Judge dismisses ‘myths’ that student loans cannot be disposed of in bankruptcy

The chances were long, but not impossible, Kevin Rosenberg knew it. He had heard that it was not possible to cancel student loans in bankruptcy, that it was not even worth trying, he said, “but I also knew that it was wrong. was not true “.

Rosenberg had read the law and read previous cases – his law degree, the source of most of his debt, at least useful for that – and he was actually pretty confident he had a decent chance of winning “if the law was applied fairly. “

Fourteen years after graduating from law school with just over $ 190,000 in debt, he owed nearly $ 380,000 in federal and private loans, despite regular payments. He was so desperate and angry that he seriously considered leaving the country for good, to escape the debt.

First, however, he decided to try and file for bankruptcy, in early 2018.

As recently as last week, U.S. Chief Bankruptcy Judge Cecelia Morris of the Southern District of New York decided in favor of Rosenberg, and paid off his remaining federal student loans, all of $ 221,385.49. The rest, he had already settled amicably with the private lender.

John Rao, lawyer at the National Center for Consumer Law who specializes in bankruptcy, called Morris’ decision “refreshing” and “real direct application” of the law.

“This really reflects a growing trend of at least some bankruptcy judges who have been prepared to ignore some of the additional hurdles that some courts have placed on borrowers when they have attempted to obtain a discharge from bankruptcy,” he said. he declares.

The point is, it is a myth that student loans cannot be canceled in bankruptcy. This has never been true. Difficult, yes, but not impossible. But over the past three decades, judges across the country have interpreted the law so harshly that “most people (bankruptcy professionals as well as individuals) think it’s impossible to pay off student loans.” Morris wrote in his ruling.

In Rosenberg’s case, she continued, “this Court will not participate in the perpetuation of these myths.”

The Brunner test

Instead, Morris decided to apply the Brunner test, the standard most commonly used by bankruptcy courts to determine whether a person is eligible for discharge from student loans, “as originally intended.” This meant that Rosenberg had to meet three criteria to prove that his student loans were causing him “undue hardship”: that he could not maintain a minimum standard of living if he had to repay his loans, that these circumstances were likely to persist for a long time. . time, and that he had made a good faith effort to repay his debt.

“She just wanted to get back to basics, and I think that’s what she did here,” Rao said. “I don’t see him as necessarily revolutionary. But I think in some ways it’s courageous because a lot of bankruptcy judges just got caught up in the idea that it’s an impossible standard. “

The big question here is whether this ruling is unique to Rosenberg’s situation or whether it signals a change in the way bankruptcy judges view student debt.

“I hope the latter,” said Susan Block-Lieb, professor at Fordham Law School. “Judges are like any other group… They learn from each other, there’s a bit of a herd mentality in there. And maybe the herd swerves.

Morris, she added, “is correct that this area of ​​law has gone mad over time.”

This is partly because the judges interpreted the Brunner test so harshly, and partly because many have also asked people to prove a “certainty of desperation” when asking for student debt remission. This means that they must actually show that there is no chance that their financial situation will ever improve in their lifetime.

“The worst decision I have ever made”

Rosenberg wasn’t desperate, exactly, but he was desperate by the time he filed for bankruptcy. He knew law school was a mistake soon after he started, but as a veteran of the Navy he said, “I had the mentality of ‘I started, I have to finish it.’ So he did.

It was “the worst decision I have ever made,” he said. “The only thing in life that I really regret is going to law school.”

Rosenberg practiced law for a total of two and a half months before deciding with certainty that it was not for him. In the years that followed, he briefly worked as a real estate broker, “until this market collapsed” and then, while he was raising money to open a bar and restaurant, was happened in the crash of 2008. Eventually, he opened another business, an outdoor gear store, a guide service, and a New York-based adventure travel outfitter, growing just as “the business” brick and mortar retail was really starting to crumble ”.

“I am not going to serve my country, risk my life and then become an indentured servant,” said Kevin Rosenberg. (Courtesy of Kevin Rosenberg)

Even before this latest coup, he had struggled for years to keep up with his student loans, especially private loans, which did not qualify for income-tested repayment programs.

“In the end, they denied me an abstention, defaulted me, then sued me to get all the money back at once, even though I couldn’t even make the monthly payment,” he said. he stated about the private lender.

This reduced his credit, which prevented him from obtaining business loans, which made his payments more difficult. And the debt kept growing.

By the time he filed for bankruptcy, Rosenberg had negative monthly income.

“I was just fed up with it,” he said. The debt had grown so great, so insurmountable, that he knew he could never pay it. And that made him angry, especially after his years in the Navy.

“I am not going to serve my country, risk my life and then become an indentured servant,” he said. “I had finished.”

“An incredibly small number”

Phrases like “undue hardship” and “certainty of desperation,” and the way they have been interpreted in business over the past 30 years, have fueled this narrative that student loans cannot be repaid in the event of failure. bankruptcy.

But the reality, said Rao of the National Consumer Law Center, is that very few people even try.

“It’s an incredibly small number of consumers doing this,” he said.

Only 0.1% of indebted people who declare bankruptcy even ask for the release of their student loan, according to a 2011 study. Of those who do, almost 40% are successful.

Yet, Rao said, people are intimidated both by the account of how difficult it is to prove undue hardship and by the current process.

In addition to filling out bankruptcy papers, people seeking cancellation of their student loans must also take civil action. The cost associated with this, said Rao, is “the real obstacle, in some ways more than the standard itself.” That is why he believes there must be a legislative solution.

For now, however, it is up to bankruptcy judges to interpret the law. And Rosenberg was fortunate enough to have his case in Morris’s courtroom.

But its story is not over, not quite yet.

Educational Credit Management Corporation, which held his loan, could still appeal. The company has yet to say whether it will, saying only “we are reviewing the decision to determine how we will proceed.”

Still, Rosenberg feels a sense of relief. No joy, no celebration, just relief.

“It just means I have a second chance, you know?” ” he said. “I can really have a life. “

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