By: Michael L. Moskowitz and Melissa A. Guseynov

We have previously reported on the judicial treatment of student loan dischargeability in bankruptcy. To this end, we have analyzed how federal courts have interpreted section 523(a)(8) of the Bankruptcy Code, which prohibits bankruptcy courts from discharging most student loan debt “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8). In a recent decision from the Southern District of New York Bankruptcy Court, Chief Judge Cecilia Morris analyzed the treatment of student loan debt in bankruptcy under the “undue hardship” exception of section 523(a)(8) of the Bankruptcy Code. Chief Judge Morris determined that, based on the Brunner test, a debtor with a gross annual income of $37,500 could discharge over $220,000 of student loan debt. In re Rosenberg, Case No. 18-09023 (Bankr. S.D.N.Y. Jan. 7, 2020). Read the full opinion here.  

Section 523(a)(8) of the Bankruptcy Code prohibits a bankruptcy court from discharging student loan indebtedness “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8). In the seminal Brunner v. New York Higher Education Services, Corp. decision, the Second Circuit gutted the undue hardship exception by requiring a three-part showing that: (i) debtor cannot maintain, based upon current income and expenses, a minimal standard of living if forced to repay the loans; (ii) additional circumstances exist indicating debtor’s affairs are likely to persist for a significant portion of the loan repayment term; and (iii) debtor has made good faith efforts to repay the loans. Brunner, 831 F.2d 395 (2d Cir. 1987).

After more than 30 years, several courts have questioned the viability of strictly interpreting Brunner and have concluded that some student loan indebtedness may in fact be dischargeable. In Rosenberg, the debtor, a law school graduate, commenced an adversary proceeding against his student loan lender and subsequently sought summary judgment to declare this debt dischargeable pursuant to section 528 of the Bankruptcy Code. In granting summary judgment in favor of debtor, Judge Morris noted that the “harsh results” connected with Brunner are due to other courts’ incorrect interpretations of the case, which render it effectively impossible for most debtors to discharge student loans.  

In analyzing the first prong of the Brunner test, the Court concluded that because Debtor reported a negative monthly income on his schedules, he simply did not have the ability to repay substantial student loan debt while also maintaining a “minimal” standard of living.  Next, the Court considered whether “additional” circumstances existed indicating debtor’s state of affairs was likely to persist for a significant portion of the repayment period. However, in this case, since the lender had accelerated the entire debt before the debtor filed for bankruptcy, the repayment period had ended. Judge Morris noted debtor’s circumstances “will certainly exist for the remainder of the repayment period as the repayment period has ended and the loan is due and payable in the full amount.” As a result, the second prong of the Brunner test was also satisfied. Lastly, the Court determined debtor made good faith efforts to repay his student loan debt, based upon numerous pre-petition payments made in various amounts, based upon debtor’s financial ability.

This case demonstrates the tide may be turning with respect to judicial treatment of the dischargeability of student loans in bankruptcy. Given the current Covid-19 pandemic and resultant financial hardship, allowing relief to those deserving individuals through bankruptcy by flexibly construing “undue hardship” may be both appropriate and necessary.

However, it is not surprising to learn that defendant filed a timely motion for leave to appeal. This motion was granted by Judge Morris on January 24, 2020. If defendant’s appeal is denied, we fully expect defendant to appeal this decision to the Second Circuit. In such event, the court will have the opportunity to review its Brunner decision, thirty-three years later.

Weltman & Moskowitz will continue to follow and report on the Rosenberg appeal and related cases. We will keep clients and colleagues informed of the developing impact to lenders and borrowers.  Please feel free to call Weltman & Moskowitz with any bankruptcy questions or challenges you, your colleagues, or clients, may have.

About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201) 794-7500 or mlm@weltmosk.com. Melissa Guseynov is an associate of the firm. Melissa can be reached at mag@weltmosk.com.