By Richard E. Weltman and Melissa A. Guseynov

Supreme Court Expected to Take Close Look at Student Loan Debt in Bankruptcy: ‘Fresh Start’ or ‘Undue Hardship’ By Richard E. WeltmanWe have previously reported on judicial treatment of student loan debt dischargeability in bankruptcy—more specifically, how federal courts construe section 523(a)(8) of the Bankruptcy Code, which prohibits bankruptcy courts from discharging most student loan debt “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8).  

More than 25 years ago, in Brunner v. New York Higher Education Services Corp., the Second Circuit pretty much gutted the undue hardship exception by requiring a three-part showing: (i) of an inability to maintain, based upon current income and expenses, a minimal standard of living if forced to repay the student loans; (ii) that additional circumstances exist indicating debtor’s affairs are likely to persist for a significant portion of the loan repayment term; and (iii) that debtor has made good faith efforts to repay the loans. Brunner, 831 F.2d 395 (2d Cir. 1987). As a practical matter, most federally guaranteed student loans are effectively non-dischargeable in bankruptcy as a result of Brunner. “Total incapacity” to repay loan debt has become the de facto standard, and has, over the years, been adopted by most circuits. Yet the holding has not been applied uniformly. For example, courts in the First and Eighth Circuits have rejected Brunner’s almost per se rule and instead adopted a more flexible “totality of the circumstances” test. Outcomes can be hard to predict.  

Fast forward to 2015. On October 15, plaintiff Mark Tetzlaff filed a petition for certiorari with the United States Supreme Court to resolve the long-standing and well-established conflict between the circuit courts in evaluating “undue hardship” and establishing a uniform standard with respect to dischargeability of educational loan debt. See Mark Warren Tetzlaff v. Educational Credit Management Corporation (No. 15-485). Mr. Tetzlaff, a 57-year-old recovering alcoholic claiming to have poor employment prospects, filed for bankruptcy protection and sought to discharge approximately $260,000 of student loan debt. Applying Brunner, the bankruptcy court determined that Mr. Tetzlaff’s student loans were not dischargeable because he failed to establish that his financial hardship would continue and he hadn’t made payments on the loans he sought to discharge. The U.S. District Court for the Eastern District of Wisconsin and the Seventh Circuit affirmed.

In his petition, Tetzlaff argues that Brunner is no longer the correct standard to determine “undue hardship.” Rather, he seeks the less restrictive “totality of the circumstances” review, which he claims better comports with the text and original meaning of section 523(a)(8). Tetzlaff hopes to modify Brunner to eliminate the prior good faith repayment test. The new standard, Tetzlaff argues, would require debtor to show by a preponderance of the evidence that s/he will prospectively be unable to make payments for a significant portion of the repayment period. In contrast, the present test typically follows even the most destitute student loan debtors to their death.

Currently, greater than 41 million people owe $1.2 trillion plus in educational loan debt. Many have called this a national crisis. Few disagree that students (and their parents) borrowing money for education have a moral obligation and legal contract to repay these loans. However, it may not be possible for borrowers with limited prospects to be able to repay tens of thousands of dollars of student loan debt in the midst of a recovering, but flat, employment market. Allowing relief to those few deserving individuals through bankruptcy by strictly, but flexibly, construing “undue hardship” in the way proponents say Congress originally intended seems to some to be both appropriate and necessary.  

For the lenders and the government, it is hard to overstate the significance of this re-evaluation. If bankruptcy becomes a viable option for some student loan borrowers, this may prompt new questions about the future of the loan program for the people who really pay for it: the taxpayers.

Both sides agree that the ability to predict section 523(a)(8) outcomes is important to debtors and creditors alike in consumer bankruptcy cases. Weltman & Moskowitz will continue to follow and report on Tetzlaff. We will keep clients and colleagues informed of the developing impact to lenders and borrowers. To help evaluate a particular loan default, contact Weltman & Moskowitz by phone or by email. Our attorneys routinely counsel on many types of dischargeability, debtor-creditor, and commercial litigation issues, as well as a full range of creditor recovery strategies.

Richard Weltman & Michael Moskowitz |

About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Richard E. Weltman, a partner with the firm, focuses his practice on bankruptcy and commercial litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Richard can be reached at (212) 684-7800, (201)794-7500 or Melissa A. Guseynov is an associate with the firm.