PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: ROBERT J. MOSKO, JR.,
Debtor.
EDUCATIONAL CREDIT MANAGEMENT
CORPORATION,
Creditor-Appellant,
v.
ROBERT J. MOSKO, JR.; BRENDA
RICHLEY MOSKO, No. 06-2076
Debtors-Appellees,
v.
BRUCE MAGERS, Trustee,
Appellee.
MICHAEL D. WEST, Bankruptcy
Administrator,
Movant.
Appeal from the United States District Court
for the Middle District of North Carolina, at Winston-Salem.
William L. Osteen, Senior District Judge;
Thomas W. Waldrep, Jr., Bankruptcy Judge.
(1:06-cv-00476-WLO; B-04-52834C-7W; A-04-06077-W)
Argued: September 28, 2007
Decided: February 12, 2008
Before TRAXLER and SHEDD, Circuit Judges,
and Norman K. MOON, United States District Judge
for the Western District of Virginia, sitting by designation.
2 In Re MOSKO
Reversed by published opinion. Judge Shedd wrote the opinion, in
which Judge Traxler and Judge Moon joined.
COUNSEL
Julie K. Swedback, EDUCATIONAL CREDIT MANAGEMENT
CORPORATION, St. Paul, Minnesota, for Appellant. Robert
Edmunds Price, Jr., Winston-Salem, North Carolina, for Appellees.
OPINION
SHEDD, Circuit Judge:
Robert and Brenda Mosko filed bankruptcy and sought to dis-
charge their government-backed student loan debt pursuant to 11
U.S.C. § 523(a)(8). The bankruptcy court granted the Moskos relief
from their student loans and the district court affirmed that order.
Educational Credit Management Corporation ("ECMC") appeals and
because we conclude that the bankruptcy court erred in discharging
the Moskos’ loans, we reverse.
I.
During their bankruptcy case, the Moskos filed an adversary pro-
ceeding to discharge their student loans on December 30, 2004. On
September 1, 2005, the bankruptcy court held a hearing and found the
following facts. The Moskos lived in Mocksville, North Carolina,
with their four-year-old son. Robert’s and Brenda’s student loans as
of July 15, 2005, equaled $63,417.06 and $57,156.41, respectively.
Robert received student loans for a bachelor of science degree in
information systems from the University of North Carolina at Greens-
boro ("UNC-G"). Brenda received student loans for a bachelor of arts
degree from Old Dominion University and a master’s degree in music
from UNC-G.
In 2002, 2003, and 2004, the Moskos’ adjusted gross income
equaled $75,546, $78,363, and $64,130, respectively. At the time of
In Re MOSKO 3
the bankruptcy court hearing, Brenda taught music at South Davie
Middle School, where she earned approximately $38,000 annually.
Robert worked at Wachovia Bank as a COBOL1 programmer until
Wachovia laid him off in August 2003. Thereafter, Robert briefly
worked for a company contracting with Wachovia. He quit when that
company informed him that he would receive his regular wage for
overtime hours (instead of an overtime wage consisting of his regular
wage multiplied by one-and-a-half). Then Robert worked at Lowe’s
until he was terminated.2
Lowe’s terminated Robert because he suffers from excessive day-
time sleepiness ("EDS"). He has severe obstructive sleep apnea, peri-
odic limb movement, and chronic obstructive pulmonary disease,
which all combine to cause EDS. Robert’s EDS currently prevents
him from driving, which limits his employment prospects.
After termination by Lowe’s, Robert received unemployment bene-
fits of approximately $420 per week until March 2005. During this
time, Robert completed two computer related online courses at David-
son Community College which he testified might open possibilities of
employment.
The bankruptcy court properly noted that it could discharge the
Moskos’ student loans only if repayment of those loans would consti-
tute "an undue hardship on the debtor and the debtor’s dependents."
11 U.S.C. § 523(a)(8). To determine whether the Moskos’ repayment
of their student loans would constitute an undue hardship, the bank-
ruptcy court applied the three-part Brunner test adopted by this cir-
cuit. In re Frushour, 433 F.3d 393, 400 (4th Cir. 2005). The Brunner
test requires the Moskos to establish, by a preponderance of the evi-
dence, that (1) they cannot maintain, based on current income and
expenses, a minimal standard of living for themselves and their
dependent if forced to repay the loans; (2) additional circumstances
exist indicating that this state of affairs is likely to persist for a signifi-
1
COBOL stands for Common Business-Oriented Language, which is
a programming language used for large mainframe computers operated
by companies such as Wachovia and Bank of America.
2
Although the record is unclear, the Moskos state in their brief that
Lowe’s employed Robert until August 2004. See Appellee Br. 4.
4 In Re MOSKO
cant portion of the repayment period of their student loans; and (3)
they have made good-faith efforts to repay their student loans. See id.
As to part one of the Brunner test, the bankruptcy court found that
the Moskos satisfied their burden because the household’s reasonable
monthly expenses of $2,600 exceeded the couple’s monthly income
of $1,400. From Brenda’s gross monthly income of $3,833, the bank-
ruptcy court calculated the household’s net monthly income by sub-
tracting amounts for mandatory state retirement; federal and state
taxes; life, dental, health, vision and teacher’s liability insurance;
repayment of a loan from Brenda’s 401(k); an income deferral to pay
Brenda during the summer months; and a nominal charitable contri-
bution. The bankruptcy court found that the household’s reasonable
monthly expenses equaled $2,600 for rent, utilities, telephone, long
distance service, day care, car payment, car insurance, groceries,
trash, gasoline, and medical expenses related to Robert’s EDS. The
bankruptcy court found that Robert would need to earn at least
$30,000 annually (for a total household income of approximately
$68,000) before the household’s monthly net income would equal
their expenses.3
The bankruptcy court held that Brenda met part two of the Brunner
test because her salary was unlikely to increase beyond cost-of-living
pay increases. However, the bankruptcy court ruled that Robert did
not satisfy part two because he had presented no evidence indicating
that his EDS permanently prevented him from returning to work. The
bankruptcy court noted that if his EDS improved or if he returned to
work despite his EDS, then he could contribute to the household
income. Finally, the bankruptcy court determined that the Moskos
proved part three because they made 24 regular payments on their
loans, made sporadic payments when they could, and requested loan
deferments and forebearances. The bankruptcy court discharged all of
3
Such a conclusion certainly suggests a close examination of the
Moskos’ financial situation is in order, because it would mean that the
Moskos could not manage their expenses unless they made $22,000
above the median household income for that locale. See U.S. Census
Bureau, 2005 Small Area Income & Poverty Estimates: Davie County
2005, http://www.census.gov/cgi-bin/saipe/saipe.cgi (last visited Jan. 10,
2008).
In Re MOSKO 5
Brenda’s student loans, but granted Robert only a partial discharge.
ECMC then appealed to the district court the bankruptcy court’s dis-
charge order.
The district court also noted that a debtor must meet all three parts
of the Brunner test to receive any discharge. However, because the
district court found the bankruptcy court order could be interpreted to
indicate that Robert had not met the second requirement, it remanded
the case for clarification. Additionally, the district court instructed the
bankruptcy court to analyze the discharge of each of the Moskos’ stu-
dent loans in light of the household’s income.
On remand, the bankruptcy court found that Robert did meet the
second requirement and that his EDS prevented him from repaying
any portion of his student loans. The bankruptcy court then fully dis-
charged both Robert’s and Brenda’s student loans. ECMC appealed
and the district court affirmed. ECMC then appealed to this court.
II.
Debtors seeking to discharge their student loans bear the burden of
proving that they are "in the limited class of debtors for which
§ 523(a)(8) meant to allow discharge." In re Frushour, 433 F.3d at
404 (emphasis added). On an appeal from a district court, we review
the bankruptcy court’s decision directly. Banks v. Sallie Mae Servic-
ing Corp., 299 F.3d 296, 300 (4th Cir. 2002). We review de novo
whether a debtor has demonstrated each of the three parts of the Brun-
ner test by a preponderance of the evidence, and we review for clear
error the facts underlying that legal conclusion. See In re Frushour,
433 F.3d at 399. A finding of fact is clearly erroneous when, "al-
though there is evidence to support it, the reviewing court on the
entire evidence is left with the definite and firm conviction that a mis-
take has been committed." United States v. United States Gypsum
Co., 333 U.S. 364, 395 (1948).
We need not decide whether the Moskos have satisfied the first and
second parts of the Brunner test because we find that they have failed
to satisfy the third part.4
4
Although we do not decide part one of the Brunner test, we note that
several of the bankruptcy court’s factual findings in calculating the
6 In Re MOSKO
III.
Applying part three of the Brunner test, we find that the Moskos
have not made a good-faith effort to repay their loans. See Brunner
v. New York State Higher Educ. Services, 831 F.2d 395 (2d Cir.
1987). Good faith consists of the debtor’s "efforts to obtain employ-
ment, maximize income, and minimize expenses." O’Hearn v. Educ.
Credit Mgmt. Corp., 339 F.3d 559, 564 (7th Cir. 2003) (internal quo-
tation marks omitted)(emphasis added). Furthermore, a debtor may
not "willfully or negligently cause his own default, but rather his con-
dition must result from factors beyond his reasonable control." Id.
(internal quotation marks omitted). Finally, the debtor must seriously
pursue loan consolidation options. See In re Frushour, 433 F.3d at
402.
The Moskos have not demonstrated a good-faith effort to obtain
employment and maximize income. Brenda does not work during the
summer months because she wishes to spend time with her son and
care for her mother. While this desire may be understandable, it is not
an undue hardship for her to endure the sacrifice most parents experi-
ence in working a full calendar year. See In re Wegrzyniak, 241 B.R.
689, 695 (Bankr. D. Idaho 1999)(stating that requiring a teacher to
work during the summer months merely "requi[res] the debtor to do
what so many parents must.").
Moskos’ monthly budget are clearly erroneous. For example, the bank-
ruptcy court’s finding of a minimum automobile gasoline expenditure of
$350 per month would equate to a monthly mileage of 3,000, which is
not supported by any evidence in the record. Similarly, the court’s use
of a $415 per month car payment as a continuing expense is not sup-
ported by the facts since the final car payment was due only three months
after the bankruptcy court hearing. In light of the $3,639 federal and state
income tax refund the Moskos received in 2004, the bankruptcy court
should have accounted for their tax refund in 2005. Either the refund
must be added to the Moskos’ income or their withholding must be
adjusted; to do neither creates a clearly erroneous statement of income,
and here no such adjustment was made. Such erroneous findings con-
cerning the Moskos’ budget hinder efforts to determine whether they
acted in good faith to repay their student loans.
In Re MOSKO 7
Aside from his unemployment benefits, Robert Mosko has not con-
tributed to the household income since Lowe’s terminated his
employment in August 2004. The record does not show that his medi-
cal condition precludes him from all part-time employment, self-
employment, or other work from home.5 Furthermore, Robert refused
a job offer because he would have been paid his regular hourly wage
for the overtime hours he worked.6 This refusal does not constitute
good faith because many in Robert’s financial situation must work
two jobs, see In re Koch, 144 B.R. 959, 965 (Bankr. W.D. Pa. 1992)
(finding no good faith where a debtor did not seek part-time employ-
ment to supplement the income from his current full-time job), with-
out receiving overtime pay for the second job.
In addition, the budget the Moskos presented to the bankruptcy
court does not minimize their expenses. Each month, the Moskos
spend $75 for internet, $80 for cell phones, $60 for satellite television,
$68 for a YMCA membership, and an undisclosed amount for ciga-
rettes. Expenditures on such items are generally unnecessary to main-
tain a minimum standard of living and, under the facts of this case,
the failure to minimize or eliminate these expenditures does not dem-
onstrate a good-faith effort to minimize expenses. See In re
Buchanan, 276 B.R. 744, 751-52 (Bankr. N.D. Va. 2002) (stating that
foregoing satellite television and internet service does not constitute
an undue hardship).
Furthermore, the Moskos’ actual expenditures do not demonstrate
an effort to minimize expenses.7 Between December 2, 2004 and
March 1, 2005, the Moskos spent over $1,600 at Circuit City, Best
5
In its first opinion, the bankruptcy court noted that Robert is skilled
and currently employable.
6
Although Robert asserts this arrangement would violate the law, noth-
ing in the record substantiates this assertion.
7
The Moskos argue that the court should examine only the budget pro-
posed to the bankruptcy court, and not their actual expenditures. This
argument confuses the purposes of part one and part three of the Brunner
test. The budget proposed to the bankruptcy court under part one is pro-
spective and determines whether the debtors can maintain a minimum
standard of living going forward. However, a determination of good faith
under part three necessarily includes a retrospective analysis because it
focuses on the debtors’ prior actions. We analyze the payments that debt-
ors have made on their loans. See Frushour, 433 F.3d at 402. Similarly,
we do not judge a debtors’ mere proposals, but their actual "efforts" to
minimize expenses. See O’Hearn, 339 F.3d at 564 (citation omitted).
Therefore, it is appropriate to examine the Moskos’ actual expenditures
in our analysis of their good faith.
8 In Re MOSKO
Buy, Amazon.com, and Radio Shack; over $3,000 at Sam’s Club,
Wal-mart, and Kmart;8 and over $800 on computer software related
purchases. We conclude that their expenditures do not indicate a good
faith effort to minimize expenses. Furthermore, the Moskos’ failure
to minimize expenses during a period when Robert was unemployed
indicates that their own negligence contributed to their current finan-
cial situation. See O’Hearn, 339 F.3d at 564 (citation omitted).
Additionally, the payments the Moskos made on their student loans
are insufficient to demonstrate good faith because they failed to make
payments on their student loans during a time period when their
income substantially exceeded their necessary expenses. The record
does not indicate that the Moskos made any payments during 2004
when Robert worked at Lowe’s and the couple’s adjusted gross
income totaled $64,130.9 Furthermore, Robert received unemploy-
ment benefits until March 2005. During the time Robert received
these benefits, the Moskos’ net income exceeded the bankruptcy
court’s determination of the Moskos’ reasonable expenses by at least
$480 per month.10 The Moskos’ failure to make payments during their
8
The Moskos claim that some of their expenditures at Sam’s Club,
Wal-mart and Kmart were for necessities such as groceries. However, the
Moskos’ claimed monthly budget for groceries is $450. Even assuming
the Moskos purchased all their groceries at these stores during this three-
month period, that still leaves an unexplained balance of at least $1,650.
9
The bankruptcy court’s opinion states that the Moskos made pay-
ments when they could after they made their 24 regular payments. How-
ever, Robert testified that the couple made those irregular payments
"[p]rior to" their 24 regular payments. App. A. 11. The regular monthly
payments were made between August 2001 and August 2003. Therefore,
the Moskos did not testify that they made any payments after August
2003.
10
Robert’s $420 per week in unemployment benefits equals monthly
income in excess of $1,680. When added to the bankruptcy court’s calcu-
lation of Brenda’s monthly net income of $1,400, less reasonable
expenses of $2,600, the household’s monthly surplus would exceed
$480. We have indicated that the bankruptcy court made erroneous find-
ings as to the Moskos’ budget. See supra note 4. In light of these errors,
the Moskos’ monthly surplus was likely significantly larger than this
amount.
In Re MOSKO 9
budgetary surplus from 2004 until March 2005 does not demonstrate
good faith.
Finally, the Moskos failed to adequately pursue loan consolidation
options. We have stated that seeking out loan consolidation options
is "an important component of the good-faith inquiry" because such
efforts demonstrate that the debtors take their debts seriously and are
doing their utmost to repay them despite their unfortunate circum-
stances. See In re Frushour, 433 F.3d at 402. Based on the Moskos’
adjusted gross income of $64,130 in 2004, their monthly payments
under the income-contingent William D. Ford Direct Loan Consolida-
tion Program would be approximately $319 per month. The Moskos
presented no evidence explaining why these payments were unafford-
able in 2004 when their monthly income averaged approximately
$5,344. Furthermore, the record indicates that since the Moskos’
annual adjusted gross income fell in 2005, the payments required
under the loan consolidation program would have decreased. How-
ever, the Moskos never presented any evidence indicating that they
had pursued an alternate amount of monthly payments based upon
their annual adjusted gross income at the time of the bankruptcy hear-
ing.
The Moskos argue that their request of deferments and forebear-
ances on their student loans demonstrates good faith. If the Moskos
had followed their receipt of these deferments and forebearances with
additional payments on their student loans, or at least efforts to work
out a reasonable repayment schedule, then such actions might help
them establish good faith. However, without reasonable efforts to
make subsequent payments, requesting deferments and forebearances
alone does not establish good faith.
Accordingly, we find that the Moskos have not met their burden of
establishing a good-faith effort to repay their student loans.
IV.
Since the Moskos have failed to demonstrate the good faith
required by the Brunner test, they have failed to prove that they are
entitled to a discharge of their student loans. See In re Frushour, 433
F.3d at 404. Therefore, we reverse the district court’s decision affirm-
10 In Re MOSKO
ing the bankruptcy court’s discharge of the Moskos’ student loans
held by ECMC.
REVERSED