A grandmother who had nearly $90,000 in student debt had her loans cancelled by a bankruptcy court in Nebraska, adding to an emerging trend of student loan borrowers successfully finding relief through personal bankruptcy.
“Most of my clients are surprised to hear that they can get their student loans discharged,” the debtor’s lawyer, Lea Wroblewski, an attorney and the director of the debt and finance unit at Legal Aid Nebraska, told Yahoo Finance.
Jamie Mudd attended college in California and earned associate’s degrees in culinary arts and medical science, incurring debts from 26 federally-backed education loans between 2006 and 2015 to attend two schools. In 2015, she moved to Nebraska and began working multiple retail jobs. In 2019, Mudd’s developmentally-challenged grandson moved into her one-bedroom apartment and she obtained temporary guardianship.
Escalating financial troubles — including $89,525.38 in student loans with a daily interest accrual of $14.31 — led Mudd to file for chapter 7 bankruptcy in June 2019 and an adversary proceeding in October 2019. The Education Department (ED) initially denied her request for cancellation, but U.S. bankruptcy court in Nebraska ruled in December 2020 that all of Mudd’s loans should be discharged.
“Mudd has made a good faith effort to maximize her income,” United States Bankruptcy Judge Shon Hastings wrote in an opinion issued by the court. Given her two jobs, lack of savings or assets, and various expenses, “Mudd does not have sufficient disposable income to pay her student loan debt,” they added, and hence it “imposes an undue hardship on her and her dependent.”
The court applied a totality-of-circumstances test, assessing “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the reasonable living expenses of the debtor and her dependents; and (3) any other relevant facts and circumstances surrounding the case.” (The totality-of-circumstances test is seen by some as less strict than a Brunner test, which is used in other cases related to student loans and bankruptcy.)
Two degrees, two jobs, and too much student debt to handle
Over the years, Mudd had taken out more than $72,000 in student loans, including two Federal Family Education Loan (FFEL) consolidated loans, while attending the now-shuttered for-profit Heald College and San Joaquin Delta College, a two-year public school in California.
She later found a job as a certified medical assistant, and as a live-in nurse caring for geriatric patients. After moving to Nebraska, Mudd found jobs as a prep cook at a local Mexican restaurant, as a deli cook at Super Saver, and as a concession stand worker at the University of Nebraska during sporting events.
But the income wasn’t enough: She only made around $16,500 in wages in 2015, and got $3,270 in unemployment benefits. In the following years, Mudd continued to make less than $30,000 a year, and eventually found jobs as a customer service representative, working for 40 hours a week at $12 an hour, and as a package handler for FedEx for 13 hours a week.
The bankruptcy filing, which requires specificity so debtors can make their case for relief, detailed how Mudd lives in a one-bedroom apartment which she does not own and pays $510 in monthly rent. She does not have a retirement account or any investments — only a checking account — and deals with several personal medical issues and the costs associated. The filing lists her subscriptions such as Netflix, in addition to estimating how much she spends on food a month, where she shops, and more.
A footnote describes that she “obtained her couch and loveseat from her niece at $75” and an end table from her brother “for free” and bar stools “from the side of the road.” The filing also described her TV as “not modern” and that her phone screen “is damaged.”
At the time of filing, Mudd was also responsible for her 17-year-old grandson, who has mild autism and was attending high school. He wasn’t employed then and Mudd wasn’t getting any financial support from the boy’s parents as they were also unemployed.
Income-driven repayment problems
The debtor tried to work with the system to ease her financial burden.
In 2015, Mudd consolidated her 26 education loans with ED in 2015, and was put on an income-driven repayment plan (IDR) with a $0 per month payment schedule.
She made 12 payments, but failed to re-certify her IDR plan in 2016, so she was put back on the standard IDR plan at a $796.87 per month plan in March. She didn’t pay, and the loans went delinquent. She re-certified and got back onto a $0 per month payment plan in June 2018.
Twelve months later, she was told to re-certify and again failed to successfully do so, meaning that the monthly rate reverted back to the standard IDR plan — but this time, they were asking for $963.38.
At this point, after being hit with multiple medical bills and wage garnishment, Mudd filed for chapter 7 bankruptcy in June 2019 and the adversary proceeding occurred a few months later.
The judge — and ED — noted that from 2014 to 2019, despite her gross income never exceeding $30,000, she was still resilient in switching fields and trying to get jobs to increase her income.
Ultimately, the court decided that it disagreed with the “optimism that ED suggests” about Mudd’s future earnings based on the evidence.
“Mudd’s loans are an undue hardship on her and her dependent grandson,” the judge ruled. “Accordingly, Mudd’s consolidated student loans are discharged under 11 U.S.C. § 523(a)(8).”