Student loans are not dischargeable in Chapter 7 or Chapter 13 bankruptcy, except in narrowly defined circumstances. A debtor must establish that continued payment of the student loan debt would cause “undue hardship” to them and their dependents. 11 U.S.C. § 523(a)(8). Most U.S. jurisdictions apply a three-part test to determine whether a debtor has met this burden. A student loan debtor is currently appealing the denial of discharge in a Chapter 7 case to the U.S. Supreme Court, arguing in part that the three-part test is improper, or alternatively that it should be modified. Tetzlaff v. Educ. Credit Mgt. Corp. (“Tetzlaff Petition”), No. 15-485, pet. for writ of cert. (Sup. Ct., Oct. 15, 2015).
Most federal appellate courts, including the Ninth Circuit, have adopted the Brunner test to determine whether a student loan debtor has met the statutory requirement of proving “undue hardship.” A debtor must prove, by a preponderance of evidence, that:
1. Based on their current levels of income and expense, repayment of the loans would prevent them from supporting themselves or their dependents at a “minimal standard of living”;
2. This situation is likely to continue for most or all of the repayment period; and
3. They have “made good faith efforts” to make timely payments on the debt. Brunner v. N.Y. State Higher Educ. Svcs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).
The Brunner standard has proven to be a very difficult hurdle for student loan debtors. It requires proof of contradictory facts, such as that a debtor is in a dire financial situation that risks destitution, but also that they have made payments on the loans. Someone whose financial difficulties began soon after leaving school, or earlier, would be unlikely to be able to meet this standard.
According to the appellate court’s opinion in Tetzlaff, 794 F.3d 756 (7th Cir. 2015), the debtor is in his mid-50s, divorced, and unemployed. He took out student loans to pursue a Masters in Business Administration and a law degree from the mid-1990s through 2005, having previously worked in finance and insurance. Since completing school, he has unsuccessfully taken a bar exam twice. He filed for Chapter 7 bankruptcy in 2012, but he was unable to obtain a discharge of about $260,000 in student loan debt. The Seventh Circuit affirmed the lower court ruling that he had failed to satisfy the second and third parts of the Brunner test. It stated that the second part of the test requires proof of “the certainty of hopelessness.” Id. at 759. See also 521 B.R. 875 (E.D. Wis. 2014).
In his petition to the Supreme Court, the debtor notes conflicts between circuits, both between those that have adopted Brunner and those that have not, and among the Brunner circuits. He claims that Brunner was “based on a district court’s flawed understanding of congressional intent” and is therefore “erroneous.” Tetzlaff Petition at 17. He argues that the “totality of the circumstances” test, based on In re Long, 322 F.3d 549, 554 (8th Cir. 2003), is a better standard and that his case meets that standard. Alternatively, he argues that the court should eliminate the “good faith efforts” requirement, and he asks the court to clarify the conflicting standards regarding “certainty of hopelessness” by ruling that § 523(a)(8) is not this restrictive.
Bankruptcy attorney Devin Sawdayi represents individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcy cases. To schedule a free and confidential consultation, contact us today online, at (800) 474-6050, or at (310) 475-9399.
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