Aug. 3, 2015 – Mark Tetzlaff owes about $260,000 in student loan debt, including debt incurred while pursuing a law degree. Recently, the U.S. Court of Appeals for the Seventh Circuit ruled that Tetzlaff’s student loan debt cannot be discharged in bankruptcy.

Student loans are not dischargeable in bankruptcy unless a debtor shows an “undue hardship” – that is, he or she could not maintain a “minimal” standard of living if forced to repay the loans, "additional circumstances” determine that the debtor’s financial situation is likely to persist, and he or she made a “good faith” effort to repay the loan.

The 56-year-old Tetzlaff, who was unable to pass a bar exam, said depression, alcohol issues, and criminal convictions made it difficult to secure employment. He had previously worked as a financial advisor, a stock broker, and an insurance salesman.

The bankruptcy court found that Tetzlaff met the first requirement of the so-called Brunner test because he could not maintain a “minimal” standard of living. However, the court concluded that Tetzlaff did not meet the second two requirements. He appealed.

In Tetzlaff v. Educational Credit Management Corp., No. 14-3702 (July 22, 2015), a three-judge panel for the Seventh Circuit Appeals Court affirmed, concluding Tetzlaff did not fully meet his burden to prove the existence of an undue hardship.

The panel noted that the “additional circumstances” prong requires courts to find a “certainty of hopelessness” in the debtor’s financial situation.

In this case, the panel affirmed that Tetzlaff’s financial situation could improve since he was an intelligent person who held a MBA degree from Marquette University, a law degree from Florida Coastal University Law School, and the family dynamics that contributed to his legal problems were largely over. In addition, the panel noted that a psychologist determined Tetzlaff’s depression and anxiety was not debilitating.

“On these facts, the bankruptcy court’s analysis of the additional circumstances prong was not clearly erroneous,” wrote Judge Joel Flaum for the panel.

“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 panel noted that Tetzlaff may have been exaggerating his mental health problems; there was no evidence that his depression and anxiety reached clinical levels.

Tetzlaff was not allowed to introduce expert testimony that would have bolstered his case, because he failed to timely disclose the experts despite extensions. One would have testified that memory loss may have affected his bar exam performances.

The panel also ruled that Tetzlaff did not make a good faith effort to repay the loans, rejecting his argument that he did pay some of his law school-financed loans, even though he had not paid toward his loans with Educational Credit Management.

“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," Judge Flaum wrote.

“Furthermore … it seems that Tetzlaff repaid his debt to Florida Coastal largely because he needed the school’s cooperation in releasing his diploma and transcript,” Flaum wrote. “Thus, Tetzlaff was motivated by certain incentives to pay down his Florida Coastal debt that do not apply to the repayment of his debt held by Education Credit.”