A New York bankruptcy court recently allowed a pro se debtor to discharge over $200,000 in student loan debt, vehemently rejecting as “punitive” more recent legal authority concerning how student loan debts may be discharged in bankruptcy.
Debtor Kevin Jared Rosenberg, a New York law school graduate earning approximately $37,000 annually, filed for Chapter 7 bankruptcy, then filed an adversary proceeding seeking to have about $220,000 in student loan debt declared dischargeable under 11 U.S.C. § 523(a)(8). While student loans generally are not dischargeable in bankruptcy, Section 523(a)(8) provides for an exception if student loan debt imposes an “undue hardship” on the debtor and his or her dependents.
The Court and the parties agreed that the “undue hardship” test established by the Second Circuit in Brunner v. N.Y. State Higher Educ. Servs. Corp. applied to determine whether the debt could be discharged under Section 523(a)(8). In Brunner, the requisite “undue hardship” exists if: (1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living if forced to repay the loans; (2) this state of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loan.
Sharply criticizing other courts’ constructions of the Brunner test as “punitive” and nearly impossible for any debtor to satisfy, the Court disregarded more recent authority and applied the Brunner test as written in the original 1987 opinion.
Thus, the first prong was satisfied because Rosenberg had negative monthly income (i.e., his expenses would exceed his income by more than $1,500 per month) based on his filed bankruptcy schedules. The second prong was satisfied and the hardship was deemed likely to continue for a “significant portion” of the repayment period because the debt already had been accelerated due to default, and the entire balance was due in full. The third prong – the debtor’s good faith effort to repay – was satisfied because Rosenberg had made 10 payments during the 26-month period that the loan was neither deferred nor in forbearance, equaling a payment rate of approximately 40%. Finding the Brunner test satisfied, the Court granted Rosenberg’s motion for summary judgment and declared that the debt was dischargeable due to Section 523(a)(8)’s “undue hardship” exception.
The appeal period has not yet expired, so it is unclear whether this ruling will be challenged further.
In any event, the bankruptcy court’s ruling in this case represents a significant departure from the case law that has developed around the Brunner test since 1987. For example, many courts considering the “undue hardship” exception will take a deeper dive into debtors’ financial situations to determine whether the loan payment difficulties are a result of imprudent spending habits or curable underemployment. See, e.g. Murrell v. Edsouth. Other courts will look into whether repayment options are available that could mitigate the claimed hardship. See, e.g. Thoms v. Educ. Credit Mgmt. Corp. Here, the bankruptcy court largely declined to do this sort of analysis, claiming that Brunner never required it in the first place.
This case – in which the court effectively lowered the presumed bar for the Brunner “undue hardship” test – exemplifies the increasing public unease with how difficult it is for student loan debts to be discharged in bankruptcy. Some courts, perceiving unfairness with this rule, may continue to explore legal workarounds to reach more debtor-friendly results, like the bankruptcy court did here.