Seventh Circuit Court of Appeals Affirms Lower Rulings Denying Discharge of Student Loan Debt

In a case decided earlier this month, the Seventh Circuit Court of Appeals affirmed a bankruptcy court’s decision not to allow a debtor to discharge $260,000 of student loan debt. Although student loan debt is generally not dischargeable in a bankruptcy, if a debtor can show that repaying the debts would cause an undue hardship on their life, the Court should allow the debts to be discharged in the proceeding.

graduation-1426997The debtor and appellant in Tetzlaff v. Educational Credit Management Corporation argued that as a 56-year-old unemployed man living with his mother and suffering from mental health issues, he would be unable to repay the debt and suffer undue hardship if he was unable to discharge the debts. The bankruptcy court applied the legal standard for proving undue hardship and ruled that the debtor was employable and could repay the debt it he wanted to, and the Seventh Circuit affirmed.

The Standard for Undue Hardship to Justify the Discharge of Student Loan Debts

Bankruptcy courts can and do allow the discharge of student loan debts when the debtor demonstrates that repayment would cause them undue hardship. Prior court decisions have developed a standard to decide what a debtor must prove to qualify for the undue hardship exception, which consists of three factors that must be met.

First, a debtor must show that they would be unable to maintain a minimum standard of living for themselves and their dependents if they are required to repay the loans. Second, the debtor must demonstrate that this state of affairs, the inability to maintain a minimum living standard, is likely to continue for a significant portion of the repayment period. Third, the debtor must have made a good-faith effort to repay the loans.

The bankruptcy court in this case ruled that the debtor did not meet the second and third prongs of the test. Ruling that his situation was not likely to persist, the court noted that he had an MBA, was not mentally ill, and had the ability to obtain and hold a job that would allow him to repay his loans. The court further noted that he hadn’t made any payments on the loans, and that he did not make a good-faith effort at paying them off. The Seventh Circuit largely left these factual findings up to the discretion of the bankruptcy court and allowed the ruling to stand. The student loan debts will not be discharged.

Bankruptcy Can Still Help Debtors with Large Amounts of Student Loan Debt

Although the courts in this case ruled that the debtor would not suffer undue hardship, many debtors are able to demonstrate that repayment would cause undue hardship, warranting the discharge of student loan debts. Consulting and obtaining skilled legal counsel improves a debtor’s chances of discharging their student loan debt in a Chapter 7 bankruptcy. The experienced Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center may be able to help you get your student loan debts discharged along with your other debts as part of a bankruptcy. Don’t be discouraged by large amounts of student loan or other debt. The Schwartz Bankruptcy Law Center can help. Call 866-366-3328 today to schedule a risk-free consultation, or contact us through our website.

More Blog Posts:

Florida Doctor Gets Prison Time for Bankruptcy Fraud after Concealing Assets from Bankruptcy Trustee, Kentucky Bankruptcy Lawyers Blog, published May 1, 2015.

Supreme Court Ruling Allows Bankruptcy Judges to Decide Issues Outside of a Bankruptcy with the Parties’ Consent, Kentucky Bankruptcy Lawyers Blog, published June 9, 2015.

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