Tetzlaff: Has the Undue Hardship Test Become Undue?

As the wage-market remains stagnant, and student indebtedness continues to rise, many graduates struggle to balance their student loan debt. Generally, when a debtor files for bankruptcy, her student loan debt is not dischargeable. However, under 11 U.S.C. § 523(a)(8), debtors can discharge their student loans through bankruptcy if they can prove that maintaining those student loan debts would impose an undue hardship upon themselves. Unfortunately, Congress did not define what undue hardship meant when enacting the bankruptcy code. Courts have since been left to interpret the definition of undue hardship, and many do so in different ways. Across the various circuits, “undue hardship” is evaluated similarly—but the differences in definitions can sometimes be outcome determinative. While rare, a jurisdiction employing a “totality-of-the-circumstances” approach to undue hardship may discharge a debtor’s student loans when a different jurisdiction employing a more rigid test would not. This is a problem because the United States Constitution requires uniform federal bankruptcy laws to be applied throughout the states. This Comment calls for the legislature to further define undue hardship to avoid the rare circumstances when debtors are treated dissimilarly solely because of what court they appear in. Since there has been no further definition of “undue hardship,” it is important to understand how the student loan discharge process works within the states of Illinois, Indiana, and Wisconsin. The Seventh Circuit, after the recent holding in Tetzlaff v. Educational Credit Management Corp., now has one of the strictest tests for evaluating undue hardship. The unanimous Tetzlaff opinion reiterated that the Seventh Circuit employs a three-pronged test to determine whether undue hardship exists. The debtor must show that: (1) he cannot currently maintain a “minimal” standard of living for himself and his dependents if forced to repay the loans; (2) additional circumstances show that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) he made a good faith effort to repay the loans in question. The Seventh Circuit clarified that the dischargeability of loans should be based on a certainty of hopelessness standard, not a present inability to fulfill a financial commitment. In light of that rationale, the second prong of the undue hardship analysis requires a debtor to show his “certainty of hopelessness.” Further, the Seventh Circuit held that the third prong of the analysis—the good faith requirement—requires payment on the specific loans the debtor is attempting to discharge. Paying private student loans in lieu of paying federal loans does not allow debtors to discharge those federal loans. Ultimately, this Comment argues that this strict application of the “undue hardship” definition is more exacting than the language of “undue hardship” itself, and that the Seventh Circuit should reconsider its rigid application of the undue hardship analysis