Court Applies Realistic Fact-Based Analysis to Student Loan Discharge

Posted by NCBRC - September 26, 2017

The Brunner undue hardship test requires examination of the unique facts and circumstances of each case, and the analysis for whether the debtor’s financial condition is likely to persist should not look beyond the life of the loan. ECMC v. Murray, No. 16-2838 (D. Kans. Sept. 22, 2017).

After an evidentiary hearing and inquiry into Alan and Catherine Murray’s expenses and income, the bankruptcy court found they could not maintain a minimal standard of living if they were required to pay off their student loans in their entirety, including interest, but that they could afford to pay off the principals.

ECMC appealed the discharge of all but the principal to the District Court.

In considering discharge of student loan debt under the undue hardship standard of section 523(a)(8), the Tenth Circuit has adopted the three-part Brunner test but has cautioned that, in the interest of bankruptcy’s commitment to providing debtors a fresh start, that test should not be applied too restrictively. Rather, the Tenth Circuit applies a fact-intensive analysis intended to result in discharge of student loans when the debtor truly cannot repay them.

ECMC argued that the Murrays’ student loan debts should be excepted from discharge in their entirety because the Murrays were enrolled in an income-based repayment plan that they could afford. A look at the practicalities, however, revealed that the payments the Murrays were making under that plan did not even suffice to cover the accruing interest. Therefore, the debt continued to grow even as they made their required monthly payments. Moreover, in the event the remaining debt was forgiven at the end of twenty-five years, the Murrays would be saddled with a new tax liability when they were in their seventies.

In their amicus brief, NACBA and NCBRC argued that courts applying the Brunner test should not take access to IBRs into consideration at all. The court declined to make a broad holding to that effect, but found that, under the particular circumstances of this case, the Murrays’ IBR was not serving a valid purpose. The court, therefore, found that the bankruptcy court did not abuse its discretion in finding that the Murrays could not maintain a minimal standard of living while paying off the loan according to its terms.

In considering whether current circumstances were likely to persist, the court, noting that the exception to discharge was intended to prevent abuse by recent graduates seeking to discharge loans without ever attempting to repay them, again took a real-life, fact-based approach. The court limited its inquiry to the foreseeable future not to extend beyond the life of the loan. The Murrays were in their late forties and both employed in jobs in which they could not expect to receive raises. Their medical expenses, on the other hand, were more likely to increase with age. These facts supported the bankruptcy court’s decision.

As to the third prong of the Brunner test, whether the debtors had made a good faith effort to repay the loans, the court noted that in the twenty years since they graduated, they had paid $54,000 and had not missed payments. Their income level was a function of the fact that both Murrays were in a profession for which earning potential was inherently limited and there was no indication of bad faith suppression of earnings. The fact that the Murrays had participated in an IBR was a further indicator of good faith.

The court affirmed.

Murray D Kans Opinion Sept 2017

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