most she can reasonably be expected
to earn in the foreseeable future." The bankruptcy court nonetheless
ruled against Nys, concluding that "undue hardship" requires the showing
of an "exceptional circumstance" beyond the mere inability to pay.
2
Nys appealed to the Bankruptcy Appellate Panel ("BAP"). In a published decision, Nys v. Educ. Credit Mgmt. Corp. (In re Nys),
308 B.R. 436 (9th Cir. BAP 2004), the BAP reversed and remanded,
directing the bankruptcy court to reevaluate Nys's claim using the
correct legal standard. The BAP reasoned that the three-prong test we
adopted in United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108 (9th Cir.1998),1
for determining whether the repayment of student loans would impose an
"undue hardship" on the debtor or her dependents requires the debtor to
show "additional circumstances" that prove that her inability to pay in
the present will likely persist for a significant portion of the loan's
repayment period. Nys, 308 B.R. at 444. We affirm the BAP. "Undue
hardship" does not require an exceptional circumstance beyond the
inability to pay now and for a substantial portion of the loan's
repayment period.
3
* Nys filed a Chapter 7 bankruptcy petition in the Northern District of California on June 12, 2002.2
Shortly thereafter, she filed an adversary complaint against
Educational Credit Management Corporation ("ECMC"), the holder of her
federally guaranteed student loans, to have those loans fully discharged
under 11 U.S.C. § 523(a)(8).3
4
Between 1988 and 1992, Nys took out thirteen separate
student loans to finance an Associate of Arts Degree in Science and
Drafting Technology from the College of the Redwoods and a Bachelor of
Arts Degree from Humboldt State University. In 1996, Nys began working
at Humboldt State University as a drafting technician. She is employed
as a Drafter II, the highest drafter position available at Humboldt
State. In 2002, Nys's net gross income was $40,244. Because she pays
$140 per month to her retirement plan, her 2002 W-2 shows an adjusted
gross income of $36,981.74. The bankruptcy judge found that this income
was about as high as one could reasonably expect in Humboldt County
given her profession and educational background. The evidence also
showed that Nys lived in a modest home in Fortuna, California, which was
in need of extensive repairs. At the time of trial, Nys was 51 years
old. She plans to retire at age 65, and at that time her income will
drop considerably.
5
Nys borrowed approximately $30,000 through student
loans. At the time of trial, she owed approximately $85,000 in
accumulated principal and interest. Nys's net monthly income was
$2,299.33. She claimed $2,295.05 in monthly expenses.
6
Because she was granted deferments, Nys made no
payments on her student loans until August 2001, when she received a
wage garnishment notice from ECMC's predecessor-in-interest. To avoid
garnishment, Nys paid $130 per month on her student loans. She made
those payments until May 2002, when ECMC notified her that her monthly
payments would increase to $917.56.
7
At that time, Nys contacted the William D. Ford Loan Program ("Ford"), see
34 C.F.R. § 685.100, in an attempt to establish an affordable payment
plan. The parties dispute what type of payment plan Ford offered Nys.
Nys claims that Ford informed her that her monthly payments would still
be between $800 and $900, and that she would need to pay an initial
assessment fee of almost $14,000. ECMC argues that Nys is eligible for
an Income Contingency Repayment Plan4 and that under this program her monthly payment would be between $389 and $453.5
8
During the trial, Nys argued that she is still unable
to make payments on her student loans, and that because of additional
circumstances, her inability to pay will continue into the foreseeable
future. Her "additional circumstances" were that (1) she is 51 years old
(14 years from legal retirement age), (2) she has "maxed out" in her
career and her income is as high as it is ever going to be, (3) her
house is in need of substantial repairs, and (4) she commutes daily at
some distance in an old automobile with high mileage that will soon need
to be replaced.
9
The bankruptcy court ruled for ECMC, finding that Nys
had not proved "undue hardship." Although it concluded that "Nys is
clearly incapable of repaying more than a portion of her student loans
and this situation will almost certainly persist for the foreseeable
future," it found no undue hardship because "[Nys] ha[d] demonstrated no
additional circumstances beyond the mere inability to pay." The
bankruptcy court rejected Nys's argument that "undue hardship exists any
time the debtor cannot afford to pay the loans now or in the
foreseeable future." It found that "[e]xceptional circumstances must be
shown to meet the second prong of the Brunner test."
10
II
The BAP reversed the bankruptcy court because it
concluded that the bankruptcy court had applied the wrong legal standard
when addressing the second prong of the Brunner test. As the BAP
characterized the test, "[a]dditional circumstances are any
circumstances, beyond the mere current inability to pay, that show that
the inability to pay is likely to persist for a significant portion of
the repayment period." Nys, 308 B.R. at 444. Because the
bankruptcy court required the additional circumstances to be
exceptional, the BAP reversed and remanded for an application of the
correct "additional circumstances" test.
11
III
The bankruptcy court had jurisdiction under 28 U.S.C. §
157(b), the BAP had jurisdiction under 28 U.S.C. § 158(b), and we have
jurisdiction under 28 U.S.C. § 158(d). We independently review the
bankruptcy court's decision. Rifino v. United States (In re Rifino), 245 F.3d 1083,
1086 (9th Cir.2001). The bankruptcy court's findings of fact are
reviewed for clear error and its application of the legal standard is
reviewed de novo. Id. at 1086-87.
12
The issue we must decide is whether "undue hardship"
requires an additional or exceptional circumstance beyond an impervious
financial situation that will continue to impede the debtor's ability to
make payments on her student loans and maintain a minimal standard of
living. Section 523(a)(8) provides that a student loan is not
dischargeable "unless excepting such debt from discharge ... would
impose an undue hardship on the debtor and the debtor's dependents." 11
U.S.C. § 523(a)(8). "Undue hardship" is not defined in the Bankruptcy
Code; however, we and a majority of the other circuits have expressly
adopted the Brunner test. See supra note 1.
13
When it adopted the Brunner test, the Second Circuit explicitly incorporated the reasoning of the district court in toto. Brunner,
831 F.2d at 396. The district court had thoroughly analyzed the limited
legislative history pertaining to the "undue hardship" requirement, Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 753-55 (1985), and therefore, because the legislative history was influential in the development of the Brunner test, we will discuss it again here.
14
Congress provided little in the way of express
legislative intent specifically addressing the "undue hardship"
requirement when it passed the statute. Id. at 753. Nonetheless,
the phrase "undue hardship" was lifted verbatim from a bill proposed by
the Commission on the Bankruptcy Laws of the United States
("Commission"), and with no clear indication to the contrary, we may
impute the Commission's intent to Congress. Id. at 754; see also McClendon v. Cal-Wood Door (In re Wadsworth Bldg. Components, Inc.),
711 F.2d 122, 124 (9th Cir.1983) (looking to the Commission's report to
interpret congressional intent). The Commission recognized that there
was a high incidence of students filing for bankruptcy after finishing
their education. Brunner, 46 B.R. at 754.
15
This "rising incidence" contravened the general policy
that "a loan ... that enables a person to earn substantially greater
income over his working life should not as a matter of policy be
dischargeable before he has demonstrated that for any reason he is
unable to earn sufficient income to maintain himself and his dependents
and to repay the educational debt."
16
Id. (quoting Report of the Comm'n on the
Bankr.Laws of the United States, H.R. Doc. No. 93-137, at 140 n. 15
(1973) [hereinafter Report of the Comm'n] (alteration in original)). By
requiring a showing of undue hardship,
17
the Commission envisioned a determination of whether
the amount and reliability of income and other wealth which the debtor
could reasonably be expected to receive in the future could maintain the
debtor and his or her dependents at a minimal standard of living as
well as pay off the student loans.
18
Id. (citing Report of the Comm'n, H.R. Doc. No. 93-137, at 140-41 n. 17).
19
Therefore, Congress sought to prohibit a
"garden-variety debtor" from discharging student loans, especially when
that "garden-variety debtor" will presumably use her loan-funded
education to substantially increase her income in the near future. See Rifino,
245 F.3d at 1087 ("`Congress viewed garden-variety hardship as [an]
insufficient excuse for a discharge of student loans ....'" (quoting Pena,
155 F.3d at 1111) (second alteration in original)). What separates a
"garden-variety debtor" from a debtor who can show "undue hardship" is
the realistic possibility that a "garden-variety debtor" could improve
her financial situation in the future. With increased financial
stability, a debtor can make payments on her student loans and maintain a
minimal standard of living. In comparison, forcing debtors who cannot
reasonably be expected to increase their future income to make payments
on their student loans when it causes them to fall below a minimal
standard of living constitutes an "undue hardship."
20
Consequently, in an effort to comply with
congressional intent and to provide some guidance for the lower courts
that are primarily responsible for administering the "undue hardship"
standard, the Second Circuit adopted the three-prong test formulated by
the district court. See Brunner, 831 F.2d at 396. The dispositive
issue in this appeal is what is meant by the phrase "additional
circumstances" as it is used in the second prong. ECMC argues that the
"[m]ere inability to repay one's student loans in the future has never
been the test for determining undue hardship." ECMC contends that "Pena and Brunner
require a debtor to show not just future inability to repay, but that
`additional circumstances' preclude future repayment." In other words,
ECMC contends that "undue hardship" requires the debtor to show (1) the
inability to pay now and in the foreseeable future and (2) some
additional or exceptional circumstance beyond the mere inability to
repay. ECMC misinterprets our case law and the purpose of the
"additional circumstances" language in the Brunner test.6
21
To be eligible for a discharge of student loans, the
debtor must prove that her present inability to pay will likely persist
throughout a substantial portion of the loan's repayment period. See Pena, 155 F.3d at 1114 (finding that the debtors satisfied the Brunner
test in part because "their unfortunate financial situation was likely
to continue for a substantial portion of the repayment period"). The
focus of this inquiry is the debtor's financial situation.
22
We recognize that courts have found it difficult to
predict future income. Consequently, courts have required debtors to
present "additional circumstances" to prove that their present financial
situation will persist well into the future, preventing them from
making payments throughout a substantial portion of the loans' repayment
period. See, e.g., Brunner, 831 F.2d at 396 ("Predicting future
income is ... problematic. Requiring evidence not only of current
inability to pay but also of additional, exceptional circumstances,
strongly suggestive of continuing inability to repay over an extended
period of time, more reliably guarantees that the hardship presented is
`undue.'"). These "additional circumstances" are meant to be objective
factors that courts can consider when trying to predict the debtor's
future income; the debtor does not have a separate burden to prove
"additional circumstances," beyond the inability to pay presently or in
the future, which would justify the complete or partial discharge of her
student loans.
23
In support of its contrary position, ECMC cites the Sixth Circuit's decision in Cheesman v. Tennessee Student Assistance Corp. (In re Cheesman), 25 F.3d 356 (6th Cir.1994). In Cheesman, although the Sixth Circuit discussed Brunner, it did not expressly adopt Brunner's three-prong test. Id.
at 359. Rather, it found that the debtor's "loans were dischargeable
under any undue hardship test the [trial] court may have used." Id.
In reaching that conclusion, the Sixth Circuit stated that "there is no
indication that the Cheesmans' financial situation will improve in the
foreseeable future." Id. at 360.
24
ECMC argues that Cheesman presents an easier
test because the debtor is only required to show a future inability to
pay, and that we explicitly rejected such a standard when we adopted the
Brunner test in Pena. Therefore, ECMC contends that
future inability to pay has never been the standard for proving "undue
hardship" in the Ninth Circuit. We disagree.
25
In Pena, although we recognized the semantical difference in language employed between Cheesman and Brunner, we concluded that "[i]t does not appear that the Sixth Circuit in Cheesman was proclaiming a test distinct from Brunner." 155 F.3d at 1112. Accordingly, we reject ECMC's argument, but will set forth here the manner in which Pena and Brunner
apply to a court's effort to predict a debtor's future income. We do
not presume that an individual's present inability to make loan payments
will continue indefinitely. Rather, we hold that the burden is on the
debtor to provide the court with additional circumstances, i.e.,
"circumstances, beyond the mere current inability to pay, that show that
the inability to pay is likely to persist for a significant portion of
the repayment period. The circumstances need be `exceptional' only in
the sense that they demonstrate insurmountable barriers to the debtors'
financial recovery and ability to pay." Nys, 308 B.R. at 444.7
However, although the trial court should look to "additional
circumstances" to make this finding, the determinative question is
whether the debtor's inability to pay will, given all we know about the
salient features of her existence, persist throughout a substantial
portion of the loan's repayment period.
26
Under this standard, the debtor cannot purposely
choose to live a lifestyle that prevents her from repaying her student
loans. Thus, the debtor cannot have a reasonable opportunity to improve
her financial situation, yet choose not to do so. See Rifino, 245
F.3d at 1089 (stating the bankruptcy court's factual finding that the
debtor's financial situation was not likely to improve was clearly
erroneous because, after she gained experience, the debtor would have
opportunities to advance to higher paying positions within her
profession). At the same time, we cannot fault the debtor for having
made reasonable choices that now inhibit her ability to substantially
increase her income in the future. See Brunner, 46 B.R. at 754
(relying on the Commission's report and its belief that the "undue
hardship" test looks at what the "debtor could reasonably be expected to
receive in the future").
27
We agree with the BAP that neither Brunner nor Pena
imposes a requirement that additional circumstances be "exceptional" in
the sense that the debtor must prove a "serious illness, psychiatric
problems, disability of a depend[e]nt, or something which makes the debtor's circumstances more compelling than that of an ordinary person in debt." Nys,
308 B.R. at 444 (internal quotation marks omitted). Undue hardship
requires only a showing that the debtor will not be able to maintain a
minimal standard of living now and in the future if forced to repay her
student loans. We will presume that the debtor's income will increase to
a point where she can make payments and maintain a minimal standard of
living; however, the debtor may rebut that presumption with "additional
circumstances" indicating that her income cannot reasonably be expected
to increase and that her inability to make payments will likely persist
throughout a substantial portion of the loan's repayment period.
28
Bankruptcy courts may look to the unexhaustive list of
"additional circumstances" provided by the BAP in its published
decision. See Nys, 308 B.R. at 446-47. The factors a court may consider include, but are not limited to:
29
[(1)] Serious mental or physical disability of the
debtor or the debtor's dependents which prevents employment or
advancement; [(2)] The debtor's obligations to care for dependents;
[(3)] Lack of, or severely limited education; [(4)] Poor quality of
education; [(5)] Lack of usable or marketable job skills; [(6)]
Underemployment; [(7)] Maximized income potential in the chosen
educational field, and no other more lucrative job skills; [(8)] Limited
number of years remaining in [the debtor's] work life to allow payment
of the loan; [(9)] Age or other factors that prevent retraining or
relocation as a means for payment of the loan; [(10)] Lack of assets,
whether or not exempt, which could be used to pay the loan; [(11)]
Potentially increasing expenses that outweigh any potential appreciation
in the value of the debtor's assets and/or likely increases in the
debtor's income; [(12)] Lack of better financial options elsewhere.
30
IV
Id. (citations and footnotes omitted).
31
The bankruptcy court erred in requiring Nys to show
exceptional circumstances beyond the inability to pay in the present and
a likely inability to pay in the future. We affirm the BAP's decision
to reverse and remand the case back to the bankruptcy court to allow it
to apply the correct legal standard. The bankruptcy court should
consider whether Nys has shown that her inability to pay will likely
persist throughout a substantial portion of her loans' repayment period.
We express no opinion as to whether Nys has established entitlement to a
partial or complete discharge. The bankruptcy court must determine the
merits of her claim by applying the correct legal standard and all three
Brunner prongs to the factual record.8
32
On remand, the bankruptcy court must also determine
whether Nys has made a good faith effort to repay her student loans,
since all three prongs of the Brunner test must be met before a court can make a finding of undue hardship. See Rifino,
245 F.3d at 1087-88. This determination will require the bankruptcy
court to consider the evidence regarding the Ford program, and whether
Nys, in good faith, considered consolidation options. See Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete), 412 F.3d 1200,
1206 (10th Cir.2005) (agreeing that "[although] participation in a
repayment program is not required to satisfy the good-faith prong" it is
considered "an important indicator of good faith" (internal quotation
marks omitted)).
33
The decision of the Bankruptcy Appellate Panel is AFFIRMED.
Notes:
1
InPena, we adopted the three-prong test set forth by the Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395
(2d Cir. 1987) (per curiam). Under this test, the debtor must show:
"(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." Id. at 396. Hereinafter, we will refer to this test as the Brunner test.
2
We extract most of the facts from the BAP's published opinion, confirmed by our own independent review of the record
3
In relevant part, § 523(a)(8) provides that a Chapter 7 discharge
does not discharge an individual debtor from any debt "unless excepting
such debt from discharge ... would impose anundue hardship on the
debtor and the debtor's dependents, 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 nonprofit institution." 11 U.S.C. § 523(a)(8) (emphasis added).
4
Nys claimed that she was never offered an Income Contingency
Repayment Plan. The trial court did not resolve this discrepancy given
its disposition of the case
5
At the time of the trial, Nys was still able to claim one of her
children as a dependent. As a result, ECMC argued that her payments
under the Ford Program would have been $389 per month. Now, if she can
no longer claim any dependents, ECMC acknowledges that her monthly
payment would be approximately $453
6
Under the test as proposed by ECMC, any decision within the debtor's
control could not qualify as an "additional circumstance." Therefore, a
person who has chosen to go into a certain field and who, despite her
best efforts, has topped out in her career with no possibility of future
advancement cannot obtain a discharge of her student loans. ECMC argues
that the debtor must either uproot her family and move, or switch
careers to try to obtain a higher paying job. Because a college
education is expensive no matter what field a student chooses, we cannot
say that a debtor who, in good faith, chooses a certain field but
ultimately cannot increase her income to a point that allows her to
repay her student loans, is foreclosed from seeking a discharge.
Furthermore, courts have recognized that a lack of useable job skills
may constitute "additional circumstances."Pa. Higher Educ. Assistance Agency v. Birrane (In re Birrane),
287 B.R. 490, 497 (9th Cir. BAP 2002). Clearly, a student makes a
choice as to which skills she will pursue during her education. We
cannot fault a debtor for making such a choice when, later on, it turns
out that despite her best efforts her skills are simply not sufficient
to allow her to earn adequate sums to repay accumulated principal and
interest.
7
By "additional circumstances" or "exceptional circumstances" we mean
only that the debtor must present something more than her current
financial situation. In other words, she cannot rely on the fact that if
she made payments now on her student loans, she would not be able to
maintain a minimal standard of living. Rather, she must present the
court with circumstances that she cannot reasonably change. To prove
"undue hardship," the circumstances must indicate that the debtor cannot
reasonably be expected to increase her income and make payments for a
substantial portion of the loan's repayment period
8
It may be that Nys is entitled to only a partial discharge due to
the amount of the debt and the unlikelihood that her income will
increase substantially between now and her retirement. Nys conceded that
she has the ability to pay a portion of the debt. Therefore, on remand,
the bankruptcy court should consider whether Nys is entitled to only a
partial dischargeSee Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168,
1175 (9th Cir.2003) (holding that before a bankruptcy court can use its
equitable powers under 11 U.S.C. § 105(a) to partially discharge a
student loan, it must find undue hardship).
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