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Challenging Bankruptcy ‘Myths’, Judge Clears $ 220,000 Student Loan Debt

Bankruptcy judge excused US Navy veteran with law degree from paying off over $ 220,000 in student loan debt, latest court ruling aimed at lowering barriers to debt service school.

Judge Cecelia G. Morris of the United States Bankruptcy Court in Poughkeepsie, NY, discharged the law school graduate’s unpaid student loans even though he is not disabled or unfit for work, saying the settlement fullness of his law school debt would impose undue hardship.

In her ruling, Justice Morris said most bankruptcy professionals and lay people “find it impossible to pay off student loans.” She said she would not perpetuate these “myths” and would apply a legal test developed in 1987 “as originally intended”.

The standard, known as the Brunner test, requires borrowers seeking student debt relief to demonstrate that they cannot maintain a minimum standard of living, that their situation is likely to last a long time, and that they made good faith efforts to repay.

The judge’s decision comes as some judges, experts and politicians reassess legal obstacles prevent financially troubled borrowers from using bankruptcy to eliminate student loan debt.

With few borrowers eligible for relief, student loan cancellations remain rare, but some bankruptcy judges are become more sympathetic. More bankruptcy lawyers are asking student loan borrowers to initiate adversarial proceedings to try to settle their student loans in bankruptcy, said Jason Iuliano, professor of bankruptcy law at Villanova University .

Of about 250,000 student loan borrowers who file for bankruptcy each year, only about 400 take legal action to seek release, according to his academic research.

“There are so many people who go bankrupt every year and have student loan debt,” Iuliano said. “But they don’t even take the necessary steps to even seek discharge because their lawyer is sort of under the spell of this myth that student loan debt cannot be discharged in bankruptcy.”

Tuesday’s decision ruled in favor of Kevin J. Rosenberg, 46, of Beacon, NY, who filed for Chapter 7 bankruptcy in 2018 and in June asked to write off his student loan debt with Educational Credit Management Corp . Between 1993 and 2004, he borrowed about $ 116,500, which had inflated interest to a total outstanding balance of nearly $ 221,400, according to the ruling.

Mr. Rosenberg used the loans to earn a history degree from the University of Arizona and a law degree from Cardozo Law School at Yeshiva University. At the time of his bankruptcy filing, he had an income of about $ 37,600 per year and negative income of about $ 1,500 per month after expenses.

He worked for a short time in a law firm and as a part-time contract lawyer. For the past 10 years, he has worked in the outdoor adventure industry, most notably as the owner of an adventure tour guide business, according to court documents.

Mr Rosenberg, who represented himself in his bankruptcy case, said the ruling “leaves me with a sense of relief, not celebration.”

“I’m grateful that I can recover from a crushing financial blow and have a chance to stand up, dust myself off and carry on,” he told WSJ Pro Bankruptcy.

The ECMC argued in court documents that Mr. Rosenberg did not meet the undue hardship standard because his financial situation was on his own initiative and he was not using the legal training his loans were paid for. .

“We are determining what our next steps are,” said a spokesperson for ECMC, a nonprofit that helps the US Department of Education administer federal loans for family education supported by the federal government. .

“This opinion is a breath of fresh air because it removes the chatter about the original legal standard and gets back to basics,” said Melissa B. Jacoby, professor of law at the University of North Carolina at Chapel Hill.

The way Justice Morris applied the legal standard is how the student loan discharge is supposed to work, said Professor Robert M. Lawless of the University of Illinois College of Law.

“A bankruptcy judge’s decision is not a precedent, but it is certainly part of a trend to think about how to apply the undue hardship standard,” said Lawless, who Served on the American Bankruptcy Institute Commission on Consumer Bankruptcy.

The difficulty of wiping out student loans in bankruptcy emerged in Democratic presidential politics. Democratic presidential candidate Senator Elizabeth Warren on Tuesday proposed a major overhaul the consumer bankruptcy system, including ending the rules on obtaining student loan bankruptcy relief.

“The tide is turning against the idea that student loans should not be dischargeable in bankruptcy,” said Rosenberg. “This creation of the banking industry has hurt many hard-working Americans who are just unlucky and looking for a second chance.”

Corrections and amplifications
Senator Elizabeth Warren is a Democratic presidential candidate. An earlier version of this article incorrectly stated that she was a Democratic presidential candidate.

Write to Aisha Al-Muslim at aisha.al-muslim@wsj.com

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