HIGHER EDUCATION BUBBLE UPDATE: Bankruptcy case could make it easier to erase student debt.

Cecelia G. Morris, chief bankruptcy judge for the Southern District of New York, ruled in favor of Kevin Jared Rosenberg, who sought to erase more than $220,000 in loans accumulated during his undergraduate and law school years.

Morris argued in the sharply worded document that courts have misapplied “the Brunner test,” a three-pronged standard for determining whether college debt poses an “undue hardship” on the borrower, which is notoriously difficult to pass.

“Brunner has received a lot of criticism for creating too high of a burden for most bankruptcy petitioners to meet … The harsh results that often are associated with Brunner are actually the result of cases interpreting Brunner,” Morris wrote. . . .

According to the Brunner standard, to have college debt discharged in a bankruptcy proceeding, borrowers must demonstrate that making loan payments would prevent them from maintaining an acceptable living standard. They also must show that their financial condition is likely to last for most of the remaining loan period and prove that they made a “good faith” effort to repay the loans.

Morris, in her ruling, illustrated how many cases have added punitive standards to the Brunner test not contained in the original decision.

“Those retributive dicta were then applied and reapplied so frequently in the context of Brunner that they have subsumed the actual language of the Brunner test. They have become a quasi-standard of mythic proportions so much so that most people … believe it impossible to discharge student loans,” Morris wrote. “This Court will not participate in perpetuating these myths.”

Stay tuned. I think that student loans should be dischargeable in bankruptcy, but I also think that the institutions that got the money should have to disgorge some or all of it when that happens.