Are You There, SCOTUS? It's Me, Tetzlaff. Why The U.S. Supreme Court Should Resolve The Student Loan Bankruptcy Conflict

It's high time for the Supreme Court to clarify how student loans get treated in bankruptcy, according to columnist Shannon Achimalbe.

Last summer, Mark Tetzlaff submitted a petition for certiorari to the U.S. Supreme Court, asking the Court to intervene in his case that seeks to discharge his student loans in bankruptcy. When I first heard about it, I thought this was an exercise in futility. We’ve been told time and time again that student loans are nondischargeable in bankruptcy. Countless stories of judges ruling against debtors in student loan cases serve as a deterrent to those who might dare to try.

But Tetzlaff filed a cert petition to the Supreme Court with the assistance of an attorney. This may be the one chance for the high court to resolve a circuit split and sensibly address a growing national student loan problem.

Both sides presented Tetzlaff as someone who failed miserably at life. After graduating from Florida Coastal Law School, he failed the bar exam twice. He also debt-financed an MBA and a master’s degree in religion. His nonfunctional law degree and MBA only got him a few dead-end jobs that led nowhere. His misdemeanor criminal convictions made him look less employable. He is now 57 years old, unemployed, divorced, and living with his elderly mother (and her Social Security benefits). He reportedly suffers from alcoholism and depression.

Tetzlaff filed bankruptcy seeking to discharge his student loans. The bankruptcy court held that the student loans should not be discharged because repayment would not create an “undue hardship.” The District Court and the U.S. Court of Appeals for the Seventh Circuit affirmed.

As most readers here know painfully well, federal and private student loans are nondischargeable in bankruptcy unless applicants can prove that the payments will create an “undue hardship” to themselves and their dependents. Congress did not define “undue hardship,” so the courts have done it for them. Judges have noted that undue hardship means having more than the typical hardship experienced by all debtors requesting bankruptcy relief.

Two tests developed to determine whether payment of the student loans would create undue hardship. One issue before the Supreme Court is whether these two tests create a conflict between the circuits.

The majority of circuits use the Brunner Test, which requires the debtor to meet three requirements. First, the debtor must establish that he or she cannot maintain, based on current income and expenses, a “minimal” standard of living for themselves and their dependents if forced to repay the loans. Second, the debtor must show that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans. Third, the debtor must have made good-faith efforts to repay the loans․

Sponsored

The Eighth Circuit uses the Totality of the Circumstances Test. Using this test, the court considers these factors as a whole: (1) the debtor’s past, present and reasonably reliable future financial resources; (2) a calculation of the reasonable living expenses of the debtor and her dependents; and (3) any other relevant facts and circumstances.

It has been argued that both tests are different in name only because both the Brunner Test and the Totality of the Circumstances Test analyze the same factors. In In Re Shadwick, 341 B.R. 6 (2006), the court stated that the Totality of the Circumstances test looks at many different factors, including whether the debtor has made a good-faith effort to negotiate a deferment or forbearance of payment and whether the debtor has made payments on the student loan both of which are used in the Brunner analysis. While this may suggest that there is no conflict, this can also mean that both tests are ill-suited and the Supreme Court should adopt its own rule looking at today’s economic conditions.

But there may be two points where the courts may have misinterpreted congressional intent. The first is the debtor’s prospect of future income, which is a factor in both tests. Courts seem to have differing ideas as to how future income should be considered.

In the Matter of Rappaport, 16 B.R. 615 (Bankr. D.N.J. 1981), the court stated that undue hardship is generally associated with a total incapacity now and in the future to pay one’s debts for reasons not within the control of the individual debtor.

In In Re Brisco, 16 B.R. 128 (Bankr. S.D.N.Y. 1981), the court stated that the dischargeability of student loans should be based upon the certainty of hopelessness, not simply a present inability to fulfill financial commitment.

Sponsored

And in In Re Kohn, 5 B.C.D. 419 (S.D.N.Y.1979) (cited here), the court made this observation about what constitutes undue hardship:

The point is that Congress meant the extinguishment of student loans to be an available remedy to those severely disadvantaged economically as a result of unique factors which are so much a part of the bankrupt’s life, present and in the foreseeable future, that the expectation of repayment is virtually non-existent unless by the effort the bankrupt strips himself of all that makes life worth living.

I understand that undue hardship generally means something above and beyond the typical hardship. And I get that courts use flowery prose every now and then. But I do not think Congress had terms like “total incapacity,” “certainty of hopelessness,” and “stripping of all that makes life worth living” in mind when they included the undue hardship provision in the Bankruptcy Code. These terms are not commonly associated with establishing undue hardship. These are terms mental health professionals frequently hear when their clients are contemplating suicide or worse. These terms have been used to justify the nondischargeability of student loans made to chronically poor people and senior citizens living on fixed income. The Seventh Circuit in Krieger v. Educational Credit Management Corp., 713 F.3d 882 (2013), stated that the “certainty of hopelessness” test may be more restrictive than what the statute intended.

The second area where the courts have overstepped their bounds is the adoption of the “good-faith effort to repay” requirement. The good-faith requirement is not explicitly mentioned in the Bankruptcy Code, but courts have inferred its existence from the legislative history and the public policy of protecting the taxpayer’s investment.

When determining good faith, the courts look to the debtor’s past conduct. In most cases, they find that the debtor did not live a financially and morally perfect life. For example, in Perkins v. Vermont Student Asst. Corp., 11 B.R. 160 (1980), the court held that the debtor’s student loans were nondischargeable in part because the court found that the debtor exercised poor judgment by purchasing a Ford Pinto Wagon because it was “too expensive.” So this may lead to some judges imposing their own values on a different, harsher reality, which can lead to inconsistent decisions.

But the very essence of bankruptcy law is the opportunity to give the debtor a fresh start. And almost every bankruptcy case has its genesis in financial catastrophes. Yet their debts are discharged regardless of past transgressions. If Congress wanted to make past conduct a basis for nondischargeability of debts, it would have said so in the Code. They have done it for damages from drunk-driving, delinquent payroll taxes, and cases of fraud.

So for these reasons, the Supreme Court should grant certiorari and create a uniform standard for determining undue hardship in student loan bankruptcy cases.

The main reason for defending the strict nondischargeability rules for student loans is to protect the American taxpayer’s investment and to ensure the solvency of the student loan system. But this argument requires a look into whether student loan policy is currently sustainable. Next week, I will write about how the laws as they stand now are contributing to the $1.4 trillion (and growing) student loan bubble and how financial institutions are taking advantage of it. I will also argue why loosening the undue hardship rules might increase the chances of collecting on seriously delinquent accounts.

As for Mark Tetzlaff, let’s hope his master’s degree in religion brings him the divine intervention he needs to get out of his predicament.

Earlier: Florida Coastal Law School Knows How To Play Hard Ball
Don’t Waste Your Time Trying To Get Your Law School Debts Discharged In Bankruptcy
Not Even Bankruptcy Will Make Your Student Loans Go Away
Can You Show ‘Undue Hardship’ On Your Student Loans? You May Be Surprised.


Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at sachimalbe@excite.com and via Twitter: @ShanonAchimalbe.