Michele Walker v. Educational Credit Manag.

Filing

OPINION FILED - THE COURT: ROGER L. WOLLMAN, DIANA E. MURPHY and STEVEN M. COLLOTON. Roger L. Wollman, Authoring Judge (PUBLISHED), CONCUR BY: STEVEN M. COLLOTON [3819394] [10-2032]

United States Court of Appeals
FOR THE EIGHTH CIRCUIT

___________
No. 10-2032
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In re: Michele D. Walker,

*
*
Debtor.
*
______________________
*
*
Michele D. Walker,
*
*
Plaintiff/Appellee,
* Appeal from the United States
* Bankruptcy Appellate Panel
v.
* for the Eighth Circuit.
*
Sallie Mae Servicing Corp.; SLM
*
Education Credit Finance Corporation; *
Kohn Law Firm, S.C.; Zwicker &
*
Associates, P.C.; Sallie Mae,
*
*
Defendants,
*
*
Educational Credit Management
*
Corporation,
*
*
Defendant/Appellant.
*
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Submitted: December 15, 2010
Filed: August 18, 2011
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Before WOLLMAN, MURPHY, and COLLOTON, Circuit Judges.
___________
WOLLMAN, Circuit Judge.

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Date Filed: 08/18/2011 Entry ID: 3819394

The Educational Credit Management Corporation (ECMC) appeals from the
judgment of the bankruptcy court, later affirmed by the Bankruptcy Appellate Panel
(BAP), which discharged the student loan debt of Michele D. Walker (Walker) under
the “undue hardship” provision of 11 U.S.C. § 523(a)(8). We affirm.
I.
We summarize the relevant facts as outlined in Walker v. Education Credit
Management Corp., 427 B.R. 481 (8th Cir. B.A.P. 2010). Walker accumulated
student loan debt to fund her undergraduate education at the University of Illinois,
from which she graduated in 1989. She completed a medical school preparatory
program at Creighton University and then enrolled in the University of Illinois
College of Medicine. After her second year of medical school, Walker failed her
initial state licensing exam and was dismissed. When her appeals for reentry were
denied, Walker worked as a pharmacy technician and substitute teacher. She met Troy
Walker, a police officer, and married him in 1996. She entered a master’s program
at Governor State University in 1997, graduating with a degree in school psychology
in 2000. She funded this part of her education with private loans that are not
implicated in her discharge petition.
The Walkers have five children —the oldest born in 1998, one set of twin boys
born in 2000, and a second set of twins born in 2001. In 2002, the Walkers moved
from Chicago, Illinois, to Minneapolis, Minnesota, where Walker began a full-time
post-graduate internship as a school psychologist with the Minneapolis Public
Schools, earning between $16,000 and $17,000 annually. Walker worked for the
school district for another year, but was unable to continue because her position was
cut. After her internship ended, Walker cared for her children, devoting much of her
time to the older set of twins, who had been diagnosed with autism in 2003.

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In 2004, the Walkers moved from Minneapolis to Hudson, Wisconsin, where
they remain. Troy retained his position with the Minneapolis police department and
moonlighted as a security officer during his off hours. Walker has not worked outside
of the home since 2004. She filed a Chapter 7 bankruptcy petition in April 2004 and
received her discharge three months later. That discharge had no effect on her student
loan debt because she did not seek an undue hardship determination until 2007, when
she initiated this proceeding. By that time, her five children were attending Wisconsin
public schools, including the autistic twins, who have been mainstreamed.
In 2008, the autistic twins were accepted into the Wisconsin Early Autism
Project, a state-funded program of intensive, in-home therapy for children with autism
that entailed eight to nineteen hours during the week, plus eight hours each Saturday
and Sunday. A parent must be present for the therapy sessions, and Walker fulfilled
that obligation. In addition, she spent about two hours per day preparing for the
session and remained available to respond to calls from the school if either of the
autistic twins had a “meltdown” at school. Setting aside time to care for the twins or
to respond to calls from their school made it difficult for Walker to keep a regular
schedule that would permit her to work outside the home, even on a part-time basis.
Additionally, because the older twins are eligible for full participation in the statefunded autism program for only a three-year period, Walker anticipates that their total
session time will be reduced to ten to twenty hours per month at some point in 2011.
From 2004 to 2007, the Walkers’ combined adjusted gross income, derived
exclusively from Troy’s employment, ranged from $59,019 to $67,639. In 2007,
Walker enrolled in an associate’s degree program to become a registered nurse, with
the aim of earning supplemental income. She left the program after one semester,
however, because she could not care for her children and attend school at the same
time. The Walkers incurred two sizeable debts during this period that are relevant to
our analysis below. In 2005, they took out a $50,000 home equity loan, $30,000 of
which went to build a screened-in deck on their home in Wisconsin, with a monthly
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payment of $373.52. In 2007, Troy purchased a new Chevrolet Suburban for $40,000,
with a monthly payment of $850. At that time, the family owned a 1998 minivan, a
2004 minivan, and a 1998 sedan that had been loaned to Walker’s mother.
In 2007, Walker filed an adversary proceeding seeking to discharge roughly
$300,000 in student loan debt under the undue hardship provision of § 523(a)(8) of
the Bankruptcy Code. The parties agree that Walker is eligible for enrollment in the
Ford Program’s Income Contingent Repayment Plan (ICRP), set forth in 34 C.F.R. §
685.209. They also agree that based on a household adjusted income of $67,639 and
a family of seven, Walker would have a monthly payment of $593.98 under the ICRP.
II.
We review de novo whether excepting a debtor’s student loan debt from
discharge constitutes an undue hardship. Long v. Educ. Credit Mgmt. Corp. (In re
Long), 322 F.3d 549, 553 (8th Cir. 2003). We review for clear error the subsidiary
findings of fact on which this legal conclusion is based. Reynolds v. Pa. Higher Educ.
Assistance Agency, 425 F.3d 526, 531 (8th Cir. 2005). We will not upset those
findings of fact unless, after reviewing the entire record, we are left with the definite
and firm conviction that a mistake has been made. Cumberworth v. U.S. Dept. of
Educ. (In re Cumberworth), 347 B.R. 652, 657 (8th Cir. B.A.P. 2006).
Section 523(a)(8) of the Bankruptcy Code provides that debts from educational
loans “made, insured, or guaranteed by a governmental unit, or made under any
program funded in whole or in part by a governmental unit,” may not be discharged
unless “excepting such debt from discharge . . . will impose an undue hardship on the
debtor and the debtor’s dependents.” The debtor has the burden of establishing undue
hardship by a preponderance of the evidence. To assess whether the debtor has met
this burden we apply a totality-of-circumstances test, under which we consider (1) the
debtor’s past, present, and reasonably reliable future financial resources; (2) a
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calculation of the reasonable living expenses of the debtor and her dependents; and
(3) any other relevant facts and circumstances surrounding the particular bankruptcy
case. In re Long, 322 F.3d at 554.
ECMC raises three claims on appeal. First, it contends that the bankruptcy
court erred in considering Walker’s financial circumstances at the time this § 523(8)
proceeding commenced in 2008. In its view, the undue hardship analysis must be
made on the evidence as it stood at the time of initial Chapter 7 discharge in 2004.
Second, it claims that Walker failed to prove undue hardship by a preponderance of
the evidence and that the bankruptcy court overcame gaps in the record by making
impermissible inferences about Walker’s financial resources and expenses. Third, it
claims that the bankruptcy court erred in finding that Walker’s household expenses
were “modest and commensurate” with a minimal standard of living. It contends that
the Walkers’ expenses are unreasonable as a matter of law so as to preclude an undue
hardship determination.
A. Temporal Scope of Undue Hardship Analysis
ECMC maintains that the bankruptcy court committed clear error in looking
beyond 2004 when calculating Walker’s expenses and income. It contends that “the
factual question is whether there is an undue hardship at the time of discharge, not
whether there is an undue hardship at the time that a § 523(a)(8) proceeding is
commenced.” Bender v. Educ. Credit Mgmt. Corp., 368 F.3d 846, 848 (8th Cir.
2004). But this precept arose from, and is to be applied in, a factual context much
different than that which exists here.
Bender involved a Chapter 13 debtor who sought an undue hardship
determination before she completed her Chapter 13 plan. At issue was whether the
debtor’s § 523(8)(a) petition was ripe for adjudication when filed three and a half
years before discharge could occur. We observed that the prospective evaluation of
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a Chapter 13 debtor’s future capacity to repay student loan debt would “require some
degree of judicial prescience,” the exercise of which was both impractical and
unnecessary. Id. We reasoned that “such proceedings should take place relatively
close to [the discharge] date so that the court can make its determination in light of the
debtor’s actual circumstances at the relevant time,” held that the petition was not ripe,
and affirmed its dismissal. Id.
The operative rule in Bender has no application here. Neither the bankruptcy
court nor the BAP was speculating about Walker’s prospective financial condition;
both courts were assessing her financial activity from the preceding four years. The
risks associated with the exercise of “judicial prescience” are thus absent here. It
would make little sense to require that the court ignore what actually occurred after
Walker’s Chapter 7 discharge in order to comply with a rule that was crafted to assure
that a court “can make its determination in light of the debtor’s actual circumstances
at the relevant time,” i.e., the time of the undue hardship determination. Id. Indeed,
to ask the court to ignore what occurred in Walker’s life after 2004 would be
inconsistent with the first prong of the totality-of-circumstances test, which instructs
a fact-finding court to consider “the debtor’s past, present, and reasonably reliable
future circumstances.” In re Long, 322 F.3d at 554.
ECMC’s invocation of In re Woodcock, 326 B.R. 441 (B.A.P. 8th Cir. 2005)
lends no support to its argument. Woodcock involved a Chapter 7 debtor who sought
reconsideration of an order denying a discharge on the basis of undue hardship. As
the BAP noted, the debtor sought relief via a Rule 60(b) motion on the grounds that
the passage of time showed that his circumstances had not improved, which
purportedly indicated that the bankruptcy court erred in denying discharge. Id. at 447.
The holding—that the judgment of nondischargeability was a final judgment not
subject to collateral attack based on a claim that debtor’s circumstances had failed to
improve—does not support ECMC’s argument for a limited temporal scope of undue

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hardship review. Accordingly, we hold that it was not clear error to consider Walker’s
financial condition from 2004 through 2007 in the undue hardship analysis.
B. Net Income Calculations
ECMC complains that Walker produced no evidence related to Troy Walker’s
part-time income, leaving an unspecified amount of income unaccounted for. It also
maintains that the bankruptcy court committed clear error when it applied 2007
income tax and payroll deductions to adjusted gross income figures from 2004 to
2007. Finally, ECMC contends that the bankruptcy court exacerbated this error by
subtracting certain tax liabilities from the stipulated adjusted gross income figure,
which amounted to a double-counting of deductions and artificially reduced the net
income calculation. ECMC asserts that this method of calculating net income taints
the overall analysis because it is based on mere speculation and relieves Walker of her
burden of proving undue hardship by a preponderance of the evidence.
We ground our review on income figures to which both parties stipulated.
Because ECMC stipulated to these figures, we reject its claim that it was clear error
not to calculate and include income from Troy Walker’s part-time work. The parties
stipulated that the Walkers’ adjusted gross income in 2007 was $67,639.1 This leaves
a monthly adjusted gross income of $5,636.58. The BAP found no error in the
bankruptcy court’s method of using the Walkers’ actual federal and state tax liability
for 2007, rather than taking the sum of income tax withholdings from Troy’s
paychecks and then accounting for the Walkers’ income tax refund. When averaged
over twelve months, the monthly income tax obligation was $372. We agree that this
was not error and thus adopt this figure for our analysis. We question, however, the

1

The BAP appears to have transposed a number in its calculation when it
concluded that the parties had stipulated to a 2007 adjusted gross income of $67,939.
The record reflects that the actual stipulation reads “$67,639.” A-134, at ¶ 6.
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manner in which both the bankruptcy court and the BAP treated additional voluntary
withholdings from Troy’s 2007 paystubs.
The paystubs indicate automatic payroll deductions in the amount of $934.10
for items such as retirement, deferred compensation, medical insurance, life insurance,
and pension. These paystubs were admitted into the record without explanation from
Walker and were not challenged by ECMC at trial. Both the bankruptcy court and the
BAP added the sum of the payroll deductions to the tax liability to reach a total
withholding of $1,306.10 and subtracted this sum from their respective gross monthly
income calculations to arrive at a net monthly income. At no point did either court
acknowledge that it had subtracted the income tax liability and payroll deductions
from the 2007 adjusted gross income figure to which both parties stipulated. In other
words, both courts treated as monthly gross income a figure the parties stipulated to
be monthly adjusted gross income. This conflation is problematic because the
adjusted gross income figure may account for at least some of the payroll deductions
on the paystub, e.g., retirement, deferred compensation, and employee contribution
to a medical insurance premium. See 26 U.S.C. § 62(a) (defining adjusted gross
income as gross income minus the sum of the above-the-line deductions, including
retirement savings and health-saving accounts).
Because we have a stipulated gross adjusted income figure, not the tax return
itself, we cannot compare the 2007 tax return with the payroll stub to discern which,
if any, deductions on the payroll stub were also claimed as above-the-line deductions.
On this record, it is impossible to discern whether double-counting did in fact take
place. ECMC is of little help, because it failed to challenge the paystub evidence at
trial, failed to address the issue of double-counting when it appeared before the BAP,
and failed to specify on appeal which specific payroll deductions it believed may have
been double-counted.

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We recognize that “a court may not engage in speculation when determining net
income and reasonable and necessary living expenses.” Educ. Credit Mgmt. Corp. v.
Jesperson (In re Jesperson), 571 F.3d 775, 780 (8th Cir. 2009). In Jesperson, the
bankruptcy court credited testimony from the debtor regarding his federal income tax
obligation that was patently false, which had the effect of understating the debtor’s
income. The bankruptcy court also concluded that the debtor’s housing expenses were
$1000 per month, when the evidence showed that the debtor lived rent-free with his
brother and had worked out an agreement under which he could continue to do so for
$500 per month. We concluded that the bankruptcy court had clearly erred in both
determinations and thus reversed the undue hardship determination. Similarly, in In
re Rose, 324 B.R. 709 (8th Cir. B.A.P. 2005), the BAP concluded that the bankruptcy
court committed clear error by ignoring more than $260 in monthly disposable income
and by giving undue weight to the mere possibility that debtor might need a new car
or the possibility that her roommate might move out, thereby doubling her housing
costs. Id. at 713. These possibilities did not rise to the level of “reasonably reliable
facts and circumstances” and could not serve as the basis of the bankruptcy court’s
legal conclusion. Id.
The degree of speculation evident in Jesperson and Rose is absent here. The
BAP did not substitute assumptions or speculation for reasonably reliable facts, nor
did it accept an income figure that was patently false or give undue weight to changes
in the debtor’s life circumstances that had not yet occurred. Rather, it employed a
method that posed a risk of double-counting in determining the debtor’s net monthly
income. We reject ECMC’s suggestion that employing this method is akin to
impermissible speculation and we likewise reject the claim that it so taints the undue
hardship analysis that it precludes discharge as a matter of law. Net income is but one
factor in the analysis and is to be assessed relative to reasonable household expenses.
Accordingly, the magnitude of the potential error can be evaluated only in the larger
context of the totality-of-circumstances analysis.

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If we exclude altogether the disputed payroll deductions of which ECMC
complains, we subtract the monthly federal and state income tax liability of $372 from
the stipulated monthly gross adjusted income of $5,636.58 to arrive at a net monthly
income of $5,264.58.2 That figure is still less than the Walkers’ monthly expenses of
$5,913, leaving a monthly deficit of nearly $650. Thus, even when the payroll
deductions are excluded, the expenses of the debtor and her dependents outstrip her
available resources. ECMC responds that this deficit is illusory because the claimed
expenses of Walker and her dependents are unreasonable as a matter of law.
C. Household Expenses
A debtor’s household income must be used to satisfy reasonable and necessary
expenses. In re Jesperson, 571 F.3d at 779. “To be reasonable and necessary, a debt
must be ‘modest and commensurate with the debtor’s resources.’” Id. at 780 (quoting
In re Debrower, 387 B.R. 587, 590 (Bankr. N.D. Iowa (2008)). “[I]f the debtor’s
reasonable 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.” In re Jesperson, 571 F.3d at 779.
ECMC challenges as unreasonable the monthly car payment of $850 on the
2007 Chevrolet Suburban SUV and the monthly payment of $373.52 on the $48,000
second mortgage, of which, as set forth earlier, $30,000 was used to build the deck
porch. ECMC points out that the monthly payment on the Suburban alone exceeds
the monthly payment of $593.98 that Walker would pay on her student loan debt
under the ICRP and questions the need to purchase a new vehicle when the family
owned two other mini-vans and had loaned its sedan to Walker’s mother.
2

By ignoring the paystub withholdings entirely, we assume that each voluntary
deduction on the paystub had already been accounted for in the gross adjusted income
figure. If anything, this approach favors ECMC and attributes to the Walkers a higher
net monthly income than might otherwise be justified.
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Both the bankruptcy court and the BAP were troubled by the cost of these two
items, as are we. Yet we also recognize that the porch and the Suburban fulfill
important functions in the daily life of this family of seven. Moreover, because
“fairness and equity require each undue hardship case to be examined on the unique
facts and circumstances that surround the particular bankruptcy,” In re Long, 322 F.3d
at 554, we consider these expenses in light of the overall financial and interpersonal
context of Walker’s household.
As outlined above, even if we exclude all the payroll deductions when
calculating net income, the Walkers run a deficit of nearly $650 per month. Aside
from challenging specific expenses as unreasonable, ECMC did not rebut the findings
of fact on which this calculation is based, nor did it identify a scenario under which
Walker could realistically increase the household’s income. Even if the family had
chosen a more modest vehicle or had not added a deck to the home, it is unrealistic to
expect that Walker could meet her minimum ICRP payment of $593.98 in light of the
monthly household deficit in excess of that amount.
Though we may question the wisdom of the particular purchases at issue, we
also recognize that “the minimal standard of living” for Walker must account for the
size of her family and the special needs of her two autistic children. On the basis of
the record before us, we agree with the BAP’s conclusion that “the reality of the
Walkers’ budget is that Michele cannot afford to make any payments on her student
loans and still maintain a minimal standard of living. That circumstance, based on the
evidence offered, is likely to continue for many years . . . .” In re Walker, 427 B.R.
at 487.
This is not a case in which a debtor willfully chose to avoid payments that could
have been made or was underemployed or unemployed for no discernible reason.
Caring for her five young children has become Walker’s full-time occupation. Both
the bankruptcy court and the BAP determined that it was unlikely that Walker would
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be able to work until the older twins reached the age of majority, if at all, and noted
that the staleness of her education at that time would limit her employment options.
We agree that, in light of the overall circumstances of this case, excepting Walker’s
student loan debt from discharge would impose an undue hardship on her.
The judgment is affirmed.
COLLOTON, Circuit Judge, concurring in the judgment.
The apparent contradictions in this case are troubling. Michele Walker could
satisfy her student loan debt of $283,354.50 by making monthly payments of $593.98
under the Department of Education’s Income Contingent Repayment Plan (“ICRP”).
See Educ. Credit Mgmt. Corp. v. Jesperson (In re Jesperson), 571 F.3d 775, 782 (8th
Cir. 2009). At the same time, she and her family are making monthly payments of
$850 on her husband’s purchase of a new 2007 Chevrolet Suburban with leather seats
and a DVD player, at a cost of approximately $40,000. See Walker v. Sallie Mae
Servicing Corp. (In re Walker), 406 B.R. 840, 857 & n.33 (Bankr. D. Minn. 2009).
The Walkers also make monthly payments of $224.11 for that portion of a $50,000
second mortgage loan that they used to build a sixteen-by-twenty-two-foot screened
deck onto their house. See id. at 857; R. Doc. 27, at 4. In total, the Walkers are
paying $1074.11 monthly for the SUV and deck addition. Without those expenses,
the same amount of funds would allow Walker to meet her student loan obligation
under the ICRP, with $480.13 per month to spare. Yet the court concludes that even
if the Walkers “had chosen a more modest vehicle or had not added a deck to the
home, it is unrealistic to expect that Walker could meet her minimum ICRP payment
of $593.98 in light of the monthly household deficit in excess of that amount.” Ante,
at 11. How can that be?
Educational Credit Management Corporation cries foul, but ECMC’s own
stipulations and forfeited objections in the bankruptcy court are the source of its
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problem. Although it seems that the Walkers must be getting money from somewhere
to pay $1074.11 per month for a new vehicle and a second mortgage, ECMC
stipulated that the family’s total adjusted gross income was $5636.58 per month in
2007, R. Doc. 27, at 4, and raised no objection to any other expenses on the monthly
budget submitted by the Walkers. 406 B.R. at 856 & n.31; see App. 101. Thus, even
correcting for the errors of the bankruptcy court and the Bankruptcy Appellate Panel
in conflating adjusted gross income and gross income, ante, at 8, and giving the
benefit of the doubt to ECMC that the BAP may have double-counted payroll
deductions, ante, at 8, the stipulations and unchallenged numbers still result in a
calculation that supports the discharge. If the SUV and mortgage payments
attributable to the deck are excluded entirely, the Walkers have left-over income of
$425.69 per month, which falls short of the minimum ICRP payment of $593.98.
Without the help of the ICRP (which would permit cancellation of debt amounting to
$105,160.50 plus interest after twenty-five years, see 34 C.F.R. § 685.208(k)(1),
§ 685.209(c)(4)(i)), it is hard to see how Walker ever could repay the student loans,
and why the “fresh start” permitted by discharge should not apply. Cf. Jesperson, 571
F.3d at 782.
The Bankruptcy Appellate Panel declined to decide whether the bankruptcy
court erred in concluding that the purchase of the SUV and the deck addition were
reasonable and necessary expenses, see 427 B.R. at 487, and this court reserves
judgment on that question as well. Ante, at 11. In view of the income and expenses
figures for 2007 that were established by ECMC’s litigating positions in the
bankruptcy court, and properly considered by the court, see ante, at 5-7, I concur in
the judgment.
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