In Murphy v. United States, 15-11240-j7 (Bankr. D. N.M. June 1, 2018), the Bankruptcy Court in New Mexico held that a debtor who was not obligated to make payments on student loans because she qualified for a -0- payment under an Income Based Repayment Plan ("IBR"), could still discharge the loans in bankruptcy under the Brunner test. According to the Bankruptcy Court:
Even though Ms. Murphy is eligible for an IBR plan that will likely require a payment of
zero dollars per month during the periods of loan repayment, and would stay on IBR plans if her student loan debt is not discharged, the Court is persuaded that her student loans represent an undue hardship under the Brunner test. In reaching this decision, the Court is relying on the
unique circumstances of this case including but not limited to: (1) Ms. Murphy’s age and
physical condition; (2) Mr. Joseph Murphy’s severe disability and Son A’s mental illness and
suicidality and Ms. Murphy’s substantial role in caring for them; (3) Ms. Murphy’s limited
prospects for future employment given the flexible work hours Ms. Murphy needs to care for
Son A; (4) Ms. Murphy’s income and frugal expenses; (5) Ms. Murphy’s eligibility to pay zero
under IBR plans, which likely would never change; and (6) Ms. Murphy’s previous efforts to use repayment plans, consolidate her loans, and enter deferments or forbearances. The Court is also taking into account the tax law under which debt forgiveness results in taxable income. The
Court will therefore discharge her student loans under 11 U.S.C. § 523(a)(8).
The Bankruptcy Court also rejected the argument that "a debtor’s eligibility for an IBR plan automatically renders a debtor ineligible to receive a student loan debt discharge under § 523(a)(8)", instead reasoning that the eligibility for an IBR was one factor to consider, albeit an "important factor." According to the Court,
[A] debtor’s ability to participate in an IBR plan does not prevent a debtor from obtaining a hardship discharge of her student loan debt at least when: (a) the debtor has demonstrated a willingness to participate in an IBR plan or alternate repayment option prior to bankruptcy; (b) the debtor has made reasonable efforts to maximize her income and minimize her expenses; (c) there is no realistic prospect the debtor would ever be required to make any payment on the student loan debt under an IRB plan as those plans are currently designed; (d) there are negative consequences to the debtor by denying the student loan hardship discharge; and (e) the debtor otherwise has demonstrated good faith. No purpose would be served by denying a student loan discharge when the debtor meets these conditions even though the debtor is eligible to participate in an IBR plan.