BAP Affirms Determination that Current Financial Difficulties Resulting from the Debtor’s Choices do not Constitute Undue Hardship Under § 523(a)(8).

By Karl Johnson posted 11-26-2018 13:30

Karl Johnson, Hellmuth & Johnson, PLLC
Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Amanda Schlitz, U.S. Bank

In Kemp v. U.S. Dep’t of Educ. (In re Kemp), 588 B.R. 226 (8th Cir. BAP Aug. 24, 2018), the BAP affirmed the bankruptcy court’s finding that repayment of student loans would not constitute undue hardship because, among other reasons, the debtor’s current financial difficulties were the result of her own choices, not expected to be long-term, and the debtor could afford income-based repayments of $0.00 per month. Notably, this case is similar to Piccinino v. U.S. Dep’t of Educ. (In re Piccinino), 577 B.R. 560 (8th Cir. BAP Dec. 7, 2017), where the BAP also determined a self-imposed hardship did not constitute undue hardship for purposes of § 523(a)(8).

Student loans can be discharged in bankruptcy only when repayment would constitute “undue hardship”—a term that is not defined by the Bankruptcy Code, and, in the Eighth Circuit, determined under a flexible “totality of the circumstances” test that mainly considers: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s reasonably necessary living expenses; and (3) any other relevant facts and circumstances. The debtor bears the “rigorous” burden of proving undue hardship.

In Kemp, the debtor previously worked for a bank, received numerous promotions and pay raises, and remained current on her student loan payments while employed by the bank.  However, the debtor resigned from the bank, claiming the environment had become too stressful—resulting in anxiety and depression for which she needed medication. 

The debtor was working part-time at Lowe’s when she filed her bankruptcy petition. The debtor claimed that this part-time employment allowed her to spend time with her teenage child and run a small childcare business.  Based on her current income and expenses, the debtor’s income-based repayment was $0.00.

The BAP addressed three issues on appeal in Kemp.  Undue hardship is a conclusion of law that the BAP reviews de novo.

  1. Whether the bankruptcy court gave improper dispositive effect to the debtor’s eligibility for $0.00 income-based repayments?

The BAP dismissed this argument. Consideration of the income-based repayment was appropriate under the “any other relevant facts and circumstances” prong of the undue hardship test in the Eighth Circuit, and, the bankruptcy court specifically noted that the debtor’s eligibility, while “not dispositive,” does weigh against discharge.

      2.  Whether the bankruptcy court may consider available payment programs and other options as a factor in the undue hardship analysis?

The BAP also dismissed the argument that the bankruptcy court could consider only a debtor’s ability to repay the whole debt, without considering other repayment programs and options.  The Eighth Circuit has not imposed any such limitation, and the bankruptcy court properly considered repayment programs as part of the totality of the circumstances test. 

       3.  Whether the bankruptcy court made erroneous factual findings of the debtor’s present income and expenses.

The debtor argued the bankruptcy court erred in calculating her present income and expenses. The BAP emphasized that a debtor bears the “rigorous” burden of showing undue hardship, and based on its de novo review of the record noted the following:

  • It was undisputed that the debtor had no difficulty remaining current on her student loans while employed full-time at the bank;
  • The debtor voluntarily left that employment and chose to remain employed only part-time;
  • The debtor had the opportunity to work full-time—whether at the bank or Lowe’s— and chose not to do so;
  • The debtor did not present any medical evidence that she is unable to work full-time;
  • The debtor’s current “financials restraints are the result of choices she has made and are not long term.”
  • The debtor’s testimony at trial was incomplete and inconsistent.

And, the BAP agreed that the debtor’s present financial difficulties were entirely within her own control due to personal choices—however understandable the decision to spend more time with family may be—and were not expected to be long-term. The BAP agreed that the debtor failed to meet her burden of proving an undue hardship, and affirmed the decision of the bankruptcy court.