Showing posts with label Judge Dale Somers. Show all posts
Showing posts with label Judge Dale Somers. Show all posts

Saturday, October 7, 2017

Alan and Catherine Murray discharged more than $200,000 in student loans in a Kansas bankruptcy court and their victory was affirmed on appeal: Good news for middle-income college borrowers

In a previous essay, I wrote about Alan and Catherine Murray, a married couple in their late forties who defeated Educational Credit Management Corporation in a Kansas bankruptcy court.  ECMC appealed, and the Murrays prevailed again--a victory that has important implications for middle-income student-loan debtors.

The Murrays took out student loans in the 1990s to obtain undergraduate degrees and master's degrees. Their total indebtedness was $77,000, which they consolidated in 1996 at an interest rate of 9 percent.

Over the years, the Murrays paid $54,000 toward paying off these loans--70 percent of the amount they borrowed. But they obtained economic hardship deferments during periods of financial stress, which allowed them to skip some loan payments.  And they entered into an income-based repayment plan to lower their monthly payments to a manageable level.

Although the Murrays handled their student loans in good faith, interest on their debt continued to accrue; and they made no progress toward paying off their debt. In fact, when they filed for bankruptcy in 2014, their loan balance had ballooned to $311,000--four times what they borrowed!

Judge Dale L. Somers, a Kansas bankruptcy judge, gave the Murrays a partial bankruptcy charge. It was clear, Judge Somers ruled, that the Murrays could not pay off their total student-loan indebtedness and maintain a minimal standard of living. And it was also clear that their financial situation was not likely to change. Finally, Judge Somers concluded, the Murrays had handled their student loans in good faith--an essential requirement for discharging student loans in bankruptcy.

On the other hand, Judge Somers determined, the Murrays could pay off the original amount they borrowed ($77,000) and still maintain a minimal standard of living. Thus, Judge Somers discharged the accumulated interest on the Murrays' debt, but required them to pay back the original amount they borrowed.

ECMC, the Murrays' ruthless creditor, appealed Judge Somers' decision. ECMC argued, as it always does, that the Murrays should be put in a long-term income-based repayment plan (IBR) that would last from 20 or 25 years.

But U.S. District Court Judge Carlos Murguia, sitting as an appellate court for the appeal, affirmed Judge Somers' decision. "The court agrees with Judge Somers' findings and conclusions that [the Murrays] made a good faith effort to repay their loans," Judge Murguia wrote.

Significantly, Judge Murguia, ruling in the capacity of an appellate judge, explicitly rejected ECMC's argument that the Murrays should be placed in an IBR and that none of the Murrays' $311,000 debt should be forgiven.

"The court disagrees," Judge Murguia wrote. "Under the circumstances of this case, debtors' payments under an IBR plan are insufficient even to stop the accrual of additional interest, and such payments directly contravene the purpose of bankruptcy."  Judge Murguia noted that Judge Somers had not discharged all of the Murrays' indebtedness--only the accumulated interest. "He discharged that portion--the interest--that had become an undue hardship on debtors, denying them a fresh start."

ECMC v. Murray is an important case for two reasons: First, this is one of the few student-loan bankruptcy court decisions that have granted relief to middle-income student borrowers. The Murrays' combined income was about $95,000.

Second, the key ruling by both Judge Somers and Judge Murguia was their finding that the interest on the original debt would constitute an undue hardship for the Murrays if they were forced to pay it back. Furthermore, this would be true even if the Murrays were placed in an IBR because the monthly payments under such a repayment plan were insufficient to stop the accrual of interest.

There are hundreds of thousands of people in circumstances very similar to the Murrays. Their loan balances have doubled, tripled or even quadrupled due to accumulating interest. People in this situation will never pay off their total indebtedness. But most of these people, like the Murrays, can pay off the amount they originally borrowed if only the accumulated interest were wiped out.

Let us hope student loan debtors situated like the Murrays will learn about ECMC v. Murray and find the courage to file bankruptcy and seek a discharge of their student loans--or at least the accumulated interest.  After all, it is the accumulated interest, penalties and fees that have put millions of student borrowers in a hopeless situation. The Murray decision offers a fair and reasonable solution for these people and gives them a fresh start. A fresh start, after all, is the core reason that  bankruptcy courts exist.


References

Murray v. Educational Credit Management Corporation (Bankr. D. Kan. 2016), aff'd, No. 16-2838 (D. Kan. Sept. 22, 2017).


Sunday, January 29, 2017

Alan and Catherine Murray are Poster Children for the Student Loan Crisis: Income-Driven Repayment Plans for Distressed Student-Loan Debtors are Insane

In a recent post, I wrote about Alan and Catherine Murray, who won a partial discharge of their student-loan debt in a bankruptcy case decided in December 2016.  Educational Credit Management (ECMC), the creditor in their case, is appealing the decision. We should all hope ECMC loses the appeal, because the Murrays are the poster children for the student-loan crisis.

Alan and Catherine Murray: Poster Children for the Student-Loan Crisis

Alan and Catherine Murray, a married couple in their late forties, took out 31 federal student loans to get bachelor's degrees and master's degrees in the early 1990s. In all, they borrowed about $77,000, not an unreasonable amount, given the fact that they used the loans to get a total of four degrees.

In 1996, the Murrays consolidated all those loans, a sensible thing to do; and they began making payments on the consolidated loans at 9 percent interest.  Over the years they made payments totally $58,000--or 70 percent of what they borrowed.

Nevertheless, during some periods, the Murrays obtained economic hardship deferments on their loans, which allowed them to skip some payments. Interest continued to accrue, however; and by 2014, when the Murrays filed for bankruptcy, their $77,000 debt had ballooned to $311,000!

Fortunately for the Murrays, Judge Dale Somers, a Kansas bankruptcy judge, granted them a partial discharge of their massive debt. Judge Somers ruled that the Murrays had managed their student loans in good faith, but they would never be able to pay back the $311,000 they owed. Very sensibly, he reduced their debt to $77,000, which is the amount they borrowed, and canceled all the accumulated interest.

 Educational Credit Management Corporation (ECMC), the Murrays' student-loan creditor, appealed Judge Somers' ruling. The Murrays should have been placed in an income-driven repayment plan (IDR), ECMC argued, which would have required them to pay about $1,000 a month for a period of 20 years.

Obviously, ECMC's argument is insane. As Judge Somers pointed out, interest was accruing on the Murrays' debt at the rate of almost $2,000 a month. Thus ECMC's proposed payment schedule would have resulted in the Murrays' debt growing by a thousand dollars a month even if they faithfully made their loan payments. By the end of their 20-year payment term, their total debt would have grown to at least two thirds of a million dollars.

The Murrays' case is not atypical: Billions of dollars in student loans are negatively amortizing

You might think the Murray case is an anomaly, but it is not. Millions of people took out student loans, made payments in good faith, and wound up owing two, three, or even four times what they borrowed. In other words, millions of student loans are negatively amortizing--they are growing larger, not smaller, during the repayment period.

For example, Brenda Butler, whose bankruptcy case was decided last year, borrowed $14,000 to get a bachelor's degree in English from Chapman University, which she obtained in 1995. Like the Murrays, she made good faith efforts to pay off her loans, but she was unemployed from time to time and could not always make her loan payments.

By the time Butler filed for bankruptcy in 2014, her debt had doubled to $32,000, even though she had made payments totally $15,000--a little more than the amount she borrowed.

Unfortunately for Ms. Butler, her bankruptcy judge was not as compassionate as the Murrays' judge. The judge ruled that Butler should stay on a 25-year repayment plant, which would terminate in 2037, 42 years after she graduated from Chapman University.

Here is sad reality. Millions of people are seeing their total student-loan indebtedness go up--not down--after they begin repayment. According to the Brookings Institution,  more than half of the 2012 cohort of student-loan borrowers saw their total indebtedness go up two years after beginning the repayment phase.  Among students who attended for-profit colleges, three out of four saw their loan balances grow larger two years into repayment.

An analysis by Inside Higher Ed concluded that less that half of college borrowers (47 percent) had made any progress on paying off their student loans 5 years into repayment. In the for-profit sector, only about a third (35 percent) had paid anything down on their student loans  over a 5-year period.

And the Wall Street Journal reported recently that half the students at more than a thousand colleges and schools had not reduced their loan balances by one dime seven years after their repayment obligations began.

The Federal Student Loan Program is a Train Wreck

Awhile back, Senator Elizabeth Warren accused the federal government of making "obscene" profits on student loans because the interest rates were higher than the government's cost of borrowing money. Warren's charge might have been true if people were paying back their loans, but they are not.

Eight million people are in default and millions more are seeing their student-loan balances grow larger with each passing month.  The Murrays are the poster children for this tragedy because they handled their loans in good faith and still wound up owing four times what they borrowed.

In short, the federal student loan program is a train wreck. Judge Somers' solution for the Murrays was to wipe out the accrued interest on their debt and to simply require them to pay back the principle. This is the only sensible way to deal with the massive problem of negative amortization.



References

Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Paul Fain. Feds' data error inflated loan repayment rates on the College Scoreboard. Inside Higher Ed, January 16, 2017.

Andrea Fuller. Student Debt Payback Far Worse Than BelievedWall Street Journal, January 18, 2017.

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default ratesWashington, DC: Brookings Institution (2015).

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).

Ruth Tam. Warren: Profits from student loans are 'obscene.' Washington Post, July 17, 2013.



Wednesday, January 25, 2017

A Kansas bankruptcy court discharged all the accrued interest on a married couple's student loans: Murray v. ECMC

Do you remember political consultant James Carville's famous line during the 1992 presidential campaign? "It's the economy, stupid," Carville supposedly observed. That eloquently simple remark became Bill Clinton's distilled campaign message and helped propel him into the presidency.

Something similar might be said about the student-loan crisis: "It's the interest, stupid." In fact, for many Americans, it is the interest and penalties on their student loans--not the amount they borrowed--which is causing them so much financial distress.

The Remarkable case of Murray v. Educational Credit Management Corporation

This truth is starkly illustrated in the case of Murray v. Educational Credit Management Corporation, which was decided last December by a Kansas bankruptcy judge.  At the time they filed for bankruptcy, Alan and Catherine Murray owed $311,000 in student-loan debt, even though they had only borrowed about $77,000. Thus 75 percent of their total debt represented interest on their loans, which had accrued over almost 20 years at an annual rate of 9 percent.

As Judge Dale Somers explained in his ruling on the case, the Murrays had taken out 31 student loans back in the 1990s to obtain bachelor's degrees and master's degrees. In 1996, when they consolidated their loans, they only owed a total of $77,524.

Over the years, the Murrays made loan payments when they could, which totaled $54,000--more than half the amount they borrowed. Nevertheless, they entered into several forbearance agreements that allowed them to skip payments; and they also signed up for income-driven repayment plans that reduced the amount of their monthly payments. Meanwhile, interest on their debt continued to accrue. By the the time the Murrays filed for bankruptcy in 2014, their $77,000 debt had grown to almost a third of a million dollars.

The Murrays' combined income was substantial--about $95,000. Educational Credit Management Corporation (ECMC), the creditor in the case, argued that the Murrays had enough discretionary income to make significant loan payments in an income-driven repayment plan.  In fact, under such a plan, their monthly loan payments would be less than $1,000 a month,

But Judge Somers disagreed. Interest on the Murrays' debt was accruing at the rate of $65 a day, Judge Somers pointed out--about $2,000 a month. Clearly, the couple would never pay off their loan under ECMC's proposed repayment plan. Instead,  their debt would grow larger with each passing month.

On the other hand, in Judge Somers' view, the Murrays had sufficient income to pay off the principle of their loan and still maintain a minimal standard of living. Thus, he crafted a remarkably sensible ruling whereby the interest on the Murrays' debt was discharged but not the principle. The Murrays are still obligated to pay the $77,000 they borrowed back in the 1990s plus future interest on this amount, which would begin accruing at the rate of 9 percent commencing on the date of the court's judgment.

Judge Somers Points the Way to Sensible Student-Debt Relief


In my view, Judge Somers' decision in the Murray case is a sensible way to address the student debt crisis.  Eight million people have defaulted on their loans, and 5.6 million more are making token payments under income-driven repayment plans that are often not large enough to cover accruing interest. Millions of Americans have obtained loan deferments that allow them to skip their loan payments; but these people--like the Murrays--are seeing their loan balances grow each month as interest accrues.

Judge Somers' decision doesn't solve the student-loan crisis in its entirety, but it is a good solution for millions of people whose loan balances have doubled, tripled and even quadrupled due to accrued interest, penalties, and fees.

Obviously, Judge Somers' solution should only be offered to people who dealt with their loans in good faith.  Judge Somers specifically ruled that the Murrays  had acted in good faith regarding their loans. In fact, they paid back about 70 percent of the amount they borrowed.

Unfortunately, but not surprisingly, ECMC appealed the Murray decision, hoping to overturn it. Nevertheless, let us take heart from the fact that a Kansas bankruptcy judge reviewed a married couple's financial disaster and crafted a fair and humane solution.


References

Murray v. Educational Credit Management Corporation, Case No. 14-22253, ADV. No. 15-6099, 2016 Banrk. LEXIS 4229 (Bankr. D. Kansas, December 8, 2016).