Student loans incurred to earn a Ph.D. qualified as non-consumer debt because the debtor had a profit motive as demonstrated by his desire to own and run a business of his own, a Colorado district judge said during the course of reversing the bankruptcy court.
The debtor filed a chapter 7 petition with more than $90,000 in student loans taken out while he was employed. The U.S. Trustee filed a motion to dismiss under Section 707(b)(2), alleging there was a presumption of abuse because the debts were primarily consumer.
The parties stipulated that the motion to dismiss would be governed by deciding whether the student loans were consumer or non-consumer in nature. Based on testimony from the debtor, the bankruptcy judge dismissed the petition after deciding that the student loans were consumer debts.
District Judge Raymond P. Moore of Denver reversed and set aside dismissal in his Nov. 15 opinion.
Judge Moore said he was bound by the Tenth Circuit’s 1999 decision in Stewart III, which says that non-consumer debts are distinguished by a “profit motive.” In that case, the appeals court said that loans taken to invest in the stock market were “clearly” motivated by profit. Otherwise, Judge Moore said that the Tenth Circuit has given little guidance on how to characterize educational expenses, leaving the case before him to fall “nicely into the void left unresolved by Stewart III.”
Judge Moore said that student loans can be non-consumer if they are “incurred primarily as a business investment in oneself.” In the process, Judge Moore rejected several tests employed by the bankruptcy court.
Judge Moore said that a debtor is not required to show a tangible benefit to an existing business or a current employer and is not required to undertake further education to comply with an employer’s mandate. He also said there is no requirement to show advancement or higher income from a current job.
Judge Moore even said there is no requirement for the student to have been employed when borrowing for education. Otherwise, he said, college loans taken by full-time students never could classify as non-consumer.
The judge even implied that the same bankruptcy judge came down the wrong way in an Oct. 26 decision in a case not before him. That case involved a nurse who took loans to attain degrees qualifying her for higher-ranking jobs in nursing. In that case, the bankruptcy judge ruled that the educational loans were consumer debt.
Judge Moore said that if a nurse’s striving for professional advancement and higher income “are not business investments in oneself, the court cannot imagine what would be.”
Significantly, Judge Moore said a debtor is not required to have achieved his or her objectives before a loan is classified as non-consumer. On the other hand, he said that a student must show an attempt at using the education to realize profit. If a former student, for example, takes out loans but only aims for a job requiring no education, the loans would be consumer in nature, he said.
For ABI’s discussion of a Ninth Circuit Bankruptcy Appellate Panel opinion called Bushkin also focusing on profit motive, click here.