IN RE MURRAY U.S. BANKRUPTCY COURT DISTRICT OF KANSAS 563 B.R. 52 (Bankr. D. Kan. 2016)

FACTS: Alan and Catherine Murray filed a voluntary petition under Chapter 13 of the Bankruptcy Code in September 2014. The case was later converted to Chapter 7. The Murrays had student loans totaling $77,524 in principal and more than $200,000 in accrued interest owing to Educational Credit Management Corporation (ECMC). The Murrays made regular payments and were never late, but the amount of their payments was insufficient to service the interest accruing at nine percent annually on the principal and accrued interest. Interest payments alone accrued at the rate of $65.89 per day. The Murrays claimed that they could not meet a minimal standard of living if they were forced to repay the principal amount of the student loans plus the accrued interest. The Murrays had a monthly net income of $6,100 and monthly expenses of $4,442 resulting in disposable monthly income of $1,658 at the time of their bankruptcy filing. This amount included no funds for emergencies, no savings for a down payment on a home, no savings for retirement, no vacations and $50 per month for entertainment other than cable television. ECMC opposed their request to discharge the interest payments. ISSUE: Section 523(a)(8) of the Bankruptcy Code provides that an educational loan is not dischargeable in bankruptcy unless excepting such debt from discharge would impose an undue hardship on the debtor and the debtors dependents. The court was required to determine whether the Murrays would suffer undue hardship if required to repay the loans in full with interest and what factors constitute a minimal standard of living to which the Murrays were entitled.

REASONING: The bankruptcy court held that the Murrays were entitled to a discharge with respect to accrued interest payments but were required to repay the principal balance of their student loans. The court found that requiring the Murrays to repay the loans and accrued interest would provide them with a minimal or spartan standard of living. The court defined undue hardship as consisting of three factors. The first factor is that the debtor cannot maintain, based on current income and expenses, a minimal standard of living if forced to repay the loans. The second factor is that the debtors circumstances are likely to persist for a significant portion of the repayment period of the student loans. The final factor is that the debtor has made good faith efforts to repay the loans. The court found that the Murrays met all three factors. According to the court, a minimal standard of living requires: (1) shelter including heating and air conditioning; (2) basic utilities such as electricity, natural gas, water, and telephone service; (3) food, personal hygiene products and decent clothing; (4) a motor vehicle, including expenses for gasoline, insurance and maintenance; (5) health insurance or the ability to pay for medical and dental expenses; and (6) recreation even if it is just watching television or keeping a pet. The Murrays would be deprived of some portion of these items if they were required to repay the student loans in their entirety with interest. As to the second and third factors, the court found that the Murrays would not be able to pay the accrued interest on their loans in the foreseeable future as they were not recent graduates, the loans were more than twenty years old, the Murrays were in their late forties, raises and promotions at their jobs were unlikely, and medical and dental expenses would increase as they aged. Finally, the Murrays had made good faith efforts to repay the loans, were never late with a payment, and had reduced the principal by $54,000 over the course of twenty years. However, the court also held that discharge ability of student loans is not an all-or-nothing proposition. When a debtor shows that the requirements of Section 523(a)(8) have been satisfied for a portion of the student loan debt, the bankruptcy court may exercise its equitable powers and discharge just that portion of the debt. In this case, the court found that the Murrays could afford to pay $900 per month on the student loan obligations while maintaining a minimal standard of living. Such payments would be sufficient to pay the original principal of the loans with interest at nine percent per year in twelve years when the Murrays would be sixty years old. Thus, the court discharged the accrued interest obligation in order to afford the Murrays a fresh start.

DECISION AND REMEDY: The court held that the Murrays were entitled to a discharge with respect to the accrued interest payments but were still required to repay the principal balance of their student loans.

SIGNIFICANCE OF THE CASE: This case sets forth a detailed definition of undue hardship with respect to the Bankruptcy Code provisions relating to the potential discharge of educational loans. The Murrays met the courts three-part test for discharge with respect to the accrued interest obligation, specifically, that they could not maintain a minimal standard of living, that such circumstances were likely to persist for an extended period of time, and that they had made a good faith effort to repay the loans. The courts definition of what constitutes a minimal standard of living is particularly noteworthy. However, the court did not grant an outright discharge of all obligations relating to the Murrays educational loans but rather forged a compromise requiring continued efforts by the debtors to repay the principal balance.

QUESTION: Do you agree with the factors identified by the court as essential to a minimal standard of living? What factors would you include or exclude from the list of factors? Was the courts decision too harsh in requiring the Murrays to repay the principal balance? Why or why not?