                            In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 02-3930
In the Matter of:
TIMOTHY GERARD O’HEARN,
                                                            Debtor,

TIMOTHY GERARD O’HEARN,
                                                 Plaintiff-Appellee,
                                v.

EDUCATIONAL CREDIT MANAGEMENT
CORPORATION,
                                             Defendant-Appellant.
                        ____________
           Appeal from the United States District Court
               for the Eastern District of Wisconsin.
           No. 01 C 1299—Charles N. Clevert, Jr., Judge.
                        ____________
      ARGUED APRIL 22, 2003—DECIDED AUGUST 8, 2003
                        ____________


  Before COFFEY, RIPPLE and EVANS, Circuit Judges.
  RIPPLE, Circuit Judge. Timothy O’Hearn filed for Chapter
7 bankruptcy relief and sought to discharge his govern-
ment-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 con-
2                                                 No. 02-3930

cluded 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.


                              I
                     BACKGROUND
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 Wash-
ington, 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. Id.
No. 02-3930                                                   3

  Upon his return home to Wisconsin in April 1999, Mr.
O’Hearn learned that his 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 insur-
ance. 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.
4                                                 No. 02-3930

  In Portland, Mr. O’Hearn lived and shared expenses with
his fiancée, 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 fiancée’s house. Id. at 27-28, 97. His fiancée 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
fiancée, $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 addi-
tional 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 monthly payments would be around
No. 02-3930                                                      5

$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 Ex.D.


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
    loans.
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 opportuni-
ties, 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
6                                                 No. 02-3930

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.


                              II
                       DISCUSSION
                              A.
  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
No. 02-3930                                                           7

    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). 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 stu-
dents who, having obtained their education, sought to
evade their commitment to pay for it by seeking immediate
                          1
discharge of their loans.
  The key phrase of the statutory provision, “undue hard-
ship,” 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 adjudica-
tions. As our colleagues in the Ninth Circuit have noted,


1
   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).
8                                                   No. 02-3930

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 Pennsylva-
nia 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 repay-
ment 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] encom-
passes a notion that the debtor may not willfully or negli-
gently cause his own default, but rather his condition must
result from ‘factors beyond his reasonable control.’ ” Id.
(citation omitted).


                              B.
 As we have stated in prior decisions, we review de novo
whether the debtor’s circumstances meet the “undue
No. 02-3930                                                      9

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 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.


                                C.
  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
        2
record.


2
  See, e.g., Ekenasi, 325 F.3d at 548-49 (reversing where evidence
was too “speculative” to substantiate bankruptcy court’s find-
ings); Goulet, 284 F.3d at 79 (concluding that bankruptcy court
erred, in part, by drawing inferences that were not supported by
the evidence); Brightful v. Pennsylvania Higher Educ. Assistance
                                                     (continued...)
10                                                   No. 02-3930

   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 main-
tain, 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
        3
$1,500. The bankruptcy court nevertheless concluded that
Mr. O’Hearn could not maintain a minimal standard of
                                    4
living if forced to repay his loans.
   The bankruptcy court’s analysis of Mr. O’Hearn’s ex-
penses raises even more serious questions for us. The
court allowed Mr. O’Hearn to justify a rent payment to live
in his fiancée’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


2
  (...continued)
Agency (In re Brightful), 267 F.3d 324, 330-31 (3d Cir. 2001)
(reversing where record did not support bankruptcy court’s
inferences).
3
  Cf. Hornsby, 144 F.3d at 438 (questioning whether debtors could
meet first prong when their income put them significantly above
poverty guideline).
4
   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).
No. 02-3930                                                      11

in less appealing housing because of the financial obliga-
tions 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
       5
house.
  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 situa-
tion is likely to persist for a significant portion of the
                   6
repayment period. The bankruptcy court did not explore


5
   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 loans.
6
   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
                                                   (continued...)
12                                                    No. 02-3930

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”).


6
  (...continued)
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 embezzle-
ment.
No. 02-3930                                                13

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”).
  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 re-
plenish 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 fiancée’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.
14                                               No. 02-3930

                        Conclusion
  On remand, the bankruptcy court should address the
matters we have noted in the course of this opinion. Al-
though our review of the ultimate issue of “undue hard-
ship” 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.
                                  VACATED and REMANDED
                                   NO COSTS IN THIS COURT

A true Copy:
        Teste:

                          _____________________________
                           Clerk of the United States Court of
                             Appeals for the Seventh Circuit




                    USCA-02-C-0072—8-8-03
