U.S. Bankruptcy Court judge finds debtor's student loans were not

Daily Record (Rochester, NY), Jun 23, 2005 by Kevin M. Momot

In an adversary proceeding where the debtor sought to discharge her student loans on the basis that payment would adversely impact her psychiatric health, U.S. Bankruptcy Court Judge Carl L. Bucki determined the debtor did not meet the requirements for discharge of the loan.

According to the court, repayment of the student loan would not preclude the debtor from maintaining a minimal standard of living.

The Facts

The debtor, an attorney, claimed that due to a psychiatric condition she could not handle the stress of private practice. In an adversary proceeding, she sought to discharge her student loans on the basis that payment would adversely impact her mental health.

At the time of trial, the debtor was employed in the development office of a cultural organization, where she earns an annual salary of approximately $28,000.

The debtor graduated from college in 1980 and from law school in 1984. To finance her education, she obtained student loans totaling $22,500. Over the past 20 years, loan payments were deferred, and the loan was consolidated, assigned and restructured.

With accrued interest, the debtor still owed an outstanding balance of over $40,000 to the Educational Credit Management Corp.

At trial, the parties presented evidence about many of the expenditures the debtor had included in her budget. Educational Credit Management Corp. questioned various recreational expenses, seemingly high spending for the care of a pet, non-traditional health care expenditures and an apartment lease of approximately $700 per month.

The creditor also demonstrated the location of the debtor's apartment limited her access to public transportation, requiring additional transportation expenses.

Court's Analysis

The court previously granted an order discharging the debtor's outstanding debts. However, pursuant to 11 USC cc(a)(8), the order does not discharge student loans unless excepting such debt from discharge ... will impose an undue hardship on the debtor and the debtor's dependents.

Under Brunner v. New York State Higher Education Services, 831 F2d 395, 396 (1987), such hardship exists only when the debtor makes a three-part showing: (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.

Judge Bucki determined the debtor failed to satisfy the first prong of the test in Brunner. Under the first prong, the focus is on whether repayment of the student loan would preclude the debtor from maintaining a minimal standard of living.

With an annual income approximately $19,000 greater than the poverty standard for her family size, however, the debtor would appear to earn sufficient income both to pay the student loan and to enjoy some discretionary expenditures in excess of her minimal needs, Judge Bucki noted.

The debtor testified that between 1995 and 2000, she made monthly payments of $337.04 for student loans at a time when her yearly income was less than it is currently.

Unless the debtor can demonstrate extraordinary circumstances, I must find that the debtor earns sufficient income both to pay $4,000 per year on account of her student loan and to maintain a minimal living standard, the judge concluded.

The question was whether extraordinary circumstances existed in this case.

The debtor argued her psychiatric health might be adversely affected if she were compelled to repay the student loan. She testified she suffered from a depressive disorder, as well as anxiety and panic attacks. According to the debtor, these conditions required hospitalization and ongoing treatment by a psychiatrist.

Expert Opinion

The debtor's treating physician, Dr. Wendy Weinstein, confirmed a diagnosis of depression with a suicidal ideation and anxiety. Observing an improvement in the debtor's mental health after termination of her practice, Dr. Weinstein expressed concern that a return to the legal profession could have adverse health effects.

Additionally, Dr. Weinstein noted the high risk of mental illness if the debtor were forced to change her current pattern of discretionary spending.

The Educational Credit Management Corp. presented the expert testimony of Dr. Brian Joseph. Based on his examination of the debtor and of her medical records, Dr. Joseph concluded the debtor was capable of returning to the practice of law, and her decision to terminate her legal practice was a matter of choice rather than medical necessity.

Application

[P]rior experience shows that for this debtor, the resumption of her legal profession would entail greater risk and the probable realization of less income, Judge Bucki wrote. For this reason, the court attaches no significance to the possibility of legal practice, even if the debtor's health would allow it.