A judge stripped a veteran's $221,000 in student-loan forgiveness, and it shows how hard the law makes it to get rid of student debt

• A veteran was granted $221,000 in student-loan forgiveness through bankruptcy last year.
• But a federal judge revoked that decision because of failure to prove hardship caused by the loans.

In 2020, a bankruptcy judge granted Kevin Rosenberg, a Navy veteran, $221,000 in student-loan forgiveness. A year later, a federal judge reversed that decision, leaving Rosenberg on the hook for his debt.

And it comes down to complexities in bankruptcy law that keep many borrowers trapped in student debt.

Lawmakers have been pushing to reform bankruptcy standards for student-loan discharges because of how difficult it is to prove enough hardship to qualify for forgiveness, and Rosenberg's original ruling showed some hope for debtors who are trying to do the same. But now the case is back to square one.

US Bankruptcy Court Judge Cecelia Morris forgave Rosenberg's loans, which he got for his undergraduate education and law school, through bankruptcy last year using the Brunner test - a legal test created in 1987 that requires borrowers to show "undue hardship" caused by their student debt. The test defines that hardship as meaning they cannot maintain a minimal standard of living, their circumstances will likely not improve, and they have made a good-faith effort in repaying their debt.

Morris wrote in her ruling that Rosenberg satisfied the legal test. She added that she wouldn't perpetuate "myths" that it's impossible to discharge student debt through bankruptcy.

But federal New York Judge Philip Halpern may have proved that the issue isn't so mythical after all. Shortly after Morris' ruling, the Educational Credit Management Corporation - the company that owned Rosenberg's student debt - challenged the ruling under the argument that while Rosenberg took out debt to practice law, he pursued jobs in the "outdoor adventure industry." The company also criticized Morris' interpretation of the Brunner test.

"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 wrote in its appeal.

Halpern sided with the student-loan company and revoked Rosenberg's loan forgiveness last month because he did not prove that his loans from college and law school created "undue hardship." Halpern said Rosenberg must go back to bankruptcy court and reevaluate the case.

The challenges with loan forgiveness through bankruptcy

After his loans were first forgiven, Rosenberg told Yahoo Finance that it's "really insane" that borrowers cannot discharge their debt through bankruptcy when "executives get golden parachutes" for making mistakes.

That notion is something advocates and lawmakers have been stressing as a reason to make student-loan discharge through bankruptcy a more accessible method for borrowers. Insider reported in August that Senate Majority Whip Dick Durbin and Sen. John Cornyn of Texas introduced the FRESH START Through Bankruptcy Act of 2021, which would allow borrowers to seek a bankruptcy discharge of their federal student loans after 10 years.

The bill would seek to eliminate the requirement of proving "undue hardship," which would significantly increase student debtors' chance of getting loan forgiveness.

"Student loan debt follows you to your grave," Durbin said in a statement. "Our bipartisan bill finally gives student borrowers - some who were misled into taking out costly loans by predatory for-profit colleges - a chance to get back on their feet when they have no other realistic path to repay their loans," he added.

While veterans such as Rosenberg had the option to seek loan forgiveness through the Public Service Loan Forgiveness program, which forgives student debt for public servants after 10 years, the program had a 98% denial rate prior to major reforms announced last week - making bankruptcy the quicker, more viable option.

"Undue hardship should not be the only path to address student loans in bankruptcy," Durbin said in an August hearing. "There should be another option."