Are student loans considered "consumer debt" for purposes of the Chapter 7 means test?

Posted by Clifford Bordeaux | Jun 14, 2019 | 0 Comments

Answer: Maybe. But probably only in limited cases where, before borrowing the money, the debtor owned a business, or worked in a business, which required the debtor to incur the debt for business purposes.

Debtors whose debts are "primarily consumer debt" must generally file a "means test" in order to establish whether a "presumption of abuse" applies to their case. Debtors whose debts are not "primarily consumer debt" are exempt from this requirement.

In Aspen Skiing Co. v. Cherrett (In re Cherrett), 873 F.3d 1060 (9th Cir. 2017), the 9th Circuit court of appeals stated that "the key factor in determining whether ... debt is consumer debt lies in the debtor's purpose in incurring the ... debt." In the context of student loans, the debtor bears the burden of demonstrating a profit motive in order to establish that a debt is nonconsumer or a business debt. In re Palmer, 542 B.R. 289 (Bankr. D. Colo. 2015). "Profit motive," however, is interpreted narrowly as meaning that the debtor's motive in incurring the student loan debt is "tied to an existing business purpose[s] or [an] advancement in a current job or organization." In re Ferreira, 549 B.R. 232 (Bankr. E.D. Cal. 2016).

In Ferreira, the debtor was unemployed when she started nursing school. By the time of her bankruptcy filing, she was earning over $148,000 per year as a nurse. Clearly, nursing school was a profitable endeavor for her. Nevertheless, the court found that since the debtor was not already involved in a nursing-related business prior to incurring her student loan debt, the debt should not be treated as being incurred with a profit motive in mind, since the debtor's nursing degree was not tied to an "existing business purpose" or "advancement in a current job or organization." Moreover, the court stated that the record in the case "supports a conclusion that [the debtor] pursued a nursing degree for the personal purpose of benefiting herself and her lifestyle." (The court does not explain why or how someone would pursue "profit," if not for the ultimate purposes of "benefiting herself and her lifestyle"?)

The bottom line though, it appears, is that the debtor must be employed in, or operating, a business which is related to the purpose of the program or degree for which the funds were borrowed.

So who would meet this strict test? A paralegal who borrows money to attend law school? An entrepeneur who borrows for an MBA? A teacher who borrows to get a master's degree to increase her teaching earnings? A street-performing musician who borrows to attend music school to improve her craft?

Given the murkiness of the law on this topic, debtors who seek an exemption from the means test on the basis of having debts which are "primarily non-consumer" should be prepared to make the case that the debts were incurred for the purpose of advancing in a business or career path which they commenced before incurring the debt.

About the Author

Clifford Bordeaux

Clifford Bordeaux practices primarily in the areas of bankruptcy, transactional, estate planning and trust administration. As Of Counsel to the Law Offices of James F. Miller in Pasadena, Cliff also assists clients with estate planning and trust administration matters.  Cliff has been practicing ...


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