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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA



In re: Case No. F99-00122-DMD ) Chapter 7
)
DAVID LEE TOWNSEND, )
)
Debtor.              )
)
______________________________________________ )
DAVID LEE TOWNSEND, ) Bancap No. 99-4021
) Adversary No. F99-00122-001-DMD
Plaintiff,              )
)
v.              )
)
EDUCATIONAL CREDIT MANAGE- )
MENT CORP. and THE EDUCA- )
TIONAL RESOURCES INSTITUTE, )
)
Defendants.              )
______________________________________________ )


MEMORANDUM DECISION



This is an action by David Townsend to establish the dischargeability of student loans under 11 U.S.C. 523(a)(8). It is a core proceeding under 28 U.S.C. 157(b)(2)(I). This court has jurisdiction in accordance with 28 U.S.C. 1334 and the district court's order of reference. I find the plaintiff's educational loans to be dischargeable in part.

Background

The parties have stipulated to the following statement of uncontested facts:

1.   Townsend is an unmarried male, age 45 and has no dependents.
2.   Townsend suffers from no medical condition that prevents him from being gainfully employed and incurs no unusual or extraordinary medical expenses.
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3.   Townsend is currently employed as an untenured Special Education Teacher by the Alaska Gateway School District, Tok, Alaska, and has been so employed since September 16, 1997.
4.   Townsend is indebted to the Alaska Commission on Postsecondary Education ("ACPE") on multiple loans, which loans had an outstanding balance as of February 11, 1999 in the approximate amount of $38,085 bearing interest at the varying rates between 5.0% and 8.6% per annum. Dischargeability of this loan has not been determined and is presumptively nondischargeable under 11 U.S.C. 523(a)(8).
5.   Townsend is indebted on Citibank Student Loans, which loans were guaranteed by ECMC its successor in interest by assignment, having an outstanding balance as of February 11, 1999 in the approximate amount of $167,000 bearing interest at the rate of 8.0% per annum.
6.   Townsend is indebted on USA Group Loans, which loans were guaranteed by TERI its successor in interest by assignment, having an outstanding balance due as of February 11, 1999 in the approximate amount of $32,399 bearing interest at the Nellie Mae prime interest rate plus one point, adjusted annually, with a current interest rate of 11.25% per annum.
A. Loan dated March 6, 1990 having a balance due as of February 11, 1999, in the approximate amount of $15,973; and
B. Loan dated October 23, 1990 having a balance due as February 11, 1999, in the approximate amount of $16,426.
7.   Townsend is indebted on a USA Group Loan dated July 5, 1994, which loan is guaranteed by TERI but USA Group has not assigned to TERI, having an outstanding balance due as of February TOP       7 ABR 69  11, 1999 in the approximate amount of $6,757 bearing interest at the Nellie Mae prime interest rate plus one point, adjusted annually, with a current interest rate of 11.25% per annum. This loan is currently being serviced by USA Group, USA Group having made demand for payment thereon from the co-guarantor, Ronald Woolf.
8.   ECMC is a nonprofit organization within the scope of 11 U.S.C. 523(a)(8).
9.   TERI is a nonprofit organization within the scope of 11 U.S.C. 523(a)(8).
10.   Townsend's Alaska Permanent Fund dividend check and any Federal income tax refunds are subject to garnishment in their entire amount by ACPE unless and until such time as the ACPE loan may be determined discharged by a court of competent jurisdiction.
11.   11. Townsend applied for and received in-school deferments on payment of the student loans for the period 1979 through 1996 and unemployment deferments for the years 1996 and 1997.
12.   Commencing in or about August 1997 through on or about June 1998, Townsend made payments on the USA Group Loans in the total amount of approximately $6,000.
13.   Commencing in October, 1998 through March, 1999, Townsend made payments on the Citi Bank consolidation loans in the total amount of approximately $5,400.
14.   Townsend holds the following degrees or certificates:
A. Bachelor of Science in Biology awarded by the University of Alaska Fairbanks in May, 1979;
B. Special Education Certificate awarded by Arizona State University in May, 1982;
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C. Bachelor of Science in Psychology awarded by the University of Alaska Fairbanks in May, 1988; and
D. MBA in Finance awarded by the University of Alaska Fairbanks in May, 1994 (attended Southern Illinois University from August, 1990 to August, 1991 and the University of Alaska Fairbanks from September 1991 to May, 1994).
E. MHA awarded by St. Louis University May 1996 (Attended St. Louis University from August, 1994 to May, 1996).
15.   For the period January, 1990 through August, 1994, Townsend worked at various temporary or part-time positions while attending school earning between $7.50 and $9.00/hour.
16.   From August 1994 through May, 1996, Townsend was employed by St. Louis University in two half-time (20-hours/week) positions earning $9/hour in one position and $12/hour in the other.
17.   17. From June 1996 through December, 1996, Townsend was unemployed.
18.   18. From January, 1997 through August, 1997, Townsend was employed in various part-time positions, earning between $5 and $10/hour.
19.   Townsend realized gross income in 1996 of $5,965.
20.   Townsend realized gross income in 1997 of $24,777.
21.   Townsend realized gross income in 1998 of $48,541, including the Alaska PFD.
22.   Townsend realized gross income in 1999 of $49,062, including the Alaska PFD.
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23.   The regular monthly payments on the various student loans, totaling $2,519, are as follows:
A. Citi Bank Consolidated Loans - $1,079
B. ACPE - $770
C. TERI - $528
D. USA Group - $142

Townsend has worked in a variety of positions over his lifetime. He started with Ralph's supermarket in Los Angeles after high school as a receiving clerk for $7.51 an hour. After four years in that position, he moved to Alaska and worked part-time as a painter and janitor at the University of Alaska - Fairbanks (UAF) for over two years earning $9.81 an hour. While living in Arizona, Townsend worked as a lab technician earning $5.00 an hour. He obtained a teaching position with the lower Kuskokwim School District for $28,000.00 annually during the 1982-1983 school year. After returning to Fairbanks, Townsend worked as an administrator for UAF, earning $13,000.00 to $15,000.00 annually. He later worked part-time on a UAF labor crew through May of 1989, earning $8.51 an hour. During 1989 and 1990 Townsend served as co-ordinator of building services at UAF, earning $18,900.00 annually. Following a move to Illinois in 1990, he worked part-time as a research assistant for $9.00 an hour. Townsend returned to Alaska and worked part-time as a bus driver and snow remover for $7.51 at UAF. From 1994 through 1996, he worked part-time as a research assistant and intern in St. Louis and Los Angeles. Townsend worked as a fish processor in early 1997, followed by stints as a warehouse worker and laborer in California during 1997.

Townsend's current employment with the Alaska Gateway School District began in September of 1997. His present contract calls for payments of $3,939.33 on a TOP       7 ABR 72  twelve month basis, or $47,200.00 annually. His permanent fund dividend (PFD) for 1999 was $1,770.00. His monthly deductions include:

TRS Teacher $ 340.75
Safeco (Retirement) 150.00
Medicare 57.12
Federal Withholding 572.53
Negotiations fee 2.08 ($25.00 per year)
NEA Dues 79.50
Net Income $ 2,737.35

His current net income, including a monthly allowance for a PFD of $1,770.00, is $2,884.85.

Townsend's expenses currently total about $1,450.00 per month without a housing allowance. They include the following:

Phone $   50.00
Power 50.00
Food 300.00
Clothes 50.00
Gas 200.00
Car Payment 300.00
Car Insurance 75.00
Miscellaneous 100.00
Car Maintenance 25.00
Support of Mother 83.00
Computer 204.70
Total $1,437.70

Allowing rent of $550.00 a month, his monthly expenses are about $1,987.70 a month.

Analysis

Educational loans are not dischargeable unless excepting such debt from discharge would impose an "undue hardship on the debtor or the debtor's dependents." (1) The TOP       7 ABR 73  student loan recipient has the burden of proof to show undue hardship. (2) The Ninth Circuit and the District of Alaska have adopted the three part test of Brunner v. New York State Higher Educ. Services Corp. (3) to determine whether an undue hardship exists. (4) Brunner requires the debtor to prove:

(1) that 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; (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. (5)

The first issue facing the court is whether the debtor can maintain a minimal standard of living and still repay the loans. To answer this question, the court must first examine the deductions taken from the debtor's income. Virtually all the deductions taken from his income are mandatory, except for the voluntary payments of $150.00 per month made by the debtor to Safeco for a retirement plan. Adding this sum to net income leaves the sum of $3,034.85 per month for expenses. Deducting $2,519.00 in student loan payments yields a balance of $515.85 available for living expenses. $515.85 is inadequate for the cost of an apartment, without even considering the costs of food, clothing, shelter, transportation and utility costs. The debtor cannot maintain a minimal standard of living and repay the loans in full.

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The second Brunner test is also satisfied here. The debtor's financial situation is likely to persist for the balance of the loan repayment period. Despite his academic achievements, teaching in Alaska has provided him with his highest salaries. His current salary has been frozen. Large salary increases are not anticipated due to declining enrollment and declining funding from the State of Alaska. If the debtor were to transfer to Anchorage his salary would decline to about $40,000.00 annually. His financial state of affairs will remain the same for the foreseeable future.

The final Brunner factor is good faith. The defendants concede this issue. I find that Townsend has acted in good faith in his attempts to repay his loans.

The focus of this case has been directed to the extent that the loans are dischargeable. The debtor and the defendants have supported recognition of the partial discharge theory in this case. I will adopt the rationale of Great Lakes Higher Educ. Corp. v. Brown (In re Brown), (6) and Raimondo v. New York State Higher Educ. Services Corp. (In re Raimondo), (7) and reject the BAP's decision in United Student Aid Funds, Inc. v. Taylor (In re Taylor). (8) The debtor has the ability to repay a portion of his student loan debts, and is entitled to a partial discharge solely as to the portion he cannot repay. The parties differ widely on the amount to be discharged, however. Townsend offers to make payments of $800.00 a month plus 75% of his PFDs over a thirteen year period. His student loan creditors seek payments of $1,500.00 a month over twenty years.

The first issue for determination when considering partial discharge of student loans is the amount of monthly debt service the debtor could bear without suffering undue hardship. As noted earlier, Townsend's Safeco retirement payments of TOP       7 ABR 75  $150.00 monthly are discretionary and unnecessary to maintain a minimal standard of living. Thus, Townsend has $3,034.85 per month available for living expenses and debt service. Of his expenses, only the sum of $204.70 per month for computer expense is objectionable. The balance of $1,783.00 is reasonable and minimal under the circumstances. After Townsend's computer is paid for in full, in March, 2001, his ability to repay the student loans will increase commensurately. I find the debtor has the ability to make monthly payments to his student loan creditors totaling $1,047.00 per month beginning April 1, 2000, and $1,252.00 per month beginning April, 2001. (9)

Having determined the amount of the monthly payment the debtor can make, the next issue is the appropriate term for the payments. Due to his prior service with the State of Alaska, Townsend can retire in just 13 years at age 58. He seeks to terminate his payments at that time. His student loan creditors demand that he continue to work through age 65 before retirement. Assuming a blended rate of 8.25%, payments of $1,047.00 per month for one year and $1,252.00 per month for twelve years would amortize debt of $126,250.00, or 52% of the debtor's student loans as of February, 1999. With the same assumptions and a nineteen year amortization of the $1,252.00 payments, Townsend would amortize $155,925.00, or 64% of the debtor's February 1999 student loan balance. I adopt an intermediate position of 15 years based primarily on two considerations. I recognize that the debtor is working in a very stressful occupation with a high burn-out rate. The extreme difficulties posed by teaching high-needs children suffering from fetal alcohol syndrome have been well stated by the debtor. Additionally, the debtor lives in a remote area with inclement weather and few of the amenities that people living outside of Alaska take for granted. Given these factors, I feel a twenty year term is unrealistic and not feasible. A fifteen year period is much more appropriate, in TOP       7 ABR 76  my view, and will result in the amortization of $136,470.00, or 56% of his total student loan debt as of February, 1999.

Since there is more than one student loan being considered under the partial discharge theory, all the student loan creditors should share equally in the payments the debtor will make. The debtor seeks to have one loan preferred, however. He had a co-signer, Ron Woolf, on a student loan with USA Group Loans in the principal amount of $6,757.00. The debtor's obligation to Mr. Woolf has been discharged in bankruptcy. The debtor seeks special status for this loan by allowing him to retain sufficient income to repay it in full. Alternatively, he asks the court to impose a requirement that loan payments to USA Group Loans (10) be applied first to the guaranteed obligation. I reject the debtor's position. Equality of distribution is a fundamental premise underlying the Bankruptcy Code. There is no legal basis for discriminating in favor of USA Group Loans and against the other student loan creditors to fulfill a discharged obligation to a co-signer or guarantor.

One obvious fly in the ointment remains. The State of Alaska is not a party to these proceedings. (11) It can proceed independently against the debtor and has the right to offset Townsend's PFDs against its indebtedness. There are advantages to the State if it consents to the current payment schedule, however, and I am hopeful that it will cooperate in the resolution of this matter. It should receive more over time through pro-rata distributions than simply through off-sets against PFDs. Assuming PFDs of $1,770.00, the State would receive about $2,149.00 as a pro-rata share of payments and TOP       7 ABR 77  PFDs the first year. As payments increase to $1,252.00 per month, the State's share would increase to about $2,613.00 per year. Should the State find such an arrangement unacceptable, any party may petition the court for Rule 60(b) relief. (12)

Conclusion

David Townsend is entitled to partial discharge of his indebtedness under 11 U.S.C. 523(a)(8). This is not an appealable order. It is simply a memorandum and not subject to appeal. Only the final judgment will be subject to appeal.

I request that the parties submit an agreed form of order and proposed judgment consistent with this memorandum. It is my hope that, through communication with the State, the parties can prepare an effective judgment that will end not only this controversy, but all further student loan litigation. The order and judgment should contain an appropriate mechanism for distribution of the debtor's monthly payments and PFDs. If the parties are unable to comply with this request, they should so advise the court on or before MARCH 31, 2000.

    DATED: March 13, 2000.

                  BY THE COURT

                  DONALD MacDONALD IV
                  United States Bankruptcy Judge



N O T E S:

    1. 11 U.S.C. 523(a)(8).
    2. Alaska Comm'n on Post Secondary Educ. v. Jester (In re Jester), 1 A.B.R. 503, 505 ( D. Alaska 1991), citing Childs v. Higher Educ. Assistance Found. (Matter of Childs), 89 B.R. 819 (Bankr. D. Neb. 1988).
    3. 831 F.2d 395 (2nd Cir. 1987).
    4. United Student Aid Funds v. Pena (In re Pena), 155 F. 3d 1108, 1111-1112 (9th Cir. 1998); United Student Aid Funds v. Nascimento (In re Nascimento), 241 B.R. 440, 445 (B.A.P. 9th Cir. 1999); Jester, 1 A.B.R. 503.
    5. Brunner, 831 F.2d at 396.
    6. 239 B.R. 204 (S.D. Cal. 1999).
    7. 183 B.R. 677 (Bankr. W.D.N.Y. 1995).
    8. 223 B.R. 747 (B.A.P. 9th Cir. 1998).
    9. These monthly payment figures include PFDs.
    10. Presumably, TERI's share of the payments under the partial discharge theory.
    11. Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996); Nutter v. Alaska Comm'n on Post-Secondary Educ. (In re Nutter), 5 A.B.R. 398 (D. Alaska 1998); Fowler v. Alaska Comm'n on Postsecondary Educ.(In re Fowler), 6 A.B.R. 94, 96 (Bankr. D. Alaska 1999).
    12. Fed. R. Bankr. P. 9024 and Fed. R. Civ. P. 60(b).