Bankruptcy Judge Mitchell L. Herren was put in the unfortunate and untenable position of having to decide how parents should spend their limited income on their children’s education and upbringing. He was placed in the similarly impossible position of projecting the couple’s income for years to come.
The couple in question received a no-asset chapter 7 discharge and reopened their case to discharge student loans they both had incurred that had grown to $435,000. They had five children, ages 9 to 18.
The husband, age 49, was a chiropractor and the wife a high school teacher. Financial problems resulted in part from the husband’s attempt to become a medical doctor after incurring debt to be a chiropractor. For about seven years, he was either unemployed or underemployed while studying medicine in the Caribbean. Although he graduated from medical school, he was never accepted into a residency program and was thus barred from practicing medicine in the U.S.
In the three years before trial, the couple’s adjusted gross income was about $120,000. They were receiving about $5,500 a year in federal tax refunds attributable to child tax credits.
The couple’s monthly take-home pay was $8,600, if the child tax creditors were treated as income. Their monthly expenses totaled $7,750, not including allowances for unexpected expenses, such a needed repairs on their home and aged cars.
To determine whether the couple were entitled to discharge their student loans under Section 528(a)(8), the Tenth Circuit has adopted the Brunner standard and decreed that bankruptcy courts may grant a partial discharge.
Sitting in Wichita, Kan., Judge Herren first examined the couple’s expenses to determine whether they would endure “undue hardship” if required to repay the student loans.
First, Judge Herren disallowed an annual expense of $5,000 for their eldest daughter to live on campus at a community college 30 miles away. Second, he disallowed $5,500 in annual expenses for their sons to participate in a traveling soccer league. He decided that both were not necessary “for a minimal standard of living.”
Deducting the two expenses, Judge Herren calculated that the couple’s monthly disposable income was $1,750. Even so, their adjusted monthly income would be insufficient even to pay interest on the student loans, which amounted to more than $1,800 a month.
Judge Herren therefore found that the couple met the first Brunner test because they could not repay even interest on their student loans while maintaining a “minimal standard of living.”
With little difficulty, Judge Herren found that the second Brunner test was satisfied because neither the husband nor the wife was likely to have increased income. Therefore, their financial circumstances were “likely to persist for a substantial portion of the repayment period.”
The third Brunner test is good faith. In that regard, Judge Herren noted that the couple had paid $34,500 toward their student loans in the 10 years before bankruptcy. They had also taken advantage of deferments and income-based payment programs, for which they consistently qualified. He found they met the good faith test.
Having decided that the couple could not be saddled with repayment of the entire student loan debt, Judge Herren turned to the question of whether the couple could repay a portion of their student loans without enduring “undue hardship.”
The couple was eligible for two income-based repayment programs ranging between $500 and $750 a month. The payments would not even cover interest and would continue for 25 years until both were retired and had lower income.
On paper, the couple had $1,750 a month in recalculated, disposable income, but it “leaves no cushion for larger unexpected expenses or the ability to save for such contingencies,” Judge Herren said. “Furthermore,” he said, “it does not consider the likely decrease and elimination of the tax refund generated by the child tax credit” that currently amounted to about $470 a month.
Regarding his computations, Judge Herren said, "Of course, all of the computational gymnastics in this opinion are simply an effort to objectively predict a very unpredictable future for the . . . family."
Taking into account surging inflation, unexpected expenses, the need to replace aging cars, and the forthcoming loss of the child tax credits, Judge Herren found that the couple “have monthly disposable income available for student loan payments over the future years in the amount of $1,250” a month.
Over 15 years until the husband reaches retirement age and the couple’s income drops, Judge Herren calculated that the couple could pay $225,000, with no interest.
Judge Herren discharged all but $225,000 of the student loans, with the proviso that the $225,000 would bear no interest.
Bankruptcy Judge Mitchell L. Herren was put in the unfortunate and untenable position of having to decide how parents should spend their limited income on their children’s education and upbringing. He was placed in the similarly impossible position of projecting the couple’s income for years to come.
The couple in question received a no-asset chapter 7 discharge and reopened their case to discharge student loans they both had incurred that had grown to $435,000. They had five children, ages 9 to 18.
The husband, age 49, was a chiropractor and the wife a high school teacher. Financial problems resulted in part from the husband’s attempt to become a medical doctor after incurring debt to be a chiropractor. For about seven years, he was either unemployed or underemployed while studying medicine in the Caribbean. Although he graduated from medical school, he was never accepted into a residency program and was thus barred from practicing medicine in the U.S.