consumer or nonconsumer debt balancing actWarning – this article is fairly technical. It’s an important issue if you’re thinking about filing for bankruptcy and have student loan debt, so skim it to get some ideas.

At least once a week, a client comes in to me with a lot of credit card debt and student loans they can’t pay.

We crunch the numbers and realize that they can pay down their student loans if only they could get rid of the credit card debts.

For those people who are over median income and fail the means test, this may mean they can’t file for Chapter 7 bankruptcy and get rid of the credit card debt.

In some situations, however, we may be able to look to the student loan debt as a way to qualify you for Chapter 7 bankruptcy.

Means Testing Applies Only To Primarily Consumer Debt

Under the U.S. Bankruptcy Code, you’re required to go through means testing only if your debts are primarily consumer in nature.  That means we total all of your debt, then divide it into consumer and non-consumer debt.

If the non-consumer debt comes out to 50% + $1 of your total consumer debt, then you do not need to go through means testing.

What Is A Consumer Debt?

Under the U.S. Bankruptcy Code, a “consumer debt” is defined as “debt incurred by an individual primarily for a personal, family, or household purpose.”

So how do you know if a debt was incurred primarily for a personal, family, or household purpose?

In the 1998 case of In re Kelly, the court determined that if a debt isn’t incurred for business ventures or other profit-seeking activities then it is considered to be consumer debt. The bankruptcy court in Los Angeles went along with this reasoning in a related 1994 case, as have other courts covering California through the years.

In New York, too, the question of a consumer debt has come down to profit motives.

So long as the debt is considered to have been incurred with an eye towards profit, you can consider is as non-consumer in nature.

If you’ve got enough non-consumer debt to tip the scales, you’re in a far better position for Chapter 7 bankruptcy.

Is A Student Loan Considered Non-Consumer Debt?

If student loan debt can be considered non-consumer, then someone with a large amount of student loan debt may be able to file for Chapter 7 bankruptcy without worrying about the means test.

The question of whether student loan debt is consumer or non-consumer is an open question in many bankruptcy courts, with judges looking at a variety of factors to decide on a case-by-case basis.

After all, every student can claim that he or she decided to pursue an education because of a long-term profit motive. But the reality is that some people get an education for reasons other than capitalism.

Some folks go back to school to be smarter than they were before (I’m not saying it’s the end result, just that this is the intent). Others do so because they’re looking to avoid a tough job market.

Student Loan Payments As Means Test Deduction

In Los Angeles bankruptcy cases, we may be able to use student loan payments as a deduction on your means test for Chapter 7 bankruptcy purposes. This can help you qualify for Chapter 7 bankruptcy even if you’re above median income.

In New York bankruptcy cases, we cannot deduct those payments from the means test.

If you live in another place and are thinking about filing for bankruptcy, your lawyer can tell you about your local practice.

The Devil is In The Details

The upshot is that when you’ve got student loan debt, you really want to sit down with a lawyer who will take the time to work through every single angle.

For example, if you went back to school because your employer told you to do so in order to get a promotion then I’d look more closely into getting that student loan debt classified as being non-consumer debt.

If, on the other hand, you took a few classes for personal improvement and pleasure then I’d lean the other way.

There are lots of grey areas but, as you can see, for the right situation there may be a way to make a better outcome.

Image credit:  Roberto Trm