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Bankruptcy case could make it easier to shed student loans

By
Amy R. Connolly
A Boston bankruptcy case could upend the decades-old federal bankruptcy laws that prohibit dismissal of student loans. Photo by AVN Photo Lab/Shutterstock
A Boston bankruptcy case could upend the decades-old federal bankruptcy laws that prohibit dismissal of student loans. Photo by AVN Photo Lab/Shutterstock

BOSTON, Oct. 9 (UPI) -- A Boston bankruptcy case could shift the decades-old federal laws that prohibit the dismissal of student loans in a bankruptcy and allow borrowers with "undue hardship" to eliminate the debt.

The First Circuit Court of Appeals is considering a request by 65-year-old Robert Murphy to discharge several Parent Plus student loans, backed by the U.S. Department of Education, now totaling $246,000. Murphy is asking the court to define what "undue hardship" means when it comes to repaying student loan debt. A win for Murphy doesn't just mean he will be released from the student debt. It could change the way U.S. bankruptcy courts handle outstanding student loan debt.

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"The opportunity here is significant," said John Rao, a lawyer with the National Consumer Law Center who submitted an outside brief supporting Murphy in the case. A judgment in favor of debtors, he said, "could have a really significant impact on other courts, which have not looked at this issue in a long time."

Murphy, who is acting as his own attorney, lost his job as president of a manufacturing company in 2002. While looking for work in the past 13 years, he's dried up his retirement savings and his home was recently foreclosed. Murphy estimates if he was to find a $50,000-a-year job now and pay until he turns 77, the balance of his loans would still grow to $500,000 with interest.

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Currently, anyone looking to discharge student loan debt in bankruptcy must prove undue hardship, a nebulous standard that has never been legally defined and is dismissed by bankruptcy attorneys as an impossible benchmark to meet.

At $1.2 trillion, federal student loan debt is the largest source of consumer debt outside mortgages. Of those, 7.5 million borrowers are severely behind in payments.

Rafael Pardo, an Emory University law professor who also filed a brief in Murphy's case, said a more lenient bankruptcy standard would help consumers but may spell trouble for student loan debt collections overall.

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"It could be a really dangerous thing for them if the First Circuit announces a rule for debtors to discharge their loans in bankruptcy," said Pardo, referring to the Department of Education. "That would call into question how much of this $1.2 trillion [in student debt] is collectable."

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