IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE: :

:

ARNOLD R. NAYLOR and :

JERRI L. NAYLOR, :

: Bankruptcy No. 05-25622-MBM

 Debtors. :

................................................................:...............................................................

Arnold R. Naylor, : Chapter 7

Plaintiff, :

:

v. : Adversary No. 05-3015-MBM

:

The State of New Jersey Higher :

Education Student Assistance :

Authority (NJHESAA), :

Defendant. :

MEMORANDUM

AND NOW, this 18th day of August, 2006, upon consideration of the

adversary complaint filed by Arnold Naylor, one of the instant debtors (hereafter

“the Debtor”), wherein the Debtor seeks a determination by the Court that (a) to

except from his Chapter 7 discharge a pre-petition student loan indebtedness

that he owes to the State of New Jersey Higher Education Student Assistance

Authority (hereafter “NJHESAA”), the above-named defendant, will impose an

undue hardship on him, and (b) said student loan debt, which debt the Debtor

contends equals $10,975.33 as of April 15, 2005, is thus discharged pursuant to

11 U.S.C. § 727 rather than is nondischargeable pursuant to 11 U.S.C.

§ 523(a)(8);

and subsequent to notice and a trial held on August 3, 2006, regarding the

nondischargeability of NJHESAA’s claim against the Debtor,

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The Debtor incurred the indebtedness to NJHESAA’s predecessor in

interest for the purpose of financing his wife’s son’s post-secondary education. 

In his pre-trial statement the Debtor raises the issue of whether his signature on

certain of the loan documents relative to such debt was forged and, therefore,

whether he is legally obligated with respect to NJHESAA’s claim against him. 

The Court determines that it need not address this particular issue given that the

Court decides that such claim against the Debtor, even if valid, is discharged in

any event.

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it is hereby determined that the Court shall now issue an order to the

effect that NJHESAA’s claim against the Debtor is NOT

NONDISCHARGEABLE, that is such claim is DISCHARGED by virtue of the

Debtor’s Chapter 7 discharge. The rationale for the Court’s decision is briefly set

forth below.1

In the Third Circuit a student loan debt is nondischargeable under

§ 523(a)(8) unless a student loan debtor can preponderantly prove each of the

following three factors so as to establish “undue hardship” within the meaning of

§ 523(a)(8), to wit

(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 for student

loans; and (3) that the debtor has made good faith efforts to repay

the loans.

Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396

(2nd Cir. 1987) (per curiam), aff’g 46 B.R. 752, 756 (S.D.N.Y. 1985) (three-part

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test set forth in Brunner adopted by the Third Circuit in In re Faish, 72 F.3d 298,

304-306 (3rd Cir. 1995)); In re Brightful, 267 F.3d 324, 327 (3rd Cir. 2001)

(standard of proof by which a debtor must establish each element of the Brunner

test is by a preponderance of the evidence). Expanding upon the foregoing,

[s]tudent loan debtors have the burden of establishing each

element of the Brunner test. All three elements must be satisfied

individually before a discharge can be granted. If one of the

requirements of the Brunner test is not met, the bankruptcy court’s

inquiry must end there, with a finding of no dischargeability.

Faish, 72 F.3d at 306. For the reasons set forth below, the Court concludes that

the Debtor has preponderantly established each of the three elements of the

aforesaid Brunner test.

First, the Debtor satisfies the second of the three elements of the Brunner

test if for no other reason than that NJHESAA, at the August 3, 2006 trial,

conceded as much. NJHESAA so conceded because it recognized, as the Court

finds as well, that additional circumstances exist that would indicate that the

Debtor’s present state of financial affairs is likely to persist for a significant –

indeed the remaining – portion of the repayment period for NJHESAA’s claim,

namely that the Debtor is 71 years old, retired, at least partially physically

disabled and, thus, unable to pursue future employment.

Second, the Court holds that the Debtor preponderantly satisfies the third

element of the Brunner test, that is that he has made a good faith effort to repay

his indebtedness to NJHESAA, because the Debtor has made substantial, albeit

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involuntary, payments toward such indebtedness, which payments total between,

according to the Debtor, $13,225.30 and, according to NJHESAA, some lesser

but still substantial amount. In holding as the Court does, it rejects NJHESAA’s

position that the Debtor has not shown the requisite good faith simply because

he made the aforesaid payments involuntarily – i.e., by virtue of seizure of his

federal income tax refunds and monthly seizures of a portion of his monthly

social security checks between 1996 and the present time – rather than on a

voluntary basis. The Court rejects such position of NJHESAA because

NJHESAA, by so involuntarily seizing such funds of the Debtor, thereby deprived

the Debtor, at least in substantial part, of his wherewithal to voluntarily satisfy

monthly installments due on the debt to NJHESAA; as well, the Court does not

find that the Debtor exhibited bad faith by refusing to voluntarily pay additional

amounts toward such debt while NJHESAA, at the same time, persisted in so

seizing funds of the Debtor on a monthly basis equal in amount to the monthly

installment due from the Debtor on such debt. The Court also rejects

NJHESAA’s argument that the Debtor has not exhibited the requisite good faith

because he has failed to renegotiate or restructure his indebtedness to

NJHESAA. Although such restructuring is relevant to the issue of a debtor’s

good faith, such restructuring “is not itself determinative” regarding such issue,

see In re Allen, 324 B.R. 278, 281 (Bankr.W.D.Pa. 2005) (quoting In re Fahrer,

308 B.R. 27, 35 (Bankr.W.D.Mo. 2004)); with respect to the Debtor’s financial

situation in particular, the Court finds that a restructuring (and, in particular, a

restructuring by way of the William D. Ford Direct Loan Program) would not

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significantly benefit the Debtor such that his failure to take advantage of the

same evidences bad faith on his part in attempting to repay his indebtedness to

NJHESAA, see Id. at 281-82 (arriving at the same conclusion with respect to a

debtor somewhat similarly situated to the instant Debtor). Finally, the Court

disagrees with NJHESAA that, because the Debtor and his wife have incurred a

debt to purchase a 2003 Ford Ranger the total amount of which is in excess of

the debt due to NJHESAA, the Debtor has failed to minimize his expenses and,

thus, has failed to exhibit the requisite good faith. The Court so disagrees

because (a) the Debtor has preponderantly demonstrated the need for such

vehicle (it is necessary because the only other vehicle owned by the Debtor and

his wife is old and malfunctioning), (b) the debt relative to such vehicle, the Court

finds, is not excessive in amount, (c) the Court finds that the monthly installment

due on such debt – i.e., $235 – is very reasonable in amount, and (d) the Court

finds, as set forth in the next paragraph herein, that the Debtor could not, as

NJHESAA argues, significantly reduce such monthly vehicle expenditure by

obtaining a cheaper vehicle.

Third, the Court holds that the Debtor preponderantly satisfies the first of

the three elements of the Brunner test, that is that he cannot maintain, based on

the current income and expenses of his wife and himself, a “minimal” standard of

living for them if he is forced to repay his indebtedness to NJHESAA. Relevant

to such holding by the Court, the parties agreed at trial that (a) the Debtor and his

wife must subsist henceforth on what they receive in the way of Social Security

payments, and (b) such Social Security payments, on a monthly basis, do no

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more than roughly equal the monthly expenses for the Debtor and his wife. 

NJHESAA contends that, the foregoing stipulation notwithstanding, the Debtor

can nevertheless satisfy NJHESAA’s claim and still maintain a minimal standard

of living because, argues NJHESAA, the Debtor (a) could reduce his household’s

monthly vehicle expenditure of $235 by obtaining a cheaper vehicle, and (b)

could sell a vacant piece of realty that he valued at $7,350 in his Bankruptcy

Schedule C. With respect to the contention that the Debtor could obtain a

cheaper vehicle and thereby reduce his corresponding monthly expenditure of

$235, the Court disagrees given that (a) the Debtor and his wife have virtually no

assets with which to purchase such cheaper vehicle, (b) the Debtor and his wife,

by virtue of their instant bankruptcy filing as well as their age and retirement

status, lack sufficient credit with which to borrow the necessary funds to obtain

such cheaper vehicle, and (c) the monthly installment payment on a loan for a

cheaper, that is presumably an older model, vehicle, presuming arguendo that

the Debtor and/or his wife could obtain such a loan, would not likely be much less

in amount than the modest $235 monthly installment presently due on the vehicle

that the Debtor and his wife presently own (the Court so finds because collateral

cheaper in value dictates not only a smaller loan/indebtedness from/to a lender

but also a smaller term within which to satisfy such debt, thereby likely resulting

in a monthly installment that rivals the one that the Debtor and his wife presently

pay). As for NJHESAA’s argument that the Debtor could minimally make ends

meet while satisfying NJHESAA’s claim by selling the aforesaid vacant lot and

then applying the proceeds to such debt, such argument is defeated by the

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The Court also rejects as misdirected and, thus, useless the suggestion

by NJHESAA that a market would exist for the aforesaid vacant lot were the

Debtor and his wife to package such vacant lot with the adjoining realty that is

presently wholly owned by the Debtor’s wife’s daughter. The Court so rejects

such suggestion because, even if true, the Debtor’s wife’s daughter, who is not a

debtor in the instant bankruptcy case, cannot be compelled to sell off any realty

that she wholly owns, regardless of whether such realty is adjacent to realty that

is owned by the Debtor and his wife.

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Debtor’s testimony at trial – which testimony the Court found to be credible and

which was not rebutted by NJHESAA – that a market does not exist for such

vacant lot so that it could be utilized by the Debtor to generate funds that could

then be used to retire a meaningful portion of NJHESAA’s claim.2

Therefore, the Court determines that it shall issue an order in the form set

forth at the beginning of the instant Memorandum.

BY THE COURT

 /s/ 

M. BRUCE McCULLOUGH,

U.S. Bankruptcy Judge

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE: :

:

ARNOLD R. NAYLOR and :

JERRI L. NAYLOR, :

: Bankruptcy No. 05-25622-MBM

 Debtors. :

................................................................:...............................................................

Arnold R. Naylor, : Chapter 7

Plaintiff, :

:

v. : Adversary No. 05-3015-MBM

:

The State of New Jersey Higher :

Education Student Assistance :

Authority (NJHESAA), :

Defendant. :

ORDER OF COURT

AND NOW, this 18th day of August, 2006, for the reasons set forth in the

accompanying Memorandum of same date, it is hereby ORDERED,

ADJUDGED, AND DECREED that the claim of the State of New Jersey Higher

Education Student Assistance Authority (NJHESAA) against Arnold Naylor, one

of the instant debtors (hereafter “the Debtor”), is NOT NONDISCHARGEABLE,

that is such claim is DISCHARGED by virtue of the Debtor’s Chapter 7

discharge.

BY THE COURT

 /s/ 

M. BRUCE McCULLOUGH,

U.S. Bankruptcy Judge

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copies to: 

Francis C. Sichko, Esq.

630 Washington Trust Building

Washington, PA 15301

Peter J. Ashcroft, Esq.

Bernstein Law Firm

Suite 2200 Gulf Tower

Pittsburgh, PA 15219

(Case Administrator to Serve)

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