Bankruptcy Calculator | Student Loans and The Means Test
Bankruptcy Calculator. If you are considering filing for Chapter 7 bankruptcy and have a large amount of student loan debt, it’s possible that your loans might help you qualify for Chapter 7. This is because in order to file for Chapter 7, most debtors must pass something called the means test. If, however, the majority of your debts are not consumer debts, you don’t have to take the means test at all. Recently, some courts have classified some student loans as nonconsumer debt. In these courts, if your student loans are not consumer debts, and their total amount outweighs your other debts, you may be able to skip the means test (bankruptcy calculator).
The bankruptcy means test, also called the median income test, measures whether you have too much income to qualify for Chapter 7 bankruptcy. The test looks at your monthly income and expenses to determine whether you have enough money left each month to repay some of what you owe to creditors. If you “fail” the means test, you may have to file a Chapter 13 bankruptcy instead.
Consumer vs. Nonconsumer Debts for the Means Test
The means test (bankruptcy calculator) only applies to individual debtors whose debt is primarily consumer debt. Businesses or consumers who have more nonconsumer than consumer debt do not have to pass the means test in order to qualify for Chapter 7 bankruptcy.
What Is Consumer Debt?
A consumer debt is incurred by an individual primarily for personal, family, or household purposes.
What Is Nonconsumer Debt?
Nonconsumer debt is not incurred primarily for personal, family, or household purposes. Instead, it is incurred with a profit motive or for a business or investment purpose. But courts also count debts that are not necessarily related to profits or business as nonconsumer debts if you did not “voluntarily incur” them for personal reasons. For example, many courts classify medical debts as nonconsumer because you don’t voluntarily incur them. The same goes for tax debts. For this reason, you might be surprised at what some courts count as nonconsumer debt. Other examples include personal injury and tort debts and student loans.
What Does “Primarily Consumer Debt” Mean?
In many states, courts consider your debts to be “primarily consumer” if more than 50% of the monetary value of your debts fall into the consumer category. In other states, courts require that more than 50% of the monetary value of your debts fall into the consumer category and the total number of your consumer debts is greater than the number of your nonconsumer debts. Generally, if less than 50% of your debt is consumer, you are not required to complete the means test.
Are Student Loans Nonconsumer Debts?
If the court considers your student loans to be nonconsumer debts, you may have an easier time qualifying for Chapter 7 bankruptcy. If your student loans and other nonconsumer debts, combined, are greater than the value of your consumer debt, you won’t have to take the means test. That means that you can qualify for Chapter 7 bankruptcy even if you would otherwise not pass the means test because your income is too high.
Not all courts classify student loans as nonconsumer. In fact, most courts presume student loans are consumer in nature, and will classify them that way unless there is some unusual factor to consider.
Texas Court Classifies Dental School Loans as Nonconsumer Debt
Recently, a bankruptcy court in Texas ruled that a portion of a bankruptcy filer’s dental school debts were nonconsumer. In re De Cunae, 2013 WL 6389205 (Bankr. S.D. Tex. 2013). The court used a “profit motive” test – which says that a debt is nonconsumer if the debtor incurred it with an eye toward making a profit. The court looked at several things to determine if Mr. De Cunae, the bankruptcy filer in this case, took out the loans in order to make a profit.
- The purpose of the loans. Here, said the court, Mr. De Cunae got the student loans to attend dental school primarily for the purpose of opening up a dental office and earning a higher income.
- How the debtor used the loan proceeds. Mr. De Cunae used part of the money for living expenses and part for tuition, fees, books, and materials necessary for attending school. The court determined that the portion of the loan Mr. De Cunhae used for living expenses was consumer debt and the portion he used for school expenses was nonconsumer debt.
Because a portion of Mr. De Cunae’s student loans were nonconsumer debts, the total amount of his nonconsumer debts outweighed his consumer debts, and he was allowed to file for Chapter 7 bankruptcy without passing the means test.
What Does This Mean for You?
This case is important because, unlike most courts, the court in In re De Cunae said student loans are not presumed to be consumer in nature. Rather, said the court, judges should analyze student loans in each case by looking at the purpose of the loan and how the proceeds were ultimately used, all the while consider the total circumstances surrounding the transaction.
However, in many areas, courts continue to assume that student loans are consumer debts barring some unusual facts or circumstances. If you have student loans and are considering bankruptcy, check with a local bankruptcy attorney to see how your local bankruptcy court views this issue.
Keep in mind that whether your student loans are classified as consumer or not for purposes of the means test (bankruptcy calculator) is a separate issue from whether you can wipe them out in bankruptcy. -nolo
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