Erin R. Kemp v. United States Department of Education

The Appellant, Erin R. Kemp, appeals the order of the bankruptcy court1

denying her request for discharge of her student loan obligations to the United States

Department of Education (“DOE”) under 11 U.S.C. § 523(a)(8). We have jurisdiction

over this appeal. See 28 U.S.C. § 158(b). For the reasons that follow, we affirm.

ISSUE

The ultimate issue on appeal is whether the bankruptcy court properly held that

Appellant failed to meet her burden of proving an undue hardship under 11 U.S.C.

§ 523(a)(8). Appellant argues that the bankruptcy court did not apply the correct legal

standards in its totality-of-the-circumstances analysis. Specifically, she believes the

bankruptcy court improperly gave “dispositive effect” to her eligibility for a zero

payment income-based repayment program offered by the DOE. Appellant also

believes the bankruptcy court improperly applied an analysis of ability to make

payments on the loan as directed by Educ. Credit Mgmt. Corp. v. Jesperson (In re

Jesperson), 571 F.3d 775 (8th Cir. 2009). Finally, Appellant believes the bankruptcy

court made clearly erroneous factual findings regarding her present income and

expenses.

STANDARD OF REVIEW

Whether excepting a debtor’s student loan debt from discharge would impose

an undue hardship is a conclusion of law that we review de novo. Walker v. Sallie

Mae Servicing Corp. (In re Walker), 650 F.3d 1227, 1230 (8th Cir. 2011) (citing

Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 553 (8th Cir. 2003)).

“Subsidiary findings of fact on which the legal conclusion is based are reviewed for

clear error.” Jesperson, 571 F.3d at 779 (citing Reynolds v. Penn. Higher Educ.

The Honorable Ben Barry, United States 1 Bankruptcy Judge for the Western

District of Arkansas.

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Assistance Agency (In re Reynolds), 425 F.3d 526, 531 (8th Cir. 2005)). “We will not

upset the bankruptcy court’s findings of fact unless, after reviewing the entire record,

we are left with the definite and firm conviction that a mistake has been made.”

Nielsen v. ACS, Inc. (In re Nielsen), 473 B.R. 755, 758 (B.A.P. 8th Cir. 2012), aff’d,

502 Fed. Appx. 634 (8th Cir. 2013) (citations omitted).

FACTUAL BACKGROUND

In February 2016, Appellant filed a petition under Chapter 7 of the United

States Bankruptcy Code in the Western District of Arkansas. On May 3, 2017, she

filed the adversary proceeding that is the subject of this appeal, seeking a

determination that her student loans owed to the DOE were dischargeable in her

bankruptcy case.

At the time of trial, Appellant was a 36-year-old single mother to a 13-year-old

daughter. She began working part-time for Arvest Bank in 1998 at a starting wage of

approximately $10.00 per hour. While working for Arvest, Appellant began attending

college, but withdrew after two semesters and began working full-time at Arvest. In

2007, while still working full-time at Arvest, she began taking online courses through

Ashford University to obtain a college degree and enhance her ability to be promoted

within Arvest. Her education at Ashford was financed with the student loan that is the

subject of this case. In 2010, she obtained a bachelor’s degree in psychology with a

minor in sociology.

The Appellant worked at Arvest Bank for 17 years and received numerous

promotions and pay raises. She began as a teller, was promoted to an administrative

assistant, then a credit manager, an assistant branch manager, and finally a branch

manager. As branch manager, her salary was $45,000.00 per year, plus periodic

bonuses. She also had health insurance and a retirement plan, which included

contributions from Arvest.

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While employed at Arvest, Appellant was able to remain current on her student

loan payments of $350.00 per month. However, she began having difficulty paying

her student loan when she resigned from her job at Arvest in June 2015, eight months

prior to filing her bankruptcy case. Appellant testified that she resigned her job at

Arvest because the working environment had become too stressful, resulting in

anxiety and depression for which she takes medication. She also testified that she left

Arvest on good terms and could even be employed there again, albeit at a lower level

position.

Upon leaving Arvest, Appellant withdrew $35,000.00 from her Arvest

retirement account. That money was quickly used to purchase or pay off a truck for

her then husband, make a loan to her stepson, and pay other bills. None of the money

from her 401(k) was paid toward her student loan.

During the eight months between leaving Arvest and filing her Chapter 7

bankruptcy case, the Appellant began working part-time for Lowe’s. At the time of

the trial, she was making $13.46 per hour and estimated that she averages around

$400.00 per biweekly paycheck. Appellant testified that she is a good employee and

Lowe’s allows her to set her own hours. She also believes that Lowe’s would hire her

full-time – but if she did so, she would lose the ability to control her schedule. The

flexible schedule allows her to spend additional time with her daughter and to run a

small childcare business. With her job at Lowe’s, Appellant has health, dental, vision,

disability, and life insurance, but the coverage is not as comprehensive as the

insurance benefits available to full-time employees.

A substantial portion of Appellant’s testimony at trial involved the childcare

business. Essentially, during the school year, the Appellant provides before- and

after- school childcare to three children, including the provision of breakfast, snacks,

and driving to and from school and after-school activities. She also watches two of

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the children on certain days of the week during the summer months. According to

Appellant’s amended Schedule I, she nets $100.00 per month from her part-time

childcare business. In addition, she receives $175.00 per month in child support and

receives a substantial tax refund every year, which she prorates to approximately

$450.00 per month. In sum, between her income from Lowe’s, net childcare business

income, child support, and her prorated tax refund, Appellant estimates her monthly

net income to be $1,711.00.

Appellant is currently enrolled in an income-based repayment plan with the

DOE. Under that plan, her income and expenses are reviewed on an annual basis, and

a payment amount is set based on her ability to pay. After a period of time (perhaps

as long as 25 years – the record is not entirely clear on this point), the balance of the

loan is forgiven if she has completed all payments under the income-based repayment

plan. Based on Appellant’s current income and expenses, her monthly payment due

to the DOE is $0.00.

BANKRUPTCY COURT OPINION

After a trial, the bankruptcy court found that the Appellant did not meet her

burden of proving that the student loan would impose an undue hardship sufficient

to discharge the debt under 11 U.S.C. § 523(a)(8), and denied her complaint. The

bankruptcy court specifically found that “the debtor appeared intelligent, composed,

pleasant, accomplished, and articulate – qualities that have undoubtedly contributed

to the debtor’s historical success in the workplace.” In its opinion, the bankruptcy

court reviewed amended Schedules I and J, which were filed in her underlying

bankruptcy case on the day before trial. The bankruptcy court noted that the $100.00

per month estimated net income from the childcare business shown on the amended

Schedule I was inconsistent with Appellant’s testimony. Specifically, the bankruptcy

court found that based on Appellant’s testimony, her actual net income from the

childcare business is about $670.00 per month. The bankruptcy court also noted that

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amended Schedule J included $700.00 of “anticipated” monthly expenses comprised

of $300.00 for a car payment, $300.00 to “upgrade health insurance,” $50.00 for

vacations, and $50.00 for emergencies. The court found that only $350.00 of the

anticipated expenses were warranted – those for the car payment and emergencies.

After the bankruptcy court made its adjustments to Appellant’s income and expenses,

the bankruptcy court found that she had a surplus (income in excess of expenses) of

at least $105.00 per month.

In addition to reviewing Appellant’s past, present, and reasonably reliable

future financial resources, the bankruptcy court also considered additional factors that

may be relevant to a determination of undue hardship as required by Jesperson. 573

F.3d at 784. In undertaking this analysis of all relevant facts and circumstances, the

bankruptcy court specifically found that the Appellant’s present inability to pay her

student loan debt is entirely within her control. The bankruptcy court acknowledged

that Appellant was a credible witness and believes that she has been diagnosed with

anxiety and depression, but noted that she introduced no medical records or testimony

to indicate the extent of those conditions and whether they make it impossible or even

inadvisable to work full-time. The court noted Appellant testified that she could work

full-time at Arvest or at Lowe’s, and have better health insurance and other benefits,

but chooses not to do so due to the flexibility of her part-time schedule.

The bankruptcy court stated “the Court finds that the debtor has prioritized the

flexibility of a part-time schedule over a more lucrative full-time employment and –

although the debtor’s choice to spend more time with her family may be

understandable to some extent – it is still a choice, and, by definition, within her

control.” The bankruptcy court further noted that when the Appellant was employed

full-time, she made regular payments on her student loans without a problem. Finally,

the bankruptcy court noted that the existing hardship is not long-term. Her daughter

is entering high school and plans to attend college. The need to prioritize flexibility

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of a part-time schedule over more lucrative full-time employment will not exist in a

few years. In short, the bankruptcy court held:

[A]lthough the Court does not believe that the debtor’s

expenses are extravagant, the Court cannot find that the

debtor has made a good faith effort to maximize her

income because – as the Court has already discussed in

detail – she is choosing to work part-time despite at least

two readily available options for her full-time employment.

Accordingly, the bankruptcy court denied Appellant’s complaint.

DISCUSSION




Bankruptcy Code § 523(a)(8) provides, in pertinent part, that a bankruptcy

discharge does not discharge student loan debt “unless excepting such debt from

discharge . . . would impose an undue hardship on the debtor or the debtor’s

dependents[.]” 11 U.S.C. § 523(a)(8). The debtor bears the burden to prove undue

hardship by a preponderance of the evidence. Jesperson, 571 F.3d at 779. The test

used in the Eighth Circuit to determine undue hardship is the totality-of-thecircumstances

test, as stated by the Eighth Circuit:

In evaluating the totality-of-the-circumstances, our

bankruptcy reviewing courts should consider: (1) the

debtor’s past, present, and reasonably reliable future

financial resources; (2) a calculation of the debtor’s and her

dependent’s reasonable necessary living expenses; and (3)

any other relevant facts and circumstances surrounding

each particular bankruptcy case. Simply put, if the debtor’s

reasonable future financial resources will sufficiently cover

payment of the student loan debt – while still allowing for

a minimal standard of living – then the debt should not be

discharged.

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Long, 322 F.3d at 554-55 (citations omitted). Applying a de novo review, we

determine that the bankruptcy court applied the correct standard, the totality-of-the

circumstances standard, and properly held that the Appellant failed to meet her

burden of proving an undue hardship.






Appellant’s briefing on appeal asserts three limited assignments of error. First,

Appellant takes issue with certain of the legal standards used by the bankruptcy court

in applying the totality-of-the-circumstances test. She believes the bankruptcy court

improperly gave “dispositive effect” to her eligibility for a zero payment incomebased

repayment program offered by the DOE. However, that belief is simply not

supported by the record. The references in the bankruptcy court’s order to the income

based repayment plan were in its analysis of “any other relevant facts and

circumstances” as required by Long and Jesperson. Contrary to Appellant’s assertion,

the bankruptcy court said, “While the debtor’s eligibility for an income-based

repayment program is not dispositive, it is a factor that weighs against the discharge

of the debt.” (emphasis added). Clearly, the bankruptcy court did not give dispositive

effect to Appellant’s eligibility for an income based repayment program and this

assignment of error is without merit.

Second, Appellant takes issue with the bankruptcy court’s refusal to hold that

the student loan debt should be discharged if debtor is unable to pay the full

contractual payment amount at the time the bankruptcy case is filed. On this point,

the bankruptcy court held:

Also, the Court will state definitively that it disagrees with

the debtor’s contention that the Court must discharge a

student loan debt if it appears on the day of trial that the

debtor will be unable to afford to repay the entire amount of

the debt without undue hardship. To the contrary, the Eighth

Circuit has stated unequivocally that “a student loan should

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not be discharged when the debtor has the ability to earn

sufficient income to make student loan payments” under an

income based program such as the one the debtor is

participating in now and the one offered by DOE at trial.

See In re Jesperson, 571 F.3d at 781 (emphasis added).

Appellant seems to be asking us to interpret Long and Jesperson in a way that

prevents the bankruptcy court from considering available payment programs as a

factor in the undue hardship analysis. She wants us to consider only whether she has

the ability to pay the whole debt, without consideration of other repayment programs

and options. However, the Eighth Circuit Court of Appeals has not imposed any such

limitation and was clear in Jesperson that the bankruptcy court should consider the

availability of other repayment programs and options, saying: “However, a student

loan should not be discharged when the debtor has ‘the ability to earn sufficient

income to make student loan payments under the various special opportunities made

available through the Student Loan Program.’” Jesperson, 571 F. 3d at 781 (citing In

re VerMass, 302 B.R. 650, 660 (Bankr. D. Neb. 2003)). The bankruptcy court properly

considered the payment programs as part of the review of “other relevant facts and

circumstances” as required by the totality-of-the-circumstances test. This assignment

of error is also without merit.

Appellant’s third and primary contention on appeal is that the bankruptcy court

clearly erred in calculating her present income and expenses by overstating her net

business income and rejecting a $50.00 per month expense deduction for a vacation

fund. We reject this assignment of error for several reasons.

First, Appellant had the “rigorous” burden of proving undue hardship by a

preponderance of the evidence. Id. at 779. Unfortunately, the testimony and evidence

regarding the childcare business was incomplete and inconsistent. Appellant gave

estimates of food and fuel expenses for the childcare business, but also acknowledged

that part of the food is consumed by Appellant and her own daughter, and some of the

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transportation expenses relate to her daughter’s school and activities. There was no

clear breakdown of the actual expenses Appellant incurred just for the childcare

business. It seems that the Appellant’s estimate of $100.00 per month net income from

the business is based on her tax returns, which allow deductions from taxable income

for certain home and automobile expenses related to the business. However, for

purposes of the undue hardship analysis, taxable income from the business is not

equivalent to actual cash flow that can be used to make student loan payments. The

bankruptcy judge made his calculations on readily identifiable testimony from the

Appellant. It was Appellant’s “rigorous burden” to show otherwise and we agree with

the bankruptcy court that she failed to meet that burden.

Second, even if the bankruptcy court misunderstood some or part of Appellant’s

testimony, it only affected one element of the first prong of the totality-of-thecircumstances

test. That is, it pertained only to the Appellant’s present financial

resources. As indicated, the test requires consideration of a debtor’s past, present, and

reasonably reliable future financial resources. The vacation fund and childcare income

issue did not affect the court’s consideration of Appellant’s past financial resources

(namely salary from Arvest Bank) or future financial resources (namely, from full-time

employment).

Third, regardless of whether the Appellant’s net monthly income from the

childcare business is $100.00 as she suggests, or more than $600.00 as the bankruptcy

court suggests, it does not change her student loan payment to the DOE. Her payment

calculated under the DOE income-based repayment guidelines is $0.00. This zero

payment amount was a factor considered by the bankruptcy court in its evaluation of

undue hardship.

Fourth, and finally, it is clear from the bankruptcy court’s opinion that

Appellant’s present financial condition was not a factor that weighed heavily in the

hardship analysis. The bankruptcy court noted more than once that Appellant’s present

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financial difficulties are not expected to be long-term and are entirely within her own

control due to choices she has made.

Accordingly, reviewing the record de novo, we note that the facts are

undisputed that Appellant had no problem making (and did make) full student loan

payments when she was employed as a full-time bank branch manager. She voluntarily

left that employment and chooses to stay in her current part-time employment status

to allow for a more flexible schedule. She testified to having opportunities to again

work full-time, whether back at the bank or at Lowe’s. No medical evidence was

presented to indicate that the Appellant is unable to work on a full-time basis. We

agree with the bankruptcy court that Appellant’s current financial restraints are the

result of choices she has made and are not long term. Therefore, we agree that

Appellant failed to meet her burden of proving an undue hardship under 11 U.S.C. §

523(a)(8).

For the foregoing reasons, we affirm the bankruptcy court.