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E.6.3 Trial Memorandum to Support Borrower’s Claim for Discharge of Student Loan Based on Undue Hardship

UNITED STATES BANKRUPTCY COURT

DISTRICT OF MASSACHUSETTS

(EASTERN DIVISION)

[plaintiff]In re [CONSUMER],

Debtor

[plaintiff][CONSUMER],

Plaintiff

[vs]

[defendant]EDUCATIONAL CREDIT MANAGEMENT CORPORATION,

Defendant

[action]Chapter 7

[action]Case No. 04-14943-jnf

[action]Adv. No. 04-1224

PLAINTIFF’S TRIAL MEMORANDUM

The Plaintiff respectfully submits this trial memorandum for the consideration of the court in ruling on her request that her student loan debt to Educational Credit Management Corporation (ECMC) should be discharged in the associated bankruptcy case because repayment would create undue hardship for herself and her dependents within the meaning of 11 U.S.C. § 523(a)(8).

QUESTIONS PRESENTED

1. What is the appropriate legal standard for evaluating whether repayment of student loan debt would create “undue hardship” for a debtor and her dependents?

2. Does the availability of an income contingent repayment plan, such as the William D. Ford Direct Loan repayment program (hereinafter the “Ford Program”), mean that repayment of the Debtor’s student loan debt would not cause undue hardship for herself and her dependents?

3. Would repayment of all or part of this Debtor’s student loan debt cause undue hardship for herself and her dependents?

4. May the court discharge just a portion of the Debtor’s student loan debt to the Defendant?

SUMMARY OF ARGUMENT

This court should consider all of the circumstances surrounding the Debtor’s case in deciding whether she can repay her student loan debt without undue hardship. The Debtor respectfully submits that neither previous-repayment-attempts nor dominant-purpose tests are appropriate in the analysis.

The existence of an income contingent repayment plan (ICRP) is relevant in this proceeding only insofar as it provides information about the minimum payments that the Debtor would have to make should her loans not be discharged. Congress never intended an ICRP to meet all hardship situations or to replace a bankruptcy discharge. This court may not abdicate its responsibility to apply the Bankruptcy Code as written simply because an administrative alternative exists. Furthermore, an ICRP denies a debtor the fresh start promised by the Bankruptcy Code.

The Debtor cannot now afford to make the minimum payments for even one of her loans. Her limited English-language skills and child-care responsibilities make it impossible for her to seek or hold higher-paying jobs. Her job prospects are unlikely to change in the foreseeable future. Her living standard is already below an acceptable minimum because she cannot afford medical insurance, a car to replace the one she is now driving, or any sort of recreation. Her children lack opportunities for enrichment. Any foreseeable increase in her earnings should be devoted to curing these shortfalls in her living standard rather than to repaying loans for an education that has not yielded the expected benefits.

While this court may discharge some of the Debtor’s notes and not others, doing so in this case would not make sense because the Debtor and her dependents would still suffer undue hardship in repaying even the smallest of the loans.

ARGUMENT

I. UNDUE HARDSHIP SHOULD BE MEASURED BY ALL THE CIRCUMSTANCES OF THE CASE, NOT INCLUDING DOMINANT PURPOSE OR PREVIOUS ATTEMPTS TO REPAY

This court has previously stated its preference to weigh all of a debtor’s circumstances in deciding whether repayment of student loans would create undue hardship for purposes of § 523(a)(8). See Burkhead v. United States, 304 B.R. 560, 564 (Bankr. D. Mass. 2004); Anelli v. Sallie Mae Serv. Corp., 262 B.R. 1, 8 (Bankr. D. Mass. 2000). As this court noted in Anelli, courts tend to apply the same factors to dischargeability determinations regardless of whether they claim to be following Brunner[nn]1@ or a more flexible “totality of circumstances” approach. 262 B.R. at 8. See also ECMC v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004) (“We do not read Brunner to rule out consideration of all the facts and circumstances”). As was true in Burkhead and Anelli, this case does not require the court to engage in metaphysical speculation concerning how many angels can dance on the head of a doctrinal pin. Rather, it requires the court to identify and weigh the relevant factors bearing on the degree of hardship this Debtor would suffer were she to be forced to attempt repayment of her $50,000 loan debt.

As District Judge O’Toole recently said, in an opinion affirming the judgment of this court in another case, the court’s job is to “evaluate the evidence before [it] in a methodical and thorough way to see if [the Debtor has] satisfactorily established that her case [is] exceptional enough to warrant suspension of the usual rule of nondischargeability for her student loans.” Nash v. Connecticut Student Loan Foundation (In re Nash), No. 04-11745, slip op. at 7 (D. Mass. Aug. 17, 2005). Or, as recently stated by the First Circuit Bankruptcy Appellate Panel,

Under “totality of the circumstances” analysis, a debtor seeking discharge of student loans must prove by a preponderance of evidence that (1) her past, present, and reasonably reliable future financial resources; (2) her and her dependents’ reasonably necessary living expenses, and; (3) other relevant facts or circumstances unique to the case prevent her from paying the student loans in question while still maintaining a minimal standard of living, even when aided by a discharge of other pre-petition debts.

ECMC v. Savage (In re Savage), 311 B.R. 835, 839 (B.A.P. 1st Cir. 2004). Accord, ECMC v. Kelly (In re Kelly), 312 B.R. 200, 205 (B.A.P. 1st Cir. 2004).

The Debtor submits, however, that “dominant purpose” and “good faith” tests, as they have sometimes been applied, are inappropriate measures of undue hardship. It is true that bankruptcy relief aids the “honest but unfortunate debtor”. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). Consequently, bankruptcy courts traditionally apply equitable principles in measuring the conduct of debtors. Cf., e.g., In re Ringham, 294 B.R. 204, 209/-/210 (Bankr. D. Mass. 2003) (homestead exemption disallowed even after undoing arguably bad-faith pre-petition transfer). Courts--including this one--have sometimes regarded with suspicion bankruptcy filings whose dominant purpose was the discharge of student loan debt, and they have expanded the notion of “good faith” to encompass bona fide attempts to repay student loans. See, e.g., Pennsylvania Higher Ed. Assist. Agency v. Johnson, 1979 U.S. Dist. LEXIS 11428, slip op. at 41 & 61 (Bankr. E.D. Pa. 1979).

Denying discharge when a greater or lesser fraction of a debtor’s obligations are for student loans invites line drawing that has no basis in the Code. Furthermore, “avoiding the consequences of debts is normally the reason for filing for bankruptcy and the fact that the Debtor seeks to discharge almost exclusively student loan obligations in his bankruptcy should be irrelevant.” In re Bryant, 72 B.R. 913, 915 (Bankr. E.D. Pa. 1987); accord, Kopf v. Department of Education (In re Kopf), 245 B.R. 731, 742 (Bankr. D. Me. 2000).

The notion that a debtor should demonstrate previous attempts to repay student loans before seeking bankruptcy protection has historical roots. Prior to 1998, § 523(a)(8) distinguished between student loan debts older than seven years, which were fully dischargeable, and younger debts, which were dischargeable only on a showing of undue hardship. See Pub. L. No. 95-598, § 101, 92 Stat. 2591 (1978) (original version of § 523(a)(8), allowing discharge after five years); Pub. L. No. 101-647, § 3621, 104 Stat. 4964/-/65 (1990) (changing five years to seven). The apparent purpose of the pre-1998 rule was to close a perceived loophole that allowed discharges to enter “on the eve of lucrative careers”. Johnson v. Missouri Baptist College (In re Johnson), 218 B.R. 449, 451 (B.A.P. 8th Cir. 1998). Accord, Limkemann v. United States Dep’t of Educ. (In re Limkemann), 314 B.R. 190, 197 (Bankr. N.D. Iowa 2004) (persons on the eve of lucrative careers were the class targeted by § 523(a)(8)). Phrased with less of a moral overtone, debtors who sought discharge within the five- or seven-year period “might not yet have given repayment efforts a chance.” Kopf, supra, 245 B.R. at 741.

Undue hardship in the pre-1998 regime was, then, an escape valve intended to ameliorate a rule that might prove too rigid in exceptional cases. Courts therefore phrased their rules of decision in very narrow terms. See, e.g., Texas Instruments Fed. Credit Union v. DelBonis, 72 F.3d 921, 927 (1st Cir. 1995) (“[t]he hardship alleged, however, must be undue and attributable to truly exceptional circumstances, such as illness or the existence of an unusually large number of dependents”). After 1998, however, courts must interpret “undue hardship” in a new way to avoid harsh and unjust results. See Kopf, supra. The underpinnings of Johnson and Brunner have washed away, and the receding water has undermined the precedential value of those cases as well. Cf. Patterson v. McLean Credit Union, 491 U.S. 164, 173 (1989) (departure from stare decisis appropriate in statutory realm “where the later law has rendered the decision irreconcilable with competing legal doctrines or policies”).

The policy favoring a fresh start for honest but unfortunate debtors is a competing policy that compels abandonment of previous repayment attempts as a factor in weighing undue hardship. On the other hand, a debtor who “willfully contrives a hardship”, Polleys, supra, 356 F.3d at 1310, or who is “deliberately underemployed” or (for example) takes in foster children to avoid having the means to repay her student loans, Kelly, supra, 312 B.R. at 207/-/208, might be denied a discharge.[nn]2@ So too might a debtor who visits casinos instead of looking for work, and then refuses to use any of her winnings to pay down her student loans. Cf. Nash v. Connecticut Student Loan Foundation, Adv. No. 02-1466, slip op. at 18 (Bankr. D. Mass. June 18, 2004). Saying that such a debtor acts in bad faith is a shorthand way of saying that the debtor might, merely by removing a self-imposed impediment, have sufficient excess of income over expenses to be able to repay his loans. See Allen v. Am. Educ. Servs. (In re Allen), 324 B.R. 278, 282 (Bankr. W.D. Pa. 2005) (“undue hardship encompasses a notion that the debtor may not willfully or negligently cause his own default”). This case presents no such circumstance, however.

This court intimated in Burkhead that refusal to participate in the ICRP option of the Ford Program might evidence bad faith weighing against discharge. 304 B.R. at 566. It cited Swinney v. Academic Fin. Servs. (In re Swinney), 266 B.R. 800, 806/-/807 (Bankr. N.D. Ohio 2001). Swinney rather frankly cast the question as one of clean hands, saying that a debtor who seeks an equitable adjustment of student loan debt must first do equity by exploring other alternatives. Yet, the debtor’s fault or lack of fault should have no place in analyzing a student-loan discharge case. See Rutanen v. Baylis (In re Baylis), 313 F.3d 9, 19 (1st Cir. 2002). Furthermore, “there is no per se requirement that the debtor pay a certain percentage or minimum amount of the student loans in order to be found in good faith, and the failure to make a payment, standing alone, does not establish a lack of good faith. Instead, the debtor’s good faith is interpreted in light of [her] ability to pay and a failure to pay does not prevent a finding of good faith if the debtor never had the resources to make payments.” McMullin v. United States Dep’t of Educ. (In re McMullin), 316 B.R. 70, 81 (Bankr. E.D. La. 2004) (citations and internal quotations omitted). The Debtor expects the evidence to show that she never had the wherewithal to make more than token payments on her student loans and should therefore not be penalized for failure to do more.

Bankruptcy courts have more recently treated eligibility for an ICRP as being simply one more factor bearing on ability to pay. The Debtor argues in the next section of this memorandum that, far from being the panacea that Swinney might imply, an ICRP in fact traps a debtor in yet another perpetual cycle of debt and despair. Factually, the Ford Program’s ICRP would lead to negative amortization of her loan debt, such that she could never even cover the interest charges on an ever-increasing principal balance. Consequently, the fact that she did not leap onto the Ford Program bandwagon when ECMC offered the opportunity earlier in this proceeding should not be a factor at all.

II. ELIGIBILITY FOR AN ICRP UNDER THE FORD PROGRAM DOES NOT NEGATE UNDUE HARDSHIP

Regulations codified at 34 C.F.R. § 685.209 govern the income contingent option under the Ford Program. According to these regulations and to ECMC’s letter to the Debtor, payments under this ICRP would start at $188.33 per month and would be adjusted annually to reflect changes in her income relative to the federal poverty level. (Ex. D-2). The plan would last at most 25 years, but the time limit would be tolled pursuant to § 685.209(c)(4)(ii) during periods of deferment or forbearance. The Debtor’s loans are subject to a variable interest rate that presently equals 6.10% (Ex. P-6), and she presently owes $54,188.01 (Id.). The monthly interest on this principal amount is therefore $275.46. It is apparent that payments of just $188.33 will lead to negative amortization of the loan unless interest rates decline.

ECMC may argue that the Debtor’s eligibility for an ICRP under the Ford Program automatically establishes that she can repay her loan obligation without undue hardship. ECMC has made just this argument in several cases in other courts within the past few years, and the courts have soundly rejected it. See generally, Durrani v. ECMC (In re Durrani), 311 B.R. 496, 506/-/509 (Bankr. N.D. Ill. 2004) (collecting cases and summarizing arguments), aff’d, 320 B.R. 357 (N.D. Ill. 2005). ECMC is bound by those holdings in this proceeding under the Parklane Hosiery doctrine. See Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979) (collateral estoppel may be used offensively by someone not a party in previous case). “Once a court of competent jurisdiction has decided an issue of fact or law necessary to its judgment, that decision can--and should--preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case.” Fiumara v. Fireman’s Fund Ins. Cos., 746 F.2d 87, 91/-/92 (1st Cir. 1984).

Congress plainly never said that eligibility for an ICRP equates to absence of undue hardship. See, e.g., Nanton-Marie v. Department of Education (In re Nanton-Marie), 303 B.R. 228, 235 (Bankr. S.D. Fla. 2003);[nn]3@ Johnson v. ECMC (In re Johnson), 299 B.R. 676, 683 (Bankr. M.D. Ga. 2003); Porrazzo v. ECMC (In re Porrazzo), 307 B.R. 345, 351 (Bankr. D. Conn. 2004). For a court to defer to an administrative determination of hardship would be an abdication of judicial responsibility. See, e.g., Furrow v. Department of Education (In re Furrow), 2004 Bankr. LEXIS 1482 (Bankr. W.D. Mo. 2004). “If Congress had intended the question of dischargeability of student loans to be delegated to a nonjudicial entity, no matter how fair its formulas and intentions may appear, it could have provided for such.” Johnson, supra, 299 B.R. at 682. “A debtor’s failure to participate in an ICRP does not necessarily imply a lack of good faith, particularly where, as here, doing so would appear futile in light of the debtor’s particular circumstances.” Curiston v. Conn. Student Loan Found. (In re Curiston), 2004 Bankr. LEXIS 2322 (Bankr. D. Conn. 2004).[nn]4@

An ICRP is also contrary to the fresh-start policy of the Bankruptcy Code. Cf., e.g., Grogan v. Garner, 498 U.S. 279, 286/-/287 (1991). Signing up for an ICRP can “doom[] a debtor to perpetual indebtedness.” Berscheid v. ECMC (In re Berscheid), 309 B.R. 5, 13 (Bankr. D. Minn. 2002). Indeed, requiring a debtor to enter into an extended repayment plan that significantly exceeds the debtor’s working life may itself constitute undue hardship. See Fahrer v. Sallie Mae Serv. Corp. (In re Fahrer), 308 B.R. 27, 35 (Bankr. W.D. Mo. 2004). The loan debt will continue to haunt the debtor, harming her creditworthiness. See Korhonen v. ECMC (In re Korhonen), 296 B.R. 492, 497 (Bankr. D. Minn. 2003); Rutherford v. William D. Ford Direct Loan Program (In re Rutherford), 317 B.R. 865, 881 (Bankr. N.D. Ala. 2004). In this case, the Debtor would be 59 years old and a grandmother at the end of the ICRP. Her children will have lived their entire childhoods in the shadow of a massive and insurmountable debt. This bankruptcy would not have given the debtor or her children any sort of fresh start.

At least two courts have considered the psychological impact of continued loan liability under the Ford Program. In Fahrer, the debtor introduced evidence concerning the emotional toll of dealing with family and financial problems, and the court inferred that the toll would be exacerbated if she remained responsible for $180,000 in student loan debt. 308 B.R. at 36. In Durrani, the court noted that the debtor would be “burdened by a huge and growing obligation” that would arguably condemn her to remaining in an unsafe neighborhood. 311 B.R. at 508. This Debtor is expected to testify to weight gain and to feelings of hopelessness and frustration arising from the stress caused by her debt obligations. Given that ECMC has managed to except itself from the fair debt collection standards that govern other debt collectors, Pelfrey v. ECMC, 71 F. Supp. 2d 1161, 1180 (N.D. Ala. 1999), aff’d, 208 F.3d 945 (11th Cir. 2000), this Debtor has nothing but constant dunning to look forward to if her debts are not discharged.

The court should also consider the tax consequences of the ICRP. See, e.g., Thomsen v. Department of Education (In re Thomsen), 234 B.R. 506, 514 (Bankr. D. Mont. 1999); Parker v. Gen. Revenue Corp. (In re Parker), 322 B.R. 856, 862 (Bankr. E.D. Ark. 2005) (citing Thomsen and other cases). At the end of the 25-year repayment plan, the Debtor would realize ordinary income in an amount equal to the unpaid principal and accumulated interest. See I.R.C. § 108(a). The relief afforded by the ICRP would therefore be illusory to the extent of the tax assessed on that amount. ECMC may argue that the Debtor’s tax liability would be forgiven because she would be insolvent at the time, but there is no way from this vantage to foretell insolvency. The Bankruptcy Code does not require the debtor to trade one debt (on her student loan) for a future debt (for income taxes) that would itself be non-dischargeable in bankruptcy for a period of time in the future.

Finally, before finding that eligibility for an ICRP is a relevant factor in a discharge case, the court should find that it would meaningfully reduce the debt. See Strand v. Sallie Mae Servicing Corp. (In re Strand), 298 B.R. 367, 377 (Bankr. D. Minn. 2003) (repayment without undue hardship does not mean “nonpayment, or zero payment, or payment toward accumulating interest only”);[nn]5@ Stockstill v. A.C.S. (In re Stockstill), 2005 Bankr. LEXIS 626 (Bankr. D. Kan. 2005) (failure to participate in ICRP that would lead to negative amortization not evidence of bad faith).[nn]6@ Expert actuarial testimony is required to establish this factor: assumptions about interest rates, inflation, income tax rates, and the time value of money to someone like the Debtor who has no funds to invest would all have to be combined using an appropriate mathematical model to yield present-value sums that could be meaningfully compared to the $54,000 presently owed. An impossibly naive calculation suggests that the Debtor would make 300 payments totaling $56,499, whereupon she would be hit with an income tax bill of $22,491 (28% of the unpaid balance, which will have grown to over $80,000 due to the negative amortization described earlier). This calculation is not evidence, however. The court should require ECMC to show the efficacy of the Ford Program, but ECMC has not adduced the expert testimony required to make that showing. As Judge Rosenthal said,

barring abuse of the bankruptcy courts and the Code, all debtors deserve at least a chance at a fresh start. This assertion is further supported by the notion that is now axiomatic, at least in this circuit, that discharge for the debtor, absent debtor abuse, should be the norm, and that exceptions to that rule, e.g., § 523(a)(8), should be narrowly construed with all doubts resolved in favor of the debtor.

Coutts v. Mass. Higher Educ. Corp. (In re Coutts), 263 B.R. 394, 399/-/400 (Bankr. D. Mass. 2001) (citations omitted). Without expert actuarial testimony, there is no basis to conclude that the ICRP would make any meaningful contribution to repayment, whereas it is reasonably foreseeable given present circumstances that the ICRP would keep this Debtor harnessed to a millstone for nearly all of her working life.

The court should therefore reject any argument by ECMC that eligibility for the Ford Program’s ICRP defeats this Debtor’s claim of undue hardship. A court, not an administrative agency, must make that determination. Requiring [Consumer] to enter into a fruitless 25-year repayment plan that would retire an unknown, but assuredly small, portion of the debt cannot comport with Congressional intent. “[B]ankruptcy relief is designed to give the honest but unfortunate debtor a fresh start, and although government guaranteed student loans are meant to be more difficult to discharge than general unsecured debts, they are not meant to be impossible to discharge.” Korhonen, supra, 296 B.R. at 497.

III. THE DEBTOR AND HER DEPENDENTS WOULD SUFFER UNDUE HARDSHIP BY BEING REQUIRED TO REPAY ANY PORTION OF HER STUDENT LOAN DEBT

The Debtor expects the evidence to show the following, leading to the conclusion that she cannot repay her indebtedness for any or all of the loans now owned by ECMC.

The Debtor’s financial resources. The Debtor is currently employed as a home health aide scheduler for a home care and hospice agency. She earns $15 per hour. Her take-home pay is $930 every two weeks, or $2,015 per month. Aged 34, she has three children aged three, six, and eleven. The fathers of her children provide no support. She receives WIC vouchers exchangeable in kind for grocery items for her three-year-old, but that benefit will cease when the child reaches five years of age. She does not receive food stamps or other government benefits.

The Debtor immigrated to the United States from Haiti in 1990, when she was twenty. She is a U.S. citizen. She obtained a high school diploma in 1991 after attending Hyde Park High School. She attended Suffolk University from 1991 until 1997. She obtained a Bachelor’s Degree in General Studies and a Master’s Degree in Public Administration. She believed that obtaining an advanced degree would fit her for a managerial job paying $40,000 or more per year. Her unofficial transcript (Ex. P-1) discloses an undergraduate grade point average of 2.4 out of 4. She spent her first two semesters exclusively studying written and spoken English, with one introductory math course. Her grades show considerable variation, such as an A in Calculus I, a D in Calculus II, and an F in Calculus III. In general, her undergraduate performance was better in introductory courses than in more advanced ones. Her graduate coursework, by contrast, was nearly all A’s and B’s, with an overall GPA of 3.3.

The Debtor speaks English with a moderate Creole accent. The Debtor is expected to offer into evidence a short letter that she wrote to her high school to request release of personal information to her attorney. (Ex. P-2) The letter contains many grammatical and diction errors. Deborah J. Veatch, a vocational rehabilitation expert retained by the Debtor, is expected to testify that the Debtor did not understand the term “cover letter” or how to submit a professional resume to a prospective employer.

The Debtor has held many jobs since graduation from Suffolk University. The following table summarizes her job experience since 2000. (Ex. D-3, ¶ 3)

[table;5]

Year

Employer

Description

Pay rate

[head5]Total earnings

2000

Boston Globe

“Department Coordinator”, but mostly performed data entry

$10/hour

[c5]$3,000

2000

Temporary Services, Inc.

Data entry clerk

$10/hour

[c5]$2,400

2000

Beth Israel Deaconess

Asst. Mgr. in dept. of transport, maintenance & housekeeping

$15/hour

[c5]$7,000

2000

Quest Diagnostics

Lab technician (night shift)

$12/hour

[c5]$13,600

2001

Prostaff

Data entry clerk

$10/hour

[c5]$1,000

2001

Boston Globe

Data entry clerk

$10/hour

[c5]$8,900

2001

Epix I, Inc.

Data entry clerk

$12/hour

[c5]$1,200

2002

Horace Mann

Mental health asst.

$15/hour

[c5]$5,000

2002

Sunrise Asstd Living

Home health aide

$10.50/hour

[c5]$4,000

2002

Hammond Pointe Nursing Home

Weekend activities asst.

$10/hour

[c5]$1,300

2002

Dobbs Temporary Services

$10/hour

[c5]$300

2002

Judge Rotenberg Ed. Center

Mental health asst.

$11/hour

[c5]$2,000

2002

Epix I, Inc.

Data entry clerk

$12/hour

[c5]$900

2003

Horace Mann

Mental health asst.

$15/hour

[c5]$1,200

2003

Chestnut Hill Nursing Home

[c5]$28

2003

Parmenter VNA

Home health coordinator

$15/hour

[c5]$28,000

2004

Parmenter VNA

Home health coordinator

$15/hour

[c5]$30,137

[end table]

The Debtor attempted to secure employment by consulting with the career placement office at Suffolk University, attending career fairs at Suffolk, and answering advertisements in the newspaper. She was pleased to land the job at Beth Israel in 2000, but staff cutbacks resulted in her being laid off. She left her job with the Boston Globe when her third child was born in September of 2001. Some of her jobs included health benefits.

The Debtor has had a desire to work as a physician or dentist. At one point in the fall of 2000, she actually enrolled in a medical school in Mexico. She found that she could not tolerate being away from her children, who had to remain in Massachusetts for financial reasons. She therefore withdrew after just one week. It should also be noted that she received low grades in biology during her undergraduate training. (Ex. P-1) Thus, her goal to work as a medical professional is probably unrealistic.

In short, the Debtor lacks the business and linguistic skills needed to obtain or hold professional employment. Her Master’s Degree is of little value to her. In the opinion of Ms. Veatch, the Debtor lacks the skills, time, experience, attire, or computer resources to independently seek professional level employment, and she lacks the financial resources to pay for individualized career counseling or additional training. According to Ms. Veatch, the Debtor is presently working at her full capacity and to the best of her ability.[nn]7@ Furthermore, and also according to Ms. Veatch, the Debtor cannot financially or emotionally subsidize a search for a better job in the foreseeable future. Under these circumstances, the Debtor has carried her burden of showing that “her prospects for increasing her income in the future are too limited to afford her sufficient resources to repay the student loans and provide herself and her dependents with a minimal (but fair) standard of living.” Smith v. ECMC (In re Smith), 2005 Bankr. LEXIS 973 (B.A.P. 1st Cir. 2005).

The Debtor’s schedules disclosed tangible assets worth approximately $3,700 at the time she filed her petition. The Debtor drives a 15-year-old car that is in such poor condition that it was returned after having been seized on execution by a judgment creditor.[nn]8@ The Debtor’s job requires her to commute 32 miles round trip by car, and the commute takes 45 minutes each way. She cannot afford to buy a new car.[nn]9@ The car breaks down frequently, and she must pay to have it repaired.

The Debtor listed cash and bank accounts totaling $143, but the amount of cash she actually has fluctuates from a monthly low of as little as zero (or negative) immediately before she receives a paycheck to a little over $900 immediately afterward. The debtor sometimes overdraws her checking account, and therefore has a negative account balance during brief periods.[nn]10@

The Debtor listed a personal injury claim on her petition, which she valued at $2,500 after deducting medical expenses and attorney’s fees that she expected to be withheld. She has now abandoned that claim after being told by her personal injury lawyer that the prospective defendant is not liable.

The Debtor received a $25,000 settlement earlier this year as a result of an adversary proceeding brought against a debt collector to redress alleged fair-debt-collection and stay violations.[nn]11@ She purchased a certificate of deposit with the proceeds and continues to hold the entire sum, with accrued interest, on the date of trial. The debt collector in question (Delta Management Associates, Inc., hereinafter Delta) was acting as the agent of ECMC’s own predecessor in interest (American Student Assistance, hereinafter ASA) while attempting to collect the very debts that are in issue in this proceeding. The Debtor therefore submits that it would be inequitable in the extreme to force her to turn this sum over to ECMC.

ASA was bound by Delta’s misconduct in furtherance of the purpose of the agency. See Konick v. Berke, Moore Co., 355 Mass. 463, 468 (1969); Kansallis Finance Ltd. v. Fern, 421 Mass. 659, 665 (1996). The Debtor could have estopped ASA to rely on the settlement as evidence of her ability to pay had ASA attempted to collect the Notes. Since the Notes are not negotiable,[nn]12@ the common law of contract assignments controls the extent to which the Debtor may assert defenses against ECMC that she had against ASA. Cf. Mass. Gen. L. c. 106, § 3-102(a) (UCC Article 3 applies only to negotiable instruments). The Debtor’s adversary proceeding against the collector was filed one day before ECMC took title to the loans by assignment. Under the common law, since the Debtor had no notice of the assignment from ASA to ECMC until after her defense against ASA arose, ECMC is subject to the same defense. RESTATEMENT (SECOND) OF CONTRACTS, § 336; Quincy Trust Co. v. Pembroke, 346 Mass. 730, 732 (1964). The parties’ stipulation concerning defenses on the instruments do not govern this equitable defense to ECMC’s claim that the Debtor can repay the loans without undue hardship.[nn]13@

The Debtor owed no federal income tax for calendar year 2004. She received federal and state income tax refunds totaling $7,028 earlier this year. Of this amount, $2,836 represents child tax credits and the earned income credit. The remainder represents a return of sums withheld from her paycheck.

The Debtor’s living expenses. The Debtor’s schedules, as clarified by her testimony at trial, are expected to reveal that she and her three minor children have a life-style that can most charitably be called “frugal”. She lives with her three children, her parents, and a 16-year-old sister in a 4-bedroom apartment on the first floor of a 3-decker owned by one of her brothers. The brother occupies a second unit, and an unrelated stranger the third. She contributes $1,000 per month of the total $1,500 rent for the unit. Her parents are responsible for paying for gas and electricity, but she contributes something towards these expenses when she is able. She spends about $64 per month for telephone service; $400 per month for food; an average of $158 per month for gasoline, oil, car maintenance and auto insurance; and $61 per month for clothing and laundry. She spends $90 every two weeks for day care, or an average of $194 per month. In the last eight months, she has paid a total of $204 for medical care for herself. On the average, these regular expenses add up to $1,902 per month.

The Debtor purchases dental insurance through her employer at a cost of $11 every two weeks, but she cannot afford to pay $250 every two weeks to purchase health insurance for herself. She does not usually have the money to purchase MassHealth insurance for her children, so she usually takes them to the emergency room at Boston City Hospital. She does not smoke. She had been in the habit of making occasional $10 payments to a gospel group, but she has stopped doing so after learning that the charity may have been a scam. In previous years, she spent $50 for an annual trip to Canobie Lake Park for herself and her children, but she was unable to afford that trip this year.

Of the $7,028 total tax refund she has received, she has spent the following sums not accounted for in the preceding narrative: three months of MassHealth coverage for her children, $324; auto excise tax, $27.50; AAA membership, $48.00; summer clothing for the children, $250; electricity and gas, which were about to be cutoff because her parents had not paid the bills, $300; car parts and labor, $584.28; and a bunk bed so her two oldest children (a son and a daughter, aged 6 and 11, respectively) would no longer have to share a twin bed, $800. These extra expenses total $2,333.78. On the Saturday preceding this trial, she was holding (uncashed) a U.S. Treasury check in the amount of $3,890.25 issued in partial payment for her refund.

The Debtor’s budget does not provide for many of the expenses that are part of a “minimal” lifestyle in Boston. While a debtor cannot expect her creditors to subsidize her children’s education, Savage, supra at 841 n. 9, the Congressional mandate to focus on “undue hardship on the debtor and the debtor’s dependents,” 11 U.S.C. § 523(a)(8), necessarily implies some allowance for an upbringing that will fit the debtor’s children for life in twenty-first century America. That allowance should embrace a modicum of culture in addition to mundane employment skills. This Debtor cannot afford to take her children to movies or other cultural events that are not free. She does not own a VCR or DVD player and can therefore not rent movies to enrich or entertain herself and her children. She cannot afford cable TV and can therefore not expose her children to educational programs on channels like History, Discovery, or even CNN. She has never taken her children to an art museum or the New England Aquarium. She and her children once toured the lobby of the Science Museum and browsed the gift shop without buying anything, but they did not go inside the museum.[nn]14@ Although one of her neighbors has a computer, neither she nor her children has regular access to a computer to learn computer skills or to access the vast educational and cultural content available on the Internet.[nn]15@

Most importantly, the Debtor cannot afford health insurance or a new car, and she cannot afford to pay market rent for housing. A medical or mechanical emergency would financially devastate her family. The Debtor believes that $1,600 per month is typical rent for one floor of a 3-decker, but the Debtor pays just $1,000 and makes no regular payments for energy.

Were reasonable but presently unfunded expenses to be included in the Debtor’s budget, the Debtor would need to spend $5,900 immediately and to have monthly take-home pay of $3,896 to cover recurring monthly expenses. She is in urgent need of a replacement car and should purchase a computer for her children. Her second-oldest needs uniforms for the school year that has just started. These expenses would be $5,000, $700, and $200, respectively. Her additional monthly expenses include an extra $600 for market-rate housing, $649 for health insurance for herself and her children, $200 for energy (assuming she can find superbly insulated housing), $50 for cable TV, $15 for Internet access, and $30 for one trip to the movies (without popcorn or other concessions). For purposes of this proceeding, the court should consider that she presently has a $1,881 monthly shortfall before she can even achieve the “minimal” lifestyle described in Kelly and Savage.

Summary. Through no fault of her own, the Debtor has been unable to make effective use of her education to obtain adequate employment. She has been leading a Joe Btfsplk[nn]16@ sort of existence as a result of naiveté concerning financial and legal matters. Her reasonable expenses, could she but fund them, would exceed her take-home income by about $1,900 per month. Life for her and her dependents is already an undue hardship; there is no practical possibility that she will ever be able to pay any portion of her student loan debt. Accordingly, the court should rule her debt to ECMC to be fully dischargeable.

IV. ALTHOUGH THE COURT MIGHT DISCHARGE SOME OF THE DEBTOR’S NOTES BUT NOT OTHERS, SUCH A PARTIAL DISCHARGE WOULD STILL CAUSE UNDUE HARDSHIP.

ECMC may argue that this court should discharge just a portion of the student loan debt. The Debtor submits, however, that a partial discharge would still lead to undue hardship.

Cases in this district support the use of a hybrid partial discharge approach, wherein the court grants a discharge on certain student loan notes but not on others. See ECMC v. Kelly, supra, 312 B.R. at 208. See also, e.g., Lamanna v. EFS Servs. (In re Lamanna), 285 B.R. 347, 353 (Bankr. D.R.I. 2002); Grigas v. Sallie Mae Servicing Corp. (In re Grigas), 252 B.R. 866, 874 (Bankr. D.N.H. 2000).

Some courts in other districts have conceived that § 105(a) permits them to reform student loan contracts in various ways. See generally Tennessee Student Assistance Corp. v. Hornsby (In re Hornsby), 144 F.3d 433, 438/-/440 (6th Cir. 1998). In Miller v. Department of Education (In re Miller), 254 B.R. 200, 206/-/207 (Bankr. N.D. Ohio 2000), for example, a bankruptcy judge discharged the interest, but not the principal, due on a student loan. He did so, moreover, only on condition that the Debtor adhere to a payment schedule. In Barron v. Texas Guaranteed Student Loan Corp. (In re Barron), 264 B.R. 833, 846/-/847 (Bankr. E.D. Tex. 2001), the court discharged interest that had accrued after a state court judgment. Finally, in Saxman v. ECMC (In re Saxman), 325 F.3d 1168, 1175 (9th Cir. 2003), the panel affirmed a district court order that the bankruptcy court consider what portion of a single debt might be discharged without undue hardship.[nn]17@

Still other courts, following a “strict” approach to the question of partial discharge, have held that either all of a debtor’s student loans must be discharged or none of them. See, e.g., United Student Aid Funds v. Taylor (In re Taylor), 223 B.R. 747, 753 (B.A.P. 9th Cir. 1998).[nn]18@

Despite the Solomonic appeal of the “flexible” approach articulated in Hornsby and Saxman, there is no textual support in the Bankruptcy Code for it. See Grigas, supra, 252 B.R. at 872. “[B]ankruptcy judges do not have a roving commission [under § 105(a)] to do equity in a fashion inconsistent with other provisions of the Code.” Lamanna, supra, 285 B.R. at 352. Moreover, fashioning a customized remedy in every case invites subjective and unpredictable line drawing--the sort of judicial subjectivity that led seventeenth century lawyer John Selden to remark that “[e]quity is a roguish thing.”[nn]19@ A customized remedy may also involve the court in ongoing supervision for many years. The Debtor therefore urges this court to reject the Hornsby/Saxman “flexible” approach.

While the Debtor acknowledges that the great weight of authority permits a partial discharge, she submits that repaying even the smallest of the notes would still create an undue hardship, and she cites the familiar cliché of loading straw onto a camel. In its Supplemental Response of ECMC to Plaintiff’s Interrogatories (Ex. P-4), ECMC stated that it “does not allow for an ‘interest only’ payment.” ECMC provided a table of minimum payments for repayment periods lasting 15, 20, and 25 years. (Ex. P-6) The payments are obviously smaller the longer the repayment period lasts. Using the figures in the table for 25 years, and placing the loans in increasing order by amount, the metaphorical load on the Debtor’s back would stack up like this:

[table;2]

Loans Numbered

Monthly Payments

2

26.87

2 & 3

55.33

2, 3, & 4

84.56

2, 3, 4 & 1

124.28

2, 3, 4, 1, & 6

181.19

2, 3, 4, 1, 6, & 5

265.87

2, 3, 4, 1, 6, 5, & 7

352.46

[end table]

If it were possible to reliably forecast the Debtor’s income and expenses for twenty-five years with sufficient precision, the court could easily divine the point at which the total of payments would exceed ability. Such precision is not possible, however. This Debtor can’t afford the luxury of a budget: she is forced by circumstances to react to each new financial crisis as it occurs. She might have the ability in any single month to pay, say $27. In another month, she might have just $10.00 left over after paying her necessary household expenses. She cannot easily shift excess funds from one month to the next because she is perpetually on the verge of collapsing under the weight of her expenses.

Thus, without forcing the Debtor into an ICRP, it makes little sense to discharge less than all of the separate loan debts. Nor can the court apply the partial discharge concept to the Ford Program ICRP. The relevant regulations state that

The amount the borrower would repay is based upon the borrower’s Direct Loan debt when the borrower’s first loan enters repayment, and this basis for calculation does not change unless the borrower obtains another Direct Loan or the borrower and the borrower’s spouse obtain approval to repay their loans jointly under paragraph (b)(2) of this section. If the borrower obtains another Direct Loan, the amount the borrower would repay is based on the combined amounts of the loans when the last loan enters repayment.

34 C.F.R. § 685.209(a). The reference to “combined amounts” would not seem to give the court discretion to fashion a partial discharge remedy even in this case, when the loans haven’t been officially consolidated. Even if permission for a partial discharge lurks in the interstices of the complex Ford Program regulations, the fresh start policy of the Bankruptcy Code and the analysis given in Part II of this argument militate against the ICRP altogether.

The court should therefore discharge all of the Debtor’s student loan debt because a preponderance of the evidence shows that the Debtor cannot afford to make minimum payments on even the smallest of the loans.

CONCLUSION

A preponderance of the evidence will show that the Debtor cannot now repay any portion of her student loan debt without suffering undue hardship and forcing her three minor children to endure undue hardship. Despite her formal education, she is unlikely to improve her lot in life in the future. Her budget leaves her and her children well below a “minimal” lifestyle. For these reasons, her entire student loan debt should be discharged.

[blank]

Dated: September 18, 2005

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[CONSUMER], by her attorney,

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[Attorney for Consumer]

[fnn]@1@ Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987).

[fnn]@2@ The debtor in Kelly was not guilty of either sin, as the court was at pains to note.

[fnn]@3@ ECMC was a party in the Nanton-Marie litigation.

[fnn]@4@ ECMC was a party in the Curiston litigation.

[fnn]@5@ ECMC was a party in the Strand litigation.

[fnn]@6@ ECMC was a party in the Stockstill litigation.

[fnn]@7@ This Debtor, who is represented pro bono by counsel, was able to secure the assistance of a qualified vocational expert, who also agreed to serve pro bono. Most debtors seeking discharge of student loan debt are not so lucky and will be unable to satisfy this court’s desire for an expert evaluation of prospective earning capacity. Cf. Burkhead, supra, 304 B.R. at 565/-/66. The Debtor urges the court to consider, for its impact on future cases, the opinion in Mosley v. Gen. Revenue Corp. (In re Mosley), 2005 Bankr. LEXIS 1640 (Bankr. D. Ga. 2005), wherein Bankruptcy Judge Mullins suggests methods (such as judicial notice, court appointment of experts pursuant to Fed. R. Evid. 706, and a pragmatic application of evidentiary rules) for tempering the need for prognostication in pro se or pro bono cases.

[fnn]@8@ The circumstances of the execution sale exemplify the sort of judicial problems that afflict this Debtor. An identity thief opened an account in her name at a local discount store. The Debtor could not afford to hire a lawyer to defend her in a lawsuit by the store, which refused to believe her explanation. In the end, the store’s judgment went unsatisfied because the Debtor had no valuable assets. The FTC later charged the store with violations of the FTC Act because of lax controls that led to millions of dollars in fraudulent purchases. See . (Press Release dated June 16, 2005).

[fnn]@9@ The Debtor in fact purchased another car in July of 2000, but it was stolen and stripped in March of 2004. The insurer declined coverage after an investigation by an individual who exhibited bias and inability to understand the Debtor’s accent and that of another witness. The Debtor could not afford to hire an attorney to take action against the insurer.

[fnn]@10@ On one occasion in October of 2004, she sent a $20 check to someone. The payee’s son gave the account information to Verizon, which charged the Debtor’s account $337 to pay the son’s phone bill. The resulting charge against the Debtor’s checking account caused multiple overdraft charges that were eventually reversed. A subprime credit card lender was making unauthorized monthly withdrawals of $39.95 from her checking account; these withdrawals, since they were unexpected, also led to overdraft charges.

[fnn]@11@ The adversary proceeding was Paul v. Delta Management Associates, Inc., No. 04-1213 (Bankr. D. Mass.). This court approved the settlement on January 26, 2005.

[fnn]@12@ The seven notes at issue in this proceeding are identical except for date, amount, and certain other, insignificant, details. Each of them contains the following promise to pay: “I promise to pay to the lender, or a subsequent holder of this Promissory Note, all sums disbursed (hereinafter “loan” or “loans”) under the terms of this Note, plus interest and other fees which may become due as provided in this Note.” This is not a promise to pay to bearer or to order, and it is not a promise to pay a sum certain in money. The notes are therefore not negotiable instruments within the purview of the UCC, as it was amended in 1990. See Mass. Gen. L. c. 106, §§ 3-102(a), 3-104.

[fnn]@13@ The Joint Pretrial Memorandum (docket # 48) in this proceeding recites [¶ (G)(6)] that “[t]he Notes are the valid, subsisting obligations of the Plaintiff and are not subject to any defense other than that the Plaintiff claims that repayment of the same would cause undue hardship for herself and her dependents.”

[fnn]@14@ The Debtor did not realize that she could also tour the southeast lobby of the museum, including the musical stairs, without paying an admission charge.

[fnn]@15@ Policy makers have highlighted the existence of a “digital divide” between those who have Internet access and those who have not. “The consequences to American society of this race gap in Internet use are expected to be severe. Just as A. J. Liebling observed for the freedom of the press, the Internet may provide for equal economic opportunity and democratic communication, but only for those with access. The United States economy may also be at risk if a significant segment of our society, lacking equal access to the Internet, wants for the technological skills to keep American firms competitive.” Hoffman, Novak & Schlosser, “The Evolution of the Digital Divide: How Gaps in Internet Access May Impact Electronic Commerce”, 2000 Journal of Computer-Mediated Communication, reprinted at (citations omitted).

[fnn]@16@ From the character in the Li’l Abner cartoon series, who has been characterized as “world’s most loving friend and worst jinx who always travels with a dark cloud over his head”. See, e.g., .

[fnn]@17@ The loans held by ECMC in Saxman had been consolidated into a single obligation. The “hybrid” approach to partial discharge mandates an undue hardship analysis of each separate obligation. See, e.g., Coutts, supra.

[fnn]@18@ Taylor was effectively overruled by the Ninth Circuit Court of Appeals in Saxman.

[fnn]@19@ J. Selden, Table Talk, 61 (Reynolds ed. 1892). Selden continued, “For law we have a measure, know what to trust to; equity is according to the conscience of him that is chancellor, and as that is larger or narrower, so is equity. ‘Tis all one as if they should make the standard for the measure we call a foot, a chancellor’s foot. What an uncertain measure would this be. One chancellor has a long foot, another a short foot, a third an indifferent foot; ‘tis the same thing in the chancellor’s conscience.” Many years later, Lord Chancellor Eldon retorted that “[n]othing would inflict on me greater pain, in quitting this place, than the recollection that I had done any thing to justify the reproach that the equity of this Court varies like the Chancellor’s foot.” Gee v. Pritchard, 36 Eng. Rep. 670, 674 (1818).

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