By: Jenna Russell
On January 7, 2020, Chief U.S. Bankruptcy Judge Cecelia G. Morris took the unprecedented step of discharging over $221,300 in student debt after finding the financial obligation imposed an undue hardship on the petitioner. Education Credit Management Corporation (“ECMC”), the loan servicer, has appealed the judgment. The decision, if upheld by the Southern District of New York, could have major repercussions for both participants in the student loan asset-backed securities (“SLABS”) market as well as the 44 million American borrowers carrying $1.5 trillion in student loan debt.
Kevin J. Rosenburg, the petitioner, is a Navy veteran and a 2004 graduate of Cardozo Law School. Upon consolidation of his student debt shortly after graduation, the principal amount was $116,464. By the time of this case, that number had ballooned to $221,385 despite missing few payments over a ten year period. He reported a negative monthly income when he filed for chapter 7 bankruptcy in 2018.
ECMC argues that Rosenberg, despite being a licensed attorney, did not put forth a good faith effort to meet his debt obligations, asserting that “[i]nstead of pursuing those opportunities available to him, and paying back his taxpayer-backed federal student loans, Plaintiff, for the past 10 years, has held various positions in the outdoor adventure industry, including starting up and running his own tour guide business.” In appeal, the loan servicer further contends that “[i]nability to pay one’s debts by itself cannot be sufficient to establish an undue hardship; otherwise all bankruptcy litigants would have an undue hardship.”
Judge Morris’ decision hinged on a liberal application of a three-part test used in most circuits to assess “hardship.” Before 1976, student loans could be discharged through bankruptcy. Over time, Congress tightened the restrictions allowing such relief until, finally, George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. The law carves out cases of “hardship” which In re Brunner would later define in a three-pronged analysis (“the Brunner test”). The Brunner test requires that: (1) the borrower has extenuating circumstances creating a hardship; (2) those circumstances are likely to continue for duration of the loan term; and (3) the borrower has made a good faith attempt to repay the loan. Although it’s not impossible to obtain bankruptcy relief for student loan debt, it has proven difficult because a stringent application of the “undue hardship” standard.
But Judge Morris’ ruling could make the option accessible to a wider range of borrowers unable to make ends meet due to steep payments. In her ruling, Judge Morris cited a desire to dispel the “myth” that student loan debt is not dischargeable through bankruptcy, adding that “for a multitude of petitioners like Mr. Rosenberg, who have been out of school and struggling with student loan debt for many years, the test is fairly straight-forward and simple.”
The loan servicer has appealed Judge Morris’ ruling, opting for federal district court venue instead of the Bankruptcy Appellate Panel. The relaxing of bankruptcy rules for discharge of student loan debt would also have a major impact on private loan lenders, leading to a spike in interest rates. According to Consumer Bankers Association consultant Harrison Watson, this is because “[l]enders would have to be careful about making loans and probably have to charge more for them” in order to spread risk. Consequently, it would make obtaining private loans difficult or impossible for many students deemed risky or likely to default. Unsurprisingly, such a move would disproportionately impact student consumers of lower socioeconomic status who do not possess a robust credit history or have access to a guarantor to boost their financial profile.
The Rosenberg case
comes at a pivotal time when the future of student loan lending is generating
wide debate amid concern that the industry’s practices are not sustainable. Regardless of the final outcome, discussions
surrounding equitable education financing and undue hardship are unlikely to go
away any time soon.
 Rosenberg v. N.Y. State Higher Educ. Servs. Corp. (In re Rosenberg), 610 B.R. 454 (Bankr. S.D.N.Y. Jan. 7, 2020).
 Zack Friedman, He Got $221,000 of Student Loan Forgiveness, But Then This Happened, Forbes (Jan. 25, 2020), https://www.forbes.com/sites/zackfriedman/2020/01/25/student-loans-bankruptcy-debt/#76114e625e7d.
 See Michael M. Krauss, Student Loan Discharged in Bankruptcy- Just a Blip, or Something Bigger?, The National Law Review (Jan. 28, 2020), https://www.natlawreview.com/article/student-loan-discharged-bankruptcy-just-blip-or-something-bigger; Zack Friedman, Can You Discharge Your Student Loans in Bankruptcy?, Forbes (Jan. 9, 2019), https://www.forbes.com/sites/zackfriedman/2019/01/09/student-loans-bankruptcy-discharge/#279527996d56.
 In re Rosenberg, 610 B.R., at 3.
 See id.
 See id.
 See Krauss, supra note 3.
 Aarthi Swaminathan, Student Loan Servicer Appeals Landmark $220,000 Bankruptcy Ruling, Yahoo! Finance (Jan. 24, 2020), https://finance.yahoo.com/news/student-loans-bankruptcy-ruling-131844930.html.
 See Friedman, supra note 3.
 See id.
 See id.
 46 B.R. 752 (Bankr. S.D.N.Y. 1985).
 See id.
 See Friedman, supra note 2.
 Chris Arnold, Myth Busted: Turns Out Bankruptcy Can Wipe Out Student Loan Debt After All, NPR (Jan. 22, 2020), https://www.npr.org/2020/01/22/797330613/myth-busted-turns-out-bankruptcy-can-wipe-out-student-loan-debt-after-all.
 Aisha Al-Muslim, Top New York Bankruptcy Judge Pushes Mediation for Student Loans, The Wall Street Journal (Jan. 28, 2020), https://www.wsj.com/articles/top-new-york-bankruptcy-judge-pushes-mediation-for-student-loans-11580244971.
 See Krauss, supra note 3.
 See Swaminathan, supra note 8.
 See Arnold, supra note 16.
 Sarah Butrymowicz, Few Scholarships, Big Student Loans: Why Colleges that Serve Poor Students Often Cost More, USA Today (Feb. 14, 2020), https://www.usatoday.com/story/news/education/2020/02/14/scholarship-student-loan-financial-aid-university-of-wisconsin-madison-milwaukee/4754913002/.
 Adam S. Minsky, What a Bernie Sanders Presidency Could Mean for Student Loan Borrowers, Forbes (Feb. 12, 2020), https://www.forbes.com/sites/adamminsky/2020/02/12/what-a-bernie-sanders-presidency-could-mean-for-student-loan-borrowers/#4d593892556e.