Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-16-06021/USCOURTS-ca8-16-06021-0/pdf.json

Parties Involved:
FedLoan Servicing
Not Party
Sara J. Fern
Appellee
Pennsylvania Higher Education Assistance Agency
Not Party
U.S. Department of Education
Appellant

Document Text:

United States Bankruptcy Appellate Panel

For the Eighth Circuit 

___________________________ 

No. 16-6021 

___________________________ 

In re: Sara J. Fern 

lllllllllllllllllllllDebtor

------------------------------ 

Sara J. Fern 

lllllllllllllllllllll Plaintiff - Appellee

v. 

FedLoan Servicing 

lllllllllllllllllllll Defendant

U.S. Department of Education 

lllllllllllllllllllll Defendant - Appellant

Pennsylvania Higher Education Assistance Agency 

lllllllllllllllllllll Defendant

____________ 

Appeal from United States Bankruptcy Court 

for the Northern District of Iowa - Dubuque 

____________ 

Submitted: January 6, 2017 

Filed: February 7, 2017 

____________ 

Appellate Case: 16-6021 Page: 1 Date Filed: 02/07/2017 Entry ID: 4498791 
Before KRESSEL, FEDERMAN and SHODEEN, Bankruptcy Judges. 

____________ 

SHODEEN, Bankruptcy Judge, 

The Defendant, U.S. Department of Education, appeals from the Bankruptcy 

Court’s1

 determination that Fern’s student loans are dischargeable based upon undue 

hardship pursuant to 11 U.S.C. § 523(a)(8). For the reasons that follow, we affirm. 

STANDARD OF REVIEW 

The determination of undue hardship is a legal conclusion subject to de novo 

review. Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 553 (8th Cir. 

2003). Subsidiary findings of fact on which the legal conclusions are based are 

reviewed for clear error. Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775, 779 

(8th Cir. 2009). We may affirm on any basis supported by the record. Kaler v. 

Charles (In re Charles), 474 B.R. 680, 687 (B.A.P. 8th Cir. 2012) (citing Stabler v. 

Beyers (In re Stabler), 418 B.R. 764, 766 n. 2 (B.A.P. 8th Cir. 2009)). 

DISCUSSION 

Between 2002 and 2004 Fern obtained student loans totaling $14,980 under 

the William D. Ford Direct Loan Program under three separate promissory notes. 

She used these funds to participate in classes to become an accounting clerk. After 

two unsuccessful attempts to complete a required class she could not finish the 

program. In 2007 Fern obtained an additional student loan of approximately $5,300 

from the Ford Program to attend Capri College for training as an esthetician. After 

graduating she rented space at a commercial tanning salon and began working in her 

field of study. Being unable to build up the necessary clientele to support her family 

she left this job. Fern has never made a payment on her student loan obligations. At 

the time of trial the aggregate balance owing on Fern’s student loans exceeded 

$27,000. 

Discharge of student loan debt in bankruptcy is governed by 11 U.S.C. § 

523(a)(8) which in relevant part states: “A discharge under section 727 . . . of this 

1

 The Honorable Thad J. Collins, United States Bankruptcy Judge for the Northern 

District of Iowa. 

Appellate Case: 16-6021 Page: 2 Date Filed: 02/07/2017 Entry ID: 4498791 
title does not discharge an individual debtor from any debt [for education loans] 

unless excepting such debt from discharge . . . would impose an undue hardship on 

the debtor and the debtor's dependents . . . .” The debtor bears the burden to prove 

undue hardship by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 

279, 289-91 (1991). The term undue hardship is not defined in the Bankruptcy Code. 

Consequently, the standards to determine what constitutes undue hardship have been 

developed by the courts. A majority of Circuits follow the test adopted by the 

Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 

F.2d 395 (2d Cir. 1987). The Brunner analysis has been expressly rejected in this 

Circuit: 

We are convinced that requiring our bankruptcy courts to 

adhere to the strict parameters of a particular test would 

diminish the inherent discretion contained in § 523(a)(8) . 

. . We believe that fairness and equity require each undue 

hardship case to be examined on the unique facts and 

circumstances that surround the particular bankruptcy. 

Long, 322 F.3d at 554. Instead, the Eighth Circuit follows a more flexible approach 

under a totality of the circumstances test. Id. Three factors are evaluated to 

determine undue hardship under this test: (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. Id. 

 1. Past, Present and Future Financial Resources 

 Fern is a 35 year old single mother of three children ages 3, 11 and 16. For 

the last 6 years she has worked at Focus Services, LLC. This job provides her with 

a monthly income of $1,506.78 and offers flexibility so she can provide the 

necessary care for her children when needed. The family also receives food stamps 

and rental assistance. The children’s fathers have made minimal or no child support 

payments. Efforts to enforce these obligations have been unsuccessful. 

 Fern’s income history has remained consistent and is in line with her current 

earnings. She has never earned more than $25,000 annually. Her take home pay of 

$1,506.78 is supplemented by public assistance which results in a modest amount 

upon which to support a family of four. She has no savings or other sources of 

income. In the past, Fern’s mother has loaned money to her daughter. Because her 

mother is retiring, she will be unable to provide this safety net to Fern. The evidence 

Appellate Case: 16-6021 Page: 3 Date Filed: 02/07/2017 Entry ID: 4498791 
supports the Bankruptcy Court’s conclusion that Fern’s income has been consistent 

and is unlikely to improve in the future which weighs in favor of discharging the 

student loans for undue hardship. 

 2. Reasonable and Necessary Living Expenses 

 “To be reasonable and necessary, an expense must be ‘modest and 

commensurate with the debtor’s resources.’” Jesperson, 571 F.3d at 780 (citing In 

re DeBrower, 387 B.R. 587, 590 (Bank. N.D. Iowa 2008)). Fern’s monthly income 

from all sources totals $2,413. The family’s monthly expenses are $2,475. Based 

upon these figures there is a shortfall of $62 each month to meet the family’s living 

expenses. The record supports the Bankruptcy Court’s conclusion that Fern’s 

monthly expenses are reasonable, necessary, modest and commensurate with her 

income and weigh in favor of discharging the student loans for undue hardship. 

3. Other Relevant Facts and Circumstances 

 This factor permits evaluation of a wide range of facts and issues that may be 

relevant to determining undue hardship, including: 

(1) total present and future incapacity to pay debts for 

reasons not within the control of the debtor; (2) whether 

the debtor has made a good faith effort to negotiate a 

deferment or forbearance of payment; (3) whether the 

hardship will be long-term; (4) whether the debtor has 

made payments on the student loan; (5) whether there is 

permanent or long-term disability of the debtor; (6) the 

ability of the debtor to obtain gainful employment in the 

area of the study; (7) whether the debtor has made a good 

faith effort to maximize income and minimize expenses; 

(8) whether the dominant purpose of the bankruptcy 

petition was to discharge the student loan; and (9) the ratio 

of student loan debt to total indebtedness. 

Brown v. Am. Educ. Servs., Inc. (In re Brown), 378 B.R. 623, 626-27 (Bankr. W.D. 

Mo. 2007) (citing VerMaas v. Student Loans of N.D. (In re VerMaas), 302 B.R. 650, 

656-57 (Bankr. D. Neb. 2003); Morris v. Univ. of Ark., 277 B.R. 910, 914 (Bankr. 

W.D. Ark. 2002)). The purpose of this final inquiry allows a court to consider any 

other relevant information that would be persuasive to overcome the income and 

Appellate Case: 16-6021 Page: 4 Date Filed: 02/07/2017 Entry ID: 4498791 
expense analysis of undue hardship under the first two factors of the totality of the 

circumstances test. 

 Fern testified that her vehicle requires maintenance and that she will need to 

replace it. She believes such a purchase is unavailable without her mother’s 

assistance or co-signature because the student loan obligations are reflected on her 

credit report, which hinders her ability to borrow money. The education obtained 

with the student loan proceeds has not resulted in gainful employment for Fern. She 

occasionally reviews job postings but has discontinued actively submitting 

applications. According to Fern, if she could find a higher paying job she would 

gladly take it. 

 None of Fern’s loans has ever been placed in repayment status, instead they 

have always been classified as deferred or in forbearance meaning that no payment 

is required. The Department of Education contends that Fern qualifies for at least 

two repayment plans. While the availability of repayment options is a relevant fact, 

it cannot be the only basis to consider in determining undue hardship. Lee v. Regions 

Bank Student Loans, (In re Lee), 352 B.R. 91, 95 (B.A.P. 8th Cir. 2006). Relying 

upon Jesperson, the Department suggests that Fern is qualified for a repayment 

program where her “payment” would be $0.00 and because that “payment” amount 

will not affect her current standard of living the student loans should not be 

discharged. See 571 F.3d at 779 (ability to make some payment on student loans 

and maintain a “minimal standard of living” does not qualify as an undue hardship). 

 There are substantial and important differences between this case and 

Jesperson which must be placed in context. Jesperson was a lawyer who owed in 

excess of $300,000 in student loans. The Court of Appeals identified numerous 

grounds in reaching its conclusion that Jesperson’s circumstances did not qualify for 

an undue hardship discharge of his student loan debt. These included: his age, good 

health, number of degrees, marketable skills, lack of dependents, self-imposed 

conditions which limited his monthly income and a failure to pay any amount on the 

student loan when he had sufficient income to do so. Id. at 782. Most notably, 

Jesperson could afford a monthly payment of $629 under an income contingent 

repayment plan. In contrast, Fern has never been required to make a payment, and 

under either the Income Contingent Repayment Program or PAYE this would still 

remain the case. We do not interpret Jesperson to stand for the proposition that a 

monthly payment obligation in the amount of zero automatically constitutes an 

ability to pay. 

Appellate Case: 16-6021 Page: 5 Date Filed: 02/07/2017 Entry ID: 4498791 
 The Department also states that the Bankruptcy Court’s conclusions about 

Fern’s emotional burden related to the student loan obligations, the continued 

accrual of interest on the loans, the negative credit effect of the loans, and the 

potential tax obligation when the repayment plan expires were in error. We do not 

agree. These additional observations identified by the Bankruptcy Court simply 

served to supplement its determination of undue hardship under the totality of the 

circumstances test. 

 For the reasons stated there is no error in the Bankruptcy Court’s 

determination that Fern’s student loans are dischargeable based upon undue 

hardship. Accordingly, the Bankruptcy Court’s order is AFFIRMED. 

_______________________ 

Appellate Case: 16-6021 Page: 6 Date Filed: 02/07/2017 Entry ID: 4498791