On January 7, 2020, Chief United States Bankruptcy Judge Cecilia G. Morris of the United States Bankruptcy Court for the Southern District of New York issued a notable opinion in the case of Rosenberg v. N.Y. State Higher Education Services Corp., granting summary judgment in favor of a U.S. Navy veteran who was seeking to discharge $221,385.49 in federal student loan debt.

The debtor first borrowed money to fund his undergraduate studies at the University of Arizona between 1993 and 1996, where he obtained a Bachelor of Arts degree in History. After serving five years in the Navy, he attended Cardozo Law School at Yeshiva University, borrowing additional sums for the cost of that tuition between 2001 and 2004. After graduating from law school, he consolidated his student loan debt on April 22, 2005 in the principal amount of $116,464.75.

The loan was then in deferment or forbearance for 10 years. In April 2015, the loan went into an income-based repayment plan for one year, over which time the debtor made six payments. The loan went into forbearance again for six months in 2016, and the debtor made three payments of varying amounts, although none were due. The loan went into a standard repayment plan in October 2016, and the debtor made one more payment in 2017. In January 2018, the loan entered default and was accelerated. In total, the debtor made 10 payments and missed 16 over the 26 months that he was responsible for making payments. As of November 19, 2019, when the debtor filed for bankruptcy, with accrued interest and penalties, the total balance of the student loan had grown to $221,385.49.

Section 523(a)(8) of the United States Bankruptcy Code provides that student loan debt will not be discharged in bankruptcy, “unless excepting such debt from discharge . . would impose an undue hardship on the debtor.” When this standard was created in 1976, student loans were dischargeable five years after the loan went into repayment, if this “undue hardship” was shown. Courts interpreted “undue hardship,” to create a high burden for debtors, with many courts interpreting this language to require a “certainty of hopelessness.” Today, student loan debt is not dischargeable at any time, unless the debtor can demonstrate this “undue hardship,” and some courts have criticized bankruptcy petitions seeking to discharge student loan debt as having been filed in “bad faith.” As a result, most laypersons and bankruptcy professionals alike have concluded that it is extremely difficult, if not virtually impossible, to discharge student loan debt. Judge Morris’ opinion in Rosenberg calls that conclusion into question.

Judge Morris began her legal analysis with the three-part test set forth by the Second Circuit in its 1987 decision in Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner):

  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.

Judge Morris then examined the line of cases applying Brunner. Referring specifically to the “certainty of hopelessness” phrase that is often repeated in the case law, she concluded that these cases have “pinned on Brunner punitive standards that are not contained therein,” and “subsumed the actual language of the Brunner test.” Judge Morris went on to state that the court would “not participate in perpetuating these myths,” but would instead “apply the Brunner test as it was originally intended.”

Analyzing the test’s first prong, Judge Morris compared the debtor’s scheduled income and expenses, which demonstrated a negative monthly income of $1,548.74, against the amount due on the loan of $221,385.49. Based on this undisputed evidence, she concluded that the debtor had satisfied the first prong because he had no money available to repay the loan and maintain a minimal standard of living. Although there was evidence that the debtor could have become eligible for a repayment plan if he first rehabilitated the loan, Judge Morris declined to analyze whether the debtor could maintain a minimal standard of living while rehabilitating the loan. Because the debtor was not currently in a repayment plan or eligible for one, she concluded that question was “appropriately reserved for a case in which it is not a hypothetical.”

Judge Morris then found that the second prong of the test was satisfied because the loan was due and payable in full, and the repayment period was over. She observed that the court was not required to determine whether the debtor’s state of affairs would persist forever or whether the circumstances were created by the debtor’s choice, but only needed to consider whether the present state of affairs was likely to persist for a significant portion of the repayment period. Finding that the debtor’s “circumstances will certainly exist for the remainder of the repayment period as the repayment period has ended,” Judge Morris concluded that the second prong was satisfied.

Analyzing the third prong, Judge Morris only considered the debtor’s pre-petition behavior in determining whether he had made good faith efforts to repay the loan. She stated that it was inappropriate to consider the debtor’s reasons for filing bankruptcy, how much debt he had, or whether he had rejected repayment options. She noted that the loan history demonstrated an approximate 40% rate of payment over a 13-year period, and that the debtor had called the loan servicer on at least five separate occasions to request forbearance . Based on those facts, Judge Morris found that the debtor had demonstrated a good faith effort to repay the loan.

This opinion may mark the beginning of a significant shift in the interpretation of Section 523(a)(8) and the dischargeability of student loan debt. We will monitor this case for any appeal and watch how other courts treat this opinion.