Every distressed student-loan debtor should read Natalie Kitroeff's recent article in BloombergBusiness.com about Murphy v. U.S. Department of Education and Educational Credit Management Corporation, now pending before the First Circuit Court of Appeals. And any student-loan debtor who is trying to discharge a student loan in bankruptcy should read the amicus brief filed in that case by the National Consumer Law Center and the National Association of Consumer Bankruptcy Attorneys.
The essence of the Murphy case can be summarized in a few words. Robert Murphy took out federal PLUS loans (student loans taken out by parents to pay their children's college costs), but he lost his job as the president of a manufacturing firm. He's been unemployed for 13 years--too old, he says, to find comparable employment and overqualified for lower-paying jobs in his field.
Today, Murphy is 65 years old, and his total student-loan indebtedness has grown to almost a quarter of a million dollars due to accumulated interest. He and his wife are living on an income of $15,000 a year, which his wife earns working as a teachers aide.
Murphy filed for bankruptcy, seeking relief from his PLUS loans, but a bankruptcy court refused to discharge the debt. Like so many debtors who try to shed their student loans in bankruptcy, Murphy is acting as his own attorney. His case is now on appeal before the First Circuit.
Murphy hopes to persuade the First Circuit to abandon the harsh Brunner test for determining when it would be an "undue hardship" for insolvent debtors to be forced to repay their student loans. That test requires debtors to show that they cannot repay their student loans and maintain a minimal standard of living, that their financial circumstances aren't likely to change soon, and that they made good faith efforts to repay their loans.
In the Ninth Circuit BAP Court's Roth decision, Judge Pappas filed a concurring opinion arguing that the Brunner test no longer makes sense. He pointed out that the Brunner test was devised at a time when student-loan debtors could discharge their student loans without restriction after a relatively short period of time--after five or seven years.
Today, Judge Pappas explained, student-loan debtors hold a trillion dollars in outstanding student-loan debt. And Congress amended the Bankruptcy Code so that insolvent debtors must prove "undue hardship" no matter when they file for bankruptcy, even if it is decades after the loans were taken out.
John Rao, attorney for the National Consumer Law Center, filed a brilliant amicus brief in support of Murphy, arguing that the Brunner test should be overturned. Rafael Pardo, a nationally renowned legal scholar from Emory Law School, also filed an amicus brief in support of Murphy's position.
If the First Circuit rules in Murphy's favor, bankruptcy might become a viable option for millions of distressed student-loan debtors. And if that happens, the world will turn upside down for the federal government, the federal student-loan program, and the colleges and universities that have feasted off of student-aid money without regard to whether their students could pay off their student loans.
Kitroeff's article pointed out that total outstanding indebtedness has doubled in just seven years. At the current rate of growth, total indebtedness will double again within 10 years, ballooning to well over two trillion dollars.
Let's all say a prayer for Robert Murphy and the two amicus attorneys who came to his aid: John Rao and Rafael Pardo. Ten million people are now delinquent on their student loans or are in default, and nine million more hold deferments or forbearances that temporarily excuse them from making payments. Almost 4 million people are making payments under income-based repayment plans, which means total indebtedess for most of them is going up, not down, because their loan payments don't cover accruing interest.
This situation can't go on forever, and Robert Murphy may be the guy that ushers in relief for millions of fellow sufferers. If you are a student-loan debtor in bankruptcy, you must read the amicus briefs in the Murphy case and get the arguments made in those briefs before your bankruptcy judge. Mr. Murphy, Mr. Rao, and Mr. Pardo are on the side of the angels, and I think their arguments will be persuasive to many bankruptcy judges around the United States regardless of what the First Circuit does.
Amicus Brief filed by National Consumer Law Center and National Association of Consumer Bankruptcy Attorneys in Support of Appellant (Robert Murphy) in Murphy v. U.S. Department of Education & Educational Credit Management Corporation. (Written by John Rao, esq.) Accessible at: https://www.nclc.org/images/pdf/bankruptcy/brief-murphy-1st-cir-amicus.pdf
Amicus Brief filed by Rafael Pardo, arguing for reversal of District Court's decision in Murphy v. U.S. Department of education and Educational Credit Management Corporation. Accessible at: http://www.businessweek.com/pdfs/murphy-pardo-brief.pdf
Natalie Kitroeff. This Court Case Could Unshackle Americans From Student Debt. BloombergBusiness.com, October 8, 2015. Accessible at: http://www.bloomberg.com/news/articles/2015-10-08/this-court-case-could-unshackle-americans-from-student-debt