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.[1]   Education Credit Management Corporation (“ECMC”), the loan servicer, has appealed the judgment.[2]  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.[3]

Kevin J. Rosenburg, the petitioner, is a Navy veteran and a 2004 graduate of Cardozo Law School.[4]  Upon consolidation of his student debt shortly after graduation, the principal amount was $116,464.[5]  By the time of this case, that number had ballooned to $221,385 despite missing few payments over a ten year period.[6]  He reported a negative monthly income when he filed for chapter 7 bankruptcy in 2018.[7] 

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.”[8]  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.”[9]

Judge Morris’ decision hinged on a liberal application of a three-part test used in most circuits to assess “hardship.”[10]   Before 1976, student loans could be discharged through bankruptcy.[11]  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.[12]  The law carves out cases of “hardship” which In re Brunner[13] would later define in a three-pronged analysis (“the Brunner test”).[14]  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.[15]  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.[16] 

But Judge Morris’ ruling could make the option accessible to a wider range of borrowers unable to make ends meet due to steep payments.[17]  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.”[18]

The loan servicer has appealed Judge Morris’ ruling, opting for federal district court venue instead of the Bankruptcy Appellate Panel.[19]  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.[20]  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.[21]  Consequently, it would make obtaining private loans difficult or impossible for many students deemed risky or likely to default.[22]  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.[23] 

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.[24]  Regardless of the final outcome, discussions surrounding equitable education financing and undue hardship are unlikely to go away any time soon.[25]

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[1] Rosenberg v. N.Y. State Higher Educ. Servs. Corp. (In re Rosenberg), 610 B.R. 454 (Bankr. S.D.N.Y. Jan. 7, 2020).

[2] 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.

[3] 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.

[4] In re Rosenberg, 610 B.R., at 3.

[5] See id.

[6] See id.

[7] See Krauss, supra note 3.

[8] 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.

[9] Id.

[10] See Friedman, supra note 3.

[11] See id.

[12] See id.

[13] 46 B.R. 752 (Bankr. S.D.N.Y. 1985).

[14] See id.

[15] See Friedman, supra note 2.

[16] 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.

[17] 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.

[18] See Krauss, supra note 3.

[19] See Swaminathan, supra note 8.

[20] See Arnold, supra note 16.

[21] Id.

[22] Id. 

[23] 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/.

[24] 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.

[25] Id.