Educational Credit Management Corporation v. Murray et al
MEMORANDUM AND ORDER: IT IS THEREFORE ORDERED that the Memorandum Opinion and Order Granting Partial Discharge of Student Loans issued by the Honorable Dale L. Somers, United States Bankruptcy Judge, is hereby affirmed. The parties' requests for oral argument are denied. The court does not find that oral argument would assist the court's findings on this matter. This case is closed. Signed by District Judge Carlos Murguia on 09/22/2017. (cv)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
EDUCATIONAL CREDIT MANAGEMENT
Case No. 16-2838
ALAN MURRAY and CATHERINE MURRAY,
MEMORANDUM & ORDER
This matter comes before the court upon Appellant Educational Credit Management
Corporation (“ECMC”)’s Notice of Appeal from Bankruptcy Court (Doc. 1). The matter is fully
briefed. The court granted Amicus Parties National Association of Consumer Bankruptcy Attorneys
(“NACBA”) and National Consumer Bankruptcy Rights Center (“NCBRC”)s’ motion to file an amicus
brief (Doc. 10).
Appellant ECMC appeals the United States Bankruptcy Court’s decision to partially discharge
appellees’ student loans pursuant to 28 U.S.C. §§ 158(a)(1), (c)(1)(A). Appellant argues that appellees
Alan and Catherine Murray did not meet their burden of establishing an undue hardship as required by
§ 528(a)(8) and as interpreted by the Tenth Circuit, because they failed to show any of the three
elements enumerated in Brunner v. New York State Higher Education Services Corporation, 831 F.2d
395, 396 (2d Cir. 1987).
Appellees argue that they met all three elements of the undue hardship test and that requiring
them to repay the full extent of their student loan debt would contravene the Bankruptcy Code’s
purpose of providing a fresh start to honest but unfortunate debtors. They urge this court to uphold
Judge Somers’s decision because it was based on debtors’ testimony and the unopposed evidence
admitted at trial.
The amici additionally suggest that debtors should not be required to participate in incomedriven repayment programs (“IDRs”), as an alternative to bankruptcy, when it is evident that debtors
would never be able to repay their loans in full. Amici suggest that IDRs should not be considered in
the undue hardship analysis.
Standard of Review
This court functions as an appellate court when reviewing a bankruptcy court’s decision, and is
authorized to affirm, reverse, modify, or remand the bankruptcy court’s order. 28 U.S.C. § 158(a); Fed.
R. Bankr. P. 8013. Legal decisions of the bankruptcy court are reviewed de novo. Educ. Credit Mgmt.
Corp. v. Polleys, 356 F.3d 1302, 1305 (10th Cir. 2004). But the bankruptcy court’s factual findings
shall not be set aside unless they are clearly erroneous. Fed. R. Bankr. P. 7052 (adopting Fed. R. Civ.
P. 52(a)(6)). And the court will give those factual findings due regard given the bankruptcy court’s
opportunity to judge the facts first hand, including the credibility of witnesses. Id.
“A finding of fact is clearly erroneous if it is without factual support in the record or if, after
reviewing all of the evidence, [the court is] left with the definite and firm conviction that a mistake has
been made.” In re Yellow Cab Co-op. Ass’n v. Metro Taxi, Inc., 132 F.3d 591, 597 (10th Cir. 1997)).
The United States Supreme Court further defines the clearly erroneous standard by explaining that
If the [bankruptcy] court’s account of the evidence is plausible in light of the record
viewed in its entirety, the court of appeals may not reverse it even though convinced
that had it been sitting as the trier of fact, it would have weighed the evidence
differently. Where there are two permissible views of the evidence, the fact finder’s
choice between them cannot be clearly erroneous.
Anderson v. City of Bessemer City, N.C., 470 U.S. 564 (1985) (applied in the context of a bankruptcy
appeal in In re Blinder, Robinson & Co. v. Stellatos, 124 F.3d 1238, 1241 (10th Cir. 1997)).
Discharging Student Loan Debt under § 523(a)(8)
11 U.S.C. § 523 sets out the exceptions to the dischargability of debt in bankruptcy. Section
523(a)(8) provides that educational loans are not dischargeable “unless excepting such debt from
discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s
dependents.” 11 U.S.C. § 523(a)(8). “This provision was enacted to prevent indebted college or
graduate students from filing for bankruptcy immediately upon graduation thereby absolving
themselves of the obligation to repay their student loans. In re Innes, 284 B.R. 496, 502 (D. Kan.
2002) (quoting In re Hornsby, 144 F.3d 433, 437 (6th Cir. 1998)). The Tenth Circuit in Polleys further
examined § 523(a)(8)’s legislative history, noting that the Report of the Commission on Bankruptcy
also recommended that the undue hardship exception to discharge should apply only during the first
five years after graduation, and that thereafter it should be lifted because “in some circumstances the
debtor, because of factors beyond his reasonable control, may be unable to earn an income adequate
both to meet the living costs of himself and his dependents and to make the educational debt
In adopting the Brunner test, the Tenth Circuit specifically warned against an overly restrictive
interpretation of the test, because it would prevent the Bankruptcy Code’s goal of providing a fresh
start for the honest but unfortunate debtor and “cause harsh results for individuals seeking to discharge
their student loans.” Id. at 1308 (citing Stellwagen v. Clum, 245 U.S. 605, 617 (1918)).
Under the Brunner test, debtors must show by a preponderance of the evidence, each of three
(1) that [they] cannot maintain, based on current income and expenses, a “minimal”
standard of living for [themselves and their] dependents if forced to repay the loans; (2)
that additional circumstances exist indicating that this state of affairs is likely to persist
for a significant portion of the repayment period of the student loans; and (3) that the
debtor[s have] made good faith efforts to repay the loans.
Polleys, 356 F.3d at 1307 (quoting Brunner, 831 F.2d at 396). In adopting the Brunner test, the Tenth
Circuit noted that the analysis would necessarily include a consideration of all the facts and
circumstances of each case. However, the court noted that judges should have “the discretion to weigh
all relevant considerations, [and that] the terms of the test must be applied such that debtors who truly
cannot afford repay their loans may have their loans discharged.” Id. at 1309.
Whether debtors can maintain a minimal standard of living if forced to
repay their loans
This first prong of the Brunner test should serve as a starting point in assessing the debtor’s
circumstances. Polleys, at 1309. Generally, student loans should not be dischargeable before the
debtor shows he is unable to earn sufficient income to maintain a minimal standard of living while
repaying educational debt. Id. A minimal standard of living is “living within the strictures of a frugal
budget in the foreseeable future.” In re Innes, 284 B.R. at 504 (quoting In re Ritchie, 254 B.R. 913,
918 (Bankr. D. Idaho 2000)).
Judge Somers’s factual determinations about debtors’ current standard of living and financial
circumstances were not clearly erroneous. The court finds factual support for the Bankruptcy Court’s
decisions in the record before it and gives appropriate deference to Judge Somers as the fact finder,
given that he viewed the evidence, testimony, and made credibility determinations firsthand.
The court also finds that Judge Somers correctly decided that debtors cannot maintain a
minimal standard of living if forced to repay their loans in full, but that they could maintain a minimal
standard of living if required to repay the principal balance on the loans. Judge Somers described
minimal standards of living to include: shelter; utilities; food and personal hygiene products; insured
vehicles and related fuel and maintenance costs; a plan for medical and end of life expenses; and some
“small diversion or recreation, even if it is just watching television or keeping a pet.” In re Murray,
563 B.R. 52, 58–59 (Bankr. D. Kan. 2016) (citing In re Ivory, 269 B.R. 890, 899 (Bankr. N.D. Ala.
After reducing debtors’ monthly expenses for transportation, groceries and meals outside the
home, and medicine and other medical or dental costs not covered by insurance, the Bankruptcy Court
determined that debtors’ estimated monthly disposable income was $1,658. The court noted that this
amount does not include funds for emergencies, savings, retirement, or vacations; it only allocates $50
for entertainment apart from home television, and would provide debtors a minimal standard of living.
The court noted that debtors’
income has been stable for the last several years; it is not temporarily reduced by health
issues or extraordinary events. Both Debtors are in their late forties; there is no
suggestion that they have intentionally sought employment below their earning
potential. Rather, Alan temporarily left the music profession in hopes of increasing his
income, but that employment was not successful. Debtors truly cannot afford to pay
their loans in full.
Id. at 59. Debtors testified that they could pay between $200 and $500 monthly on their student loans.
The bankruptcy court found that ECMC presented two payment-in-full options for debtors that
required payments of either $3,945 or $2,614 monthly. As of September 2016 standard repayment of
debtors’ loans with 9% interest would require monthly payments between $2,613.57 (over 25 years)
and $3,945.16 (over 10 years). The court noted that ECMC also presented evidence of two income
based repayment programs (“IBR”) that would require debtors to pay between $605.20 and $907.80
monthly. The Bankruptcy Court rejected these options because it concluded that it did not constitute
payment of the student loan. To the contrary the amount due would only increase if these payments
were made, with the interest on the loans increasing by around $2000 a month. Judge Somers also
noted that although the IBR programs provide for loan forgiveness after 25 years, there is the potential
that that forgiveness would come with a large tax liability, thwarting the purpose of providing a fresh
start and potentially saddling defendants with a new tax debt in their early seventies.
The court agrees. Although ECMC argues that debtors should be required to participate in an
IBR plan, the court finds that these debtors are not examples of the freshly graduated young people
who might seek to discharge student loans in bankruptcy prior to reaching their full earning potential.
These debtors are in their forties and are potentially settled into the jobs they will hold for the rest of
their careers. Mr. Murray sought more gainful employment that unfortunately failed. They have
reduced their expenses in recent years and Judge Somers found their standard of living minimal. The
court agrees that debtors could not maintain a minimal standard of living if required to repay their
loans in full, but that they could reasonably be required to pay the principal. The court declines to
make any decision regarding the appropriateness of considering IBRs in other cases. But the court
does finds that the IBR plans would thwart these debtors’ chance at a fresh start, under the facts of this
Whether debtors’ circumstances are likely to persist
The second prong of the Brunner analysis “considers whether there are other circumstances
making it likely that the debtor will not be able to pay his loans for a significant portion of the
repayment period.” As noted in Polleys, Congress’s primary concern in adopting § 523(a)(8) was to
“remove the temptation of recent graduates to use the bankruptcy system as a low-cost method of
unencumbering future earnings.” 356 F.3d at 1306.
The Tenth Circuit has explained that the second prong inquiry should involve a “realistic look”
at debtors’ circumstances and their “ability to provide for adequate shelter, nutrition, health care, and
the like.” In re Alderete, 412 F.2d 1200, 1205 (10th Cir. 2005). It further noted that “courts should
base their estimation of a debtor’s prospects on specific articulable facts, not unfounded optimism, and
the inquiry into future circumstances should be limited to the foreseeable future, at most over the term
of the loan.”
Building on the Bankruptcy Court’s findings under the first prong, Judge Somers determined
that debtors’ circumstances are likely to persist for a significant portion of the repayment period of
their student loans. The bankruptcy court specifically noted that debtors are not recent graduates; they
took out educational loans around twenty years ago; they are in their late forties; Ms. Murray’s
employer told her not to expect raises or promotions; Mr. Murray is employed by a community college
whose funding is controlled by the state legislature, making raises unlikely; and that debtors’ medical
and dental expenses are only likely to increase in the future. The bankruptcy court found no facts in
the record suggesting that debtors’ circumstances are likely to improve based on decreased expenses.
The bankruptcy court applied the correct test and listed specific articulable facts to support its
The court agrees with Judge Somers’s findings and conclusions that debtors’
circumstances are likely to persist.
Whether debtors have made good faith efforts to repay the loans
The third prong of the Brunner analysis requires debtors to show that they have made a good
faith effort to repay their loans. The Tenth Circuit instructs that the court’s inquiry on the third prong
“should focus on questions surrounding the legitimacy of the basis for seeking a discharge. For
instance, a debtor who willfully contrives a hardship in order to discharge student loans should be
deemed to be acting in bad faith.” In re Alderete, 412 F.3d at 1206. On the other hand, a debtor’s prebankruptcy efforts to cooperate with lenders may show their good faith attempts to repay. Id.
Judge Somers found that debtors made a good faith effort to repay their loans. In reaching this
conclusion, the bankruptcy court noted that debtors have already paid over $54,000 of their student
loan debt and that since they took out the loans they have either been current on their payments, or in
deferral or forbearance status. Judge Somers noted that debtors have no late charges in their payment
histories. Around 2010, Ms. Murray inquired about and entered an IBR plan and debtors made
payments under that plan until they filed for bankruptcy in 2014. The bankruptcy court specifically
noted that under the IBR plan, all of debtors’ payments went to interest payments and were insufficient
to stop more interest from accruing. So the longer debtors paid under the IBR plan, the more they
The bankruptcy court found that debtors’ inability to pay was legitimate and not willfully
contrived. Judge Somers found that debtors’ inability to pay was caused by factors beyond their
control, primarily the fact that people with masters in music degrees have low earning potential. The
bankruptcy court found that debtors’ low earning potential, combined with the size of the debt and the
high interest rate resulted in failure of even their good-faith efforts to pay off their loans. The court
also noted that the IBR plan and similar plans were unproductive alternatives to seeking discharge in
bankruptcy, presumably because debtors would never have been able to pay off their loans, or even
reduce the interest under an IBR plan.
The court agrees with Judge Somers’s findings and conclusions that debtors made a good faith
effort to repay their loans. The Tenth Circuit has noted that a debtor’s participation in an IBR plan is
not required but can be an important indicator of good faith. In re Alderete, 412 F.3d at 1206 (quoting
In re Alderete, 289 B.R. 410, 420 (Bankr. D.N.M. 2002) (quoting In re Wallace, 259 B.R. 170, 185
(C.D. Cal. 2000))). ECMC’s brief argues that none of debtors’ loan, principal or interest, should be
discharged, primarily arguing that even though debtors may not be able to reduce interest, they should
be required to participate in an IBR plan of some type and pay on their loan. The court disagrees.
Under the circumstances of this case, debtors’ payments under an IBR plan are insufficient even to
stop the accrual of additional interest, and such payments directly controvene the purpose of
Judge Somers did not discharge all of debtors’ student loans.
He discharged that
portion—the interest—that had become an undue hardship on debtors, denying them a fresh start.
Debtors will still have to repay the principal balance on their student loans.
IT IS THEREFORE ORDERED that the Memorandum Opinion and Order Granting Partial
Discharge of Student Loans issued by the Honorable Dale L. Somers, United States Bankruptcy Judge,
is hereby affirmed. The parties’ requests for oral argument are denied. The court does not find that
oral argument would assist the court’s findings on this matter. This case is closed.
Dated September 22, 2017, at Kansas City, Kansas.
s/ Carlos Murguia
United States District Judge
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