Bankruptcy Law

Federal judge tosses decision erasing law grad's student debt, says issues should be decided at trial

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Updated: A New York federal judge has overturned a decision to discharge a law grad’s student debt, citing a “constellation of evidence” that the debtor “placed himself in this predicament" after abandoning a legal career.

U.S. District Judge Philip M. Halpern of the Southern District of New York said a bankruptcy judge should not have granted summary judgment to Kevin Jared Rosenberg because he has not yet submitted sufficient evidence that repaying the loan would constitute an undue hardship.

Halpern said in his Sept. 29 decision that he was expressing no opinion on whether the student loan at issue—which had grown to a debt of more than $220,000—may be discharged in bankruptcy.

“Either party may prevail at a trial on the facts; but that is an issue for the bankruptcy court,” Halpern said.

A bankruptcy judge had ruled in January 2020 that Rosenberg could discharge his law student debt in what was deemed a “stunning” decision at the time. Student debt can’t be discharged absent an undue hardship as defined by a three-part test that is difficult to satisfy.

In August, the ABA House of Delegates urged Congress to amend the bankruptcy code to allow borrowers to discharge student loans without proving repayment imposes an undue hardship.

Halpern said Rosenberg had not submitted enough evidence to satisfy the three-part test, known as the Brunner test because of a 1987 appellate decision that established it.

The Brunner test considers whether the debtor can maintain a minimal standard of living if forced to repay the loans, whether an inability to maintain the minimal standard is likely to persist for a significant portion of the repayment period, and whether the debtor had made a good faith effort to repay the loans.

Halpern noted allegations that Rosenberg’s inability to repay his student loan was “a monster of his own making,” as asserted by the Educational Credit Management Corp., which holds the interest in the debt.

Rosenberg served in the Navy for about five years and graduated from Yeshiva University’s Benjamin N. Cardozo School of Law in 2004. After passing the bar, he worked for less than three months as an associate at a New Jersey law firm making an annual salary between $55,000 and $60,000.

Rosenberg testified that he was miserable in the job, and he got fired after a partner discovered that he intended to leave. He did some contract legal work on a sporadic basis, but now his law license is in “retired status.”

When contract legal work dried up during the financial downturn in 2008, according to the decision, Rosenberg started an outdoor recreation company, sold it and then started a similar company. The newer company, International Adventure Guides, offers outdoor guided tours.

Before starting the new company, Rosenberg moved out of his Brooklyn, New York, studio apartment and leased a house in Beacon, New York. The Beacon lease was $2,150 per month, a $700 increase from his rent in Brooklyn.

Rosenberg defaulted on the student debt after periods of deferment or forbearance. He had paid less than $3,000 of the debt.

In support of his motion for summary judgment, Rosenberg submitted a vocational evaluation report that said he could work as a legal assistant or a paralegal, at an annual salary of $42,000 to $120,000; as a retail store manager, at an annual salary of $45,000 to $100,000; and in other customer service or sales roles at an annual salary of $36,000 to $50,000.

There is also evidence that Rosenberg had injuries and underwent surgery “that may or may not have impacted his ability to work,” Halpern said.

Halpern said Rosenberg had not presented any admissible evidence establishing the severity of his injuries and the impact on his ability to work.

Halpern also noted that Rosenberg was earning about $1,500 less than needed to meet his current expenses of about $4,000 per month, which include rent of $2,150 per month.

Rosenberg “offers no substantive explanation as to why his expenses are necessary to maintain a minimal standard of living and points to no admissible evidence supporting his conclusory argument that they are, indeed, necessary,” Halpern said.

Nor is it clear whether Rosenberg made a good faith effort to repay the loan, Halpern said.

He “presumably made enough money to move out of New York City and rent a two-bedroom house—and ultimately made less than $3,000 in payments on a debt that ballooned from an initial balance of $116,465 to over $220,000,” Halpern said.

“These considerations are compounded by plaintiff’s apparent decision to abandon his career in law (i.e., he field for which he assumed the debt in the first place), his admission that he filed the Chapter 7 proceeding with the purpose of discharging the presumptively nondischargable student loan, and his representation that he has no interest in rehabilitating the debt through a repayment program. … This constellation of evidence certainly suggests a lack of good faith and that plaintiff has, indeed, placed himself in this predicament,” Halpern said.

Rosenberg gave this statement to the ABA Journal: “This decision is a temporary setback in the fight against an unfair system that is used to always winning and was stung by my David v. Goliath victory. The district court decision didn’t really decide anything and merely put us back to where we were in January 2020. [The bankruptcy judge] was clear in her decision then and applied the Brunner standard as it was meant to be applied. Though it may be a long road with many battles to fight, I’m confident in our ultimate victory, and I hope my case inspires others suffering under a heavy-handed, one-sided system to fight back and file their own adversary proceedings.

“I’d add that the judge actually introduced new arguments that were never put forth by ECMC, so he essentially acted as both a judge and a litigant at the same time. Based on his background and who he was appointed by, we expected this decision, and I feel as if the real first level of appellate review won’t happen until the case reaches the 2nd Circuit. Appealing to the district court, rather than a bankruptcy appeals panel, was really just a PR move by ECMC, since they knew it would give them a temporary victory.”

Hat tip to Bloomberg Law.

Updated Oct. 6 at 11:45 a.m. to include Rosenberg’s statement. Updated Oct. 8 to include ABA position on undue hardship.

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