Can you bankrupt (discharge) student loans in bankruptcy? For cases filed after October 7,
1998, Student Loans are dischargeable only if you can prove that
having to repay it would impose an "undue hardship" on you (as defined
below).
(for cases filed PRIOR TO October 17, 2005, if the PROGRAM under which your student loan is issued, insured,
administered is a FOR-profit, PRIVATE (non-government) entity, it may
be dischargeable. However, if the program itself, such as LAL, GSL,
etc. receives nonprofit funding by participation of nonprofit entities,
the loan is not dischargeable in bankruptcy. For cases filed prior to October 7, 1998, student loans were dischargeable if they were in repayment status for a certain period of time).
To obtain a discharge based on undue hardship in the Ninth Circuit (which includes California) you must prove all of the following:
1.
that you cannot maintain, based on current income and expenses, a
'minimal' standard of living for yourself and your dependents if forced
to repay the loans;
2. that additional circumstances exist
indicating that this state of financial affairs is likely to persist
for a significant portion of the repayment period of the student loans;
and,
3. that you made good faith effort to repay the loans, for
example, by past payments for several years, etc. Making payments is
not always required if you didn't ever have the money to pay the loans.
Forebearances may be sufficient.
The above is known as the "Brunner Test" named after an appeals court decision by that name.
Courts have the authority to issue
partial discharges of student loans, in cases where the debtor shows
the ability to repay some, but not all, of the loans. This is a huge
improvement in the ability to possibly discharge some of these debts,
but all three of the above factors must be still be met. It is very difficult to prove all the necessary elements.
HEAL Loans are subject to a higher standard of scrutiny than regular student loans and are even harder to discharge.
For
other alternatives to dealing with Student Loans, including income
contingent repayment plans, and non-bankruptcy methods of canceling the
debt, see http://www.ed.gov/offices/OSFAP/DCS/loan.cancellation.discharge.html
The following are important cases governing student loan undue hardship discharge in the ninth circuit (California, Arizona, Oregon, Washington). These cases set forth the three part test for undue hardship and how the courts have analyzed it in a few bankruptcy cases. Please note that although this is put in the Chapter 7 section of my site, the same test applies under any bankruptcy chapter, including 13 and 11. Student and educational loans can only be discharged in bankruptcy under specific circumstances. These court cases analyze the criteria for undue hardship in this jurisdiction. **Please note that these are merely representative cases and are not necessarily binding on your circumstances.**
In re: LORNA KAYE NYS, Debtor, EDUCATIONAL CREDIT MANAGEMENT CORPORATION, Appellant, v. LORNA KAYE NYS, Appellee.
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
February 15, 2006, Argued and Submitted, San Francisco, California,
April 26, 2006, Filed
PRIOR HISTORY: [*1] Appeal from the Ninth Circuit Bankruptcy Appellate Panel. BAP No. NC-03-01438-MaMcP. Perris, McManus, and Marlar, Bankruptcy Judges, Presiding.
DISPOSITION: AFFIRMED.
COUNSEL: Miriam Hiser, San Francisco, California; Curtis P. Zaun, Educational Credit Management Corporation, St. Paul, Minnesota, for the appellant.
Christopher G. Metzger, Eureka, California, for the appellee.
JUDGES: Before: Stephen Reinhardt, Richard A. Paez, and Richard C. Tallman, Circuit Judges. Opinion by Judge Tallman.
OPINIONBY: Richard C. Tallman
OPINION: TALLMAN, Circuit Judge:
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.
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 (B.A.P. 9th Cir. 2004), [*2] 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), n1 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.
n1 In Pena, 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.
[*3]
I
Nys filed a Chapter 7 bankruptcy petition in the Northern District of California on June 12, 2002. n2 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). n3
n2 We extract most of the facts from the BAP's published opinion, confirmed by our own independent review of the record.
n3 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 an undue 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).
Between [*4] 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.
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 [*5] expenses.
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.
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 Plan n4 and that under this program her monthly payment would be between $ 389 and $ 453. n5
n4 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.
[*6]
n5 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.
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.
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 [*7] persist for the foreseeable future," it found no undue hardship because "[Nys] had 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 "exceptional circumstances must be shown to meet the second prong of the Brunner test."
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, "additional 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.
II
The bankruptcy court had jurisdiction under 28 U.S.C. § 157(b), the BAP had jurisdiction under 28 U.S.C. § 158(b) [*8] , 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.
III
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.
When it adopted the Brunner test, the Second Circuit explicitly incorporated the reasoning of the district [*9] 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 (Bankr. S.D.N.Y. 1985), and therefore, because the legislative history was influential in the development of the Brunner test, we will discuss it again here.
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 [*10] for bankruptcy after finishing their education. Brunner, 46 B.R. at 754.
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."
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,
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.
Id. (citing Report of the Comm'n, H.R. Doc. No. 93-137, at 140-41 n.17).
Therefore, Congress sought to prohibit a "garden-variety debtor" from discharging student loans, especially when [*11] 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."
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 [*12] court. See Brunner, 831 F.3d 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 "mere 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. n6
n6 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 (B.A.P. 9th Cir. 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.
[*13]
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.
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 [*14] "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.
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.
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 [*15] 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.
In Pena, although we recognized the semantical difference in language employed between Cheesman and Brunner, we concluded that "it 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. [*16] n7 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.
n7 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.
Under this standard, the debtor cannot purposely choose to live a lifestyle that prevents her from repaying [*17] 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").
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 dependent, or something which makes the debtor's circumstances more compelling than that of an ordinary person in debt." Nys, 308 B.R. at 444 [*18] (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.
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:
[(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; [*19] [(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.
Id. (citations and footnotes omitted).
IV
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 [*20] 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. n8
n8 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 discharge. See 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).
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 [*21] 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)).
The decision of the Bankruptcy Appellate Panel is
AFFIRMED.
In re: ERNEST J. PENA; JULIE PENA, Debtors, UNITED STUDENT
AID FUNDS, INC., Appellant, v. ERNEST J. PENA; JULIE PENA,
Appellees.
No. 97-16012
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
155 F.3d 1108; 1998 U.S. App. LEXIS 22063; Bankr. L. Rep.
(CCH) P77,793; 40 Collier Bankr. Cas. 2d (MB) 848; 978 Cal.
Daily Op. Service 7128; 98 Daily Journal DAR 9839
July 16, 1998, Argued and Submitted, San Francisco,
September 11, 1998, Filed
PRIOR HISTORY: [**1] Appeal from the Ninth Circuit Bankruptcy Appellate Panel. BAP No. AZ-96-1568. Hagan, Jones and Russell, Judges, Presiding.
DISPOSITION: AFFIRMED.
CORE TERMS: undue hardship, disability, monthly, good faith, repay, guaranteed, bankruptcy petition, standard of living, disability benefits, time of trial, student loan, prong, current income, good-faith, depression, discharged, repayment, persist, lump sum payment, interrogatory, anticipated, exhibited, averaging, ongoing, dischargeable, deferment, elapsed, net monthly income, mental disability, hospitalized
COUNSEL: Madeleine C. Wanslee, Phoenix, Arizona, for the appellant.
Ernest J. Pena and Julie Pena, Phoenix, Arizona, pro se appellees.
JUDGES: Before: Stephen Reinhardt, John T. Noonan and David R. Thompson, Circuit Judges. Opinion by Judge Thompson.
OPINIONBY: DAVID R. THOMPSON
OPINION: [*1110] OPINION
THOMPSON, Circuit Judge:
Debtor-Appellees Ernest and Julie Pena sought a bankruptcy court discharge of government insured student loans which were guaranteed by appellant United Student Aid Funds, Inc. (USA Funds). The Penas contended the loans were dischargeable in bankruptcy because payment of them would impose an undue hardship within the meaning of 11 U.S.C. § 523(a)(8)(B). The bankruptcy court agreed and discharged the loans. The BAP affirmed. USA Funds now appeals. We have jurisdiction pursuant to 28 U.S.C. § 158(d) and we affirm.
STANDARD OF REVIEW
"Because this court is in as good a position as the district court to review the findings of the bankruptcy court, it independently reviews the bankruptcy court's decision." Ragsdale v. Haller, 780 F.2d [**2] 794, 795 (9th Cir. 1986). This court applies a clearly erroneous standard to the bankruptcy court's findings of fact and reviews conclusions of law de novo. In re Claremont Acquisition Corp., 113 F.3d 1029, 1031 (9th Cir. 1997).
FACTS
Debtors and appellees Ernest J. Pena, Jr. and Julie Pena are husband and wife. On July 1, 1994, they filed a petition for relief under Chapter 7 of the Bankruptcy Code. Among the debts from which the Penas sought relief were federally guaranteed student loans incurred by Ernest to attend ITT Technical Institute (ITT) in Phoenix, Arizona. Ernest consolidated his loans under a single note for $9,399.60. The note bears an annual interest rate of 10%. The loans were guaranteed by appellant, United Student Aid Funds, Inc. (USA Funds), a private, non-profit guarantee agency under the Guaranteed Student Loan Program established by the Higher Education Act of 1965, Public Law No. 89-329, November 8, 1965, Title IV, 79 Stat. 1219 (20 U.S.C. §§ 1087-1087-4).
When Ernest completed his studies at ITT, he was awarded a credential as an "Associate of Specialized Technology." The credential was useless to him. It did not help him in his employment, and it [**3] was not accepted by other colleges for course work credit. Nevertheless, the Penas made several payments on the student loans. When Ernest became unemployed, they sought and obtained a 90-day deferral. At the end of that period, they were unable to resume payments and have made no payments since.
Julie suffers from a serious mental disability. Since the age of 13 she has experienced severe stabbing pains and occasionally hears voices. In 1992 she became psychotic and was hospitalized. She has not been able to hold a job longer than six months to a year. In or about August 1995, Julie received roughly $8,000 in a lump sum payment as an award of past-due disability benefits related to her mental condition. The Penas used the lump sum payment to buy a 1976 Oldsmobile Cutlass Supreme automobile and to pay other bills. The Penas said they needed to buy the Cutlass because their other car, a 1972 Buick, did not run well. At the time of trial, Julie was receiving $378 per month in disability payments.
When the Penas filed their bankruptcy petition, they listed net monthly income of $1,178.67 (entirely from Ernest's employment) and monthly expenses of $2,605. During discovery, the Penas' [**4] income had increased to $1,748.47 (Ernest's net wages had increased to $1,370.47 and Julie began receiving disability payments of $378.00), while their expenses had dropped to $1,803.78 and they anticipated a further drop to $1,570. By the time of trial, Ernest testified that his wages had increased an additional $1.57 per hour, and expenses, as anticipated, had decreased to approximately $1,570 per month.
The bankruptcy court granted a discharge of the student loans pursuant to the undue hardship provision in 11 U.S.C. § 523(a)(8)(B). The BAP affirmed in a published opinion. In re Pena, 207 B.R. 919 (9th Cir. BAP, 1997).
I
THE UNDUE HARDSHIP STANDARD
Government guaranteed student loans cannot be discharged in bankruptcy unless, (A) more than seven years has elapsed between the time the loan first became due and the [*1111] filing of the bankruptcy petition; or "(B) excepting such debt from discharge . . . will impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523(a)(8) (emphasis added). n1
n1 The Penas had one dependent at the time of trial.
[**5]
The Penas do not contend that at the time they filed their bankruptcy petition more than seven years had elapsed since Ernest's student loans first became due. They contend that if Ernest's student loans are not discharged, they will be subjected to "undue hardship" within the meaning of 11 U.S.C. § 523(a)(8)(B). Neither Congress nor this court has defined the term "undue hardship" in section 523(a)(8)(B). However, "The existence of the adjective 'undue' indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans. . . ." In re Brunner, 46 B.R. 752, 753 (S.D.N.Y., 1985) ( Aff'd by 831 F.2d 395 (2d Cir. 1987)).
A. In re Brunner
Brunner established a three-part test for a bankruptcy discharge of a student loan. First, the debtor must establish "that she cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents if forced to repay the loans." Brunner, 831 F.2d 395 at 396. The court noted that this portion of the test "comports with common sense" and had already "been applied frequently as the minimum necessary to establish 'undue hardship.'" Id. (citing In re Bryant, [**6] 72 B.R. 913, 915 (Bankr. D. Minn. 1986).
Second, the debtor must show "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." Brunner, 831 F.2d at 396. This second prong is intended to effect "the clear congressional intent exhibited in section 523(a)(8) to make the discharge of student loans more difficult than that of other nonexcepted debt." Id.
The third prong requires "that the debtor has made good faith efforts to repay the loans . . . ." Brunner, 831 F.2d at 396. The "good-faith" requirement fulfills the purpose behind the adoption of section 523(a)(8). Brunner, 46 B.R. at 754-55. Section 523(a)(8) was a response to "a 'rising incidence of consumer bankruptcies of former students motivated primarily to avoid payment of education loan debts.'" Id., (quoting the Report of the Commission on the Bankruptcy Laws of the United States, House Doc. No. 93-137, Pt. I, 93d Cong., 1st Sess. (1973) at 140 n. 14). This section was intended to "forestall students . . . from abusing the bankruptcy system." Id.
The Brunner test has been adopted by the [**7] Third and Seventh Circuits. In re Faish, 72 F.3d 298, 306 (3d Cir. 1995) cert. denied, 518 U.S. 1009, 135 L. Ed. 2d 1055, 116 S. Ct. 2532 (1996); Matter of Roberson, 999 F.2d 1132 (7th Cir. 1993). Although some confusion exists regarding the status of Brunner in the Sixth Circuit, n2 it has been applied by the bankruptcy and district courts in every other circuit. n3
n2 The Sixth Circuit has not yet adopted a test for determining undue hardship but referred to and applied Brunner in In re Cheesman, 25 F.3d 356 (6th Cir. 1994) (noting the existence of several undue hardship tests, the court rephrased Brunner and applied its test to support the conclusion that the student loans at issue "were dischargeable under any undue hardship test the [bankruptcy] court may have used . . . ."). The bankruptcy courts in the Sixth Circuit have since applied "the Brunner test as restated in Cheesman." See, e.g., In re Dolph, 215 B.R. 832, 836 (6th Cir. BAP, 1998).
n3 See, e.g., 1st Cir.: In re Garrett, 180 B.R. 358 (Bankr. D.N.H. 1995); 4th Cir.: Commonwealth of Virginia, State Educ. Assistance Authority v. Dillon, 189 B.R. 382 (W.D. Va., 1995), In re Ammirati, 187 B.R. 902 (D.S.C. 1995), aff'd 85 F.3d 615 (4th Cir. 1996), In re Walcott, 185 B.R. 721 (Bankr. E.D.N.C. 1995); 5th Cir.: In re Coveney, 192 B.R. 140 (Bankr. W.D. Tex. 1996), In re Raisor, 180 B.R. 163 (Bankr. E.D. Tex. 1995), In re Stebbins-Hopf, 176 B.R. 784 (Bankr. W.D. Tex. 1994); 8th Cir.: In re Rose, 215 B.R. 755 (Bankr. W.D. Mo. 1997); 9th Cir.: In re Shankwiler, 208 B.R. 701 (Bankr. C.D. Cal. 1997); In re Hinkle, 200 B.R. 690 (Bankr. W.D. Wash. 1996); In re Rosen, 179 B.R. 935 (Bankr. D. Or. 1995); In re Raymond, 169 B.R. 67 (Bankr. W.D. Wash. 1994); In re Lynn, 168 B.R. 693 (Bankr. D. Ariz. 1994).
[**8]
Notwithstanding this wide acceptance, the BAP in the present case preferred the test set forth in In re Cheesman, 25 F.3d 356 (6th Cir. 1994). Pena, 207 B.R. at 922. The BAP stated, "The Cheesman standard . . . is the [*1112] better test. . . . The Debtors should not be required to prove that 'exceptional circumstances' exist precluding an improved financial status in the future." Id.
B. In re Cheesman
Although the Sixth Circuit in Cheesman apparently applied Brunner to support its conclusion that the debtor did not meet any standard for undue hardship, the Sixth Circuit did not adopt any particular test. Cheesman, 25 F.3d at 359. Nor did the Cheesman court engage in any analysis regarding the various undue hardship tests then in use. Cheesman, however, did use slightly different language in applying the Brunner test to the Cheesman facts. Id. at 360. n4
n4 Here are the two formulations, side by side, of the Brunner and Cheesman tests:
________________________________________________________________________________
Brunner Cheesman
1) "the debtor cannot maintain, based 1) "the [debtors] could not maintain
on current income and expenses, a a minimal standard of living for
'minimal' standard of living for their family if they were required
herself and her dependents if forced to repay their loans."
to repay the loans;"
2) "additional circumstances exist 2) "There is no indication that the
indicating that this state of affairs [debtors'] financial situation will
is likely to persist for a significant improve in the foreseeable future."
portion of the repayment period of the
student loans;"
and and
3) "the debtor has made good-faith 3) "There is no evidence that the
efforts to repay the loans." [debtors] did not act in "good faith."
Brunner, 831 F.2d at 396. Cheesman, 25 F.3d at 360.
________________________________________________________________________________
[**9]
It does not appear that the Sixth Circuit in Cheesman was proclaiming a test distinct from Brunner. In any event, we join the Second, Third and Seventh Circuits and adopt the Brunner test to determine whether, pursuant to 11 U.S.C. § 523(a)(8)(B), a debtor in bankruptcy may discharge a student loan.
II
APPLYING BRUNNER
A. Maintaining a Minimal Standard of Living on Current Income and Repaying the Loans
The bankruptcy court found that the Penas' net monthly income totalled $1,748 (Ernest's take-home pay of $1,370 plus Julie's disability payments of $378). Although USA Funds points out that the bankruptcy court did not include an increase in Ernest's wages that occurred between discovery and the time of trial, this does not suggest that the bankruptcy court was clearly erroneous in its finding. There was evidence before the bankruptcy court that Ernest's income fluctuated. Accordingly, we accept as not clearly erroneous the bankruptcy court's finding that the Penas' monthly net income was $1,748.
USA Funds also challenges the bankruptcy court's finding of the Penas' monthly expenses. USA Funds contends the bankruptcy court clearly erred by averaging [**10] the differing monthly expense figures the Penas provided at various stages of the proceeding - at the time they filed their Chapter 7 bankruptcy schedules, at the time they responded to interrogatories, and at the time of trial.
We cannot say the bankruptcy court clearly erred in averaging the Penas' monthly expenses. The method for calculating a debtor's average monthly expenses is a matter properly left to the discretion of the bankruptcy court. Although the Brunner test looks to the debtor's "current" income and expenses, where the evidence suggests that the debtor's income or expenses tend to fluctuate, it is not inappropriate to average figures over a reasonable period of time. To require strict reliance upon conditions existing at the moment of trial could result in an accurate snapshot but a distorted picture. We do not believe Congress intended to impose upon the debtor or the bankruptcy court such a narrow focus.
[*1113] Using its averaging analysis, the bankruptcy court found that the Penas' expenses "on a monthly basis ranged between $1,570 and $1,993." The court selected the $1,570 figure by using the Penas' answer to Interrogatory 20 in which they stated their expenses [**11] were anticipated to drop to that amount. The court selected the $1,993 figure by combining portions of the Penas' trial testimony with figures they provided on Schedule J of their bankruptcy petition. The court then averaged in the figure of $1,804 which was the amount of the Penas' actual monthly expenses at the time they answered Interrogatory 19. The average of these three figures is $1,789, and that is the figure the bankruptcy court found to be the Penas' average monthly expenses.
Subtracting the Penas' average monthly expenses ($1,789) from their net monthly income ($1,748), the Penas were faced with a monthly deficit of $41. Clearly, in these circumstances the Penas could not maintain a minimal standard of living and pay off the student loans.
B. Additional Circumstances
The bankruptcy court did not state which of its findings it considered applicable to the second prong of the Brunner test. However, two factual findings are relevant to this portion of the analysis: Julie's disability and the fact that Ernest's earning potential was not increased by his ITT education. USA Funds challenges these findings.
i. Julie's Disability
Based on Julie's testimony [**12] and a letter notifying her of her disability benefits, the bankruptcy court found that Julie suffered from a "mental medical condition . . . . variously diagnosed as depression, manic depression (bipolar disorder), schizophrenia and paranoia," which "prevents long-term stability." USA Funds argues that because this testimony was uncorroborated, it is insufficient to establish a medical disability. The cases relied upon by USA Funds do not support this argument.
In re Sands, 166 B.R. 299, 311 (Bankr. W.D. Mi. 1994), held that although a diabetic debtor's uncorroborated testimony of past medical problems did explain his lack of employment prior to trial it did not establish a "disability that will persist for an extended period of time into the future." (emphasis added). The distinction between Sands and the present case rests in the nature of the disabilities. In Sands, the debtor had pretrial medical problems requiring surgery which interfered with his employment. Id. There was apparently no indication that the debtor had continuing problems other than his diabetes. Id.
In contrast, Julie suffers from a serious ongoing mental illness which will likely continue [**13] to interfere with her ability to work. She testified that since the age of 13 she has suffered from stabbing pains and she occasionally hears voices. In 1992, she became psychotic and had to be hospitalized. Due to her disability, she has not been able to hold any job for more than six months to a year. According to Julie, the administrative judge who awarded her disability benefits found her to be permanently mentally disabled. Although this was hearsay evidence, USA Funds did not object.
USA Funds also relies on portions of the lower court opinions in Brunner and In re Garrett, 180 B.R. 358 (Bankr. D.N.H. 1995). In Garrett, one of the debtor's doctors provided a letter which stated in part, "'Avoid heavy lifting (clerical work, e.g. typing okay).'" Garrett, 180 B.R. at 364 (quoting letter from Dr. Taylor-Olson) (emphasis added). The court held, "Based on the evidence before the court, the court finds that Garrett's medical problems would not prevent her from obtaining the type of employment she is most suited for." Id.
In Brunner, the district court reversed the bankruptcy court's disability finding because it was "clearly erroneous," not because it [**14] relied on uncontroverted testimony by the debtor. Brunner, 46 B.R. at 757. The court noted the debtor "testified that she was capable of working." and that, "Although appellee testified that she was consulting a therapist, there is no evidence in the record that her depression and anxiety impair her capacity [*1114] to work. She has no 'impairment' in any relevant sense of the word." Id. (emphasis added).
The present case is clearly distinguishable. In her testimony, Julie described her serious, ongoing mental disability which continues to prevent her from obtaining meaningful permanent employment. Further, her testimony is corroborated by an eight thousand dollar back disability award, continuing disability payments and the letter notifying her that she would receive disability payments. The bankruptcy court did not clearly err in its conclusion that Julie has an ongoing disability which prevents her from being employed.
ii. Ernest's Lack of Job Potential
USA Funds contends the bankruptcy court erred by considering evidence regarding the value of the ITT education. The Brunner court stated that "consideration of this factor is not only improper, it is antithetical [**15] to the spirit of the guaranteed loan program. . . ." Brunner 46 B.R. at 757.
We agree that consideration of educational value as a separate factor in analyzing undue hardship would improperly place too much emphasis on this evidence. However, as part of the second prong analysis, the value of Ernest's education is relevant to his future ability to pay off the student loans. The bankruptcy court did not err in considering that Ernest's income was not likely to increase as a result of his ITT education.
C. Good Faith
USA Funds finally contends that the bankruptcy court erred in finding that the Penas exhibited good faith in attempting to pay back the student loans.
The bankruptcy court found, "The debtors have made payments on the loans. After being laid off from Honeywell, the debtors were given a 90-day deferment, but then were unable to meet their obligations and filed chapter 7." These facts support the bankruptcy court's finding of good faith. They are quite different from the facts found in Brunner. There, the debtor failed to establish good faith because she "filed for discharge within a month of the date for the first payment of her loans came due, . . . . [**16] made virtually no attempt to repay, [and never] requested a deferment of payment, a remedy open to those unable to pay because of prolonged unemployment." Brunner, 46 B.R. at 758.
USA Funds also argues that the Penas' lack of good faith is demonstrated by the fact that when they received a lump sum payment of approximately $8,000 in back disability benefits for Julie, they bought a car and paid other bills.
Although there was no testimony regarding the purchase price of the car, it was approximately 20 years old when they bought it. With regard to the use of part of the lump sum payment to pay other bills, according to Ernest's testimony at trial, the Penas had "unsecured debts totalling $43,360 of which the student loan is approximately $8,685, excluding interest." USA Funds does not suggest why good faith would have required the Penas to pay the student loan debt prior to paying down portions of their other debts, when the other debts ($43,360 minus $8,685) were approximately four times the amount of the student loans.
We conclude the bankruptcy court did not clearly err in finding that the Penas exhibited good faith in attempting to pay back the student loans.
[**17] CONCLUSION
We adopt the Brunner test as the test to be applied to determine the "undue hardship" required to discharge student loans in bankruptcy pursuant to 11 U.S.C. § 523(a)(8)(B). Applying this test, the bankruptcy court did not clearly err in finding that (1) the Penas could not maintain a minimal standard of living and repay their student loans, (2) their unfortunate financial situation was likely to continue for a substantial portion of the repayment period, and (3) they made a good-faith attempt to pay the loans. The Penas established "undue hardship" within the meaning of 11 U.S.C. § 523(a)(8)(B), and they are entitled to a bankruptcy discharge of their student loans.
AFFIRMED. ****
In re: ROSEMARY RIFINO, Debtor. ROSEMARY RIFINO,Plaintiff-Appellant, v. UNITED STATES OF AMERICA; SALLIE MAE; UNIVERSITY OFWASHINGTON; NORTHWEST EDUCATION LOAN ASSOCIATION; WILLIAM D. FORD FEDERAL DIRECTLOAN, Defendants-Appellees.
No. 99-35378
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
2001 U.S. App. LEXIS 6239
February 12, 2001, Argued and Submitted, Seattle, Washington
April 13, 2001, Filed
PRIOR HISTORY: [*1] Appeal from the United States District Court for the Western District of Washington. D.C. No. CV-97-01860-R. Barbara J. Rothstein, Chief District Judge, Presiding.
DISPOSITION: AFFIRMED.
CASE SUMMARY
PROCEDURAL POSTURE: Debtor appealed from the judgment of the United States District Court for the Western District of Washington, which reversed the decision of the bankruptcy court and held that debtor's student loan obligations were not dischargeable as an undue hardship pursuant to 11 U.S.C.S. § 523(a)(8).
OVERVIEW: Debtor filed an adversary proceeding seeking to discharge her student loan obligations under 11 U.S.C.S. § 523(a)(8). The bankruptcy court ruled that debtor's student loan's were dischargeable, but on appeal to the district court, the bankruptcy court was reversed. The district court reinstated the debtor's student loans, holding that the loans were not dischargeable as an undue hardship because there was nothing exceptional about the debtor's circumstances that indicated a long-term hardship. The debtor appealed, but judgment of the district court was affirmed. Although the bankruptcy court did not clearly err in finding that the debtor's standard of living would fall below a minimal level if she were required to repay her student loans, the bankruptcy court clearly erred in concluding that the debtor's circumstances were likely to persist for a significant portion of the repayment period of her student loans. Consequently, debtor's student loans were not dischargeable pursuant to § 523(a)(8).
OUTCOME: Judgment was affirmed.
CORE CONCEPTS -
Bankruptcy Law: Practice & Procedure: Appeals
Pursuant to 28 U.S.C.S. § 158(c)(1), an appeal is to be heard by a bankruptcy appellate panel unless any party elects to have such appeal heard by the district court.
Bankruptcy Law: Practice & Procedure: Appeals
An appellate court is in as good a position as the district court to review the findings of the bankruptcy court, so the appellate court independently reviews the bankruptcy court's decision. The appellate court reviews the bankruptcy court's findings of fact under a clearly erroneous standard. Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous. The appellate court reviews de novo the bankruptcy court's application of the legal standard in determining whether a student loan debt is dischargeable as an undue hardship.
Bankruptcy Law: Nondischargeability of Individual Claims
Generally, student loan obligations are presumed to be nondischargeable in bankruptcy pursuant to 11 U.S.C.S. § 523(a)(8).
Bankruptcy Law: Nondischargeability of Individual Claims
See 11 U.S.C.S. § 523(a)(8).
Bankruptcy Law: Nondischargeability of Individual Claims
The existence of the adjective "undue" in 11 U.S.C.S. § 523(a)(8) indicates that the garden-variety hardship is viewed as an insufficient excuse for a discharge of student loans.
Bankruptcy Law: Nondischargeability of Individual Claims
To determine if excepting student loans from discharge will create an undue hardship on a debtor, the Ninth Circuit has adopted the Brunner test. To obtain a discharge of a student loan obligation, the debtor must prove: (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.
Bankruptcy Law: Nondischargeability of Individual Claims
Under the Brunner three-part test for determining the dischargeability of student loans, the burden of proving undue hardship is on the debtor, and the debtor must prove all three elements before discharge can be granted. If the debtor fails to satisfy any one of these requirements, the bankruptcy court's inquiry must end there, with a finding of no dischargeability.
Bankruptcy Law: Nondischargeability of Individual Claims
The first prong of the Brunner test requires the debtor to prove that she cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans. To meet this requirement, the debtor must demonstrate more than simply tight finances. In defining undue hardship, courts require more than temporary financial adversity, but typically stop short of utter hopelessness.
Bankruptcy Law: Nondischargeability of Individual Claims
The second prong of the Brunner test requires a debtor to prove 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. This prong is intended to effect the clear congressional intent exhibited in 11 U.S.C.S. § 523(a)(8) to make the discharge of student loans more difficult than that of other nonexcepted debt.
COUNSEL: Peter S. Holmes, Miller, Nash, Wiener, Hager & Carlsen, LLP, Seattle, Washington, for the plaintiff-appellant.
Diane Tebelius, Assistant United States Attorney, Seattle, Washington; Bruce Fine, Aiken & Fine, P.S., Seattle, Washington; Donivan R. Irby, Office of the Attorney General, Seattle, Washington; Joann L. Pheasant, Attorney General's Office, Social & Health Services, Olympia, Washington, for the defendants-appellees.
JUDGES: Before: Stephen Reinhardt, Kim McLane Wardlaw, and Ronald M. Gould, Circuit Judges. Opinion by Judge Gould.
OPINIONBY: Ronald M. Gould
OPINION:
GOULD, Circuit Judge:
This case involves the undue hardship provision of 11 U.S.C. § 523(a)(8). After debtor-appellant Rosemary Rifino ("Rifino") filed an adversary proceeding seeking to discharge her student loan obligations, the bankruptcy court ruled that Rifino's loans were dischargeable as an undue hardship pursuant to 11 U.S.C. § 523(a)(8). The defendants, holders of Rifino's student[*2] loan obligations, appealed to the district court, which reversed the bankruptcy court and reinstated Rifino's loans. We have jurisdiction over Rifino's appeal pursuant to 28 U.S.C. § 158(d). We hold that the district court correctly determined that Rifino was not entitled to a discharge on undue hardship grounds, and affirm.
FACTS AND PROCEDURAL BACKGROUND
At the time of the bankruptcy adversary proceeding, Rifino was forty-one years old, and a single mother with a ten-year-old son. Rifino earned a Bachelor of Science degree from the University of Oregon in 1991 and a Master of Social Work ("MSW") degree from the University of Washington in 1994. Rifino financed her education by acquiring federally insured student loans totaling approximately $69,000 from various lenders, including Sallie Mae, the University of Oregon, the Oregon State Scholarship Commission, the University of Washington, the Northwest Education Loan Association, and the William D. Ford Federal Direct Loan Program. Most of Rifino's student loans obligations did not go into repayment status until August 1996.
At the time of the adversary proceeding, Rifino was a social worker at Ryther [*3] Child Center, earning a gross annual salary of $27,591.36 and a net monthly salary of $1,898. Rifino's stated monthly expenses totaled approximately $1,897, and included tanning salon visits, cable television, a new car payment, and expenses related to her son's enrollment at Seattle Country Day School, a private elementary school. Although Rifino's son had a partial scholarship to this school, the cost of tuition and fees not covered by the scholarship totaled $1,780 for the 1993-1994 academic year and $1,400 for the 1994-1995 academic year. These expenses were in addition to child care expenses. Rifino has paid for her son to participate in Aikido, swimming lessons, skating lessons, Little League, and cross country-CYO. Rifino's stated monthly expenses did not include child care during school breaks, clothing, or maintenance for her car.
Rifino filed a Chapter 7 bankruptcy petition in June 1996 seeking to discharge her consumer debt. The petition was granted on September 16, 1996. On September 17, 1996, Rifino commenced an adversary proceeding seeking an undue hardship discharge of her student loan obligations under 11 U.S.C. § 523(a)(8). Rifino named[*4] Sallie Mae, the University of Oregon, the Oregon State Scholarship Commission, the University of Washington, the Northwest Educational Loan Association ("NELA"), and the William D. Ford Federal Direct Loan Program ("United States") as defendants in the adversary proceeding.
The adversary proceeding was tried before the bankruptcy court on September 23-24, 1997. The bankruptcy court entered judgment in favor of Rifino, ruling that Rifino would suffer an undue hardship if her student loans were not discharged.
All defendants timely appealed, electing to have their appeals reviewed by the district court as opposed to a bankruptcy appellate panel. See 28 U.S.C. § 158(c)(1) (stating that an appeal is to be heard by a bankruptcy appellate panel unless any party elects to have such appeal heard by the district court); see also Fed. R. Bankr. P. 8001(e). Pursuant to a stipulation of all the parties, the University of Oregon and the Oregon State Scholarship Commission moved to dismiss their appeals and the district court granted the dismissal with prejudice.
The district court reversed the bankruptcy court's discharge order and reinstated Rifino's student loan[*5] debt. Addressing the "undue hardship" discharge provision of 11 U.S.C. § 523(a)(8), the court held that the bankruptcy court erroneously applied the law to Rifino's claims. n1 Specifically, the court explained that "there is nothing exceptional about Rifino's circumstances and there are no additional circumstances that indicate longterm hardship." On the issue of good faith, the court reasoned, "Rifino has not made any payments on her loans and has not made any effort to repay her loans at any time. The timing of Rifino's bankruptcy filing, her choice to file under chapter 7 rather than chapter 13, and her refusal to consolidate her loans further demonstrate an absence of good faith."
n1 The district court also dismissed appellee, the University of Washington, finding that sovereign immunity barred Rifino's adversary proceeding. Because the University of Washington withdrew its sovereign immunity claim on appeal to this court, we instruct the district court to vacate that part of its opinion. We express no view on the merits of the University of Washington's claim.
[*6]
Rifino now appeals.
ANALYSIS
I
"Because this court is in as good a position as the district court to review the findings of the bankruptcy court, it independently reviews the bankruptcy court's decision. " Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986). We review the bankruptcy court's findings of fact under a clearly erroneous standard. In re Pena, 155 F.3d 1108, 1110 (9th Cir. 1998). "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574, 84 L. Ed. 2d 518, 105 S. Ct. 1504 (1985). We review de novo the bankruptcy court's application of the legal standard in determining whether a student loan debt is dischargeable as an undue hardship. In re Taylor, 223 B.R. 747, 750 (B.A.P. 9th Cir. 1998).
II
Rifino contends that the district court improperly substituted its judgment n2 for that of the bankruptcy court by concluding that she failed to establish that repayment of her student loans would present an "undue hardship. "We find Rifino's arguments unpersuasive.
n2 While the district court was obliged to accept the bankruptcy court's findings of fact unless clearly erroneous, it was not required to accept its conclusions as to the legal effect of those findings. Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner ), 831 F.2d 395, 396 (2d Cir. 1987). Determining whether payment of Rifino's student loans would constitute an undue hardship under 11 U.S.C. § 523(a)(8) required the district court to reach a conclusion as to the legal effect of the bankruptcy court's findings regarding her circumstances. Id. Thus, the district court properly reviewed the bankruptcy court's determination of undue hardship.
[*7]
Generally, student loan obligations are presumed to be nondischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(8). Section 523(a)(8) provides:
A discharge under section 727 ... does not discharge an individual debtor from any debt --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) (emphasis added). n3 Although "undue hardship" is not defined in the Bankruptcy Code, this court has recognized that "'the existence of the adjective 'undue' indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans. ...'" Pena, 155 F.3d at 1111 (quoting In re Brunner, 46 B.R. 752, 753 (Bankr. S.D.N.Y. 1985), aff'd 831 F.2d 395 (2d Cir. 1987)).[*8]
n3 This version of 11 U.S.C. § 523(a)(8) became effective on October 7, 1998. The revision repealed a provision controlling the dischargeability of student loans that became due more than seven years prior to filing the bankruptcy petition. Undue hardship is now the only basis for discharging student loans. The prior version of the statute would not produce a different result in this case because Rifino filed her Chapter 7 petition less than seven years after her student loans first became due.
To determine if excepting student loans from discharge will create an undue hardship on a debtor, the Ninth Circuit has adopted the three-part test established by the Second Circuit in Brunner. See Pena, 155 F.3d at 1112. To obtain a discharge of a student loan obligation, the debtor must prove:
(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[*9] 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.
Brunner, 831 F.2d at 396. Under this test, the burden of proving undue hardship is on the debtor, and the debtor must prove all three elements before discharge can be granted. In re Faish, 72 F.3d 298, 306 (3d Cir. 1995). If the debtor fails to satisfy any one of these requirements, "the bankruptcy court's inquiry must end there, with a finding of no dischargeability." Id.
A
The first prong of the Brunner test requires the debtor to prove that she "cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents if forced to repay the loans." Brunner, 831 F.2d at 396. To meet this requirement, the debtor must demonstrate more than simply tight finances. In re Nascimento, 241 B.R. 440, 445 (B.A.P. 9th Cir. 1999) (citation omitted). "In defining undue hardship, courts require more than temporary financial adversity, [*10] but typically stop short of utter hopelessness." Id. (citation omitted).
In this case, the bankruptcy court found that Rifino was "barely living within a minimal standard" and that "there are no excess funds in her budget which could be used for repayment of the loans." The bankruptcy court also noted that while "it is conceivable that [Rifino ] could reduce some of the items in her budget, ... such reductions would be minimal and inconsequential."
NELA, Sallie Mae, the United States, and the University of Washington (collectively "appellees") contend that the bankruptcy court's findings are clearly erroneous because Rifino's budget contains unnecessary items such as tanning, cable television, and a new car. Appellees contend that because Rifino's budget does not constitute a minimal standard of living, the bankruptcy court clearly erred in granting Rifino a discharge of her student loan debt.
Some courts have declined to discharge student loan debt where the debtor's budget included items such as cable television, a new car, and private schooling for a child. See Commonwealth of Va. State Educ. Assistance Auth. v. Dillon, 189 B.R. 382, 385-86 (Bankr. W.D. Va. 1995)[*11] (denying discharge of educational debt and finding debtor incurred $35 per month on cable television); Faish, 72 F.3d at 307 (rejecting claim of undue hardship by debtor who wanted to buy a car rather than continue to take the bus); Perkins v. Vermont Student Assistance Corp., 11 B.R. 160, 161 (Bankr. D. Vt. 1980) (finding that purchase of new car was self-imposed hardship); In re Conner, 89 B.R. 744, 749 (Bankr. N.D. Ill. 1988) (finding that choosing to send children to private school was self-imposed hardship). However, while a number of courts have declined to discharge student loan obligations in such circumstances, and though a close question is presented, the bankruptcy court's refusal to do so here is not necessarily clearly erroneous. See Anderson, 470 U.S. at 574 (" Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.").
We conclude that the bankruptcy court did not clearly err in finding that Rifino's standard of living would fall below a minimal level if she were required to repay her student loans.
B
The second prong of the Brunner[*12] test requires a debtor to prove 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." Brunner, 831 F.2d at 396. We have explained that this prong "is intended to effect 'the clear congressional intent exhibited in section 523(a)(8) to make the discharge of student loans more difficult than that of other nonexcepted debt. '" Pena, 155 F.3d at 1111 (quoting Brunner, 831 F.2d at 396).
In discharging Rifino's student loan obligations, the bankruptcy court reasoned:
Next, as to whether the debtor's present financial circumstances are likely to persist in the future or during the repayment period ... certainly, on the evidence, if the debtor remains in her present employment, her circumstances are not likely to improve.
This factual finding is not supported by the record and is clearly erroneous.
At Rifino's adversary proceeding, Dr. John Longris ("Dr. Longris"), the Associate Dean for Curriculum and Student Affairs at the University of Washington School of Social Work, testified generally about the earning[*13] potential of individuals employed as social workers. Dr. Longris explained that although salaries for social workers tend "to stay a little flat over the beginning years of the career," salaries typically increase after approximately five years of employment. After gaining experience, social workers with MSW degrees often move into administrative positions, with annual salaries ranging from $47,000 to $65,000, or private practice, with annual salaries up to $75,000. Dr. Longris also testified that numerous opportunities for advancement exist for individuals with a MSW degree, including supervisory roles, agency administration, policy analysis, policy development and implementation at state and federal levels, and private practice.
The record demonstrates that at the time of the adversary proceeding, Rifino was a professionally employed social worker at Ryther Child Center, earning a gross annual salary of $27,591.36. At that time, Rifino was only three years into her employment as a social worker and had already received two salary increases. Given the uncontested testimony of Dr. Longris, we hold that the bankruptcy court clearly erred in concluding that Rifino's circumstances [*14]are likely to persist for a significant portion of the repayment period of her student loans. n4
n4 Because Rifino has failed to satisfy the second prong of the Brunner test, our "inquiry must end [here], with a finding of no dischargeability." Faish, 72 F.3d at 306. We need not and do not consider arguments relating to the third prong of the Brunner test --whether Rifino has made a good faith effort to repay her loans.
Also, Rifino's argument that, as a prevailing party, she would be entitled to an award of attorney's fees is foreclosed by our affirmance and need not be further addressed. However, we are not suggesting that Rifino would have been entitled to attorney's fees had we reversed. See In re Fobian, 951 F.2d 1149, 1153 (9th Cir. 1991) (holding that discharge proceeding is not an action on the contract and reciprocal attorney's fees statutes are not implicated). That issue is left for another day and another case where it must be decided.
CONCLUSION[*15]
Rifino failed to prove that her present circumstances are likely to persist for a significant portion of the repayment period of her student loans. We hold that Rifino's student loans are not dischargeable pursuant to 11 U.S.C. § 523(a)(8).
AFFIRMED.