Couple in 40s Use Bankruptcy to Partly Wipe Out Student Debt

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By Diane Davis

A couple in their 40s only have to pay the principal balance on their student loans because the debt had become an undue financial hardship, the U.S. District Court for the District of Kansas held ( Educ. Credit Mgmt. Corp. v. Murray , 2017 BL 336315, D. Kan., No. 16-2838, 9/22/17 ).

Requiring the debtors to also pay interest would “contravene the Bankruptcy Code’s purpose of providing a fresh start to honest but unfortunate debtors,” Judge Carlos Murguia wrote Sept. 22.

The bankruptcy court correctly allowed Alan and Catherine Murray to partially discharge their student loan debt, the court said. It’s extremely difficult to wipe out any part of student debt in bankruptcy due to the criteria debtors must meet.

Under Bankruptcy Code Section 523(a)(8), educational loans aren’t dischargeable in bankruptcy unless it would impose an “undue hardship on the debtor and the debtor’s dependents.” Educational Credit Management Corporation argued that the Murrays didn’t meet that burden.

But the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys, as friends of the court, argued that the Murrays shouldn’t be required to participate in a program that ties repayment amounts to personal income as an alternative to bankruptcy when it was clear they’d never be able retire the debt in full.

After taking a “realisitc look” at their circumstances, the court found the Murrays met the hardship criteria laid out in Brunner v. New York State Higher Educ. Serv. Under the Brunner test, debtors must, among other things, prove they can’t maintain a minimal standard of living if required to repay student loans on top of basic expenses.

The Murrays have low earning potential, even with graduate degrees, and can meet some of the obligation. They are able to pay between $200 and $500 monthly toward their student debt based on their income, which doesn’t look like it will improve in the future, the court said.

Those payments, even under an income-based repayment plan, aren’t sufficient to stop the accrual of additional interest, and such payments contravene the purpose of bankruptcy, the court said. As a result, the Murrays can’t be required to participate in these programs, the court said.

N. Larry Bork, Goodell, Stratton, Edmonds & Palmer, LLP, Topeka, Kan., represented Educational Credit Management Corporation; George J. Thomas, Phillips & Thomas, LLC, Prairie Village, Kan., represented Alan and Catherine Murray; and Jill A. Michaux, Neis & Michaux, PA, Topeka, Kan., represented Amici National Consumer Bankruptcy Rights Center, National Association of Consumer Bankruptcy Attorneys.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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