SDNY grants debtor discharge of student loans

The following is a case update analyzing a recent decision of interest:

Summary

In In re Rosenberg (Rosenberg v. N.Y. State Higher Education Services Corp., et al.), No. 18-09023, 2020 WL 130302, 2020 Bankr. LEXIS 73 (Bankr. S.D.N.Y., Jan. 7, 2020), Chief Judge Cecelia Morris of the United States Bankruptcy Court, Southern District of New York, in a decision to be published, granted Kevin Rosenberg’s summary judgment motion, finding that his student loan obligations were dischargeable pursuant to 11 U.S.C. § 523(a)(8). A Notice of Appeal and Memorandum For Leave to Appeal Interlocutory Order seeking District Court review were filed in the bankruptcy case on January 17, 2020. The bankruptcy court entered the Order Granting Leave to Appeal on January 17, 2020. To read the full to be published decision, click here.

Facts and Procedural History

Debtor Kevin Rosenberg borrowed funds from 1993 to 1996 to fund his education at the University of Arizona, where he received a Bachelor of Arts degree in history. He then served a five year tour of duty in the United States Navy.

After his tour of duty, Rosenberg attended the Cardozo Law School at Yeshiva University. He borrowed additional funds to attend Cardozo Law School. As of April 2005, Rosenberg consolidated his federal student loans in the principal amount of $116,464.75.

On March 12, 2018, Rosenberg filed his petition for relief under Chapter 7 of Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. On June 12, 2018, he commenced an adversary proceeding against the New York State Higher Educational Services and others seeking to discharge approximately $221,000 of student loan debt. Thereafter, Educational Credit Management Corporation (“ECMC”) intervened as a holder of one federal consolidation loan.

As of November 19, 2019, the debtor’s student loan balance was $221,385.49 with interest accruing at 3.38%. The debtor’s means test showed his monthly income at $3,136.24 and annual income of $37,634.88. He scheduled his monthly income at $2,456.24 and expenses of $4,005.00, and verified that he had monthly negative income. At the filing of his petition, the debtor was in default on his student loan payments, was not enrolled in a payment plan, and was not eligible for a payment plan.

The debtor filed a motion for summary judgment, and on August 27, 2019, ECMC filed a cross-motion for summary judgment and opposition to the debtor’s motion. Ultimately, on January 7, 2020, the court held that the debtor had satisfied the undue hardship standard set forth in Section 523(a)(8) and granted the Debtor a discharge of his federal student loans. On January 24, 2020, the court granted ECMC’s motion for leave to appeal the interlocutory order.

The Bankruptcy Court’s Decision and Reasoning

The debtor sought to discharge his student loans under Section 523(a)(8) which provides, in part:

(a) A discharge under section 727, …does not discharge an individual debtor from any debt-

. . .

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for-

(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

In the Second Circuit, the controlling law on proving entitlement to a discharge of a student loan is set forth in Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 831 F.2d 395,396 (2d Cir.1987). Under Brunner, the debtor must prove the following three elements to discharge a student loan:

“(1) that the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.” Id. at 396.

This three-part test pronounced by the Brunner court has become known as the Brunner test. The Brunner test was formulated by a New York District Court and affirmed by the Second Circuit to determine when the repayment of the student loan would constitute an “undue hardship” on a debtor. The Second Circuit noted that element 2 of the test was “reasonable in light of the clear congressional intent exhibited in section 523(a)(8) to make the discharge of student loans more difficult than that of other nonexcepted debt.”  Id. at 396. Brunner and its progeny have largely been interpreted to set a high standard of proof for a debtor to discharge student loans.

Chief Judge Morris revisited the line of cases following Brunner noting: “Over the past 32 years, many cases have pinned on Brunner punitive standards that are not contained therein.” 2020 WL 130302 *3. Judge Morris also noted how many cases followed Brunner rather than the statute, and found: “Those retributive dicta were then applied and reapplied so frequently in the context of Brunner that they have subsumed the actual language of the Brunner test. They have become a quasi-standard of mythic proportions so much that most people (bankruptcy professionals as well as lay individuals) believe it is impossible to discharge student loans.” Id. at *3.

Judge Morris reasoned: “This Court will not participate in perpetuating these myths. (“It is important not to allow judicial glosses . . .  to supersede the statute itself.”) Rather, this Court will apply the Brunner test as it was originally intended.” Id. at *3 (citation omitted).

Under the first element, maintaining a minimal standard of living, the court relied upon the means test under Section 707(b)(2) to determine the debtor’s income and expenses and thus ability to maintain a minimal standard of living if the debtor had to repay the loan. Judge Morris found that the debtor had a negative monthly income and thus no funds to repay the defaulted loan. Element 1 of the Brunner test was satisfied.

Under the second element, the key was whether the Debtor’s current state of financial affairs were likely to persist “for a significant portion of the repayment period of the student loans.” Id. at *4. Here, the debtor’s repayment period had expired, and the loan was due in full such that Debtor owed payment of over $221,000. Since the repayment period had expired and the loan was due in full, Judge Morris found the second element of the Brunner test was satisfied.

Finally, the third element asked whether the Debtor had made a good faith effort to repay the loans. Under Brunner, Judge Morris determined this element addresses only the Debtor’s past efforts to repay the loan. She stated: “It is therefore inappropriate to consider: Petitioner’s reasons for filing bankruptcy; how much debt he has; or whether the Petitioner rejected repayment options.” Id. at *4. These factors had been considered by other courts, but Judge Morris rejected them under the statute. Her analysis of the debtor’s history of payment plans, forbearance agreements, and extensions led her to conclude the debtor “did not sit back for 20 years but made a good faith effort to repay his Student Loan.” Judge Morris concluded that the debtor had satisfied the third element of the Brunner test.

Accordingly, Judge Morris ruled the Debtor satisfied each element of the Brunner test and ordered his student loans discharged under Section 523(a)(8).

Commentary

Student loan debt is a national issue with significant economic impacts. Today, 44 million Americans collectively owe more than $1.6 trillion in student loan debt.^[i] Unlike the modest dollar-amount loans made to students in the 1970s by local banks and colleges, present-day students face mammoth costs to pay for education. Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908, 922 (B.A.P. 9th Cir. 2013) (Pappas, J. concurring). Student loan debt increased from $260 billion in 2004, to $1.4 trillion in 2017, to more than $1.6 trillion today.^[ii] On an individual level, the average student loan debt increased from $18,650 in 2004 to $38,000 in 2017.

For the 2014-2015 academic year, the College Board reported that a moderate college budget for an in-state public college averaged $26,590, while a moderate budget at a private college averaged $54,980.^[iii] The economic picture is not brighter for students seeking a post-graduate degree, such as a law degree. In 1985, the average private school law school tuition was $7,526. By 2019, it ballooned to $49,312.^[iv] One striking factor is that the number of people over 60 with student loan debt has increased from 700,000 to 2.8 million over the last ten years. The amount of their debt has increased to $67 billion.

The topic is of national interest as the Democratic presidential candidates and President Trump have all proposed solutions, from wiping out all existing student loan debts to a percentage reduction.^[v]

The Brunner test is the acknowledged law in many circuits, including the Ninth Circuit. See In re Mason, 464 F.3d 878 (9th Cir. 2006). However, in 1998, the Ninth Circuit was faced with adopting the Brunner test or the Sixth Circuit’s Cheesman test. The Cheesman test was “1) ‘the [debtors] could not maintain a minimal standard of living for their family if they were required to repay their loans.’ 2)’[T]here is no indication that the [debtors’] financial situation will improve in the foreseeable future.’ and 3) ‘There is no evidence that the [debtors] did not act in ‘good faith’.” In re Pena, 155 F.3d 1108,1114, n. 4 (9th Cir. 1998). The Ninth Circuit adopted the Brunner test.

Judge Morris identified a key problem with the Brunner test, i.e., the application of the law to the facts under the somewhat punitive standard that has evolved since 1987. Certainly there will be cases where the facts show rather obviously that a debtor will or will not be able to discharge student loans. However, for cases which fall in the middle of the factual spectrum, a statutory application of Brunner instead of the punitive viewpoint requiring a debtor to demonstrate a “certainty of hopelessness” can provide justified debt relief to individuals under Section 523(a)(8). Accordingly, at least one bankruptcy court has now recognized the need to apply the Brunner test rather than allowing judicial gloss to supersede the statue itself.

These materials were prepared by Dennis D. Miller of Lubin Olson & Niewiadomski LLP; dmiller@lubinolson.com, with editorial contributions from Magdalena Reyes Bordeaux, Public Counsel, Supervising Senior Staff Attorney; mbordeaux@publiccounsel.org.

---

[i] Lombardo, Chelsea, “’Super debt’: Expert explains why student loans are particularly brutal,” Yahoo Money, available at: https://money.yahoo.com/student-debt-mortgage-debt-190200740.html.

[ii] “Students & Debt,” Debt.org, available at: www.debt.org/students/.

[iii] “Trends In College Pricing 2019,” CollegeBoard, available at:  https://research.collegeboard.org/pdf/trends-college-pricing-2019-full-report.pdf.

[iv] “Nominal Tuition Averages,” Law School Transparency, available at: https://data.lawschooltransparency.com/costs/tuition/?scope=national (last visited on January 10, 2020). 

[v] Friedman, Zack, “Here’s What 2020 Presidential Candidates Think About Your Student Loans,” Forbes, January 6, 2020, available at: https://www.forbes.com/sites/zackfriedman/2020/01/06/student-loans-2020-presidential-candidates/#373033c82ee3.