This veteran thought he got $221,000 of student loan forgiveness, but then this happened. Here’s what you need to know.
Student Loans: Bankruptcy
A Navy veteran was granted $221,000 of of student loan forgiveness, which is also known as student loan discharge. U.S. bankruptcy judge in New York, Cecilia G. Morris, ruled that Kevin J. Rosenberg will not have to repay his student loan debt because it will impose an undue financial hardship.
However, in a relatively rare move in bankruptcy cases, his student loan servicer, Education Credit Management Corporation (ECMC), is now appealing the ruling.
“Instead of pursuing those opportunities available to him, and paying back his taxpayer-backed federal student loans, Plaintiff, for the past 10 years, has held various positions in the outdoor adventure industry, including starting up and running his own tour guide business,” ECMC wrote in filings.
ECMC claims that Rosenberg, who has a law degree from Cordozo Law School at Yeshiva University, could have earned more income working as an attorney. Rosenberg borrowed $116,500 of student loans between 1993 and 2004. He filed for Chapter 7 bankruptcy in 2018 and asked the court last June to discharge his student loan debt, which had grown to $221,400, including interest. At the time of filing, Rosenberg’s annual salary was $37,600, and after living and debt expenses, his monthly net loss was $1,500.
Traditionally, unlike mortgages or credit card debt, student loans cannot be discharged in bankruptcy. There are exceptions, however, namely if certain conditions regarding financial hardship are met.
The Brunner Test: Financial Hardship
Those conditions are reflected in the Brunner test, which is the legal test in all circuit courts, except the 8th circuit and 1st circuit. The 8th circuit uses a totality of circumstances, which is similar to Brunner, while the 1st circuit has yet to declare a standard.
In plain English, the Brunner standard says:
- the borrower has extenuating circumstances creating a hardship;
- those circumstances are likely to continue for a term of the loan; and
- the borrower has made good faith attempts to repay the loan. (The borrower does not actually have to make payments, but merely attempt to make payments – such as try to find a workable payment plan.)
“Inability to pay one’s debts by itself cannot be sufficient to establish an undue hardship; otherwise all bankruptcy litigants would have an undue hardship,” ECMC argued.
What Else Can You Do If You’re Struggling To Make Student Loan Payments?
Here are some potential action steps:
1. Income-Driven Repayment: For federal student loans, consider an income-driven repayment plan such as IBR, PAYE or REPAYE. Your payment is based on your discretionary income, family size and other factors, and you can receive federal student loan forgiveness on the remaining balance after 20 or 25 years of payments. However, you will owe income taxes on the amount of student loans forgiven.
2. Pay Off Other Debt: Pay off credit card debt first. Credit card debt typically has a higher interest rate than student loans. You may qualify for a personal loan at a lower interest rate, which can be used to pay off credit card debt, save you money in interest costs and potentially improve your credit score.
3. Contact your lender: If you’re facing financial struggle, don’t keep it a secret from your lender. Contact your lender to discuss alternative payment options.
4. Refinance student loans: Student loan refinancing rates are incredibly cheap right now and start at 1.99%. Student loan refinancing is the fastest way to pay off student loan debt. To qualify, you’ll need a credit score of at least 650 and enough monthly income for living expenses and debt repayment. If you meet those requirements, you may be a good candidate for student loan refinancing. If you don’t, you can also apply with a cosigner to help you get approved and get a lower interest rate.
This student loan refinancing calculator shows how much you can save with student loan refinancing.
Zack Friedman is the bestselling author of the blockbuster book, The Lemonade Life: How To Fuel Success, Create Happiness, and Conquer Anything. Apple named The Lemonade Life one of “Fall’s Biggest Audiobooks” and a “Must-Listen.” Zack is the Founder & CEO of Make Lemonade, a leading online personal finance company that empowers you to live a better financial life. He is an in-demand speaker and has inspired millions through his powerful insights. Previously, he was chief financial officer of an international energy company, a hedge fund investor, and worked at Blackstone, Morgan Stanley, and the White House. Zack holds degrees from Harvard, Wharton, Columbia, and Johns Hopkins.