Rosenberg v. ECMC: A NY bankruptcy judge cuts through the crap and discharges $221,000 in student-loan debt

Less than a week ago, Bankruptcy Judge Cecelia G. Morris cut through the crap and granted a student-loan discharge to Kevin Rosenberg, a Yeshiva University law graduate. Judge Morris's opinion was so compassionate and surprising that the lyrics of a traditional Christmas carol come to mind: "A thrill of hope, the weary world rejoices, for yonder breaks a new and glorious morn."

Judge Morris's decision may be appealed. If so, and her ruling is affirmed by the Second Circuit Court of Appeals, it will have enormous implications for millions of student loan debtors.

As even the nation's politicians now realize, the federal student-loan program has run amok like a crazed bull in Pamplona. Millions of distressed but honest student debtors need bankruptcy relief from crushing student debt, which now totals $1.6 trillion.

Unfortunately, many bankruptcy judges have denied student-loan debt relief even under the most heartwrenching circumstances. In most cases, these harsh judges have relied on the famous Brunner test to plunge the knife into the hearts of desperate student-loan borrowers.

The Brunner test, first articulated by the Second Circuit Court of Appeals in 1987, requires the debtor to show three things to discharge student-loan debt: 1) The Debtor cannot pay off the loan and maintain a minimal standard of living, 2) The debtor's precarious financial circumstances are likely to persist over the term of the repayment period, and 3) The debtor made good faith efforts to repay the student loans.

Educational Credit Management Corporation (ECMC), the Department of Education's designated assassin in the bankruptcy courts, almost always takes the position that the debtor cannot meet even one of the Brunner test's three prongs. The debtor is often forced to defend against ECMC's tactics without a lawyer; standing like Christ before Pontius Pilate--depicted by ECMC almost like a common criminal who deserves a public flogging.

Again and again, ECMC has argued to the courts that a debtor is unworthy of bankruptcy relief because the debtor lived above a minimal lifestyle. Maybe a debtor eats at fast-food restaurants a few times a month--what a spendthrift! Maybe the debtor has a pet-- an outrageous extravagance! Maybe the debtor rents an apartment with an extra bedroom or makes modest deposits into a retirement account--how recklessly irresponsible!

A summary of Judge Morris' opinion

And then--just a few days ago--a remarkable thing happened: Judge Morris cut through ECMC's crap and applied the Brunner test the way it was originally meant to be applied.  Applying a correct and well-reasoned interpretation of Brunner, she concluded that Kevin Rosenberg was entitled to relief from his student debt--about $221,000.

Here is a summary of Judge Morris's reasoning.

First, to determine whether Rosenberg can maintain a minimal standard of living if forced to repay his student loans, Judge Morris simply looked at the schedule of income and obligations that Rosenberg filed when he applied for bankruptcy. That schedule attested that Rosenberg's net monthly income was $2,456 and his expenses amounted to $4,005. Clearly, Rosenberg met the first prong of the Brunner test.

Second, the judge applied the Brunner test's second prong, which asks whether Rosenberg's financial circumstances were likely to persist over the "repayment period" of the student loans. Judge Morris pointed out that Rosenberg's repayment period had ended after his creditor accelerated his loan and demanded payment in full. Thus, it was evident that Rosenberg passed the second prong of the Brunner test.

Finally, Judge Morris ruled that Roseberg met Brunner's third prong; he had made good faith efforts to repay his student loans. According to the Judge's analysis, Rosenberg had only missed six payments over a 13-year period.  Indeed, for 10 of those 13 years, his loan was in forbearance or deferment and he wasn't required to make any payments.

Judge Morris ruled in favor of Mr. Rosenberg by interpreting the Brunner test as it was originally meant to be interpreted. Brunner, she noted, dealt with a debtor who filed for bankruptcy only a few months after graduating from college. Over the years, however, courts have incorrectly applied punitive standards to Brunner, making it almost impossible for worthy student-loan borrowers to obtain bankruptcy discharges.

"This Court will not participate in perpetuating these myths," Juge Morris wrote. She then applied Brunner to Mr. Rosenberg's situation as she believed the Second Circuit meant for the test to be applied.

What does the Rosenberg decision mean for 45 million student-loan debtors?

As I stated above, if Judge Morris's Rosenberg opinion is appealed and upheld by the Second Circuit, the implications are enormous.  A majority of federal circuits rely on the Brunner test to determine whether a debtor's student loans constitute an undue hardship and are dischargeable. Most federal courts have misinterpreted Brunner so harshly that many legal commentators maintain that student loans are never dischargeable in bankruptcy.

If the Second Circuit endorses Judge Morris's opinion, then bankruptcy courts across the country that have relied on Brunner for the past three decades will feel pressure to abandon their misinterpretation of Brunner in order to harmonize with Judge Morris' ruling.  Hundreds of thousands of student-loan debtors who do not qualify for student-loan relief under the bastardized Brunner standard will be eligible under the Rosenburg ruling.

Additionally, and perhaps most importantly, Judge Morris's Rosenburg decision undercuts a central argument made by both the U.S. Department of Education (DOE) and ECMC.  Both maintain that virtually all student debtors should be required to sign up for long-term, income-based repayment plans (IBRP) in lieu of getting bankruptcy relief.

Many courts have bought this specious (and I might say vicious) argument, which has led to absurd results. For example, in Butler v. ECMC, a bankruptcy judge refused to discharge Brenda Butler's student-loan debt in spite of the fact that the judge explicitly ruled that she had made good faith efforts to repay her student loans over a period of 20 years. Bankruptcy Judge Mary Gorman ruled that Ms. Butler should sign up for an IBRP, a plan that would end in 2037--42 years after Ms. Butler graduated from college!

Judge Morris pointed out that the Brunner test asks whether the debtor's financial circumstances are likely to improve over the "repayment period" of the loan, not whether the debtor can make token loan payments for 25 years. This simple change in the interpretation of the Brunner standard obliterates arguments made by DOE and ECMC that all distressed student debtors should sign up for repayment plans that last as long as a quarter-century.

So let's watch the Rosenberg litigation closely. If the Second Circuit puts its seal of approval of Judge Morris's ruling, the federal government will need to hire a lot more bankruptcy judges. And ECMC, which has made a nice living hounding student debtors in the bankruptcy courts, will have to look for another line of work.

References

Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Rosenberg v. Educational Credit Management Corporation, Adv. No. 18-09023 (Bank. S.D.N.Y. Jan. 7, 2019).

Juber v. Conklin: Parents' loan to son's fiancee to enable her to pay off student loans is dischargeable in bankruptcy

No good deed goes unpunished. That's the lesson we learn from Juber v. Conklin.

Kevin and Linda Juber were delighted to learn that their son Christopher (Kip) was engaged to marry Liana Sue Conklin. Kip and Liana had begun dating when Liana was a student at the University of New Haven.

Liana had financed her college studies with scholarships, federal student loans, and three private loans. The interest rate on the private loans was high--bearing a weighted average of  9.5 percent. The total amount borrowed through private loans was almost $90,000.

Mr. and Mrs. Juber wanted Kip and Liana to begin their married life unencumbered by burdensome debt, and they offered to pay off Liana's three private student loans. The Jubers obtained the money to pay off the loans by drawing on their home-equity line of credit (HELOC), which had a very attractive interest rate: only 1.99 percent.

Apparently, the arrangement called for Liana to make $500 bi-weekly payments to the Jubers for about a year, when the Jubers expected to sell their home. Liana and Kip would then refinance the debt at a low-interest rate to repay the Jubers, which would allow the Jubers to pay off their HELOC loan.

Fortunately or unfortunately, Liana broke her engagement with Kip. For a while, Liana made regular payments to the Jubers on the debt, but she later filed for bankruptcy and attempted to discharge the Jubers' loan through the bankruptcy process.

The Jubers sued Liana in a North Carolina bankruptcy court, arguing that their loan to Liana was a student loan that could not be discharged in bankruptcy unless Liana could establish that repaying the Jubers would impose an undue hardship.

Judge Laura T. Beyer, a North Carolina bankruptcy judge, conducted an exhaustive statutory analysis to determine whether the Jubers' loan to Liana Conklin was dischargeable. In the end, Judge Beyer sided with Liana.

In Judge Beyer's view, "the Jubers issued a private loan to [Liana] that served a personal purpose rather than an educational one" (p. 680). Thus, Judge Beyer concluded, "the Jubers' purpose, although generous, was not meant to help [Liana] but, rather, their son" p. 681).

As a matter of law, the Judge ruled, the Jubers' loan to Liana was a "general unsecured debt" that could be discharged through bankruptcy like any other unsecured debt. The Jubers are appealing Judge Beyer's ruling, but the judge's legal analysis is sound.

My sympathies are with Kevin and Linda Juber. They loaned Liana nearly $90,00 in a spirit of generosity in order to help Kip and Liana begin their marriage "somewhat free of debt." Had the Jubers not paid off Liana's private student loans, those loans would not have been dischargeable in bankruptcy.

It is unjust in my opinion for the Bankruptcy Code to protect private lenders like Wells Fargo Bank and Sallie Mae, who are loaning students money at high interest rates, while kind-hearted people like Kevin and Linda Juber are not given similar protection.

References

Juber v. Conklin, 606 B.R.664 (Bankr. W.D.N.C. 2019).

Note: Judge Beyer's opinion did not specify the amount of money that the Jubers lent to Liana. The Jubers stated in their appellant brief that they loaned her $89,186.

University of New Haven: An expensive college

Bankruptcy judge denies relief to student debtor who provides 24/7 care for elderly mother: What's the friggin' point?

In 1998, Guy DiFrancesco enrolled in a bachelor's degree program at Luzerne County Community College. He transferred to Bloomsburg University of Pennsylvania and obtained a degree in political science in 2005. Later, DiFrancesco enrolled at East Stroudsburg University, where he earned a master's degree in American politics in 2008.

Continuing his studies, DiFrancesco enrolled in a PhD program at Marywood University, and he began another program at King's College, where he sought a teaching degree. He dropped out of both programs in order to provide around-the-clock care for his mother, who suffered a debilitating stroke in 2010.

According to a Pennsylvania bankruptcy court, DiFrancesco's last job was at an auto parts company, which he left in  2009 or 2010.  He financed his college and university studies by taking out student loans. By the time he filed for bankruptcy in 2019, DiFrancesco's accumulated student debt had grown to $200,000, which constituted 99 percent of his total indebtedness.

DiFrancesco attempted to clear all this debt in bankruptcy, but Pennsylvania Bankruptcy Judge Robert Opel II was unsympathetic. In Judge Opel's view, DiFrancesco had not made good faith efforts to repay his loans and thus they were nondischargeable.

It was uncontested, Judge Opel observed, that DiFrancesco had not made a single payment on his student loans. Furthermore, he had not maximized his earning potential. Indeed, according to Judge Opel, DiFrancesco had not sought employment of any kind.

Judge Opel conceded that DiFrancesco's mother's stroke and her need for 24/7 care were beyond DiFrancesco's control. Nevertheless, "his decision to not actively seek any form of employment since 2010 was well within his reasonable control." After all, the judge pointed out, DiFrancesco was "a healthy, forty-year-old man with no disability who holds a bachelor's degree, a master's degree, and credits toward a PhD." Even taking his mother's incapacity into account, Judge Opel wrote, "this fails to establish that [DiFrancesco] could not have found any employment opportunities in the last ten years" (p. 168).

Perhaps Guy DiFrancesco is not the most sympathetic person to seek bankruptcy relief from massive student debt. Nevertheless, Judge Opel acknowledged that DiFrancesco and his mother lived on Social Security benefits totally only $15,000 a year. This paltry sum was the sole source of income to pay food, utilities, and roughly $4,000 a year in property taxes. Clearly, DiFrancesco and his mother lived at or below the poverty level. Is it good public policy to refuse bankruptcy relief to a man who is his mother's full-time caregiver and is too poor even to own a car?

But there is a more basic question that needs to be answered, which is this: What is the friggin' point of hanging $200,000 in debt on a man who hasn't worked since 2010 and is totally responsible for caring for his incapacitated mother?

Will Mr. DiFrancesco ever pay back this debt? No, he will not. Even if he signs up for a long-term, income-based repayment plan and makes token monthly payments on his student loans for 25 years, his debt will grow larger every month due to accumulating interest.

References

DiFrancesco v. Educational Credit Management Corporation, 607 B.R. 463 (Bankr. M.D. Pa 2019).

East Stroudsburg University: "Where Warriors Belong" (whatever that means)

Raquel Welch's earring bomb: Passing thoughts on gun control

I like to watch old movies on television on Saturday afternoons, and I don't care whether the movie I watch is good or bad. This afternoon, I watched Fathom, a 1967 film starring Raquel Welch.

Raquel is involved in some sort of international terror plot. A guy with a British accent gives her a pair of lime green earrings, which happen to match the lime green bikini she is wearing. The left earring is a small bomb, the guy tells her. Just drop it down a ventilator shaft and it will explode in 30 seconds.

In the next scene, Raquel entices the villain, a creepy looking character wearing a green-tinted monacle, into the master suite of a luxury yacht.  He is so enchanted by Raquel's beauty that he doesn't notice her throw her left earring down a conveniently located ventilator shaft. Sure enough, in 30 seconds (maybe less), the earring explodes and sinks the yacht. Raquel gets away on a speedboat being driven by the guy who gave her the earrings.

This movie got me to thinking about gun control. I have a Remington 20-gauge shotgun for quail hunting and a  Remington 12-gauge shotgun for shooting ducks. I would be very sorry if Michael Bloomberg confiscated them should he be elected president. I wouldn't go postal, but I wouldn't be happy about it.

I'm a reasonable guy, and I'm not totally against all gun control. Nevertheless, I think the Democrats should start small with their campaign to take guns away from Americans.  Let them start by banning those dangerous earring bombs like the one Raquel Welch used to sink a yacht. I for one would not object.

Fortunately, earring bombs are rare. After the movie ended, I drove to my local Academy store and asked if they carried earring bombs. (I guilefully told the sales associate I was shopping for a Christmas present for my wife.)

The associate told me the store was sold out of earring bombs and wouldn't restock them until after the holidays.  He also said the lime green model had been discontinued.

Returning to my discussion of the movie Fathom, I highly recommend it. It is true the plot is a little thin but no thinner than an Ingmar Bergman movie. It is also true that Roger Ebert gave Fathom a "thumbs down." But the New York Times described the movie as "crackling good fun," and who would argue with the New York Times over matters of culture and the arts?

Raquel Welch, sans earring bomb.

Let's kick California off the island: When bad things happen to a good state

You don't know me but you don't like me,

You say you care less how I feel

How many of you that sit and judge me

Ever walked the streets of Bakersfield?

Streets of Bakersfield

Sung by Buck Owens

I love California, which I've visited many times. Napa Valley is lovely and produces terrific wines. The landscape around Santa Barbara is the most beautiful in the world, surpassing Tuscany and the Li Valley in southwestern China, in my opinion.

Unlike (I suspect) California's politicians, I appreciate the great literature of California. I've read Frank Norris' The Octopus, Nathanael West's Day of the Locust, some of Joan Didion's essays, Richard Henry Dana's Two Years Before the Mast, and many of the works of Jack London and John Steinbeck. I love T.C. Boyles' California novels, particularly The Tortilla Curtain and Budding Prospects.

And Californians are great people. Although I haven't met them all, I've never met a Californian I didn't like. (I might not like Charlie Manson or HarveyWeinstein, but we don't run in the same circles.)

But let's face it. The Californians insist on sending wingnuts to Congress, and these nut jobs are ruining the country.  I'm talking Nancy Pelosi, Adam Schiff, Maxine Waters, etc., etc.  It's got to stop.

So let's vote California off the island. I realize a state can't secede from the Union, but with a constitutional amendment, we can surely vote to kick a state out of the club.

Who could oppose such a move? Texas? North Dakota? Hell, the Californians would jump at the chance to have their own nation.

If California was a country it could do whatever it damn likes. It could have open borders, free sex-change operations for illegal immigrants, and no-charge facelifts. It could require corporations to put convicted rapists on their governing boards and make it a criminal offense for Christians to go to college. The People's Republic of California could give citizens the constitutional right to crap on the sidewalks instead of restricting that privilege to San Francisco.  What's not to like?

Of course, my proposal has some limitations. First of all, the town of Bakersfield--home of Buck Owens, Merle Haggard and the Bakersfield sound--would continue to be part of America.  And the Ronald Reagan Library.  That goes without saying.

And America would keep the military bases and Disney Land.  But Hollywood would be happier if California were a separate nation, and Americans are tired of Hollywood movies anyway.

Think about it. Kicking California out of the USA would solve a lot of problems, and I can think of no downsides. And if Americans get nostalgic about the old California, they can watch classic movies: Vertigo, The Big Lebowski, and The Maltese Falcon.

The Dude abides, man.

College leaders are the new Marlboro Man--touting dangerous products to gullible Americans

I'm old enough to remember when a lot of Americans smoked cigarettes.

People smoked on buses and airplanes, they smoked in restaurants and bars, they smoked in movie theatres. People even smoked in hospitals and grocery stores. I remember seeing a guy pick up a head of lettuce in the produce section of my local supermarket, and he had a cigarette wedged between the fingers of the same hand that grabbed the lettuce. Hey, no problem!

It's not like people didn't know that cigarettes were dangerous to our health. We all knew people who died slow, painful deaths from lung cancer and emphysema. We all saw elderly people who were basically living skeletons with sunken chests, yellowish skin, and discolored teeth. We knew why cigarettes were called coffin nails. But we ignored all that to appear cool.

Meanwhile, the cigarette industry advertised their products on television. I must have seen the Marlboro Man a thousand times on TV--that rugged, ruddy-faced cowboy with a viral cigarette clamped in his perfect teeth. But the Marlboro Man was a cynical, vicious lie.  Robert Norris, the original Marlboro Man, didn't smoke.

America's college presidents are like the cigarette industry in the 1950s. Just as Madison Avenue pitched cigarettes as sexy,  university leaders blather on and on about the value of higher education, how American graduate schools are the envy of the world, and about the big income bonus that comes with a college degree. They dress up in clown suits (academic regalia) on commencement day as if they were bestowing a high honor on the rubes by handing them diplomas.

But for millions of Americans, higher education's cheery bullshit about the benefits of a college degree are lies. More than 45 million Americans are student-loan debtors; collectively they owe $1.6 trillion. Eight million people are in income-based repayment plans that can last as long as 25 years. Millions have defaulted on student loans that they can't discharge in bankruptcy. College debt hampers Americans from buying homes, getting married, and having children.

Pompous college presidents, administrators, and professors think of themselves as superior individuals with keenly attuned social consciences and highly developed intellects. But they are lying to themselves and the world at large. In reality, they're the new Marlboro Man, selling products that they know are often dangerous.

Cigarettes are sexy and American higher education is the envy of the world.

Moody's Investor Services says 1 in 5 small private colleges face "fundamental stress"

Moody's Investor Services reported recently that 1 in 5 small, private colleges face "fundamental stress" and that as many as 15 colleges will close by the end of the year (as reported by CNBC.com). Small liberal arts colleges in the Midwest and New England are particularly under pressure, and four
Vermont colleges have closed within the past year.

What's going on?

First, changing demographics provides part of the explanation. There are simply fewer people in the traditional college-going age, and this population decline is especially acute in rural areas where a great many small colleges are located.

Second, tuition costs have risen sharply in recent years, and potential students and their parents are experiencing sticker shock at the prospect of paying $60,000 to $70,000 a year to attend a small, liberal arts college. Even though liberal arts schools have been discounting their tuition by 50 percent or more, these slashed tuition rates are still often higher than the cost of attending a public university.

Finally, fewer students want to study liberal arts, which has traditionally been the core mission of small, private colleges.  For example, the University of Tulsa, a highly regarded private university, is shifting its mission from liberal arts to science and technology and intends to cut 40 percent of its programs--primarily in the humanities and natural sciences--in order to focus on STEM-related academic programs.

Without question, many small, liberal arts colleges are facing an existential crisis, and they have tried a variety of strategies to boost their enrollments. Some have invested in athletics programs, hoping to attract students who are interested in sports. Others have rolled out new vocation-based majors like criminal justice, sports management, and business administration.

But these tactics are often unsuccessful. A college that was founded to be a traditional liberal arts institution often finds it difficult to break into new areas of study, particularly those fields that have been offered by public universities for decades.

Furthermore, new majors usually require new faculty members--and that costs money.  Colleges cannot easily lay off tenured liberal-arts professors s in order to replace them with business and criminal-justice professors. Schools that try to cut faculty positions in order to balance their budgets often run into threats of litigation, as the University of St. Thomas in Houston recently discovered.

A fair number of private colleges are going to fail in the coming years, regardless of the tactics they employ to boost their enrollments.  Obscure liberal arts schools with religious affiliations seem especially vulnerable because the millennials are far more secular than previous generations. Many young people have no interest whatsoever in religion. Moody's estimate of a 20 percent attrition rate may understate the crisis.

While shopping for a college, potential students and their parents need to realize that the small, liberal arts college they may be considering could be closing in the near future. Does anyone want to take out student loans to attend a college that could be shutting its doors within the next five or ten years?