There is Rarely Any Student Loan Relief in Bankruptcy
Bankruptcy is often seen as a fresh financial start, providing individuals with a path out of debt and towards better money management habits. Each year, the U.S. Bankruptcy courts receive thousands of petitions from individuals hoping to discharge their debts and start anew. But some types of debt are so strong that they even outlive a bankruptcy court discharge.
In July, the Seventh Circuit Appeals Court affirmed a bankruptcy court ruling that disallowed the discharge of student debt in a bankruptcy proceeding. Tetzlaff v. Educational Credit Management Corporation revolves around a 56-year-old man who reportedly accumulated more than $250,000 in student loan debt. The loans were taken out to assist with the completion of his undergraduate and advanced degrees. Tetzlaff argued that various circumstances left him unable to repay the hefty student loans, including his inability to pass the bar exam and a bout of mental depression. He also reported struggles with an alcohol addiction and a criminal arrest record.
In hearing the case, the court relied on the Brunner Test, which originates from a 1987 case involving the discharge of student debt. The test consists of three prongs:
- Inability to pay the loans and keep up a minimum standard of daily living;
- The likelihood that the debtor’s current circumstances will continue; and
- Demonstration of a “good faith” effort to pay the student loans.
Tetzlaff’s financial circumstances satisfied the bankruptcy court in regards to the first prong and the appeals court panel chose not to review that aspect of the case. However, like the bankruptcy court, the appeals court did find that Tetzlaff’s circumstances fell short of the two additional requirements.
Continuation of Circumstances
The appeals court ruled that Tetzlaff’s circumstances were unlikely to continue, based on his level of advanced education. He had earned a MBA degree and a law degree. The court stated, “Given Tetzlaff’s academic degrees, prior work experience, and age, we agree with the bankruptcy court that he is capable of earning a living.”
The court also looked at Teztlaff’s family dynamics and determined that the issues leading to his legal difficulties were resolved. Panel members also questioned his assertion of mental health challenges. According to the court, there was no clinical proof that his levels of anxiety and depression kept him from working.
Effort to Repay the Loans
The appeals court also found that Tetzlaff failed to make a good faith attempt at repaying the loans. He argued that payment made directly to one of his schools satisfied this prong of the analysis, but the court disagreed, stating “The bankruptcy court was not required to consider Tetzlaff’s payments to Florida Coastal as evidence of a good faith effort to repay Educational Credit, as his Florida Coastal debt was not included in the discharge action.” The court further noted that the payments were made because Tetzlaff needed copies of his degree and transcripts.
Bankruptcy cases can prove challenging to navigate. If you are saddled with debt and considering bankruptcy, contact Julia Kefalinos today for immediate assistance with your case. We serve clients in Miami, and are prepared to help you whenever you are ready.