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ELECTRONIC CITATION: 2005 FED App. 0003P (6th Cir.)

File Name: 05b0003p.06

BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT

In re: LISA M. FIELDS, )

)

Debtor. )

_____________________________________ )

)

LISA M. FIELDS, )

)

Plaintiff-Appellee, )

)

 v. ) No. 04-8031

)

SALLIE MAE SERVICING CORP. and )

EDUCATIONAL CREDIT MANAGEMENT ) 

CORP., )

)

Defendants-Appellants. ) 

_____________________________________ )

Appeal from the United States Bankruptcy Court

for the Northern District of Ohio, Western Division at Toledo.

No. 02-31325-7; Adv. No. 02-3140.

Submitted: February 2, 2005

Decided and Filed: April 5, 2005

Before: AUG, COOPER, and LATTA, Bankruptcy Appellate Panel Judges.

____________________

COUNSEL

ON BRIEF: Daniel N. Sharkey, BUTZEL LONG, Detroit, Michigan, for Appellant.
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____________________

OPINION

____________________

JENNIE D. LATTA, Bankruptcy Appellate Panel Judge. Sallie Mae Servicing Corporation

and Educational Credit Management Corporation appeal an order of the bankruptcy court declaring

a portion of Lisa M. Fields’ (the “Debtor”) student loan debts dischargeable as an undue hardship

pursuant to 11 U.S.C. § 523(a)(8) and § 105(a). For the reasons set forth below, we AFFIRM the

order of the bankruptcy court.

I. ISSUES ON APPEAL

Whether a bankruptcy court may grant a partial discharge of student loan debt upon a finding

that repayment of the entire debt would impose an undue hardship pursuant to 11 U.S.C. § 523(a)(8),

but repayment of some portion of the debt would not. If so, what standard should be applied in

granting a partial discharge?

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel (“BAP”) of the Sixth Circuit has jurisdiction to hear and

decide this appeal. The United States District Court for the Northern District of Ohio has authorized

appeals to the BAP. A “final order” of a bankruptcy court may be appealed by right under 28 U.S.C.

§ 158(a)(1). For purposes of an appeal, an order is final if it “ends the litigation on the merits and

leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United

States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). A bankruptcy court’s

judgment determining dischargeability is a final and appealable order. Cundiff v. Cundiff (In re

Cundiff ), 227 B.R. 476, 477 (B.A.P. 6th Cir. 1998) (citations omitted).

The appellate court reviews conclusions of law de novo. “De novo review requires the Panel

to review questions of law independent of the bankruptcy court’s determination.” First Union

Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 469 (B.A.P. 6th Cir. 1998) (omitting

citations). “Determinations of dischargeability under 11 U.S.C. § 523 are conclusions of law

reviewed de novo.” Bailey v. Bailey (In re Bailey), 254 B.R. 901, 903 (B.A.P. 6th Cir. 2000) (citing

Hart v. Molino (In re Molino), 225 B.R. 904, 906 (B.A.P. 6th Cir. 1998)); see also Sorah v. Sorah

(In re Sorah), 163 F.3d 397, 400 (6th Cir. 1998) (holding that “the interpretation of § 523 is a legal

issue that we review de novo”). But the BAP must “affirm the underlying factual determinations

unless they are clearly erroneous.” Nat’l City Bank v. Plechaty (In re Plechaty), 213 B.R. 119, 121
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(B.A.P. 6th Cir. 1997). A factual determination 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.” In re Bailey, 254 B.R. at 903 (citations omitted).

III. FACTS

The Debtor filed a voluntary Chapter 7 bankruptcy petition on March 6, 2002, less than two

months after payments on her student loan debt became due. The Debtor initiated an adversary

proceeding on May 8, 2002, seeking discharge of student loans totaling $129,801.05, alleging that

it would be an undue hardship for her to repay the student loans. A general discharge was granted

on July 9, 2002, pursuant to 11 U.S.C. § 727, discharging more than $15,000.00 in unsecured debt

other than student loans and discharging approximately $79,000.00 in secured debt.

From 1989 until 2001, the Debtor was enrolled in various educational programs, which she

paid for with student loans. She received an Associates Degree in General Studies from Drury

College in 1993, a Bachelor of Science Degree in Healthcare Management from Southern Illinois

University in 1995, and a Master of Science Degree in Health Promotion from The University of

Memphis in 2001. 

The bankruptcy court, in a lengthy and detailed memorandum opinion, evaluated the

Debtor’s personal, educational, and financial situation, and found that the Debtor had failed to show

undue hardship pursuant to the Brunner test, but that the Debtor had demonstrated that repayment

of the full amount of the student loans would be an undue hardship due to “other factors” and thus

that a partial discharge of the Debtor’s student loan debt was appropriate. The bankruptcy court

found that the Debtor could afford to maintain a reasonable standard of living if forced to make at

least some payments on the loans and that the Debtor’s financial problems were likely to be

temporary. The bankruptcy court noted that the Debtor did not make any effort to make payments

on the loans before filing for bankruptcy, but concluded that the Debtor had exhibited good faith

since she truthfully believed that any available repayment plans for the student loans would be

unworkable and since she had maintained both oral and written contact with student loan creditors.

The bankruptcy court concluded that the Debtor did not succeed in proving the hardship necessary

to except her entire student loan debt from discharge. This conclusion did not end the bankruptcy

court’s undue hardship analysis, however.

Relying on Hornsby and Cheesman, the bankruptcy court found that it was required to take

the further step of analyzing whether any other circumstances justified an equitable or partial remedy
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for the Debtor. See Hornsby v. Tenn. Student Assistance Corp. (In re Hornsby), 144 F.3d 433, 435

(6th Cir. 1998); Cheesman v. Tenn. Student Assistance Corp. (In re Cheesman), 25 F.3d 356 (6th

Cir. 1994). The bankruptcy court interpreted Cheesman as authorization from the court of appeals

for trial courts to evaluate undue hardship under 11 U.S.C. § 523(a)(8) in light of and in conjunction

with 11 U.S.C. § 105(a), and interpreted Hornsby as a mandate that trial courts undertake such an

analysis.

The bankruptcy court found that the most significant other factor justifying a partial remedy

for the Debtor was the substantial amount of the Debtor’s student loan debt. At the time of trial, the

Debtor’s total student loan debt was $129,801.05. The bankruptcy court calculated the likely

amount of monthly payments that would be required of the Debtor pursuant to a graduated

repayment plan (approximately $884.00 per month), and found that repayment of that amount each

month would be “unsustainable under the family’s current and reasonably predictable future

financial circumstances,” noting that the Debtor’s biweekly pay at the time of trial was $781.46.

The bankruptcy court found that the Debtor was maximizing her personal and professional

resources, that she was acting in good faith, and that even if she further reduced her expenses she

would still be unable to pay her existing student loan debts. The bankruptcy court noted that since

Hornsby, bankruptcy courts in the Sixth Circuit have consistently granted partial discharges and

developed other remedies in undue hardship cases. The bankruptcy court went on to find that the

Debtor could clearly make some payments but that her ability to repay the entire debt “borders on

hopelessness” and found the case appropriate for equitable intervention under § 105. The

bankruptcy court then proceeded to fashion a remedy.

The bankruptcy court sought a remedy which would afford the Debtor a financial fresh start,

while holding her accountable for the portion of the cost of her education that she could repay while

still maintaining a basic standard of living. At the time of trial the Debtor was involuntarily paying

$338.00 per month through an administrative garnishment. Based on a close analysis of the family

budget and in light of the Debtor’s age, education and work experience, the court concluded that the

Debtor could afford to pay $338.00 per month for 25 years, the maximum amount of years allowed

for payment to be made under the income contingent repayment plans for federally subsidized

student loans. The court noted that by paying $338.00 per month for 25 years, the Debtor would

pay nearly the entire amount of the original funds borrowed, without capitalized interest, interest,

or fees. The bankruptcy court apportioned payments pro-rata between the two student loan
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creditors. As for interest, the bankruptcy court abated the accrual and capitalization of interest for

six years, explaining that in six years the Debtor would likely be making more money and would

likely have less expenses for children since one of her children would have reached the age of

majority. The bankruptcy court estimated that after six years the amount the Debtor would have to

pay per month would increase from $338.00 to $623.60. This abatement of interest for a brief period

of time was designed by the bankruptcy court to give the Debtor “breathing room” without providing

her a windfall, since the bankruptcy court anticipated that her financial circumstances are more

likely to improve than to remain the same or decline. 

IV. DISCUSSION

The nondischargeability of student loan obligations is specified at 11 U.S.C. § 523(a)(8),

which provides:

(a) A discharge under section 727. . . of this title does not discharge an individual

debtor from any debt —

(8) 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, or for an obligation to repay funds received as an

educational benefit, scholarship or stipend, 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).

The broad equitable authority of bankruptcy courts is provided for in 11 U.S.C. § 105(a),

which provides:

(a) The court may issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title. No provision of this title

providing for the raising of an issue by a party in interest shall be construed to

preclude the court from, sua sponte, taking any action or making any determination

necessary or appropriate to enforce or implement court orders or rules, or to prevent

an abuse of process.

11 U.S.C. § 105(a).

While “undue hardship,” the standard for the discharge of student loans, is not a defined term

in the Bankruptcy Code, the Court of Appeals for the Sixth Circuit has consistently used, and very

recently explicitly adopted, the Brunner test for undue hardship. Oyler v. Educ. Credit Mgmt. Corp.
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(In re Oyler), 397 F. 3d 382 (6th Cir. 2005). The Sixth Circuit has summarized the Brunner test

as follows:

The Brunner test requires a three-part showing by the debtor:

(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.

Miller v. Pa. Higher Educ. Assistance Agency (In re Miller), 37 F.3d. 616, 623 (6th Cir. 2004)

(citing Brunner v. N.Y. State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2d Cir. 1987)). 

Appellants argue that the Debtor failed to establish undue hardship as to any part of her

student loans and suggest that a debtor’s failure to meet any one of the Brunner factors mandates

judgment for the student loan creditor and a complete denial of discharge. That is, the Appellants

urge the Panel to ignore Hornsby and not consider the possibility of partial discharge. The

bankruptcy court held that Debtor’s student loans were dischargeable to the extent that repayment

of the student loans would cause undue hardship for the Debtor. While the bankruptcy court did not

find undue hardship sufficient to warrant a discharge of all of the Debtor’s student loan debt, it did

find that repayment of all of the Debtor’s student loan debt would constitute undue hardship. The

bankruptcy court discharged only that portion of the debt that it found posed an undue hardship to

the Debtor.

Miller, which was published after the bankruptcy court’s decision, clarified the interplay of

§§ 523(a)(8) and 105(a). Miller also clarified Hornsby, the principal case relied upon by the

bankruptcy court in this case, holding that “the requirement of undue hardship must always apply

to the discharge of student loans in bankruptcy – regardless of whether a court is discharging a

debtor’s student loans in full or only partially.” In re Miller, 37 F.3d at 622.

The facts of Miller are similar to those of the present case. The chapter 7 debtor, Patricia

Miller (“Miller”), had a B.A., an M.A. in Philosophy, and had spent five years working toward a

Doctorate in Philosophy but failed to meet the requirements for obtaining that degree. Miller sought

discharge of her student loan debt of $89,832.16. She had made payments of only $368.00 toward

her student loan debt. The bankruptcy court in Miller discharged $55,000.00 of Miller’s student

loan debt, despite a finding that the “full amount of the debts did not impose an undue hardship upon
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her.” In re Miller, 37 F.3d at 619. The district court affirmed, but the court of appeals reversed and

remanded the case for a determination of whether Miller had shown undue hardship with respect to

the portion of her student loans which the bankruptcy court discharged. 

The Miller court explained that partial discharge should only be granted when “certain

requirements are met.” In re Miller, 37 F.3d at 620. The rule announced in Miller is:

[W]hen a debtor does not make a showing of undue hardship with respect to the

entirety of her student loans, a bankruptcy court may – pursuant to its § 105(a)

powers – contemplate granting the various forms of relief discussed in Hornsby,

including granting a partial discharge of the debtor’s student loans.

Id. Bankruptcy courts may “discharge the portion of student loan debt for which payment would

impose an undue hardship on the debtor,” emphasizing that the “requirement of undue hardship must

always apply to the discharge of student loans in bankruptcy . . . .” Id.

Miller recognized that “undue hardship” is not a defined term in the Bankruptcy Code and

explained that the court has looked to the Brunner test for guidance and may also look to “other

factors, including ‘the amount of the debt . . . [and] the rate at which interest is accruing’ as well as

‘the debtor’s claimed expenses and current standard of living, with a view toward ascertaining

whether the debtor has attempted to minimize the expenses of himself and his dependents.’” Id.

(quoting In re Hornsby, 144 F.3d at 437 (citing Rice v. United States (In re Rice), 78 F.3d 1144 (6th

Cir. 1996))). While reaffirming the availability of partial discharges of student loans in the Sixth

Circuit, the court squarely held that partial discharges of student loans for reasons other than undue

hardship are impermissible and are at odds with the “express language of the Bankruptcy Code.”

In re Miller, 37 F.3d at 620. The court remanded the case to the bankruptcy court to determine

whether Miller had shown undue hardship with respect to the portion of her student loans that were

discharged. Id.

In Oyler, decided after Miller, the Sixth Circuit incorporated into the Brunner test the socalled “other factors.” In re Oyler, 397 F. 3d 382. “Other factors,” now part of the Brunner test,

include a debtor’s expenses, standard of living, amount of outstanding debt, and ability to maximize

income. Id.; see also In re Rice, 78 F.3d at 1149-50 (listing as “other factors” income, earning

ability, health, educational background, dependents, age, accumulated wealth, and professional

degree.).
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Appellants correctly argue that partial discharge of student loans is improper where a debtor

has not shown undue hardship as to that portion of student loan debt to be discharged. In this case,

however, the debtor has shown undue hardship as to a portion of the student loan debt. The factors

that the bankruptcy court relied on, such as the substantial size of the Debtor’s student loan debt, the

overwhelming interest accruing on the debt, the Debtor’s maximization of income, the Debtor’s

continued contact with creditors, and the Debtor’s exploration of other repayment alternatives are

no longer just “other factors” to consider, but have been expressly integrated into the Brunner test

in the Sixth Circuit.

The bankruptcy court carefully analyzed the Debtor’s financial circumstances, using the

Brunner test as it incorporates factors identified in Miller, Hornsby, and Rice. The court then

structured a partial discharge of student loan debt to the extent that it constituted an undue hardship

for the Debtor. The court took into consideration the amount of the debt, the rate at which interest

was accruing, the amount of money the Debtor makes now and is likely to make in the future, the

Debtor’s good faith in attempting to repay the student loan debts, and the amount of money that the

Debtor could pay now and in the future. In a carefully written opinion, the bankruptcy court

explained in detail how the amount of student loan debt to be discharged was derived in light of all

of these factors. The bankruptcy court addressed the Debtor’s inability to maintain a reasonable

standard of living if forced to repay the entire debt, describing the substantial size of the student loan

debt at issue and the amount of interest rapidly accruing on the debt. In an assessment of “other

factors” which fit within the second prong of the Brunner test, the bankruptcy court found that

circumstances hindering payment will exist for a significant amount of the repayment period. The

bankruptcy court sought to require the Debtor to work towards maximization of income by including

in its remedy an abatement of interest on her loans for a limited amount of time, six years. The

bankruptcy court also found that the Debtor exhibited good faith by maintaining contact with her

creditors and exploring alternative debt solutions. The bankruptcy court found that repayment of

the entire indebtedness would impose an undue hardship on the Debtor. The court’s factual findings

are not clearly erroneous. Based upon applicable law, a partial discharge of the Debtor’s student

loan debt is warranted.

V. CONCLUSION

For the foregoing reasons, the decision of the bankruptcy court is AFFIRMED.