A U.S. bankruptcy judge in New York ruled that a Navy veteran does not have to repay nearly a quarter of a million dollars in student loans due to the debt creating an undue financial hardship.

Judge Cecilia Morris’s ruling stunned many observers as student loan debt has traditionally been much more difficult to discharge in bankruptcy proceedings compared to credit card and mortgage debt.

Ruling dismisses loan debt dating back to 1993

Kevin Rosenberg filed for Chapter 7 bankruptcy in 2018, asking the court to discharge his student loan debt. The Wall Street Journal says Rosenberg borrowed $116,500 between 1993 and 2004 to earn his bachelor’s and law degrees.

By the time he filed, Rosenberg’s debt grew to $221,400. He now owns an adventure tour guide business and reports an annual income of $37,600. After subtracting living and debt expenses, he has a monthly net loss of $1,500.

Judge applies the Brunner Test

Courts have rarely discharged student loan debt since bankruptcy laws were changed in 1976. There are exceptions if certain conditions are met. Most courts recognize these conditions under the Brunner Test, which states student loans can be dismissed if:

  • Extenuating circumstances create a hardship for the borrower
  • Those circumstances are likely to continue for the duration of the loan
  • The borrower has already made good faith efforts to repay the loan

Will the ruling encourage others to file for bankruptcy?

Nearly 43 million Americans currently have outstanding student loan debt – that’s one out of every six people over age 18. Current estimates put the total debt at $1.5 trillion in federal loans and $119 billion in loans from private lending institutions.

While Morris’s ruling applies only to this case, some experts say it will encourage others to seek relief. If you are struggling with massive student loan debt, an experienced bankruptcy attorney here in Pennsylvania can answer your questions to find the best options for your situation.