The US Supreme Court has declined to review a student loan case that would have presented the question as to the appropriate standard of review for a hardship discharge of student loans in bankruptcy cases. While a number of interesting student loan opinions are coming out from courts across the United States, this was the first major head-on challenge to the tough standard for obtaining a discharge of student loans, and the Court closed the door, at least for now, on resolving the issue.
In the petitioning the Supreme Court for review of his case, Mark Tetzlaff asked the Court to resolve the following questions: (1) whether the Brunner test is the proper standard for determining undue hardship in bankruptcy for discharging student loans; and (2) if the Brunner test is the correct standard, to clarify that standard.
Mark Tetzlaff is in his mid-50’s. With over $260,000.00 in student loan debt (including obtaining an MBA and a JD), Tetzlaff failed his state’s bar exam twice, and due to a criminal records, has argued that he’s unable to secure employment. Additionally, he lives with his elderly mother, and they survive on her social security benefits. He had filed for bankruptcy and, in his case, commenced a case to have the court issue a hardship discharge to discharge his student loans. He represented himself for most of the way up the legal ladder, when attorneys agreed to represent him in the petition to the Supreme Court.
The Brunner test, referenced above, comes from a 1987 case, where the debtor was trying to discharge some student loan debt 6 months after graduating from school. Back then, student loans were actually dischargeable after 5 years, but the law has been changed to now exclude student loans from discharge, except in the case of a hardship discharge. In that Brunner case, the court laid out a three part test that, for years, most courts across the country have adopted. This test includes:(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependent if forced to repay the loans; (2) 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; and (3) that the debtor had made good faith efforts to repay the loans. Courts interpreted and applied these tests differently around the country.
With the changing student loan landscape over the years, including more student loans as well as more student loan defaults, some courts recognizing the problem, have relaxed the standard to a “totality of the circumstances” analysis. In Tetzlaff’s case, the federal appeals court applied a “certainty of hopelessness” standard to him, denying his hardship discharge, and thus leading to the petition to the Supreme Court.
So what does the denial of review of this case mean for student loan debtors across the country? One takeaway is that the Court would prefer Congress make the law and define the standard to apply, rather than have the Court impute a meaning to an undefined standard created by another court. Another takeaway might be that the Court would prefer a case where it can affirm the use of the totality of circumstances approach, rather than strike down the Brunner test and leave lower courts to rule without guidance. For now, the student loan discharge game will have to reset with some new players.