Supreme Court declines to hear student loan case involving bankruptcy

Bankruptcy discharge for student loans will remain challenging

Determining why the Supreme Court decides not to hear a case is an exercise in frustration. The Court grants what is known as “cert petitions” when at least four justices agree to hear the case. The Court typically will accept cases where there is an important legal question presented and if there is a split among the 13 circuit courts of appeal, the level of court directly below the Supreme Court.

Seemingly, these elements were present in the case of a man from Wisconsin who was appealing the refusal of the Seventh Circuit to grant the discharge of his student loans. His student loan debt was breathtaking, at $260,000. To make matters worse, he is 57 years old. If he had 30-year loans, he would be almost 90-years old before he would have them all paid off.

Undue Hardship

If he had a job. Which is something he has been less than successful at finding. He went to law school, then another law school, then attempted an MBA, finally graduated, but has since failed the Bar Exam twice. He has suffered from alcoholism and bouts of depression and acquired a criminal record, all of which apparently make him less than an ideal new employee.

One would expect this would meet the requirements for a bankruptcy discharge of a student loan, which is subject to a special standard different from that of most other debts. To discharge a student loan, the borrower must prove “undue hardship.”

The difficulty has been that Congress failed to define what constitutes this type of hardship, and the court-created test used in most of the country has made proving undue hardship an undue hardship for many borrowers.

Brunner Test

Many bankruptcy lawyers and former students had hoped this case would be accepted by the Court, and that it would clarify the meaning of undue hardship. The test used by many bankruptcy courts is known as the “Brunner test” and it demands that a debtor in a bankruptcy case show three things:

They must show that they have attempted to repay their loans, that if they tried to pay the full amount, it would deprive them of even a minimal standard of living and that it is unlikely that their financial situation or earning capacity will ever improve.

The debtor in the case from the Seventh Circuit seems to cover all of these bases, but he that court felt he had not tried hard enough, or in “good faith” to repay his loans.

Not enough of a circuit split?

At least one other circuit has applied a different standard, which involves the “totality of the circumstances.” This standard is seen as offering a more realistic and flexible means of determining undue hardship.

Apparently, the Supreme Court did not feel this split was sufficiently severe to require their better defining undue hardship, although it is rarely clear why they turn away a case. For anyone with significant school loans, no job and few prospects, it may be worth speaking to a bankruptcy lawyer, as one study found that less than one percent of debtors attempt to discharge student loans, but of those who did, almost 50 percent were successful.