Lokey v. United States Department of Education (In Re Lokey) , 98 F. App'x 938 ( 2004 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: CYNTHIA ANN LOKEY, 
Debtor.
CYNTHIA ANN LOKEY,
Debtor-Appellant,
v.  No. 03-2125
THE UNITED STATES DEPARTMENT OF
EDUCATION; SALLIE MAE;
EDUCATIONAL CREDIT MANAGEMENT
CORPORATION,
Creditors-Appellees.

Appeal from the United States District Court
for the Southern District of West Virginia, at Charleston.
Charles H. Haden II, District Judge.
(CA-03-289-2; BK-01-20298; AP-01-0057)
Submitted: January 30, 2004
Decided: May 13, 2004
Before MOTZ, MICHAEL, and DUNCAN, Circuit Judges.
Vacated and remanded by unpublished per curiam opinion.
COUNSEL
Cynthia Ann Lokey, Appellant Pro Se. Gary L. Call, Assistant United
States Attorney, Charleston, West Virginia; Steven Leftridge Thomas,
2 IN RE: LOKEY
KAY, CASTO & CHANEY, Charleston, West Virginia, for Appel-
lees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
Cynthia Ann Lokey appeals from the district court’s order affirm-
ing the bankruptcy court’s order determining that her student loans
are not dischargeable in bankruptcy because she failed to establish
that repayment of the loans would constitute an undue hardship, 11
U.S.C. § 523(a)(8)(2000). Because we find that the bankruptcy
court’s determinations were clearly erroneous, we vacate the district
court’s order and remand for further proceedings.
The following evidence was adduced at the hearing before the
bankruptcy court on Lokey’s complaint to determine dischargeability
of approximately $73,000 in federally-insured student loans. Lokey is
33 years old and has no dependents. She graduated with a master’s
degree in psychology in the spring of 1999 and began working as a
supervised psychologist for a private contractor with the State of West
Virginia Mental Health Department. According to Lokey, in order to
be eligible for licensure as a psychologist, one must have a minimum
of five years of full-time clinical work under a licensed psychologist
with at least 24 hours of clinical work per week or 15 hours of clinical
work per week for ten years. Lokey’s position was funded by a grant
which was subsequently lost; at the time of hearing, Lokey was work-
ing in a case management position, acquiring approximately 69 clini-
cal hours per quarter. In addition to the minimum number of clinical
hours, licensure is dependent upon both an oral and a written exam.
Lokey lives alone in a one-bedroom apartment that she rents for
$360 per month. Her total monthly living expenses, consisting of rent,
IN RE: LOKEY 3
utilities, insurance, car payment ($260), gasoline, food, laundry, and
$30 in miscellaneous expenses, amount to $1575.00, exclusive of any
student loan payment.
Lokey testified that she receives two paychecks per month, the first
in the net amount of $736.91 and the second in the net amount of
$752.48. Including an anticipated tax refund of $500, Lokey esti-
mated her average total net monthly income to be approximately
$1650. Therefore, the undisputed evidence established that Lokey had
approximately $75 available each month after paying minimal living
expenses. Nevertheless, the bankruptcy court determined that Lokey
had "income earning capability that you have only begun to explore,"
and that she had "the opportunity to continue to look at areas of
expense reduction that have been pointed out here in connection with
cross-examination." With respect to the latter finding, the bankruptcy
court was referring to Lokey’s testimony that she did not pursue a
loan consolidation through the William D. Ford Program because the
lowest payment available under that program (the income contingent
plan) is $269 per month—a payment still beyond her ability to make
each month. The bankruptcy court concluded that Lokey failed to
establish "undue hardship" and denied her a discharge. The district
court affirmed; Lokey noted a timely appeal to this court.
This court reviews the judgment of a district court sitting in review
of a bankruptcy court de novo, applying the same standards of review
that were applied in the district court. Three Sisters Partners, L.L.C.
v. Harden (In re Shangra-La, Inc.), 167 F.3d 843, 847 (4th Cir. 1999).
Specifically, the bankruptcy court’s factual findings are reviewed for
clear error, and legal determinations are reviewed de novo. Loudoun
Leasing Dev. Co. v. Ford Motor Credit Co. (In re K & L Lakeland,
Inc.), 128 F.3d 203, 206 (4th Cir. 1997). A finding of fact is clearly
erroneous when, "although there is evidence to support it, the review-
ing court on the entire evidence is left with the definite and firm con-
viction that a mistake has been committed." United States v. United
States Gypsum Co., 333 U.S. 364, 395 (1948); In re Green, 934 F.2d
568, 570 (4th Cir. 1991).
The Bankruptcy Code excepts from discharge in bankruptcy a stu-
dent loan debt, "unless excepting such debt from discharge . . . will
impose an undue hardship on the debtor and the debtor’s dependents."
4 IN RE: LOKEY
11 U.S.C. § 523(a)(8). To qualify as an undue hardship, the 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 por-
tion of the repayment period of the student loans; and
(3) that the debtor has made good faith efforts to repay the
loans.
Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395(2d Cir. 1987). The debtor bears the burden of showing the existence
of all three prongs. See In re Faish, 72 F.3d 298, 304-06 (3d Cir.
1995).
First, the debtor must establish "that [he] cannot maintain, based on
current income and expenses, a ‘minimal’ standard of living for [him-
self] if forced to repay the loans." Brunner, 831 F.2d at 396. "Where
a family earns a modest income and the family budget, which shows
no unnecessary or frivolous expenditures, is still unbalanced, a hard-
ship exists from which a debtor may be discharged of his student loan
obligations." In re Correll, 105 B.R. 302, 306 (Bankr. W.D. Pa.
1989). A debtor is not required to live at the poverty level in order
to satisfy the first prong of the Brunner test. Correll, 105 B.R. at 306.
We find that, given the undisputed evidence of Lokey’s income
and monthly expenses, she cannot meet a minimal standard of living
if she has to repay the full amount of her student loans. Lokey’s
monthly take-home pay averages $1613.51, leaving her no more than
$75 per month for any unexpected expenses. Her monthly expenses
are modest—she has no credit cards, cable television, cell phone, or
home internet access. Moreover, she testified that she had been able
to reduce some of her expenses since the time she filed her petition,
by economizing on certain items. Lokey also testified that it was not
IN RE: LOKEY 5
feasible for her to obtain a second job, given the unpredictability of
her shifts and the nature of her work. Lokey also testified that the
expense of sharing a two bedroom apartment was not likely any less
than the $360 per month she pays for a one-bedroom apartment.
Under the second prong of Brunner, the debtor must show "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." Brunner, 831 F.2d at 396. The bankruptcy court
found that Lokey had "earning potential which she has barely begun
to explore." However, we find that this finding is not based on any
evidence presented. On the contrary, Lokey’s testimony established
that it is very unlikely that she will obtain licensure any time in the
next several years. Moreover, her current job is funded by a three-
year grant from the State of West Virginia. Given the budget crises
faced by states all over the country, Lokey’s income will not likely
increase dramatically, if at all.
The third prong under Brunner requires "that the debtor has made
good faith efforts to repay the loans." Brunner, 831 F.2d at 396.
Lokey testified that she "tried to make several payments. Unfortu-
nately, I just couldn’t keep it up. There was no money left. So, I asked
for forbearance and got that and then I found I still wasn’t able to pay
it." The bankruptcy court found that Lokey failed this prong because
she did not pursue loan consolidation options available through the
Ford Program. However, Lokey testified that she investigated the pos-
sibility of consolidating the loans but that the lowest payments avail-
able still would have been too high for her to be able to pay.
Based on the foregoing, we find that the bankruptcy court clearly
erred in finding that Lokey failed to establish undue hardship.
Accordingly, we vacate the district court’s order and remand with
instructions to remand the case to the bankruptcy court to determine
what portion of Lokey’s student loan is dischargeable under 11
U.S.C. § 523(a)(8). We dispense with oral argument because the facts
and legal contentions are adequately presented in the materials before
the court and argument would not aid in the decisional process.
VACATED AND REMANDED