In a major victory for a Duxbury father, a federal appeals court has urged a bankruptcy judge to consider a settlement that would allow the man to erase more than $246,000 he still owes on student loans he borrowed to send his
“We’re looking at a closed door,” said the 65-year-old Murphy, who was unable to find work after losing his job 14 years ago and is now facing foreclosure. “I’m not saying that you swing the door open and let every Tom, Dick, and Harry write off their loans, but if they can’t pay them back through no fault of their own and the situation is out of their control, then they shouldn’t be penalized.”
The Educational Credit Management Corp., a company hired by the US Department of Education to assume Murphy’s student loans after he filed a bankruptcy petition in 2012, had vigorously fought Murphy’s efforts to get his loans discharged for four years. A bankruptcy judge and district court judge ruled that Murphy failed to prove repaying the loans was an undue hardship, as required under the bankruptcy law.
But, on Tuesday, four months after the US First Court of Appeals heard oral arguments in the case and urged the parties to try to settle, the company signed an agreement acknowledging that Murphy’s debt should be forgiven because he has proven that repaying it would pose an undue hardship.
A common hardship standard applied by bankruptcy courts makes it difficult to have student-loan debt wiped away.
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The following day, the appeals court sent the proposed settlement to the bankruptcy court. It’s still up to the bankruptcy judge to accept the agreement, but if he doesn’t, Murphy’s case would go back to the appeals court.
Boston attorney Steven D. Pohl, a partner at Brown Rudnick who took on Murphy’s case pro bono while it was pending before the appeals court, likened it to a David versus Goliath battle, and gave Murphy credit “for fighting the fight” as long as he did.
However, Murphy — in the first interview he’s granted about his financial woes — said his circumstances were the same as he had outlined when he first sought relief through bankruptcy.
Murphy lost his $165,000-a-year position as president of a Canton manufacturing company when it moved overseas in 2002, and he said he’d been unable to find another job. He depleted his retirement savings to pay bills — including more than $61,000 that was applied to his student loan debt — which left him and his wife largely dependent on her $13,200 yearly salary as a teacher’s aide. A bank is trying to foreclose on their home of 30 years.
Murphy sought to discharge the $246,000 he still owed on a dozen Parent Plus loans he took out between 2001 and 2007 to send two of his children to Loyola University Maryland and a third to the University of Connecticut and Bridgewater State.
“If I knew I was going to be in the situation I am today, I wouldn’t have borrowed,” Murphy said. Even though he was unemployed when the government issued him most of the loans, he said, he believed he’d find another high-paying job and be able to repay them.
“The longer you are out,” he said, “you look like damaged goods, and no one else is going to want to hire you.”
Murphy’s children are not legally responsible for his loans. “I made the decision to finance it, and it shouldn’t be their burden,” Murphy said. He said they have their own debt totalling $150,000 for undergraduate and graduate programs.
Congress made it difficult to erase student loan debt in 1978 by requiring proof that repayment presented an undue hardship. But it left it to the courts to define hardship.
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 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.
Most courts rely on one of two tests when defining hardship. The Brunner test, which is most common, requires a borrower to show that he has made a good faith effort to pay the debt, can’t maintain a minimal standard of living
The second test, called the “totality of the circumstances” test, considers a debtor’s past, present, and future financial resources; living expenses; and any other facts and relevant circumstances surrounding each particular bankruptcy case. When assessing hardship, most courts require borrowers to show extraordinary circumstances, such as a serious illness, psychiatric problem, or permanent disability.
Murphy’s case was being watched by consumer advocates across the country, who hoped the appeals court would take a fresh look at what constitutes undue hardship. But the settlement would preempt a decision that could establish a precedent.
In the interview, Murphy called on Congress to define undue hardship and urged the Department of Education to create a panel to review cases and make a recommendation on whether they are eligible for a discharge of their loans before going to bankruptcy court.
“If they want to say that no one should get undue hardship, fine; but you can’t say ‘we are going to allow undue hardship’ and not define it because then everybody has a different measuring stick,” Murphy said.
Murphy said he’s now collecting Social Security payments and working as a handyman, taking on odd jobs like painting.