United States 7th Circuit Court of Appeals Reports

IN RE O’HEARN, 339 F.3d 559 (7th Cir. 2003) In the Matter
of: Timothy Gerard O’HEARN, Debtor, Timothy Gerard O’Hearn,
Plaintiff-Appellee, v. Educational Credit Management
Corporation, Defendant-Appellant. No. 02-3930. United
States Court of Appeals, Seventh Circuit. Argued April 22,
2003. Decided August 8, 2003.

Appeal from the District Court, Charles N. Clevert, Jr.,
J. Page 560


Daniel Fisher (argued), Educational Credit Management Corp,
St. Paul, MN, for Appellant.

Christine Wolk (argued), Wolk Law Office, Oshkosh, WI, for

Before COFFEY, RIPPLE and EVANS, Circuit Judges.

RIPPLE, Circuit Judge.

Timothy O’Hearn filed for Chapter 7 bankruptcy relief and
sought to discharge his government-guaranteed educational
loans owed to the defendant, Educational Credit Management
Corporation (“ECMC”), a not-for-profit organization that
administers guaranteed student loans. After a hearing, the
bankruptcy court concluded that the student loans would
impose an “undue hardship” on Mr. O’Hearn. See 11 U.S.C.
§ 523(a)(8). The court therefore entered an order
discharging the loans. The bankruptcy court further ordered
that any funds Mr. O’Hearn might collect from an earlier
judgment against the person who fraudulently had diverted
Mr. O’Hearn’s payments to his own use be remitted to ECMC
in order to satisfy the amount of the student loans plus
interest. ECMC appealed the bankruptcy court’s decision to
the district court. That court affirmed the decision of the
bankruptcy court. For the reasons set forth in the
following opinion, we vacate the judgment of the district
court and remand the case for proceedings consistent with
this opinion.



A. Facts

Mr. O’Hearn had attended Loma Linda University in
California in 1993 and 1994 to obtain a master’s degree in
international public health. He financed this education
through student loans totaling approximately $37,000. After
graduation, Mr. O’Hearn worked at various jobs in
Washington, D.C., and Uganda and Malawi in Africa.
Bankr.Hr’g Tr. at 4. During his two-year service in Malawi,
he sent $55,000, which was the bulk of his income, to his
accountant in the United States. He had given directions
that the funds be used to pay his student loans and other
bills. Id. at 22-23. Mr. O’Hearn presented evidence that
these funds should have been enough to pay his student
loans in full, and that, had his accountant done so, the
loans would have been repaid upon his return from Africa.

Upon his return home to Wisconsin in April 1999, Mr.
O’Hearn learned that his Page 562 accountant had paid
only $6,200 on the student loans and had absconded with the
rest of his income and most of his retirement investment.
Id. at 6, 23-24; R.3. Mr. O’Hearn sued his former
accountant and received a judgment for $79,000 plus
punitive damages but, at the time of the bankruptcy court
hearing, he had only been able to collect about $5,700.
Appellee’s Summ. J. Mot. at 3.

Mr. O’Hearn was 50 years old at the time of trial. He had
no children or dependents. After filing for Chapter 7
bankruptcy in January 2000 while living in Wisconsin, Mr.
O’Hearn relocated to Portland, Oregon, in order to take a
job as a diabetes coordinator for the Northwest Indian
Health Board. Bankr.Hr’g Ex.2; Bankr. Hr’g Tr. at 10. His
salary was $43,000 per year, plus medical and dental
benefits. Bankr.Hr’g Tr. at 11, 38. There was some evidence
that his salary might increase eventually to $50,000 per
year, and that he was eligible for future retirement
contributions from his employer. Id. at 19-20, 46. The
bankruptcy court found that Mr. O’Hearn had obtained the
best-paying job he could, given his age, training and
interests. Id. at 99-100. Mr. O’Hearn testified that,
before taking this position, he had applied to over 500
public and private employers in such fields as public
health, teaching, administration and insurance. Id. at
62-64. The court also noted that, given his age, Mr.
O’Hearn might have a “tough time” finding work in the
future. Id. at 99. Mr. O’Hearn had no retirement investment
left at the time of trial; it either had been stolen by his
former accountant or had been used to pay for living
expenses. Id. at 13-15. He testified that he did not have
any health problems that impaired his ability to work. Id.
at 69-70.

In Portland, Mr. O’Hearn lived and shared expenses with
his fianc?©e, although he testified that their relationship
was “strained” at that time. Id. at 54-57. The court
calculated his net monthly income as $2,376 and his monthly
expenses, excluding student loan payments, as approximately
$2,500. Id. at 96. Mr. O’Hearn testified that, as part of
his monthly expenses, he paid $1,402, or half of the
mortgage payment, for his fianc?©e’s house. Id. at 27-28,
97. His fianc?©e had purchased the 2000-square-foot,
four-bedroom house for around $380,000. Id. at 43-44. Mr.
O’Hearn claims no equity interest in this property. Id. at
29. He presented evidence that the average purchase price
of a 2000-square-foot house in Portland in 1998 was
$260,000. Id. at 44-45. The court found that he could rent
a two-bedroom apartment in Portland for less than $1,000
per month, but also concluded that his other expenses, no
longer being shared, would probably double. Bankr. Hr’g
Ex.6; Bankr.Hr’g Tr. at 97-98.

The bankruptcy court detailed Mr. O’Hearn’s other monthly
expenses as: $115 for a car purchased from his fianc?©e, $100
for car insurance, $210 for food, $160 for phone and
utilities, $80 for clothing and $100 for incidentals.
Bankr.Hr’g Ex.1; Bankr.Hr’g Tr. at 32-34, 98-99. Mr.
O’Hearn also reported legal expenses of $200 per month, and
the court believed that he probably would face additional
medical expenses because he had contracted malaria in
Africa and had eye and dental problems. Bankr.Hr’g Tr. at
38, 99. ECMC presented the current IRS housing and utility
allowance for a family of two or less in Portland as $837
per month. Bankr.Hr’g Ex.5; Bankr.Hr’g Tr. at 79.

As for the student loans, Mr. O’Hearn had defaulted on them
in early 1999 and, at the time of the hearing, owed ECMC
just over $50,000 in principal and interest. Bankr.Hr’g Tr.
at 88; Appellee Summ. J. Mot. at Ex.A. The court calculated
that his Page 563 monthly payments would be around $375.
Bankr.Hr’g Tr. at 100. Before filing for bankruptcy, Mr.
O’Hearn had offered a lump sum payment of $30,000,
comprised of remaining savings and contributions from
family, but the collection agency handling the loans
rejected this proposed settlement, and Mr. O’Hearn made no
further payments. Id. at 15-16; Appellee’s Summ. J. Mot. at

B. Earlier Proceedings

The bankruptcy court concluded that Mr. O’Hearn had met
the “undue hardship” test of 11 U.S.C. § 523(a)(8).
It took the view that Mr. O’Hearn had satisfied the
three-part test for “undue hardship” previously established
by this court:

(1) the debtor cannot maintain, based on current income
and expenses, a minimal standard of living for himself and
his dependents if forced to repay the loans; and

(2) 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) the debtor has made good-faith efforts to repay the

See In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993).

The bankruptcy court concluded that Mr. O’Hearn could not
cover his current expenses despite what the court
characterized as a “frugal” budget. The court also believed
that, given his age, Mr. O’Hearn’s financial difficulties
would persist. With respect to his employment
opportunities, the court believed that, considering his age
and his particular training and talents, he had maximized
his job opportunities. With respect to his living
arrangement, the court believed that he could not reduce
his overall expenses by renting less expensive quarters
because he would not have the advantage of sharing other
living expenses. The court also noted that he had made
good-faith efforts to pay the loans.

Accordingly, the court discharged Mr. O’Hearn’s student
loans. The court further ordered that any funds recovered
on the judgment against his former accountant be remitted
to ECMC. It decided to impose this arrangement despite
ECMC’s objection that such a plan would have the practical
effect of relieving Mr. O’Hearn of any incentive to collect
the judgment. On appeal, the district court affirmed the
discharge. ECMC timely appealed to this court.




The basic purpose of a discharge in bankruptcy is to give
debtors a fresh start. See Vill. of San Jose v. McWilliams,
284 F.3d 785, 790 (7th Cir. 2002). Congress nevertheless has
decided that various considerations of public policy
require that certain debts be excluded from the general
principle of discharge. Student loan debts are among those
debts that Congress has singled out for such exclusion.
This student loan exception is codified in the Bankruptcy
Code at 11 U.S.C. § 523:

A discharge under section 727, 1141, 1228(a), 1228(b), or
1328(b) of this title does not discharge an individual
debtor from any debt . . . 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 Page 564 an undue hardship on the debtor
and the debtor’s dependents.

11 U.S.C. § 523(a)(8). Under this provision, debtors
cannot discharge student loans in bankruptcy unless they
show that paying on the loans would cause “undue hardship.”
Supporters of this limitation on the dischargeability of
these loans sought to curb abuse by unscrupulous former
students who, having obtained their education, sought to
evade their commitment to pay for it by seeking immediate
discharge of their loans.[fn1]

The key phrase of the statutory provision, “undue
hardship,” is not defined in the statute. Nor does the
legislative history provide meaningful guidance. As noted
earlier, in Roberson, 999 F.2d at 1135, we adopted the
three-part test for “undue hardship,” first enunciated by
the Second Circuit in Brunner v. New York State Higher
Educucation Services Corp. (In re Brunner), 831 F.2d 395
(2d Cir. 1987) (per curiam). In adopting that approach, we
chose a path that gave ample recognition to the term
“undue” in order to ensure that the intent of Congress
would be fully reflected in our adjudications. As our
colleagues in the Ninth Circuit have noted, Congress would
not have made student loans an exception to discharge if it
meant to allow discharge based on merely “garden-variety”
hardship. See Rifino v. United States (In re Rifino), 245
F.3d 1083, 1087 (9th Cir. 2001); see also Pennsylvania
Higher Educ. Assistance Agency v. Faish (In re Faish), 72
F.3d 298, 305-06 (3d Cir. 1995) (“[T]he Brunner standard
safeguards the financial integrity of the student loan
program by not permitting debtors who have obtained the
substantial benefits of an education funded by taxpayer
dollars to dismiss their obligation merely because
repayment of the borrowed funds would require some major
personal and financial sacrifices.”); Roberson, 999 F.2d at
1135 (deeming § 523(a)(8) as “heightened standard
for dischargeability of student loans”).

Each prong of this “undue hardship” inquiry reflects the
need to keep in mind this basic policy decision by
Congress. Accordingly, the first prong examines “the
debtor’s current financial condition to see if payment of
the loans would cause his standard of living to fall below
that minimally necessary.” Id. Similarly, the second prong,
future prospects, “should be based upon the certainty of
hopelessness, not simply a present inability to fulfill
financial commitment.” Id. at 1136 (citation omitted). The
third prong, good faith, is measured by the debtor’s
“efforts to obtain employment, maximize income, and
minimize expenses . . . [and] encompasses a notion that the
debtor may not willfully or negligently cause his own
default, but rather his condition must result from `factors
beyond his reasonable control.'” Id. (citation omitted).


As we have stated in prior decisions, we review de novo
whether the debtor’s circumstances meet the “undue
hardship” test. Goulet v. Educ. Credit Mgmt. Corp. (In re
Goulet), 284 F.3d 773, 777 (7th Cir. 2002); Roberson, 999
F.2d at 1137. In doing so, however, we must give deference
to the bankruptcy court’s findings of adjudicative fact and
to the factual inferences that the court drew from those
facts Page 565 as long as those findings are ground in the
evidence of record. See, e.g., Pena, 155 F.3d at 1114
(“[T]he bankruptcy court did not clearly err in finding
that the [debtors] exhibited good faith in attempting to
pay back the student loans.”); Roberson, 999 F.2d at 1137
(accepting the bankruptcy court’s factual finding that the
debtor’s “financial straits were not likely to continue for
an extended period of time”). The debtor has the burden of
establishing each element of the three-part “undue
hardship” test by a preponderance of the evidence, and if
he fails on any one element, “the test has not been met and
the court need not continue with the inquiry.” Goulet, 284
F.3d at 777.


Although we normally give deference to a bankruptcy
court’s factual findings and inferences, we must conclude
that, in this case, we cannot affirm the discharge of Mr.
O’Hearn’s student loans because, insofar as we can tell
from the record before us, the bankruptcy court grounded
its decision on factual inferences that are not supported
by the record.[fn2]

Of particular concern to us is the bankruptcy court’s
analysis of Mr. O’Hearn’s financial circumstances under the
first prong of the established test — his ability to
maintain, based on current income and expenses, a minimal
standard of living for himself, if he is required to repay
the loans. At the time of the hearing, Mr. O’Hearn had no
dependents and an annual income of $43,000 plus benefits.
Thus, his monthly income exceeded the IRS housing and
utility allowance for a family of two in Portland by nearly
$1,500.[fn3] The bankruptcy court nevertheless concluded
that Mr. O’Hearn could not maintain a minimal standard of
living if forced to repay his loans.[fn4]

The bankruptcy court’s analysis of Mr. O’Hearn’s expenses
raises even more serious questions for us. The court allowed
Mr. O’Hearn to justify a rent payment to live in his
fianc?©e’s house that was nearly $500 higher than the amount
he apparently would have paid for a two-bedroom apartment
in the Portland area. The court based this justification on
two assumptions: that Mr. O’Hearn would have to live alone
if he rented an apartment; and that by living alone many of
his expenses, no longer shared, would likely double. We
cannot see how this record necessarily supports these
conclusions. Many couples are forced to live in less
appealing housing because of the financial obligations
undertaken by one or the other. More importantly, it is
speculative to assume that his expenses would necessarily
double if he lived alone in an apartment. There is no
evidence of record that it takes even close to the same
amount of heat or light to service a two-bedroom apartment
as it does to support a 2000-square-foot, four-bedroom
Page 566 house.[fn5]

With respect to the second prong, the bankruptcy court’s
conclusions with respect to Mr. O’Hearn’s future outlook
also are troubling. Here, the inquiry centers on whether
circumstances indicate that Mr. O’Hearn’s financial
situation is likely to persist for a significant portion of
the repayment period.[fn6] The bankruptcy court did not
explore fully whether taking jobs in other fields might put
Mr. O’Hearn in better financial standing. The bankruptcy
court concluded that Mr. O’Hearn had found the best-paying
job he could in the public health field and that, given his
age, he might have a “tough time” finding other work in the
future. And Mr. O’Hearn testified that he contacted over
500 employers in different fields before landing his
present job. But, other than testimony that he has worked
as a substitute teacher and has some “background in
manufacturing,” we cannot tell from the record if Mr.
O’Hearn has job skills that would be transferable to
higher-paying occupations. Instead, the bankruptcy court
seemed to focus on his choice to work in the public health
field, commenting that “I don’t think we can necessarily
ask people to [take other jobs] just to pay their student
loans.” However, it is not uncommon for individuals to take
jobs not to their liking in order to pay off their student
loans, or for that matter to meet all sorts of other
financial obligations. See Brightful, 267 F.3d at 329 n. 4
(noting debtor’s responsibility to pursue other employment
avenues if prospects at current job are limited). But cf.
Cheesman v. Tennessee Student Assistance Corp. (In re
Cheesman), 25 F.3d 356, 360 (6th Cir. 1994) (in affirming
stay of discharge decision, accounting for debtors’ choice
to “work in worthwhile, albeit low-paying, professions”).
Although Mr. O’Hearn has been fortunate in finding a
position that he deems satisfying and that is socially
useful, Congress has not provided that such considerations
ought to be weighed in determining the discharge of student
loans. See Roberson, 999 F.2d at 1137 (explaining, in
adopting the Brunner test, that “[i]f the leveraged
investment of an education does not generate the return the
borrower anticipated, the student, not the taxpayers, must
accept the consequences of the decision to borrow”). Page

With respect to this second prong, another factor remains
underdeveloped on this record. Although Mr. O’Hearn has a
responsibility to take into account the need to replenish
his retirement assets, we are not told with any precision
the impact that this consideration might have on his
economic future. Mr. O’Hearn is a crime victim. If the
record were more fully developed and the findings of the
bankruptcy court more extensive, it would be possible to
determine the sort of weight that this factor ought to be
given in analyzing Mr. O’Hearn’s prospects.

Given the evidence in the record, we cannot say that the
bankruptcy court was on solid ground in its determination
that Mr. O’Hearn had met his burden on either the first or
the second prong of the established “undue hardship” test.

With respect to the third prong, ECMC takes the position
that the bankruptcy court erred in finding that Mr. O’Hearn
had not established this factor. In ECMC’s view, the record
establishes that, rather than face up to his obligation to
pay his student loans, Mr. O’Hearn has pursued a course of
building an equity interest in his fianc?©e’s home. The
bankruptcy court took a different view of the record, a
view that appears to be based at least in part on the
court’s assessment of the credibility of the witnesses. We
shall not disturb that determination.


On remand, the bankruptcy court should address the matters
we have noted in the course of this opinion. Although our
review of the ultimate issue of “undue hardship” is de
novo, that review ought to be predicated on an analysis
that fully takes into account the record developed by the
parties. The bankruptcy court is free to reassess its views
or to reaffirm those already stated, albeit with a more
plenary explanation. We shall leave to the discretion of
the bankruptcy court whether considerations of fairness and
substantial justice require that the parties be permitted
to supplement the record with additional evidence. For the
foregoing reasons, the judgment of the district court is
vacated and the case is remanded for further proceedings
consistent with this opinion. The parties shall bear their
own costs in this court.



[fn1] See Ekenasi v. Educ. Res. Inst. (In re Ekenasi), 325
F.3d 541, 545-46 (4th Cir. 2003); Long v. Educ. Credit Mgmt.
Corp. (In re Long), 322 F.3d 549, 554 (8th Cir. 2003);
United Student Aid Funds, Inc. v. Pena (In re Pena), 155
F.3d 1108, 1111 (9th Cir. 1998); Tennessee Student
Assistance Corp. v. Hornsby (In re Hornsby), 144 F.3d 433,
436-37 (6th Cir. 1998).

[fn2] See, e.g., Ekenasi, 325 F.3d at 548-49 (reversing
where evidence was too “speculative” to substantiate
bankruptcy court’s findings); Goulet, 284 F.3d at 779
(concluding that bankruptcy court erred, in part, by
drawing inferences that were not supported by the
evidence); Brightful v. Pennsylvania Higher Educ.
Assistance Agency (In re Brightful), 267 F.3d 324, 330-31
(3d Cir. 2001) (reversing where record did not support
bankruptcy court’s inferences).

[fn3] Cf. Hornsby, 144 F.3d at 438 (questioning whether
debtors could meet first prong when their income put them
significantly above poverty guideline).

[fn4] Cf. Faish, 72 F.3d at 306 (concluding that single
mother did not meet first prong where she made salary of
$27,000 in 1993, faced loan payments of $300, and supported
one son).

[fn5] The bankruptcy court estimated Mr. O’Hearn’s monthly
loan payments at $375, based on figures provided by ECMC’s
attorney during closing argument at the hearing. In its
brief on appeal, however, ECMC now suggests that Mr.
O’Hearn’s payments might be lower — around $325 per
month — if he consolidated his loans. (ECMC revised
this figure to $350 per month in its reply brief.) It
appears, however, from the hearing transcript that ECMC’s
attorney already had assumed a low-interest rate of 4
percent in calculating the $375 figure. We do not believe
that it is appropriate for ECMC to amend its estimation on
appeal. We also note that neither party has explored
whether Mr. O’Hearn is eligible for consolidation of these

[fn6] Although we discern serious gaps in the bankruptcy
court’s analysis on the second prong, we do wish to note
that the court properly considered Mr. O’Hearn’s age in
forecasting his future prospects. Mr. O’Hearn was 50 years
old at the time of the hearing and the court found that,
given his age, he might have a “tough time” finding other
work in the future. The bankruptcy court was also concerned
with Mr. O’Hearn’s lack of retirement funds. Although we
have discounted such arguments in the past, see Goulet, 284
F.3d at 779 (“By returning to graduate school at the age of
45 and voluntarily assuming the debt, [the debtor] must
have believed that he had future earnings potential.”), the
consideration may be more compelling in Mr. O’Hearn’s case
because there is some evidence that he devised a way to pay
the loans in full before even coming close to retirement
age, and might have done so were it not for his
accountant’s embezzlement.