Earlier this year, the author of an article in Forbes Magazine noted that the total outstanding student loan balance in America is over $1 trillion. Further, the delinquency rate on student loans is higher than the delinquency rate on credit cards, mortgages and automobile loans. Politico observes that it is dubious whether Congress will pass legislation proposed by Senator Elizabeth Warren which would allow 25 million individuals with student loan debt to refinance at lower interest rates. For some individuals staggering under the weight of a large student loan, a Chapter 7 bankruptcy is tempting.

The difficulty of using bankruptcy to crawl out from under student debt is illustrated by Murphy v. Educational Credit Management Corp., a case recently decided by the federal District Court of Massachusetts. Murphy is not the typical bankruptcy action bought by someone in their 20s, 30s or 40s to discharge a student loan debt. In Murphy, the debtor who brought a Chapter 7 bankruptcy action was a 63-year-old man who had taken on over $240,000 in student loan debt on behalf of his children who were not responsible for repaying the loans.

A bankruptcy court judge concluded that the debt was nondischargeable despite the fact that the debtor was nearing retirement age and had been unemployed for years despite attempts to secure a job. This conclusion was based upon findings that the debtor was: (1) well educated; (2) near but not yet at retirement age; and (3) unburdened from other debt. The debtor appealed.

The Murphy appeal

The district court began by observing that the debtor had a “steep hill to climb” since the purpose of the Bankruptcy Code-which is to give honest debtors a fresh start-does not automatically apply to student loan debtors. Accordingly, discharges of student loans are granted only in truly exceptional circumstances.

The court stated that a student loan debtor cannot discharge an educational loan unless the debt would be an undue hardship on the debtor and the debtor’s dependents. The totality of circumstances test was applied which, according to the court, boiled down to one question with regard to the debtor before it: Can the debtor now and in the foreseeable future maintain a reasonable, minimal standard of living for he and his wife and still afford to make payments on the student loans?

The district court noted that the debtor’s bankruptcy schedule showed that he and his wife operated at a monthly loss of close to $4,000. The debtor’s house was well underwater and his IRA account had been liquidated to cover expenses. At the same time, the debtor was in good health and had not yet reached retirement age. In fact, the court found that he probably had a good many productive years ahead of him in which to repay the loans. The district court agreed with the bankruptcy court that the debtor’s situation did not present truly exceptional circumstances warranting a discharge.

Seeking bankruptcy relief

If you find yourself under a heavy student loan debt, you should contact an experienced Massachusetts bankruptcy attorney for advice. It is true that discharging a student loan debt is a daunting task. However, the “undue hardship” test is not invariably impossible to meet and, in fact, some people have successfully satisfied the test. Assuming that bankruptcy might not be a viable way to discharge your student loan debts, a bankruptcy might eliminate other debt which, in turn, would make it easier for you to repay the student loan.


On behalf of David Nickless