Robert E. Murphy lost his job nearly 14 years ago and says he hasn’t been able to find a new one. Now 65, he has already depleted his retirement savings, which has left him and his wife largely dependent on her $13,200 yearly salary as a teacher’s aide. And a bank is trying to foreclose on their Duxbury home.
Based on these facts, Murphy might seem a sympathetic petitioner for relief from the more than $246,000 he still owes on student loans he borrowed to send his three children to college. But a federal bankruptcy judge denied Murphy’s request, ruling that he has not proven that paying the debt would present an undue hardship.
His case, now pending before the US First Circuit Court of Appeals, is being closely watched across the country because it challenges the standard many courts use to determine when the burden of repaying student loans is too much and comes as more people are turning to the courts for relief.
“If this doesn’t constitute undue hardship, what would?” one of the appeals court judges asked last December during oral arguments in Murphy’s case.
The appeals court postponed a decision on whether to overturn the bankruptcy court’s denial of Murphy’s request to discharge his debt. The panel urged Murphy and Educational Credit Management Corp., a Minnesota company hired by the government to fight Murphy’s bankruptcy complaint, to try to reach a settlement. A report on their progress is due by the end of the month.
The bankruptcy judge found that Murphy might find a job because he is healthy and well-educated, yet commiserated with his situation.
“You’ve raised a case that I think we’ll see a lot of in this court in the next few years, and, that is, people who got to the peak of their career in a way, lost their jobs, and incurred debt to educate their children, and . . . are going to have a hard time in this market,” US Bankruptcy Judge Frank J. Bailey told Murphy during a 2013 hearing, adding, “I’m darn near in that situation myself.”
John Rao, of the Boston-based National Consumer Law Center, said in an interview, “We are starting to see more of these cases where people are asking to have loans discharged in bankruptcy. . . . People have paid more than the principal borrowed and still owe three or four times that because of the way fees and interests are calculated.”
Murphy took out a dozen Parent Plus loans between 2001 and 2007, with original principal of $220,765, plus interest, to send two of his children to Loyola University Maryland and a third to the University of Connecticut and Bridgewater State University. The children, who took out their own loans for undergraduate and graduate study, are not legally responsible for Murphy’s debts.
Murphy, who earned a master’s degree in business administration at Babson College, was earning $165,000 a year as president of a Canton manufacturing company when it moved overseas in 2002. He testified that he launched an exhaustive job search and blamed his inability to find work on his advanced age, a failing economy, and the loss of manufacturing jobs.
After depleting his retirement savings to pay bills — including more than $61,000 toward the student loan debt — he still owed $246,539 when he filed his bankruptcy complaint in 2012.
Congress made it difficult to erase student loan debt in 1978 by requiring proof that repaying was an undue hardship but left it to the courts to define hardship.
Rao contends that most courts are too strict when assessing hardship and require borrowers to show extraordinary circumstances, such as a serious illness, psychiatric problem, or permanent disability.
In a brief filed in support of Murphy by the law center and the National Association of Consumer Bankruptcy Attorneys, Rao urged the appeals court to take a fresh look at what constitutes hardship, arguing that many of today’s borrowers “have already been burdened by the obligations for decades and, if denied a discharge, face a lifetime of crushing debt.”
‘People who got to the peak of their career in a way, lost their jobs, and incurred debt . . . are going to have a hard time in this market.’US Bankruptcy Judge Frank J. Bailey
The US Department of Education said in court filings that the fiscal integrity of the federal education loan program requires people to repay debts unless they are in “the most dire circumstances” and can show they can’t make payments now or in the future.
The nation’s student loan debt currently exceeds $1.2 trillion and, according to statistics released by the government last fall, the percentage of students defaulting on loans within three years of beginning repayment was 11.8 percent. Those who default may have their wages or Social Security checks garnished.
The department has been steering those who have difficulty paying into income-based repayment plans, which may require minimal or no monthly payments. The remainder of the debt is canceled after 25 years.
Critics say the program might benefit those who temporarily can’t pay but is detrimental to those who cannot pay over the long term. Interest is added to the debt during nonpayment periods, and borrowers may face a tax liability after the debt is canceled.
Murphy, who initially represented himself and was appointed a lawyer pro bono by the appeals court, declined to comment on his case.
Parent Plus loans are not eligible for the income-based repayment plan. But, Murphy testified that after he filed his bankruptcy claim, he was advised he would qualify if he consolidated his loans under the Department of Education’s William D. Ford program. Based on his current situation, his monthly payments would be $0.
Murphy said he declined because he estimated that his debt would grow from $247,000 to more than $500,000 over 15 years, as interest accrued, and he could face a potential tax penalty of $10,000 when his debt was forgiven.
Lawyers for Educational Credit Management Corp. disputed Murphy’s calculations.
Most courts rely on one of two tests when defining hardship. The Brunner test, which is most common, was established in a 1987 case involving a New York woman who tried to erase her college debt two months after graduating.
It requires a borrower to show that he can’t maintain a minimal standard of living for himself and his dependents if forced to repay the loan, additional circumstances make it unlikely he’ll be able to pay in the future, and he has made a good faith effort to pay the debt.
Some courts have gone further, requiring that borrowers have a “certainty of hopelessness” or suffer total incapacity.
The second test used by courts, which is similar, is called the “totality of the circumstances” test. It considers a debtor’s past, present, and future financial resources, living expenses, and any other facts and relevant circumstances surrounding each particular bankruptcy case.
Others burdened by student debt have won in court. In December, a bankruptcy judge discharged nearly $50,000 in student loan debt owed by a Fall River couple — the woman is legally blind and her husband is disabled.
In 2014, a Methuen man who was permanently disabled and a Chelsea woman who was diagnosed with pancreatic cancer had their student loan debts discharged by a bankruptcy judge.
Another case that was brought by a Groton couple and closely resembled Murphy’s was dismissed by a bankruptcy judge last year after a settlement was reached. The couple, who borrowed Parent Plus loans totalling $263,756 in principal to send their three children to college and still owed $337,479 — despite paying $98,000 toward the debt — agreed to enter an income-based repayment plan.Shelley Murphy can be reached at email@example.com. Follow her on Twitter @shelleymurph.