Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-05-00124/USCOURTS-ca10-05-00124-0/pdf.json

Parties Involved:
United States Department of Justice
Appellant
Larry Lee Woody
Appellee

Document Text:

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE TENTH CIRCUIT

IN RE LARRY LEE WOODY,

Debtor.

BAP No. KS-05-124

BAP No. KS-05-125

LARRY LEE WOODY,

Plaintiff – Appellee,

Bankr. No. 02-21662-7

Adv. No. 02-6095

 Chapter 7

v.

UNITED STATES DEPARTMENT OF

JUSTICE,

Defendant – Appellant.

JUDGMENT

Filed June 16, 2006

Before BOHANON, BROWN, and McNIFF, Bankruptcy Judges.

This case originated in the United States Bankruptcy Court for the District

of Kansas at Kansas City.

The judgment of that court is AFFIRMED.

For the Panel:

Barbara A. Schermerhorn, Clerk of Court

By:

Deputy Clerk

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 1 of 21
* The parties did not request oral argument, and after examining the briefs

and appellate record, the Court has determined unanimously that oral argument

would not materially assist in the determination of this appeal. See Fed. R.

(continued...)

FILED

U.S. Bankruptcy Appellate Panel

of the Tenth Circuit

June 16, 2006

Barbara A. Schermerhorn

Clerk PUBLISH

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE TENTH CIRCUIT

IN RE LARRY LEE WOODY,

Debtor.

BAP No. KS-05-124

BAP No. KS-05-125

LARRY LEE WOODY,

Plaintiff – Appellee,

Bankr. No. 02-21662-7

Adv. No. 02-6095

 Chapter 7

v.

UNITED STATES DEPARTMENT OF

JUSTICE,

Defendant – Appellant.

LARRY LEE WOODY,

Plaintiff – Appellee,

Bankr. No. 02-21662-7

Adv. No. 02-6096

 Chapter 7

v. OPINION

UNITED STATES DEPARTMENT OF

EDUCATION,

Defendant – Appellant.

Appeal from the United States Bankruptcy Court

for the District of Kansas

Submitted on the briefs:*

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 2 of 21
* (...continued)

Bankr. P. 8012. The case is therefore ordered submitted without oral argument.

1 28 U.S.C. § 158(a)(1); Fed. R. Bankr. P. 8002(a).

2 28 U.S.C. § 158(b)-(c); Fed. R. Bankr. P. 8001(e).

3 In 1970,Woody received a Bachelor of Science degree with a major in

accounting and a minor in general business. 

-2-

Eric F. Melgren, United States Attorney (Christina Medeiros, Assistant United

States Attorney, and Christopher Allman, Assistant United States Attorney, with

him on the brief), Kansas City, Kansas, for Appellants.

Kenneth M. Gay of Consumer Advocate, L.L.C., Lenexa, Kansas, for Appellee.

Before BOHANON, BROWN, and McNIFF, Bankruptcy Judges.

BOHANON, Bankruptcy Judge.

The United States Department of Justice and the United States Department

of Education (collectively, the “Creditors”), timely appeal a final judgment

entered by the United States Bankruptcy Court for the District of Kansas

discharging the Chapter 7 debtor’s Department of Education student loans (the

“523 Loan”) pursuant to the “undue hardship” provision in 11 U.S.C. § 523(a)(8),

and debtor’s Health Education Assistance Loan (the “HEAL loan”) pursuant to

the “unconscionable” provision in 42 U.S.C. § 292f(g).1

 The parties have

consented to this Court’s jurisdiction because they have not elected to have the

appeal heard by the United States District Court for the District of Kansas.2

 For

the reasons stated below, the bankruptcy court’s Judgment is AFFIRMED.

I. Background

Between 1979 through 1983, Larry Lee Woody, the debtor (“Woody” or

“debtor”), obtained a series of loans to assist him in procuring a chiropractic

degree.3

 Woody obtained two different types of student loans. The first type of

loan is governed by the dischargeability standard under § 523(a)(8) and the

second type is governed by the HEAL program. The original aggregate principal

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 3 of 21
4 Schedule F, in Appellant’s Appendix (App.”), Vol. II, at 0541-0546.

5 Woody initially sought to discharge his HEAL loan under 11 U.S.C.

§ 523(a)(8). The parties, however, stipulated in the pretrial order that the

“unconscionability” standard set forth in the HEAL statute, 42 U.S.C. § 292f(g)

applied to the determination of the dischargeability of the HEAL loan. Final

Pretrial Order at 11, ¶ 21, in App., Vol. I, at 0076.

-3-

debt on the 523 loan is $25,000 with interest accruing annually at 7% or $4.54 per

day. The original principal debt on the HEAL loan is $4,700 with interest

accruing annually at 4.550% or $2.31 per day. By July 12, 2005, Woody owed

more than $53,000 on the 523 Loan and more than $18,750 on the HEAL loan. 

Woody failed to complete the curriculum to receive a chiropractic degree. 

He had approximately one and one half semesters left to complete his degree, but

discontinued his studies in 1983. Woody has never worked as a chiropractor. 

From 1998 until early 2001, Woody held a number of temporary positions

and collected unemployment compensation, presumably during the periods he was

eligible to do so. With the exception of two years with no income, Woody’s

annual income, while varying considerably, rarely surpassed $15,000. The record

does not suggest that Woody quit or was fired from any of the temporary

positions he held or that he has otherwise abused his right to collect

unemployment benefits. 

In May 2002, Woody filed Chapter 7 bankruptcy. Woody’s bankruptcy was

precipitated by a heart attack in 2000 when he incurred substantial medical bills

(approximately $67,000).4

 

On October 7, 2002, Woody filed two complaints seeking to discharge his

student loan debts. In one, he sought to discharge his 523 loan debt to the DOE

alleging “undue hardship” under 11 U.S.C. § 523(a)(8). In the other, he sought to

discharge his HEAL loan under the “unconscionability” standard of 42 U.S.C.

§ 292f(g).5

On July 12, 2005, the bankruptcy court held a trial on the two adversary

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 4 of 21
6 Since early 2001, Woody has been employed by the IRS. His initial

employment with the IRS was seasonal. In August 2004, the IRS offered Woody

full-time employment and he accepted. July 12, 2005, Transcript of Proceedings

(“Tr.”) at 14-15, in App., Vol. II, at 0242-0243.

7 Schedule C, in App. Appendix, Vol. II, at 0538.

8 Tr. at 131, in App., Vol. II, at 0359.

9 Id. at 134, in App., Vol. II, at 0362.

-4-

proceedings. The bankruptcy court found from the evidence that Woody was 58

years old, single with no dependents; that he was employed full-time by the

Internal Revenue Service (“IRS”) with an annual salary of approximately

$38,000;6

 that it is unlikely Woody’s income will increase materially, either by

promotion or other means, over the amount he is now earning; that his monthly

net income was $1,856 and his monthly expenses were $1901; that for 2006, his

projected monthly net income increased to $1,864 and his monthly expenses

decreased to $1,785; that Woody owns no real property and virtually no personal

property of note except for a 15 year-old pickup truck with a rebuilt engine, his

retirement accounts (worth approximately $3,000),7

 and an insurance policy with

cash value; and that he paid $995.00 toward his 523 loan through Treasury

Department offsets and made one payment of $484.48 toward his HEAL loan in

1987. 

At the conclusion of the trial, the bankruptcy court announced its ruling. 

With respect to the 523 loan, the bankruptcy court held that Woody had

demonstrated by a preponderance of the evidence that it would be an undue

hardship on him if he were required to repay the 523 loan.8

 With respect to the

HEAL loan, the bankruptcy court entered an order of partial discharge of the loan,

finding that it would be unconscionable for Woody to pay anything more than the

original principal on the loan.9

 

On December 15, 2005, the bankruptcy court issued a memorandum

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 5 of 21
10 Woody v. U.S. Dep’t of Justice (In re Woody), 335 B.R. 431 (Bankr. D.

Kan. 2005).

11 Memorandum Opinion and Order Supplementing Oral Findings and

Conclusions (“Opinion”) at 25, in App., Vol. I, at 215.

12 Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1305 (10th Cir. 2004). 

13 Id.

14 United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). 

15 As part of its research, this court reviewed Rafael I. Pardo & Michelle R.

Lacey’s law review article, Undue Hardship in the Bankruptcy Courts: An

(continued...)

-5-

opinion and order supplementing its oral findings and conclusions.10 The

bankruptcy court concluded that “[Woody] has satisfied his burden and is entitled

to discharge, in their entirety, [of] both the 523 Loan and the HEAL Loan.”11 The

bankruptcy court noted that upon further consideration, a partial discharge of the

HEAL loan was inappropriate since the nondischarge of any portion of the HEAL

loan would be unconscionable under the facts and circumstances of the case.

On December 22, 2005, judgment in favor of Woody was entered in both

adversary cases. Creditors timely appealed to this Court the bankruptcy court’s

final Judgment in favor of the debtor. 

II. Discussion

A. The 523 Loan

1. Standard of Review

A decision that repayment of student loans constitutes an undue hardship is

a question of law subject to de novo review.12 The underlying factual

determinations, however, must be accepted unless they are clearly erroneous.13

“A finding is ‘clearly erroneous’ when although there is evidence to support it,

the reviewing court on the entire evidence is left with the definite and firm

conviction that a mistake has been committed.”14

2. Merits15

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 6 of 21
15 (...continued)

Empirical Assessment of the Discharge of Educational Debt, 74 U. Cin. L. Rev.

405 (Winter 2005). This article provides a comprehensive analysis of the section

523(a)(8) issues and the history of the undue hardship exception.

16 11 U.S.C. § 523(a)(8).

17 356 F.3d 1302 (10th Cir. 2004).

18 831 F.2d 395 (2d Cir. 1987).

19 Brunner, 831 F.2d at 396, quoted in Polleys, 356 F.3d at 1307. 

-6-

Section 523(a)(8) excepts from the Chapter 7 discharge any debt “for an

educational . . . loan made, insured, or guaranteed by a governmental unit,”

“unless excepting such debt from discharge under this paragraph would impose an

undue hardship on the debtor and the debtor’s dependents . . . .”16 That Woody’s

student loan debt owed to the DOE falls within this section is undisputed. The

only issue on appeal is whether the bankruptcy court erred in concluding that

excepting the debt from discharge under § 523(a)(8) would impose an “undue

hardship.”

The phrase “undue hardship” is not defined in the Bankruptcy Code. As

correctly noted by the bankruptcy court, the Tenth Circuit in Educational Credit

Management Corp. v. Polleys,

17 adopted, with some limitations, a test originally

established by the Second Circuit in Brunner v. New York State Higher Education

Services Corp.18 for determining whether repayment of student loans imposes an

“undue hardship” within the meaning of § 523(a)(8). Under the Brunner test, the

debtor must prove by a preponderance of the evidence: 

(1) that the debtor cannot maintain, based on current income and

expenses, a “minimal” standard of living for herself and her

dependents if forced to repay the loans;

(2) that additional circumstances exist indicating that this state of affairs

is likely to persist for a significant portion of the repayment period of

the student loans; and

(3) that the debtor has made good faith efforts to repay the loans.19

 A student loan debt is nondischargeable under § 523(a)(8) if the debtor fails to 

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 7 of 21
20 Polleys, 356 F.3d at 1307.

21 In re Woodcock, 45 F.3d 363, 367 (10th Cir. 1995). 

22 Polleys at 1308.

23 Id. at 1309.

24 Id. at 1309-1310.

25 Id. at 1310.

26 Id. (internal quotation marks omitted).

-7-

show any one prong of this test.20 The debtor bears the burden to demonstrate

undue hardship.21 

 Although the Tenth Circuit adopted the Brunner framework, it expressly

shunned “overly restrictive interpretation[s]” of the test that “deny discharge [of

student loan debt] under even the most dire circumstances.”22 In the Tenth

Circuit, therefore, courts have “discretion to weigh all the relevant

considerations” within the framework of the Brunner test, applying the terms of

the test “such that debtors who truly cannot afford to repay their loans may have

their loans discharged.”23 

In Polleys, the Tenth Circuit clarified how a court should decide if the

prongs are met. The first part of the Brunner test requires analysis of the debtor’s

current financial situation. It entails an analysis of all relevant factors, including

the health, education, skill level and age of the debtor.24 The second part of the 

Brunner test requires “a realistic look . . . into [the] debtor’s circumstances and

the debtor’s ability to provide for adequate shelter, nutrition, health care, and the

like.”25 Further, “courts should base their estimation of a debtor’s prospects on

specific articulable facts, not unfounded optimism, and the inquiry into future

circumstances should be limited to the foreseeable future, at most over the term of

the loan.”26 The third part of the Brunner test requires consideration of whether

the debtors are acting in good faith in seeking the discharge, or whether they are

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 8 of 21
27 Id.

28 Id.

-8-

intentionally creating their hardship.27 The Tenth Circuit cautioned that the goodfaith requirement “should not be used as a means for courts to impose their own

values on a debtor’s life choices.”28

On appeal, Creditors contend that Woody did not carry his burden of

proving any of the three prongs. We disagree. The bankruptcy court applied the

correct test and made factual findings to support its conclusion that each prong

has been met. 

With respect to the first prong, maintenance of a minimal standard of

living, the bankruptcy court found that even without paying the 523 loan, Woody

barely maintains a minimal standard of living. The bankruptcy court found: (1)

Woody’s current monthly expenses ($1901) exceeded his currently monthly net

income ($1856); (2) it is highly unlikely his income will increase materially,

either by promotion or other means, over the amount he is now earning; (3)

Woody’s projected expenses (i.e., gas consumption, monthly car payments, and

medical) are too low and fail to account for day-to-day cost of living and

unexpected expenses (i.e., costs of replacing an automobile); (4) Woody’s

“voluntary” expenses for storage, union dues, retirement contributions, and loan

repayment, are not excessive or unnecessary in maintaining a minimal standard of

living; (5) Woody’s “voluntary” expense, in reality, will be redirected toward

paying for the higher than projected costs of auto repairs/replacement and gas

prices; and (6) any garnishment of Woody’s earnings, whether 10% or 25% of his

earnings, to repay the student loan debt would deprive Woody of the ability to

maintain a minimal lifestyle with his current level of income.

As to the second prong, whether additional circumstances exist to indicate

that his state of affairs is likely to persist, the bankruptcy court found “[w]ith his

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 9 of 21
29 Consolidated Brief of Appellants at 7.

-9-

work history, current age, and state of health, [Woody’s] prospect for increased

salary is negligible.” The bankruptcy court stated that Woody’s credible

testimony reflects that it is highly unlikely his income will increase materially. In

addition, the bankruptcy court noted that Woody is not in good health for he

suffers from heart disease and endures the medical problems associated with a

recent heart attack. 

As to the third prong, Woody’s good faith, the bankruptcy court concluded

that Woody has demonstrated good faith despite his failure to make any voluntary

payments toward the 523 Loan. The bankruptcy court found: (1) Woody has not

contrived to create a hardship; (2) when healthy, Woody has continually sought

full-time employment and has worked through temporary agencies when no other

full-time work could be found; (3) Woody has minimized his expenses as

evidenced by his budget; (4) Woody has maximized his earning potential in that

he has sought and held a job throughout his working life and currently holds a

position that utilizes his skills in accounting; (5) Woody has maximized his

income by contributing to a flexible spending account; (6) Woody has had

conversations with loan representatives, although sporadic, which indicates his

good faith intent to cooperate and desire to repay his student loans, although he

was unable to do so because of unemployment or insufficient income; and (7)

there is no indication that Woody is attempting to abuse the student loan system

by having his loans forgiven before embarking on a lucrative career in the private

sector. 

At first blush, it appears Creditors do not dispute the bankruptcy court’s

factual findings since many of the facts were stipulated and those that were not,

are largely undisputed.29 When the bankruptcy court’s factual findings are

undisputed, we review de novo whether the facts support a finding that an undue

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 10 of 21
30 See Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete), 412 F.3d 1200,

1204 (10th Cir. 2005).

31 For instance, Creditors challenge the bankruptcy court’s factual finding that

it is unlikely Woody’s income will materially increase. Creditors, however, claim

the evidence demonstrates that Woody’s salary will continue to increase in the

future. The Court notes that it is sometimes difficult to separate “findings of

fact” from “conclusions of law” when the matter involves mixed fact and law. 

Moreover, Creditors likely tailored their argument to attack the bankruptcy

court’s conclusions instead of its factual findings in order to avoid the more

difficult “clearly erroneous” standard of review. 

-10-

hardship does exist.30 Creditors’ arguments on appeal, however, to some extent

attack the bankruptcy court’s factual findings.31 Thus, we must review under the

clearly erroneous standard the bankruptcy court’s resolution of any factual

disputes that are relevant to the test. We then review under the de novo standard

the bankruptcy court’s ultimate conclusion whether an “undue hardship” has been

shown. 

Creditors contend that the bankruptcy court erred in concluding that Woody

met the first Brunner prong and could not maintain a minimal standard of living if

forced to repay his 523 loan for the following reasons: (1) it improperly assumed

the role of advocate for the debtor when it found that he understated his expenses

despite the fact that his testimony and schedules actually established those

expenses; (2) it presumed that Woody would retire at age 65 or soon thereafter;

(3) it failed to consider that Woody has no dependents in its analysis of his

circumstances; (4) it incorrectly described Woody as reaching the pinnacle of his

earning potential; (5) it failed to find that the elimination of expenses for storage

of worthless furniture, repayment of a loan from his mother, and contribution to

his retirement would allow Woody to comfortably repay his student loans; and (6)

it misunderstood the extent Creditors could offset Woody’s social security

benefits to repay the student loans. 

Next, Creditors contend that Woody failed to satisfy the second prong of

the Brunner test because the bankruptcy court did not take a “realistic look” at

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 11 of 21
32 Consolidated Brief of Appellants at 24.

-11-

Woody’s circumstances and did not base its findings on “specific articulable

facts” that are consistent with Woody’s overall financial situation which has

improved substantially over the past two years.32 Creditors argue that Woody’s

past health problems are not an additional circumstance that satisfies the second

Brunner prong.

Creditors likewise argue that Woody failed to establish good faith efforts to

repay the debt as required by the third prong of the Brunner test. Creditors claim

that the bankruptcy court generously construed the evidence regarding Woody’s

cooperation with his lenders and state there is no evidence of any meaningful

effort to repay his student loan. Moreover, Woody’s decisions to pay for life

insurance, store worthless furniture for $125 a month for the last 12 years, and

work temporary or seasonal jobs from 1983 to 2001 are “life choices” which

indicate he did not maximize his income and minimize his expenses.

We have reviewed the bankruptcy court’s decision de novo and have

considered the testimony and other evidence adduced at trial, as well as all of the

pleadings and filings of the parties. Based upon this review, we find that

Creditors’ arguments lack merit, and that the decision discharging the 523 loan

should be affirmed. 

Creditors’ contention that the bankruptcy court improperly assumed the role

of advocate for the debtor when it weighed the reasonableness of his scheduled

expenses is without merit. As the bankruptcy court correctly stated, it is within

the province of the court to account for over- and understatements of scheduled

expenses. Moreover, contrary to Creditors’ contention, Woody testified that (1)

he anticipated that his vehicle will have to be replaced sometime within the next

year or so, (2) he failed to budget for unexpected or emergency expenses, (3) he

anticipated increased medical costs due to problems with his foot/ankle and his

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 12 of 21
33 Tr. at 29-30, in App., Vol. II, at 257-258.

-12-

hands, and (4) his transportation costs should be higher as gas prices continue its

upward trend and the distance he has to travel to work will increase due to

relocation of his workplace. 

Creditors’ contention that a person’s desire to retire at age 65 should not be

considered a basis for discharging student loan debt is unpersuasive. It is not

Woody’s desire to retire at age 65 which drives the bankruptcy court’s analysis,

but Woody’s age. Age is a relevant factor to be considered in the Brunner

analysis. A person in the his 20s or 30s will certainly have more opportunities to

improve their earnings than a person in his late 50s or 60s. In addition,

deteriorating health often accompanies old age, which in turn affects the ability to

work and increases expenses. The findings are supported by the evidence.

Creditors take issue with the bankruptcy court’s description of Woody as a

man who has reached the pinnacle of his earning potential. Creditors claim the

evidence indicates Woody just received a raise and could also earn overtime. The

record, however, reflects that Woody will not receive a major raise unless he is

promoted to management, which Woody testified he did not foresee happening in

the future. With respect to overtime, given Woody’s age and recent heart attack,

it was not clearly erroneous for the bankruptcy court to find that Woody could not

work more than 40 hours without suffering adverse health effects. Woody

testified that his health and energy have been diminishing over time and that he

does not have the energy to work overtime despite his best intentions.33 Creditors

argue that the evidence presented by Woody was outdated, referencing a medical

report issued in April 2003. Essentially, Creditors argue that the bankruptcy

court’s findings of fact were against the weight of the evidence and the

bankruptcy court did not accord the proper weight to the evidence. Creditors urge

us to reverse based on their interpretation of the evidence. That we cannot do. 

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 13 of 21
34 In re Mama D’Angelo, Inc., 55 F.3d 552, 555 (10th Cir. 1995) (quoting

Krasnov v. Dinan, 465 F.2d 1298, 1302 (3d Cir. 1972)).

35 See Allen v. Am. Educ. Servs. (In re Allen), 329 B.R. 544, 552 n.3 (Bankr.

W.D. Pa. 2005) (Retirement contributions, reasonable in amount, are allowable

within the context of an undue hardship analysis when debtor is fairly close to

retirement, has not thus far saved anything for retirement, and is not likely to

improve his earning ability such that he could otherwise save for retirement.).

-13-

We must accept the bankruptcy court’s determination unless “‘that determination

either (1) is completely devoid of minimum evidentiary support displaying some

hue of credibility, or (2) bears no rational relationship to the supportive

evidentiary data.’”34 We have carefully considered the record and the arguments

presented and do not find the bankruptcy court’s findings of fact clearly

erroneous regarding Woody’s earning potential.

Likewise, contrary to Creditors’ assertion, the bankruptcy court’s finding

regarding the reasonableness of Woody’s budget to maintain a minimal standard

of living is not clearly erroneous. Expenses toward storage of worthless furniture

and contribution toward his retirement are offset by Woody’s understatement of

expenses for lodging, transportation, medical, and other inevitable life expenses. 

In addition, retirement contributions, under these circumstances, are necessary for

the maintenance of a minimal standard of living.35

Finally, it is irrelevant whether the bankruptcy court misunderstood the

extent Creditors could offset Woody’s social security benefits and that the right to

offset is limited to 15%. The bankruptcy court concluded that any garnishment,

whether 10 or 25%, would deprive Woody of the ability to maintain a minimal

lifestyle. After carefully considering the record and the arguments, we do not

find the bankruptcy court’s findings of fact clearly erroneous with respect to the

first Brunner prong. It was not an abuse of discretion to find that Woody has met

his burden here. 

As to the second part of the Brunner test, the bankruptcy court found

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 14 of 21
36 Opinion at 13, in App., Vol. I, at 203.

-14-

“[w]ith his work history, current age, and state of health, Mr. Woody’s prospect

for increased salary is negligible.”36 By listing these factors, the bankruptcy court

provided specific articulable facts that support its conclusion. We hold that,

based on these factual findings, the bankruptcy court did take a realistic look at

Woody’s circumstances. The record reflects that Woody was utilizing his

accounting degree. He was fifty-eight years old at the time of the bankruptcy

court’s decision and thus has a limited work life. He has maximized his income

working for the IRS. While his earnings may increase through cost of living

increases and occasional “step” raises, it will be offset by the increase in his

medical and other expenses required to maintain a minimal standard of living. 

Finally, contrary to Creditors’ assertion, Woody’s heart condition is not a “past

health problem.” He suffers from the after-effects of a heart attack and has

foot/ankle and hand problems. Each of these circumstances indicates that

Woody’s state of affairs is likely to persist. Accordingly, the bankruptcy court’s

finding that Woody satisfied the second prong of the Brunner test is not clearly

erroneous. 

Last, we examine Creditors’ claim that the bankruptcy court erred in

concluding that the third part of the Brunner test has been satisfied. Although

Woody and Creditors are in disagreement as to whether Woody cooperated with

his student loan lenders, the record is clear that Woody is not attempting to abuse

the student loan system by having his loans forgiven before embarking on a

lucrative career in the private sector, and that his past and current income was and

is insufficient to support payments toward his student loans. These facts, coupled

with evidence that Woody maximized his earning potential by seeking and

holding positions throughout his working life that utilize his skills in accounting,

maximized his income by contributing to a flexible spending account, and

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 15 of 21
37 U.S. Dept. of Heath and Human Servs. v. Smitley, 347 F.3d 109, 115 (4th

Cir. 2003). 

38 Id.

39 Id. at 116.

-15-

minimized his expenses by living a meager lifestyle, establishes that the

bankruptcy court’s finding that Woody satisfied the third factor of the Brunner

test is not clearly erroneous. 

After reviewing the evidence and testimony in this case and after carefully

considering the arguments raised by Creditors, we simply are not left with a

definite and firm conviction that a mistake has been committed by the bankruptcy

court. As a result, the bankruptcy court’s conclusion that the 523 loan was

dischargeable is not clearly erroneous. The decision of the bankruptcy court

discharging the 523 loan pursuant to 11 U.S.C. § 523(a)(8) is AFFIRMED.

B. The HEAL Loan

1. Standard of Review

The determination of the meaning of “unconscionable” constitutes a

question of law reviewed de novo.

37 Application of the unconscionability

standard to the facts of a case constitutes a mixed question of law and fact,

requiring a conclusion regarding the legal effect of the bankruptcy court’s

findings as to the debtor’s circumstances.38 Mixed questions of law and fact are

reviewed under a hybrid standard, applying the clearly erroneous standard of

review to factual findings and examining de novo the legal conclusions derived

from those facts.39

2. Merits

Discharge of a HEAL loan is governed by 42 U.S.C. § 292f(g), which 

provides that:

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 16 of 21
40 Consolidated Brief of Appellants at 33.

41 Walters v. Metro. Educ. Enters., Inc., 519 U.S. 202, 207 (1997) (citation

omitted).

42 Webster’s Third New International Dictionary 2486 (1993). 

-16-

Notwithstanding any other provision of Federal or State law, a debt that is a

loan insured under the authority of this subpart may be released by a

discharge in bankruptcy under any chapter of Title 11, only if such

discharge is granted – 

(1) after the expiration of the seven-year period beginning on the first

date when repayment of such loan is required, exclusive of any

period after such date in which the obligation to pay installments on

the loan is suspended;

(2) upon a finding by the Bankruptcy Court that the nondischarge of

such debt would be unconscionable; and

(3) upon the condition that the Secretary [of Health and Human Services]

shall not have waived [certain rights].

The sole question before the bankruptcy court was whether the nondischarge of

Woody’s HEAL loan would be unconscionable under § 292f(g). 

Creditors claim that the bankruptcy court correctly recognized the

judicially-established standards and criteria for determining unconscionability,

but failed to correctly apply those standards when it discharged Woody’s HEAL

loan.40 Creditors argue that the bankruptcy court’s interpretation of

“unconscionability” is inconsistent with its plain meaning and established case

law. We disagree.

Section 292f(g) does not define the term “unconscionable,” and the Tenth

Circuit has not addressed the question in a published opinion. The Supreme

Court has directed, however, that “[i]n the absence of an indication to the

contrary, words in a statute are assumed to bear their ‘ordinary, contemporary, 

common meaning.’”41 The dictionary defines “unconscionable” as “excessive;”

“exorbitant; “lying outside the limits of what is reasonable or acceptable;”

“shockingly unfair, harsh, or unjust;” or “outrageous.”42 Attempts to further

define the standard have not succeeded in developing a straightforward test. As

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 17 of 21
43 63 B.R. 731, 736 (Bankr. D. S.D. 1986). 

44 Id.

45 In re Woody, 335 B.R. at 447.

-17-

described in Hines v. United States (In re Hines),

43 “unconscionability is likened

to beauty in that it appeals to the senses and is found in the eyes of the beholder.” 

Therefore, its “precise definition . . . is better left to the discretion of the

Bankruptcy Judge.44

The bankruptcy court, noting that “unconscionable” should be given its

plain meaning of excessive, exorbitant, lying outside the limits of what is

reasonable or acceptable, shockingly unfair, harsh, or unjust, or outrageous, and

that the standard imposed by this definition is more stringent than the “undue

hardship” standard imposed by § 523(a)(8), summarized the analysis courts

should utilize in determining the dischargeability of HEAL loans as follows:

In an “unconscionability” analysis, a court should look to the plain meaning

of the word “unconscionable” in determining whether, within the totality of

the circumstances, nondischarge of a HEAL obligation is appropriate. A

court should look to factors used by other courts for guidance in examining

the totality of the circumstances, but should avoid employing the factors as

a rigid, formula-driven calculation. Weight should be given to a debtor’s

good faith, or lack thereof. In addition, a court should consider the likely

consequences nondischarge of a HEAL obligation will have on the debtor

and whether those consequences will adversely affect the debtor’s ability to

maintain a minimal standard of living into the foreseeable future.45

Factors to consider include (1) the debtor’s income, earning ability, health,

educational background, dependents, age, accumulated wealth and professional

degree; (2) the debtor’s standard of living, with a view toward ascertaining

whether the debtor has attempted to minimize the expenses of himself and his

dependents; (3) whether the debtor’s current situation is likely to continue to

improve, including whether the debtor has attempted to maximize his income by

seeking or obtaining stable employment commensurate with his educational

background and abilities; (4) whether the debtor could supplement his income

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 18 of 21
46 Smitley, 347 F.3d at 117-118.

47 261 B.R. 444 (Bankr. D. Minn. 2001).

-18-

through secondary part-time or seasonal work, even if already employed full time;

(5) whether the debtor’s dependents are or could be contributing financially to

their own support; (6) the amount of the debt and the rate of interest; and

(7) the debtor’s role in accruing the amount of debt, including requesting multiple

forbearances and making minimal repayments.46 

Following this framework, the bankruptcy court incorporated its findings

concerning the dischargeability of the 523 loan, as they are equally applicable

under the “unconscionability” analysis, and revisited a number of factors with

specific regard to the unconscionability analysis. The bankruptcy court found

that Woody’s gross income was insufficient to maintain even a minimal standard

of living if he were forced to repay his HEAL loan. The bankruptcy court

concluded that depriving Woody of the ability to afford life’s basic necessities,

such as health care, transportation, food, housing, utilities, or even the ability to

care for one’s self upon impending retirement would be unconscionable. 

Creditors claim Woody’s circumstances cannot approach, much less meet,

the burden of establishing unconscionability. Creditors argue that the

nondischarge of a HEAL loan has only been deemed unconscionable when the

debtor demonstrates that he or she is permanently unable to engage in any type of

gainful employment. This is not accurate. In Soler v. United States (In re

Soler),

47 the bankruptcy court granted discharge of a HEAL loan to a dentist,

earning approximately $79,000 per year, working 36-hours per week. The court,

after examining the totality of facts and circumstances, found the nondischarge of

one of her HEAL loans would be unconscionable considering the debtor’s

significant repayment efforts, she was earning the most she could using her

degree and skills, she was working the maximum number of hours recommended

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 19 of 21
48 See discussion, supra, regarding Brunner prongs.

49 Soler, 261 B.R. at 463.

-19-

by her treating doctor despite her chronic, acute back pain, and she was

minimizing her expenses and living a frugal existence. As we have previously

noted, there is no straightforward test. While a court should look to factors used

by other courts for guidance in examining the totality of the circumstances, it

should avoid employing the factors as a rigid, formula-driven calculation. 

Creditors also claim that the bankruptcy court improperly based its finding

of unconscionability upon speculation that Woody would be unable to save

sufficient income for retirement. First, that was not the sole basis for the

bankruptcy court’s findings. Second, contrary to Creditors’ assertion, that is not

an improper basis upon which to analyze unconscionability. As part of its

analysis, the court must consider whether Woody’s state of affairs is likely to

persist and thus requires inquiry into the foreseeable future. Given Woody’s age

and health problems, his retirement is inevitable. Retiring, of course, in turn

affects his income and ability to repay the loan. What he contributes into

retirement now will increase his income later.

After reviewing the evidence and testimony in this case and after carefully

considering the arguments raised by Creditors on appeal, we simply are not left

with a definite and firm conviction that a mistake has been committed by the

bankruptcy court.48 Congress created the ‘unconscionable’ standard for use with

HEAL loans to prevent a borrower who obtains a medical degree with a HEAL

loan and is on the threshold of a prestigious, high paying medical career, from

easily discharging the HEAL loan in bankruptcy.49 Woody does not fit this

profile.

The record reflects that Woody incurred his HEAL loan in 1982, but he

never received a chiropractic degree. Woody filed for bankruptcy approximately

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 20 of 21
50 Polleys, 356 F.3d at 1311.

-20-

20 years later, but only after incurring significant medical bills as a result of the

heart attack.

The record also reflects that Woody struggled and continues to struggle to

make ends meet. He continually sought employment and even took temporary

positions when permanent ones were unavailable. He lives on a tight budget. His

health, while currently stable, is that of a man who suffers from heart disease and

a recent heart attack. He also has foot and hand problems. Given his health

condition, he cannot work more than 40 hours per week without suffering adverse

health effects. These facts, combined with his age, support the bankruptcy court’s

finding that he has maximized his earnings and minimized his expenses. 

As for good faith in repaying the HEAL loan, Creditors base their lack of

good faith argument on the minimal amount of payments made by Woody. Failure

to make a payment, standing alone, does not establish a lack of good faith.50 We

agree with the bankruptcy court that Woody’s failure to make more payments was

justified because, despite reasonable efforts on his part, he was unable to earn

income sufficient to reasonably warrant any attempt at repayment. Because

Woody’s lifestyle is modest and unremarkable and he has maximized his income

by fully utilizing his accounting degree, the bankruptcy court’s findings regarding

unconscionability are not clearly erroneous. 

III. Conclusion

For the reasons set forth, we AFFIRM the bankruptcy court. 

BAP Appeal No. 05-124 Docket No. 36 Filed: 06/16/2006 Page: 21 of 21