Students have taken on more than $1 trillion in debt to pay for the relentlessly rising costs of higher education. With that much debt outstanding, it’s no surprise that there are increasing numbers of borrowers defaulting on student loan debt, and seeking to discharge that debt by filing for bankruptcy protection. But, as a Wisconsin man recently learned, discharging student loan debt in bankruptcy is no easy feat.
The U.S. Supreme Court refused to hear an appeal by would-be lawyer Mark Tetzlaff who has been attempting to discharge more than $260,000 in business and law school debt in bankruptcy. The high court’s refusal to hear the appeal leaves intact an appeals court circuit split regarding the proper standard to determine whether “undue hardship” exists that would justify the discharge of student loan debt.
Undue hardship is a very high burden to meet in the majority of circuits which use the “Brunner” test to evaluate a debtor’s request to discharge student loans. The three-part Brunner test focuses first on whether a debtor is unable to maintain a minimal standard of living, second on additional circumstances that may exist, such debtor’s physical, mental or emotional disability, that indicate that the inability to maintain a minimal standard of living is likely to persist for an extended period of time, and third on whether the debtor has made good faith efforts in repaying the loan.
The minority approach, used by the First and Eighth Circuits, looks at the “totality of the circumstances,” a more lenient test.
Tetzlaff, in his Chapter 7 case, argued unsuccessfully that alcoholism, depression and his criminal record prevented him from finding a job and repaying his debt, and thus discharge was justified. On appeal he urged, again without success, the Seventh Circuit to adopt the “totality of the circumstances” test rather than the stricter “Brunner” test. Tetzlaff did not help his case by failing to make a single payment on his student loans, a point noted by the courts.
Because the Supreme Court refused to consider the appeal, the Brunner/totality of the circumstances split endures. Why did the Supreme Court take a pass? Trying to “read the tea leaves” about the high court’s intent when denying review of an appeal is always tricky business. Perhaps it’s a punt to Congress in hopes that lawmakers will address the issue through the legislative process. It just may not have been the right case at the right time. Regardless, in the interim, student loan debt discharge requests will continue to be considered according to different standards, depending on the circuit in which a debtor resides.