Another Update on Discharge of Student Loans – The Challenge of Obtaining a Discharge

I wrote in 2020 about a bankruptcy case, In Re Rosenberg, where the court discharged $221,000 in student loans that were accumulated by a law school graduate. At the time, I had substantial doubts that the decision would be upheld on the inevitable appeal.

As I anticipated, the bankruptcy court’s decision was reversed by the district court.

U.S. District Judge Philip M. Halpern of the Southern District of New York said that the bankruptcy court should not have granted summary judgment to the debtor because he has not yet submitted sufficient evidence that repaying the loan would constitute an undue hardship.

Halpern said in his decision that he was expressing no opinion on whether the student loan at issue, totaling approximately $221,000, is dischargeable in bankruptcy. Halpern said that during the prior proceedings Rosenberg had not submitted enough evidence to satisfy the three-part test, known as the Brunner test.

The Brunner test goes through a three step analysis: (1) whether the debtor can maintain a minimal standard of living if forced to repay the loans; (2) whether an inability to maintain the minimal standard is likely to persist for a significant portion of the repayment period; and (3)whether the debtor had made a good faith effort to repay the loans.

Judge Halpern considered creditor’s allegations that Rosenberg’s inability to repay his student loan was “a monster of his own making,” as alleged by the Educational Credit Management Corp., which holds the debtor’s student loans.

While Rosenberg had obtained a law degree, he worked as an attorney only minimally, getting fired after a few months. He did some contract legal work on a sporadic basis, subsequently placing his law license in “retired status.”

When contract legal work ended in 2008, Rosenberg started an outdoor recreation company, sold it and then started a similar company. The new company offers outdoor guided tours.

Before starting the new company, Rosenberg moved out of his Brooklyn, New York, studio apartment and leased a house in Beacon, New York. The Beacon lease was $2,150 per month, a $700 increase from his rent in Brooklyn.

Rosenberg defaulted on the student debt after periods of deferment and forbearance. He had repaid less than $3,000 of the debt.

In support of his motion for summary judgment, Rosenberg submitted a vocational evaluation report that said he could work as a legal assistant or a paralegal, at an annual salary of $42,000 to $120,000; as a retail store manager, at an annual salary of $45,000 to $100,000; and in other customer service or sales roles at an annual salary of $36,000 to $50,000. He has also claimed that he had physical limitations as a result of prior injuries.

Judge Halpern said Rosenberg had not presented any admissible evidence establishing the severity of his injuries and the impact on his ability to work. He also noted that Rosenberg was earning about $1,500 less than needed to meet his current expenses of about $4,000 per month, which include rent of $2,150 per month.

Rosenberg “offers no substantive explanation as to why his expenses are necessary to maintain a minimal standard of living and points to no admissible evidence supporting his conclusory argument that they are, indeed, necessary,” Halpern said.

Nor was it clear whether Rosenberg made a good faith effort to repay the loan. According to the court, the debtor “presumably made enough money to move out of New York City and rent a two-bedroom house—and ultimately made less than $3,000 in payments on a debt that ballooned from an initial balance of $116,465 to over $220,000.”

According to the decision, “[t]hese considerations are compounded by plaintiff’s apparent decision to abandon his career in law (i.e., he field for which he assumed the debt in the first place), his admission that he filed the Chapter 7 proceeding with the purpose of discharging the presumptively nondischargable student loan, and his representation that he has no interest in rehabilitating the debt through a repayment program. … This constellation of evidence certainly suggests a lack of good faith and that plaintiff has, indeed, placed himself in this predicament”.

Given that the district court remanded the case back to the bankruptcy court, it is likely that it will be tried at some point in the future.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Henrietta, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.