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Supreme Court Might Hear Law School Debtor’s Bankruptcy Case

In the late 1970s, Congress amended the Bankruptcy Code to require student loan debtors to demonstrate that their loans posed an “undue hardship” on them in order to be discharged in bankruptcy. Over time, Congress tightened this restriction, eliminating its seven-year time limit and in 2005 extending the requirement to private student loans. The problem, though, is that Congress never defined “undue hardship,” leaving the term to the federal courts.

A New York bankruptcy case, Brunner v. N.Y. State Higher Education Services Corporation, established the most commonly used test for showing a student loan is “an undue hardship.” Other federal circuits use a “totality of the circumstances test.” No national definition of the term exists, but that may change thanks to a bankruptcy case that is being appealed to the U.S. Supreme Court.

Here’s the background: Over the summer, the U.S. Court of Appeals for the Seventh Circuit (Ill., Ind., and Wis.) heard Tetzlaff v. Educational Credit Management Corporation (ECMC). The debtor-appellant attended a business-school program and two law programs, graduating from law school in 2005. He never passed a bar exam despite two tries and has been unemployed ever since. (Coincidentally, The New York Times recently ran an editorial attacking his for-profit alma mater and other law schools for enrolling students they know won’t pass a bar exam and saddling them with excessive federal loans in the process.)

Tetzlaff filed bankruptcy in 2012, and both the bankruptcy court and a Wisconsin federal district court held that repaying his $260,000 in student loans was not an undue hardship for the fifty-six year-old. He appealed, and the Seventh Circuit, which uses the same Brunner test that originated in New York, also sided with the bankruptcy and district courts.

According to Bloomberg.com, Tetzlaff is appealing to the Supreme Court with an eye towards establishing a less onerous standard for the entire country than the Brunner test allows. The Bloomberg article is optimistic that Tetzlaff’s lawyers will persuade justices who favor plain-language interpretations of legislation rather than convoluted tests created by courts. If the Court grants certiorari Tetzlaff may have a shot.

Aside from the possibility of a lighter interpretation of the “undue hardship” requirement, Tetzlaff should interest student loan debtors because the same appellate court decided a similar case two years but arrived at a different conclusion.

In both Tetzlaff and Krieger v. ECMC, the debtors were in their mid-fifties, lived with their mothers, and were unemployed. Yet the Seventh Circuit clearly sympathized with Krieger and not with Tetzlaff. In fact, the opinion in Krieger opened with, “Susan Krieger is destitute.” By contrast, in a parenthetical comment, the court informed Tetzlaff that his “capable pro se representation … is, in our opinion, an indicator of his marketable job skills.” (Perhaps a backhanded reason for hiring a bankruptcy lawyer is to ensure the court doesn’t conclude that you’re too capable to deserve relief.)

Perhaps the difference in outcomes is due to different judges deciding the cases, but that’s not all. The court in Tetzlaff argued that the open-ended character of the “undue hardship” standard required it to give latitude to the bankruptcy judge deciding the case. The bankruptcy court in Tetzlaff believed the debtor was capable of working, and therefore his situation was not hopeless, as the Brunner test requires. By contrast, the bankruptcy court in Krieger determined that the debtor’s situation was hopeless, and ECMC even conceded that point. The issue in that case was whether Krieger should be required to sign on to an income-based repayment plan rather than receive a discharge (the court held she wasn’t). Income-based repayment plans weren’t at issue in Tetzlaff, perhaps because his loans were too old to be eligible and ECMC held a different opinion of his ability to work.

The lesson from these two cases is that unless the Supreme Court takes Tetzlaff and creates an easier rule, student loan debtors can expect varying outcomes from their cases, which is a compelling reason to hire an experienced bankruptcy lawyer.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

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