Friday, January 10, 2020

UPENDING BANKRUPTCY MYTHS - JUDGE ERASES $220,00 IN STUDENT LOAN DEBT

Upending Bankruptcy ‘Myths,’ Judge Erases $220,000 Student Loan Debt

The borrower-friendly ruling comes as bankruptcy judges across the country are growing more sympathetic to discharging student debt

A bankruptcy judge excused a U.S. Navy veteran with a law degree from repaying more than $220,000 in student loan debt. PHOTO: SACHELLE BABBAR/ZUMA PRESS
  • SAVE
  • PRINT
  • TEXT
A bankruptcy judge excused a U.S. Navy veteran with a law degree from repaying more than $220,000 in student loan debt, the latest court ruling to lower the barriers to discharging educational debt.
Judge Cecelia G. Morris of the U.S. Bankruptcy Court in Poughkeepsie, N.Y., discharged the law school graduate’s unpaid student loans even though he isn’t disabled or unemployable, saying that satisfying his law school debt in full would impose an undue hardship.
In her ruling, Judge Morris said most bankruptcy professionals and laypeople “believe it impossible to discharge student loans.” She said she would not perpetuate those “myths” and would apply a legal test developed in 1987 “as it was originally intended.”
The standard, known as the Brunner test, requires borrowers seeking bankruptcy relief from their student debt to show they cannot maintain a minimal standard of living, their circumstances are likely to continue for a significant period and they have made good-faith efforts at repayment.
The judge’s ruling comes as some judges, experts and politicians re-evaluate the legal hurdles preventing borrowers in difficult financial straits from using bankruptcy to eliminate student loan debt.
With few borrowers qualifying for relief, student loan cancellations remain rare, but some bankruptcy judges are becoming more sympathetic. More bankruptcy attorneys are directing student loan borrowers to seek adversary proceedings to try to discharge their student loans in bankruptcy, said Jason Iuliano, a bankruptcy law professor at Villanova University.
Out of about 250,000 student loan borrowers who file for bankruptcy every year, only about 400 sue to make a discharge request, according to his academic research.
“There’s so many people who file bankruptcy each year and have student loan debt,” Mr. Iuliano said. “But they don’t take the steps to even request the discharge because their attorney is sort of under the spell of this myth that’s out there that student loan debt can’t be discharged in bankruptcy.”
Tuesday’s decision sided with Kevin J. Rosenberg, 46, of Beacon, N.Y., who filed for chapter 7 bankruptcy in 2018 and asked in June to wipe out his student loan debt with Educational Credit Management Corp. Between 1993 and 2004, he borrowed about $116,500, which had ballooned with interest to a total outstanding balance of nearly $221,400, according to the decision.
Mr. Rosenberg used the loans to earn a history degree at 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 a year and negative income of about $1,500 each month after expenses.
He worked for a short time at a law firm and as a part-time contract attorney. In the past 10 years, he has worked in the outdoor adventure industry, including owning an adventure tour guide business, according to court papers.
Mr. Rosenberg, who represented himself in his bankruptcy case, said the ruling “leaves me with a feeling of relief, not celebration.”
“I’m thankful that I get to recover from a crushing financial blow and have a chance to get up, dust myself off, and keep going,” he told WSJ Pro Bankruptcy.
ECMC argued in court papers that Mr. Rosenberg didn’t meet the undue hardship standard because his financial circumstances were of his own making and he wasn’t using the legal education his loans paid for.
“We are determining what our next steps are,” said a spokeswoman for ECMC, a nonprofit company that helps the U.S. Department of Education administer federally backed Federal Family Education Loans.
“This opinion is a breath of fresh air because it strips away the chatter about the original legal standard and gets back to the basics,” said Melissa B. Jacoby, law professor at the University of North Carolina at Chapel Hill.
The way Judge Morris applied the legal standard is how student-loan discharge is supposed to work, said professor Robert M. Lawless of the University of Illinois’s College of Law.
“One bankruptcy judge’s decision isn’t precedential but it does certainly fit in a trend of thinking how to apply the undue hardship standard,” said Mr. Lawless, who served on the American Bankruptcy Institute’s commission on consumer bankruptcy.
The difficulty of erasing student loans in bankruptcy has cropped up in Democratic presidential politics. On Tuesday, Democratic presidential candidate Sen. Elizabeth Warren proposed a sweeping overhaul to the consumer bankruptcy system, including ending the rules on obtaining bankruptcy relief from student loans.
“The tide is turning against the idea that student loans should not be dischargeable in bankruptcy,” Mr. Rosenberg said. “This creation of the banking industry has done harm to many hard-working Americans that are simply down on their luck and looking for a second chance.”
Corrections & Amplifications
Sen. Elizabeth Warren is a Democratic presidential candidate. An earlier version of this article incorrectly stated she is a Democratic presidential nominee.

No comments: