Marchus v. Student Loans of North Dakota: Another Victory for Student-Loan Debtors in the Eighth Circuit

In 2020, Debra Jean Marchus filed an adversary proceeding in a North Dakota bankruptcy court, seeking to discharge about $38,000 in student-loan debt. After a trial, Bankruptcy Judge Shon Hastings wiped out the debt.

As summarized in Judge Hastings's decision, Ms. Marchus began her journey through higher education in 1975, forty-five years before she filed for bankruptcy. She first enrolled at North Dakota State University, then attended a couple of for-profit institutions, and finally obtained an associate degree in accounting from the University of Phoenix in 2013.

When Marchus appeared in Judge Hastings's courtroom, she only made $11.00 an hour working as a North Dakota grocery store stocker. Moreover, Marchus had never made a lot of money. Her average annual income over the previous fifteen years was only $14,493. 

As Judge Hastings noted, Marcus bought her clothing from second-hand stores, received health care from Medicaid, and supplemented her food budget with financial assistance from the federal government's SNAP program. She drove a 17-year-old car and lived in a one-bedroom apartment.

Ms. Marchus also suffered from serious health problems, which Judge Hastings summarized in some detail:

[Marchus's] physical conditions include arthritis, water retention, relaspes of colitis, chronic sinusitis . . . , no upper arm strength, weight gain, lack of blood flow in her legs, thyroid disease, hiatal hernia and kidney disease

After sifting through all the evidence (including more than 500 pages of medical records), Judge Hastings concluded Ms. Marchus's financial future did not look promising.

[Marchus] is almost 64 years old. She holds no pension or investment accounts and saved no money for retirement. Her employment and income opportunities are limited, and the prospect of [Marchus] increasing her income either through new employment or a promotion at her current job appears bleak.

Summarizing the evidence (which included more than 500 pages of medical records), Justice Hastings concluded that it was unlikely that Ms. Marchus would ever earn more than her current income. He discharged her debt to SLND in its entirety.

What are we to make of Marchus v. SLND? 

First, Debra Machus is one among millions of Americans who took out student loans to attend for-profit colleges but did not benefit financially. For more than forty years, Marchus attempted to improve her lot in life by enrolling at for-profit schools, and yet she wound up working at a job that paid only $11 an hour.

Second, Marchus's case shows how interest and penalties can cause a student-loan debt to balloon out of control. Debra Marchus borrowed $14,000 in 2007 to attend Aakers Business College, and she paid back more than half that amount with money she received from an inheritance. Nevertheless, by the time she filed for bankruptcy, her debt had grown to more than $38,000! 

Finally, Marchus v. SLND is another win for student-loan debtors who reside in the Eighth Circuit Court of Appeals. Like Diane Ashline's victory in Iowa and Michael Abney's success in Missouri, Marchus's victory in North Dakota is a sign that the bankruptcy judges in the Eighth Circuit are becoming more willing to grant student-loan debtors the relief to which they are clearly entitled.    

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Ashline v. U.S. Department of Education, Adversary No. 16-09028 (Bankr. N.D. Iowa, Sept. 28, 2021).

Marchus v. Student Loans of North Dakota, 630 B.R. 91 (Bankr. D.N.D. 2021).

Elizabeth Lally, N.D. of Iowa Judge Collins Leads the Way On Discharge of Student Debt in the Eighth Circuit, Goosmann Law Firm (July 28, 2018).

Jamie Mudd v. U.S. Department of Education: A Nebraska bankruptcy court discharges a grandmother's student loans

 Between 2006 and 2015, Jamie Mudd took out 41 student loans to attend Heald College, a for-profit institution, and San Joaquin Delta College, a public institution. In 2015, she rolled these loans into two consolidated federal loans, totally about $72,000. 

Mudd put her student loans into an income-based repayment plan (IBRP) that established her monthly payments at zero due to her low income.  Under this plan, she was obligated to certify her income on an annual basis. Evidently, she forgot to do this because the U.S. Department of Education (DOE) removed her from the IBRP and reset her monthly payments at almost $800 per month. 

Mudd was readmitted into an IBRP, but she again failed to certify her income, and DOE set her new monthly payment at $963.

According to Bankruptcy Judge Shon Hastings, Mudd never earned more than $13 an hour, and she often worked two jobs to make ends meet. She lived in a one-bedroom apartment and incurred regular expenses caring for a grandson with disabilities. She also suffered from significant health problems.

Ms. Mudd filed an adversary proceeding, hoping to discharge her student loans, but DOE objected. First, DOE said Mudd's financial circumstances would probably improve, enabling her to make modest payments in an IBRP.  Second, Mudd was a smoker, and DOE said she should save her cigarette money and use it to pay down her student loans. DOE also claimed that Mudd's expenses for her grandson's video streaming were unnecessary.  Indeed, DOE disapproved of any money Mudd spent on her grandson.

Fortunately, Bankruptcy Judge Shon Hastings was considerably more compassionate than DOE. In a decision issued last month, Judge Hastings discharged all of Mudd's student-loan debt.

In ruling in Mudd's favor, Judge Hastings applied the "totality of circumstances" test approved by the Eighth Circuit Court of Appeals. This is a summary of his reasoning:

Mudd has made a good faith effort to maximize her income. Mudd works approximately 53 hours per week at two jobs. . . . Overall, Mudd's expenses are necessary and reasonable and consistent with a minimal standard of living. . . . She has no savings, owns no assets of significant value (except her used car in which she holds no equity), lives in a one-bedroom apartment and obtains food and toiletries from local nonprofit organizations to make ends met. Her medical expenses are higher than budgeted, and she anticipates that her health care costs will continue to rise due to her high cholesterol and diabetes.  

In short, Judge Hastings concluded, Mudd did not have sufficient disposable income to pay on her student loans. Thus, the judge discharged all of this debt.

Judge Hastings specifically rejected DOE's suggestion that Mudd should not be credited for the expenses she incurred for her grandson. "[T]he Court finds it entirely inappropriate to find or suggest that Mudd should not care for her grandson or to weigh undue burden factors against her for doing so." 

Judge Hasting's ruling should not surprise us. Clearly, Jamie Mudd was in dire financial straits and entitled to discharge her student loans in bankruptcy.

What is shocking is the fact that DOE objected. Mudd v. U.S. Department of Education is just one more example of the federal government's heartlessness toward college-loan debtors, heartlessness that borders on viciousness

References

Mudd v. U.S. Department of Education, Adversary No. 19-04048, 2020 WL 7330054 (Bank. D. Neb. Dec. 9, 2020).