Student loans taken out to finance a professional education are considered consumer debts, not business debts, at least where the debtor was not already in that profession when the loans were taken out.
Bankruptcy Judge Christopher D. Jaime of Sacramento, Calif., ruled in a chapter 7 case where the U.S. Trustee was moving to dismiss for “substantial abuse” under Section 707(b)(1) and (b)(3)(B).
The debtor was a woman who was unemployed while she was in nursing school and incurred more than $50,000 in student loans. When she filed under chapter 7, she had a job as a nurse and was earning almost $150,000 a year.
Judge Jaime rejected the argument that student loans are always non-consumer debt. Instead, he inquired as to whether the student loans were incurred “with the necessary profit motive.” He went on to hold that the profit-motive element “is interpreted narrowly.”
The debtor lost because the loans were not “tied to an existing business purpose or an advancement in a current job.”
Since more than 50% of her total obligations were consumer debts, the debtor was subject to a “substantial abuse” dismissal. In his Feb. 29 opinion, the judge ruled in favor of the U.S. Trustee and gave the debtor a choice between dismissal or conversion to chapter 13 because she could reduce her expenses by $800 a month to repay creditors.