Bankruptcy Settlement Could Wipe Out Parent’s Student Loans

Can parents with substantial student loan debt from PLUS loans have an easier time discharging this debt through consumer bankruptcy? It is difficult to wipe out any student loan debt by filing for Chapter 7 bankruptcy, regardless of whether you are the student who borrowed the money or a parent who borrowed on behalf of your children. However, according to a recent article in MarketWatch, an appeals court settlement suggests that some parents may indeed be able to wipe out the PLUS loans they have borrowed under certain circumstances. While the recent case ended in a settlement—meaning that it will not create court precedent for other parent borrowers—it does suggest that student loan debt may not be as difficult to discharge as many of us assume.
Parent PLUS Loans and Consumer Bankruptcy
The debtor in this case, Robert Murphy, had borrowed around $200,000 in parent PLUS loans to finance his children’s education. What are PLUS loans? According to a fact sheet from the U.S. Department of Education, PLUS loans are “federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school.” With a PLUS loan, the U.S. Department of Education serves as the lender, and you must not have an adverse credit history to qualify.
In the present case, Murphy borrowed PLUS loans between 2001 and 2007 to help his dependent children finance their undergraduate educations. Since 2002, Murphy, who is now 65, has been unemployed. Back in 2011, he filed for personal bankruptcy and requested that the bankruptcy court discharge the debt owed on the parent PLUS loans. He argued that he had attempted to repay the loans and had tried to find work, but that he was unable to do so. The bankruptcy judge initially determined that Murphy could not have the student loan debt discharged.
However, Murphy appealed the bankruptcy judge’s decision. The three-judge panel at the appeals court heard arguments from Murphy, but before it could make a decision, Murphy and the creditor reached a settlement that would allow the PLUS loan debt to be discharged. According to the article, this case was unique in that the debtor “fought it all the way up to an appeals circuit that has yet to adopt a uniform standard for how it handles student loans in bankruptcy.” In other words, the appeals circuit that heard Murphy’s case has not adopted the Brunner test, which largely remains the standard for determining whether student loan debt can be discharged in a personal bankruptcy case.
Settlements at the appeals stage are rare, the article underscores, because most debtors simply cannot afford to appeal their cases.
Settlement Does Not Set Standard, but Leaves Room for Student Debt to Be Discharged
As the article makes clear, Murphy’s settlement does not set a new standard for bankruptcy judges or appeals courts that face the question of whether to discharge student loan debt in a Chapter 7 bankruptcy filing. However, given that Americans now have, collectively, about $1.3 trillion in student loan debt, the settlement suggests that there may be some hope for debtors who are burdened with student loan payments.
At the same time, consumer advocates highlight that the case could have helped a lot more debtors if it had not ended in a settlement. In other words, if the appeals circuit had decided that Murphy’s PLUS loan debt could be discharged, it would have set a significant precedent for other student loan borrowers.
Do you have questions about discharging student loan debt in bankruptcy? An experienced Oak Park bankruptcy attorney can answer your questions today. Contact the Emerson Law Firm to learn more about how we can help with your case.
See Related Blog Posts:
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