Consumer Finance Insights
March 3, 2020

Student Loan Servicer Appeals Bankruptcy Court’s Decision to Discharge Student Loan Debt

On January 17, student loan servicer Educational Credit Management Corporation (ECMC) filed a notice of appeal in the United States District Court for the Southern District of New York, challenging the decision of Chief Bankruptcy Judge Celelia Morris, which granted summary judgment for a student loan debtor and discharged his student loan debt of $221,385.49.  Rosenberg v. N.Y. State Higher Education Services Corp., et al., Case No. 18-35379 (Bankr. S.D.N.Y. January 7, 2020).

In order to discharge student-loan debt, the Brunner test requires the debtor to demonstrate that (1) he cannot maintain a minimal standard of living if forced to repay the loans, (2) his circumstances are likely to persist for a significant portion of the repayment period, and (3) he made good faith efforts to repay the student loans.  In granting summary judgment, Judge Morris found that the debtor had sufficiently satisfied each of the three prongs of the Brunner test.  The court also found that the debtor had satisfied the “undue hardship” standard of the Bankruptcy Code, which requires the court to except student loan debt from discharge unless it would impose an “undue hardship” on the debtor.  This decision challenges the notion that student loan debt is generally not dischargeable under Chapter 7 bankruptcy.  Judge Morris notes this assumption, stating “most people (bankruptcy professionals as well as lay individuals) believe it is impossible to discharge student loans.”  In addressing this assumption, Judge Morris stated that many courts had misinterpreted the Brunner test over the past 32 years by adding a “punitive standard that [is] not contained therein,” which, when applied, “subsumed the actual language of the [test].”

In its appeal, ECMC contends that the Bankruptcy Court has “rejected 32 years of case law.”  ECMC argues that the debtor did not satisfy the Brunner test as he failed to pursue career opportunities available to him in the legal profession in order to repay the loans.  It also argues that the “[i]nability to pay one’s debts by itself cannot be sufficient to establish an undue hardship.”

If affirmed, this case is likely to have a significant impact on student loan servicers as more debtors may seek to discharge their student loan debt.