You might not have heard about it – but over the last few years there was a case working its way through the court system that could have made it easier for student loans to be discharged.
The plaintiff in the case was Mark Tetzlaff, 57, a man who owed over $260,000 in student loans. He didn’t believe he could pay those loans back and was seeking to clarify the definition of the term ‘undue hardship,’ which could have opened the door to allow him and other borrowers to discharge their loans.
On January 11th, the Supreme Court refused to hear the case thereby dashing the hopes of Tetzlaff and overwhelmed borrowers everywhere.
The Case Revolved Around the Term: “Undue Hardship”
As you probably know, student loans are different than most other forms of debt in that you can’t usually discharge them in bankruptcy. In fact, there are several laws that were designed to make this almost impossible.
But even though laws make it hard to discharge your loans, they still allow for some recourse where people won’t ever be able to repay their student loans. If the court determines that these people are facing ‘undue hardship’ then they can often get some or all of their student loans discharged.
The problem with ‘undue hardship’ and the main argument in Tetlaff’s case is that it’s a vague term that has no clear definition. This has led to different courts interpreting it differently.
The Court Applied Was Less Lenient to Tetlaff
Tetlaff believed he was facing ‘undue hardship’. After graduating from law school he failed the bar exam twice and couldn’t get a job because he had a criminal record and was an alcoholic.
In some courts, including the court that heard Tetlaff’s case, a test called the Brunner test is used to determine ‘undue hardship.’ This test looks at whether someone would be able to get a job and earn money or if their current financial difficulties would be likely to persist for the long term. It also considers whether they can maintain a minimal standard of living if they had to repay their loans, and whether they’ve been diligently trying to pay off their student loans.
In Tetlaff’s case, the judge believed he would be able to get work again and could pay his student loans. The judge also took issue with the fact that he had never yet made a single payment towards his debt.
There is an Easier Test
Many consumer advocates believe that the Brunner test sets too high a bar and means that most student loan borrowers don’t qualify for relief.
Advocates instead believe that a different test should be used – one which a small number of courts already deploy. This other test is called the ‘totality of the circumstances’ test. One of the main differences is that this option doesn’t require the debtor to show that they have made ‘good faith’ payments towards their loans. It also doesn’t make them prove that they will face financial hardship for the foreseeable future.
Instead, the Totality of the Circumstances test looks at the past, present and potential future financial resources of the borrower, the debtor’s necessary living expenses, and any other facts that are relevant to the bankruptcy case.
While the factors that are examined are similar to the Brunner test, they include additional data which allows for greater judicial discretion and leads to a higher likelihood of student loans being discharged.
Tetlaff Wanted All Courts to Use the Easier Test
The argument that Tetlaff likely hoped to make to the Supreme Court was that had he been heard by a court that applied a Totality of Circumstances test, he would have likely had his debt discharged.
He wanted the Supreme Court to clarify what ‘undue hardship’ was so that it could be applied fairly across all courts. He believed that the courts that were using the Brunner test were using a stricter version of the law than was intended when it was written.
No Relief for Bankrupt Student Loan Borrowers
The fact that the Supreme Court refused to hear the case means that the Brunner test won’t be going anywhere any time soon. Courts will be allowed to continue to apply the different tests and borrowers will be given different assessments of their undue hardship depending on where they live.
What is perhaps interesting about this case is how vigorously the federal government defended against it, in this instance through the Educational Credit Management Corp, which is one of the organizations that collect debt payments for the U.S. Education Department.
Despite making recent changes in the Pay as You Earn repayment plan that will allow more borrowers to discharge their student debt after 20 years of payments, the federal government is opposed to having a more lenient interpretation of ‘undue hardship.’
This is likely because there are over 44 million Americans with student debt and the current system depends on ensuring that students are forced to at least try to repay them.
The fact that this case was dismissed means that there likely won’t be any relief anytime soon for student loan borrowers who are declaring bankruptcy. Unless you’re completely incapacitated and unable to ever work again – you’re likely stuck with your loans. So, you might as well figure out how best to stay on track with your repayment.
Author: Dave Rathmanner
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