In re Sandra Jane FRUSHOUR, Debtor. Educational Credit Management Corporation, Plaintiff-Appellant, v. Sandra Jane Frushour, Defendant-Appellee, 335 B.R. 393

OPINION WILKINSON, Circuit Judge. A debtor in bankruptcy cannot discharge government-guaranteed educational loans through the normal channels. Congress instead protected the financial integrity of the student-loan program by precluding a debtor from discharging these loans unless the debtor would endure an “undue hardship” in remaining obligated to repay them. See 11 U.S.C. § 523(a)(8) (2000). The bankruptcy court held that the debtor in this case satisfied the undue hardship requirement, and the district court affirmed.

We hold that the debtor failed to prove undue hardship both because she provided no exceptional circumstances over and above her present inability to pay her debt, and because she failed to seriously consider loan consolidation measures that would greatly reduce her current payments. Congress sought to ensure repayment of educational loans through its use of the term “undue” and the courts are obligated to follow its imperative. We accordingly reverse the judgment of the district court. I. The debtor, Sandra Jane Frushour, filed for bankruptcy on December 24, 2003, to discharge her debts under

Chapter 7 of the Bankruptcy Code. See 11 U.S.C. § 701 et seq. Frushour owed $12,148.70 in student-loan debt as of March 14, 2004. The original principal on this debt was $11,688. The debtholder, Educational Credit Management Corporation (ECMC), is a nonprofit corporation that administers government-guaranteed student loans. On March 2, 2004, Frushour filed an adversary complaint against ECMC to discharge her student-loan debt as an undue hardship under 11 U.S.C. § 523(a)(8). Both parties agree that § 523(a)(8) is the relevant provision for Frushour’s student loans.

At the time of the adversary proceeding, Frushour was in her forties and had a seven-year-old son for whom she received no child support. She had gone to college for several years with the help of her student loans. Between 1986 and 1993, she attended the University of South Carolina Coastal Carolina College, California State University, and Long Beach City College. She was an arts major at Coastal Carolina and obtained an associate’s degree with an emphasis in tourism from Long Beach City College-in 1998. Frushour has been employed in a variety of different jobs since she obtained her degree in 1993.

She worked in restaurant management in California from 1994 to 2000. Specifically, she managed a high-end tourist restaurant, the Queen Mary, in Long Beach, and continued in a similar line of work in Huntington Beach. During Frushour’s first few years in restaurant management, she made between $18,000 and $20,000 per year. After her son was born, however, she made significantly less money per year, between $7,000 and $10,000. In 2000, Frushour decided to move to Florida. She obtained a Florida real estate license, and worked in the resort sales industry.

Frushour made approximately $20,000 in 2000 and $15,000 in 2001. Sadly, however, tourism sales declined after the events of September 11, 2001. Frushour thus moved again. This time, she decided to return to South Carolina to be with her ailing sister and aging mother. She started her own company, and has been self-employed ever since. Frushour specializes in interior design and decorative painting, returning to her goal of working in the arts and using the art education that she received at Coastal Carolina.

In her current capacity, Frushour provides architects and interior designers with artistic backdrops for walls. She is her own marketer, through cold calls and referrals, and does the artistic work herself. In 2002, she made approximately $7,395, and in 2003 her income increased to $10,771. Frushour’s living situation at the time of the adversary proceeding was anything but desirable. Her expenses exceeded her income, even excluding the loan repayments. She earned a gross income of $998 and a net income of $918 per month. Her expenses were $1,022 per month.

These monthly expenses included $300 for food, $200 for rent, $100 for clothing, $95 for cable and Internet, $75 for electricity, $75 for transportation, $66 for telephone, $61 for car insurance and taxes, and $50 for water and sewer. Frushour had no childcare costs because she regularly worked from home. She also had no expenses for medical insurance and she drove a used Volvo with over 250,000 miles on it. Frushour has repaid her student loans on an inconsistent basis. She was obligated to start making payments in 1994, but she was able to obtain forbearance until July 1998.

As a result, she started making loan repayments in August 1998. She made about twenty-three consistent payments from that time until approximately June 2000. The record is ambiguous as to the exact amount of these payments, but it was either $113.41 or $189 per month. She has not made payments on her own initiative since 2000. Nonetheless, the IRS seized her 2002 tax refund of $1,905 and applied it to her student loans. Frushour believes that it may have done the same in 2003, since she has yet to receive her tax refund of $910 for that year either.

After Frushour filed this complaint to discharge her student-loan debt, ECMC brought to her attention that she qualified for several consolidation plans through the William D. Ford Direct Loan Program, the federal program that makes available educational loans. One of these plans is income contingent. Under this plan, a debtor’s payment is twenty percent of the difference between her gross income and the federal poverty guidelines for her family size. See 34 C.F.R. § 685.209(a)(2)-(3) (2004).

If Frushour consolidates under this plan, she would have a payment of between zero and five dollars per month unless her income increased. She would be obligated to make payments for twenty-five years, but at the end of that period her remaining debt would be discharged. Id. § 685.209(c)(4)(iv). If her income level rises such that she would have to make larger payments, she could switch to a fixed-payment plan. Id. § 685.210. She refused to participate in any of these consolidation plans because she stated they were not right for her and she wanted a fresh start.

The bankruptcy court discharged Frushour’s student-loan debt because it held that she proved an “undue hardship” under 11 U.S.C. § 523(a)(8). It applied a three-part test first adopted by the Second Circuit to determine whether she did so. See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987) (per curiam).

The Brunner test requires a debtor to show that (1) she cannot maintain a minimal standard of living and repay the loans, (2) additional circumstances exist that illustrate she will not be able to repay the loans for a substantial part of the repayment period, and (3) she attempted to repay the loans in good faith. Id. The bankruptcy court held that she proved all three factors. The district court affirmed. As to the first prong, it noted that Frushour maximized her income and minimized her expenses, but her expenses still exceeded her income.

With regard to the second, it held that given her employment history, she was not likely to make more money in the future. Further, she had testified that she anticipated more expenses for her son, as he grew older, and for her worn automobile, as it required additional repair. It also noted that she has no health care or money for home maintenance, and she would likely have to direct any increased income to these needs.

Finally, the district court held that Frushour satisfied the final prong because, although she did not accept a loan consolidation plan, she paid the loans during years when her income was greater than it currently is. II. Before reaching the merits of this case, we must resolve a dispute over the appropriate standard of review. We review directly the bankruptcy court’s decision. Banks v. Sallie Mae Servicing Corp. (In re Banks), 299 F.3d 296, 300 (4th Cir.2002). All agree that we review the bankruptcy court’s legal conclusions de novo and its factual findings for clear error. Id.

Dispute arises, however, over whether we review the ultimate determination of undue hardship under a de novo or clearly erroneous standard. Whether a debtor has met the undue hardship standard is a legal conclusion that is based on the debtor’s individual factual circumstances. It is thus a mixed question of law and fact. As we have explained in a related context, these types of questions are reviewed “under a hybrid standard, applying to the factual portion of each inquiry the same standard applied to questions of pure fact and examining de novo the legal conclusions derived from those facts.” U.S.

Dep’t of Health & Human Servs. v. Smitley, 347 F.3d 109, 116 (4th Cir.2003) (internal quotation marks omitted) (reviewing de novo the bankruptcy court’s legal conclusion that a debtor met the “unconscionable” standard required to discharge a Health Education Assistance Loan). Several of our sister circuits have reached the same conclusion in the undue hardship context. See, e.g., Tirch v. Pa. Higher Educ. Assistance Agency (In re Tirch), 409 F.3d 677, 680 (6th Cir.2005); U.S. Dep’t of Educ. v. Ger hardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir.2003).

We therefore review de novo the determination of whether a debt- or has met the undue hardship standard, and we review the factual underpinnings of that legal conclusion for clear error. III. A discharge under

Chapter 7 does not ordinarily discharge government-backed student-loan debt, because Congress expressly excluded this debt from the regular bankruptcy procedures.

It provided that [a] discharge under [certain sections of the Bankruptcy Code] does not discharge an individual debtor from any debt ... (8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor’s dependents. 11 U.S.C. § 523(a)(8) (emphasis added).

A debtor seeking to discharge government-guaranteed educational loans thus faces a difficult burden, because she must show that not discharging the debt would impose an undue hardship. Congress, however, neither defined “undue hardship” nor provided standards for what it entails. See O’Hearn v. Educ. Credit Mgmt. Corp. (In re O’Hearn), 339 F.3d 559, 564 (7th Cir.2003). Nonetheless, the ordinary meaning of “undue” gives us clear guidance. “Undue” generally means “unwarranted” or “excessive.” See The Random House Dictionary of the English Language 2066 (2d ed.1987).

Because Congress selected the word “undue,” the required hardship under § 523(a)(8) must be more than the usual hardship that accompanies bankruptcy. Inability to pay one’s debts by itself cannot be sufficient; otherwise all bankruptcy litigants would have undue hardship. The exception would swallow the rule, and Congress’s restriction would be meaningless. As a result, “[t]he existence of the adjective ‘undue’ indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans.” Rifino v.

United States (In re Rifino), 245 F.3d 1083, 1087 (9th Cir.2001) (internal quotation marks omitted). In enacting the undue hardship standard, Congress had to take into account the viability of the student-loan program. That program serves valuable purposes. It affords individuals in all walks of life the opportunity to obtain an education, and with it the mobility and financial stability that an education can provide. Indeed, without the program, many people would never receive any higher education, because their credit risks would preclude them from obtaining private commercial loans. Brunner v. N.Y.

State Higher Educ. Servs. Corp., 46 B.R. 752, 756 (S.D.N.Y.1985), aff'd, 831 F.2d 395 (2d Cir.1987). The program does not just give loan recipients such as Frushour the major benefits of a taxpayer-funded education. As history has shown, a well-educated society is critical to our general welfare and prosperity. It is thus understandable why Congress would “exact[ ] a quid pro quo” for government-guaranteed loans by using the undue hardship standard. Id.

Debtors receive valuable benefits from congressionally authorized loans, but Congress in turn requires loan recipients to repay them in all but the most dire circumstances. Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 306 (3d Cir.1995) (debtor should not be able to discharge student loans “merely because repayment of the borrowed funds would require some major personal and financial sacrifices”). This heightened standard protects the integrity of the student-loan program and saves it “from fiscal doom.” Id. at 302 (internal quotation marks omitted).

It also ensures public support for the program by preventing debtors from easily discharging their debts at the expense of the taxpayers who made possible their educations. See Hemar Ins. Corp. of Am. v. Cox (In re Cox), 338 F.3d 1238, 1242 (11th Cir.2003). Over the years, the circuit courts have considered the standards that should guide the undue hardship analysis. An overwhelming majority of circuits has now adopted the Second Circuit’s three-part Brunner test. See, e.g., Tirch, 409 F.3d at 680; Educ. Credit Mgmt. Corp. v.

Polleys, 356 F.3d 1302, 1309 (10th Cir.2004); Gerkardt, 348 F.3d at 91-92; O’Hearn, 339 F.3d at 564; Cox, 338 F.3d at 1241; Brightful v. Pa. Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324, 327 (3d Cir.2001); Rifino, 245 F.3d at 1087; Brunner, 831 F.2d at 396. But see Long v. Educ. Credit Mgmt. Corp. {In re Long), 322 F.3d 549, 554 (8th Cir.2003) (adopting totality-of-the-circumstances test). This circuit has never explicitly adopted any one test in the

Chapter 7 context, although we have applied the Brunner factors in the

Chapter 13 context. Ekenasi v. Educ. Res. Inst. (In re Ekenasi), 325 F.3d 541, 546-49 (4th Cir.2003). We now adopt the Brunner test for

Chapter 7. Since Congress did not provide express standards to guide the undue hardship analysis, the Brunner test best incorporates the congressional mandate to allow discharge of student loans only in limited circumstances. Uniformity among the circuits is also important in the bankruptcy context.

In order to prove an undue hardship, therefore, a debtor must show: (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 debt- or has made good faith efforts to repay the loans. Brunner, 831 F.2d at 396. The debtor has the burden of proving all three factors by a preponderance of the evidence.

O’Heam, 339 F.3d at 565; Brightful, 267 F.3d at 327. IV. A. We do not decide whether Frushour has satisfied the first part of the Brunner test, because we hold that she has failed to prove the second and third factors. We do note, however, that ECMC is mistaken to suggest that having Internet and cable connections requires the conclusion that Frushour maintains more than “a ‘minimal’ standard of living.” Brunner, 831 F.2d at 396. Such a per se rule would simply be too harsh.

It cannot be said that the transmission of information, whether via Internet or cable, is always unnecessary to maintain a minimal standard of living, especially for those who work from home. The undue hardship test necessarily requires a case-by-case approach to determine whether certain expenses are or are not essential for maintaining a minimal standard of living. See, e.g., Rifino, 245 F.3d at 1088 (holding debtor satisfied first prong even though she had cable television). In short, the mere fact of Frushour’s Internet and cable expenses would not disqualify her from an undue hardship discharge. B.

Frushour has not, however, satisfied the second Brunner factor, “that additional circumstances exist indicating that [her] state of affairs is likely to persist for a significant portion of the repayment period of the student loans.” Brunner, 831 F.2d at 396. This factor is the heart of the Brunner test. It most clearly reflects the congressional imperative that the debtor’s hardship must be more than the normal hardship that accompanies any bankruptcy. See Rifino, 245 F.3d at 1087.

The second factor is, therefore, “a demanding requirement,” Brightful, 267 F.3d at 328, and necessitates that a “certainty of hopelessness” exists that the debtor will not be able to repay the student loans, id. (internal quotation marks omitted); see also Tirch, 409 F.3d at 681 (same); O’Hearn, 339 F.3d at 564 (same). Only a debtor with rare circumstances will satisfy this factor. For example, although not exhaustive, a debtor might meet this test if she can show “illness, disability, a lack of useable job skills, or the existence of a large number of dependents.” Oyler v. Educ. Credit Mgmt.

Corp. (In re Oyler), 397 F.3d 382, 386 (6th Cir.2005). Frushour fails to meet this test because she has provided no additional circumstances beyond the debt itself that show her hardship is undue. She was in her forties at the time of the adversary proceeding, and has one child. There is no indication she or her son has any physical or mental disabilities, and both appear to be healthy. She is college educated, has a Florida real estate license, and has worked in several different areas of employment. Every indication is that Frushour is an intelligent individual with a range of job skills.

While Frushour’s present financial condition is certainly not desirable, the second Brunner factor is prospective in nature and looks for exceptional circumstances beyond the debtor’s current situation. See Gerhardt, 348 F.3d at 92 (“proving that the debtor is currently in financial straits is not enough.”) (internal quotation marks omitted). Frushour’s employment history illustrates that she has held good jobs in the past in which she made almost double her current income. She has provided no indication as to why she could not return to a similar type of work.

Nor has she indicated any specific steps she has taken to seek higher-paying employment in other fields. Instead, she appears to be content with her present employment as a decorative painter because it was her original goal to work in the arts, the area in which she initially studied at Coastal Carolina. Having a low-paying job, however, does not in itself provide undue hardship, especially where the debtor is satisfied with the job, has not actively sought higher-paying employment, and has earned a larger income in previous jobs.

Indeed, Frushour points to no circuit court that has held a debtor can voluntarily take a low-paying job in her preferred field, and then refuse to repay her student loans by claiming undue hardship. Quite the opposite is true. As the Fifth Circuit has explained, “nothing in the Bankruptcy Code suggests that a debtor may choose to work only in the field in which he was trained, obtain a low-paying job, and then claim that it would be an undue hardship to repay his student loans.” Id. at 93.

This is the case because “it is not uncommon for individuals to take jobs not to their liking in order to pay off their student loans.” O’Heam, 339 F.3d at 566. For example, the Sixth Circuit refused to discharge the debt of a married couple where one of the debtors chose to work in a low-paying job, as a pastor of a church. Oyler, 897 F.3d at 386. It found undue hardship was not present even though the debtors had three children and an annual income of $10,000 in the previous two years. Id. at 384.

Frushour nevertheless suggests that potential childcare costs would outweigh any additional income from working outside the home. But we have no way of knowing whether this would be the case. Her contention is founded on little more than speculation, and cannot satisfy her burden to prove the second Brunner factor by a preponderance of the evidence. 0’Hearn, 339 F.3d at 565. And since this factor looks to the future, it is not implausible to think that childcare costs will drop as her child progresses in school. See, e.g., Educ. Credit Mgmt. Corp. v.

Carter, 279 B.R. 872, 874, 878 (M.D.Ga.2002) (no undue hardship where, inter alia, plaintiff failed to show that her childcare costs were likely to remain the same in the future); Wessels v. Educ. Credit Mgmt. Corp., 271 B.R. 313, 315 (W.D.Wis.2002) (same); Kirchhofer v. Direct Loans {In re Kirchhofer), 278 B.R. 162, 168 (Bankr.N.D.Ohio 2002) (same). We recognize that Frushour’s circumstances are far from ideal.

But given her college education, real estate license, and restaurant management experience, we are not left with the likelihood that her present circumstances will extend for the rest of her repayment period or that she will not be able to pay off her loans at some future date. See Brightful, 267 F.3d at 328. C. Frushour has also failed to meet the third Brunner factor, which requires her to show that she “has made good faith efforts to repay [her] loans.” Brunner, 831 F.2d at 396.

This factor looks to the debtor’s “efforts to obtain employment, maximize income, and minimize expenses.” O’Hearn, 339 F.3d at 564 (internal quotation marks omitted). Further, the debtor’s hardship must be a result of factors over which she had no control. Id. The debtor’s effort to seek out loan consolidation options that make the debt less onerous is an important component of the good-faith inquiry. See Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete), 412 F.3d 1200, 1206 (10th Cir. 2005).

Although not always dispositive, it illustrates that the debtor takes her loan obligations seriously, and is doing her utmost to repay them despite her unfortunate circumstances. See Tirch, 409 F.3d at 682-83; see also Smitley, 347 F.3d at 121-22, 124 (relying in part on fact that debtor was eligible for income contingent repayment plan to deny discharge under “unconscionable” standard for Health Education Assistance Loans). Frushour has not shown the requisite effort to repay her loans. To be sure, she should be commended for making several payments in the past.

But she did not seriously consider the income contingent plan under the William D. Ford Direct Loan Program. See Tirch, 409 F.3d at 682-83 (debtor did not illustrate good faith when she did not take advantage of the William D. Ford Income Contingent Repayment plan); see also Alderete, 412 F.3d at 1206 & n. 1 (debtors did not prove good faith when they did not consider applying for the income contingent plan, even though the court was not certain they were even eligible for the plan).

Both parties agree that Frushour could have taken advantage of this plan, and ECMC has provided assurances that she continues to remain eligible. The plan would have allowed her to pay between zero and five dollars per month unless her income increased. After twenty-five years, any remaining debt would be discharged. See 34 C.F.R. § 685.209. Frushour’s only reasons for refusing that option, however, were that it was not suited for her and she wanted a fresh start. It is hard to see why these reasons are not simply shorthand for her lack of interest in repaying her debt.

The consolidation plan would allow her both to remain at her preferred job and to maintain her current level of expenditures. Accounting for these considerations, Frush-our has provided insufficient justifications for refusing to take a simple step that would have allowed her to fulfill her commitments in a manageable way. See, e.g., Tirch, 409 F.3d at 683. She has thus failed to satisfy the third Brunner factor of manifest good-faith effort to repay her loans. V. Frushour’s case, like that of most debtors, is not without appealing and sympathetic elements.

But Congress, in enacting § 523(a)(8), set a high bar for a debtor seeking to discharge government-guaranteed educational loans. Permitting loan beneficiaries a routine discharge of these obligations through bankruptcy would create the very inequities among loan recipients that Congress sought to avoid with its use of the word “undue.” To allow Frushour’s claim would force courts to draw almost impossible lines. Applying a looser standard, courts would inevitably reach inconsistent results across bankruptcy cases.

Some loan recipients would obtain discharge while others in similar circumstances would unfairly remain obligated. A looser standard would also be unfair to the vast majority of loan recipients who do not attempt to discharge their loans and meet their obligations even with much self-sacrifice. Nor would we be faithful to Congress if we relaxed the undue hardship standard in a manner that drew increasingly on the public fisc to account for growing shortfalls.

The appellate courts have thus declined to allow debtors to discharge their student loans in cases where their circumstances at the time of the adversary proceeding were similar or even more compelling.

See, e.g., Alderete, 412 F.3d at 1203, 1206 (no. undue hardship on debt of $78,000 for debtors with three children and low-paying jobs); Oyler, 397 F.3d at 384, 386 (no undue hardship on debt of $40,000 for debtors with three children and $10,000 annual income over last two years); Brightful, 267 F.3d at 326, 329-31 (no undue hardship for debtor who had one dependent, even though she was forced to live with her sister, had no college degree, and was “emotionally unstable” with “glaring psychiatric problems”); Brunner, 46 B.R. at 756-58, aff'd, 831 F.2d 395 (2d Cir.1987) (no undue hardship where the debtor was unemployed and on public assistance, had made at most $9,000 per year over the previous several years, and had sent out “over a hundred” resumes in her chosen field, without success).

Frushour failed to show that she has exceptional circumstances, and she refused to consider loan consolidation programs that would have required from her a monthly payment of near zero based on her current income. She has thus failed to prove that she is in the limited class of debtors for which § 523(a)(8) meant to allow discharge. Accordingly, the judgment of the district court is REVERSED. With respect to the dissenting opinion of our fine colleague, we take exception to several points. The dissent’s reliance on Ekenasi is ironic because Ekenasi supports the majority's view.

The Ekenasi Court in fact reversed the bankruptcy court’s determination that the debtor was due an undue hardship discharge. 325 F.3d at 549. It found that the bankruptcy court erred in holding that the debtor met the second Brunner factor because of the speculative nature of its determination. Id. at 548. Here also the bankruptcy court erred in speculating under the second Brunner factor that an individual with varied and demonstrated job skills would never achieve a higher income stream during the entirety of the loan repayment period.

Ekenasi also concluded that the bankruptcy court mistakenly found that good faith was present. Id. at 549. The bankruptcy court in this case was similarly incorrect to find good faith because Frushour sought to discharge her student loans in their entirety without seriously considering an option that would have allowed her to pay between zero and five dollars a month. Thus, we fully agree with the Ekenasi Court that the conclusions the bankruptcy court sought to draw from the undisputed facts would be error under any standard.

It is disappointing that our dissenting colleague has never attempted to address the significance of the actual language chosen by Congress to govern the discharge of educational loans. The dissent does not choose to acknowledge that ”[s]tudent loans, as a general rule, fall within the category of non-dischargeable debts and pass through the bankruptcy process unaffected.” Ekenasi, 325 F.3d at 545. It does not even contend its result would square with the large corpus of circuit law on this subject.

Finally, the dissent disputes neither the availability of loan consolidation programs that would all but eliminate Frushour’s current payments nor the existence of employment skills in restaurant management and real estate that may raise the earnings of this college educated individual over time. The danger of overlooking the many factors not addressed by the dissent is that student-loan discharges would become the rule and not the exception — the precise result that Congress in the explicit language of the statute has sought to avoid.