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Are Student Loans Non-Consumer Debts Allowing a Chapter 7 Case?

Norma Duenas

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Are Student Loans Non-Consumer Debts?

Are Student Loans Non-Consumer Debts Allowing a Chapter 7 Case?A couple months ago we dug into this question, and why it matters. See “Avoiding the Means Test If Your Student Loans are Non-Consumer Debts.” It matters because skipping the means test may allow you to file a Chapter 7 “straight bankruptcy” case instead of a 3-to-5-year Chapter 13 “adjustment of debts” one. A Chapter 7 case is not only much shorter; you usually pay much less to your creditors.

You skip the means test—an income and expenses test—and are more easily able to file a Chapter 7 case, if you have more non-consumer debts than consumer debts. Then you do not have “primarily consumer debt.” So if all or most of your student loans can be considered non-consumer debts, and those are larger than your consumer debts, you can likely file a Chapter 7 case when otherwise you could not have.

The above earlier blog post focused on the law locally on this question, which is inconclusive. There are very few directly binding court opinions, and I discussed the noteworthy ones there. Today I look at pertinent court opinions outside California to see what further guidance they provide. I end up focusing on a couple important opinions in the federal circuit right next door, in the 10th Circuit, specifically from the District of Colorado.


The Bankruptcy Code defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.” Section 101(8). A non-consumer debt is simply one that was not incurred for any of those purposes.


This is the heart of the question.

One phrase that courts have focused on is “profit motive.” If the debt was incurred with a profit motive then that would not be a consumer debt but rather a non-consumer one.

The main example of this by a relatively high court is the 10th Circuit Court of Appeals in a 1999 opinion called In re Stewart. (175 F. 3d 796) After citing the above statutory definition of consumer debt, this appeals court said: ” ‘Consumer debt’ is further distinguished from ‘non-consumer’ debt as a debt incurred with a ‘profit motive.’ ” (175 F. 3d 796, 806.)


Although this 10th Circuit opinion did involve student loans, it did not explain what it meant by “profit motive” for student loans. The court first asserted that at that time no “persuasive authority exists to help us determine the characterization of educational expenses such as books, tuition, and room and board as either consumer or business debt.” (175 F. 3d 796, 807.) Then the court did not say anything further about whether or not these “educational expenses” were incurred with a profit motive. That’s because under the facts of that case there were so much consumer debts that the court did not need to look any more closely at the student loans.

But a much more recent case from within that same 10th Circuit dug deeply into what the profit motive means with student loans. About a year and a half ago in Palmer v. Laying (559 BR 746, November 2016), the federal district court in Colorado overturned a bankruptcy court by characterizing $91,000 in student loans as non-consumer debts, enabling the debtor to avoid the means test.

The district court said that “the primary purpose for which the debt was incurred must be determinative. . . . [A]t least under the circumstances of this case, . . . non-consumer debts include those [student loans] incurred primarily as a business investment in oneself.” (559 BR 746, 750.)

So what were the circumstances of this Colorado case?

First, “all of [the debtor’s] student loans were used to pay for tuition and books.” (559 BR 746, 749.)

Second, the debtor’s “personal goal in taking the doctorate program was to advance his business knowledge and, ultimately, own and run a business.” (559 BR 746, 755.) “If wanting to own a business is not profit related, the Court does not know what is, at least where, as here, [the debtor] had an actual business and opportunity in mind . . . .” (559 BR 746, 756.)

Third, “the courses [debtor] took helped him understand how to attract customers to a business, build relationships with them, and, importantly, run a profitable business. . . . . No more was required for [debtor] to show that the student loan debt was incurred with a profit motive.” (559 BR 746, 756.)


Not necessarily. The primary principle laid down in this Colorado case is that “non-consumer debts include those [student loans] incurred primarily as a business investment in oneself.” (559 BR 746, 750, emphasis added.) This court makes clear that the facts there made for an easy decision. But the court also stated some principles that signal that the profit motive could well be much, much broader.

In rejecting the bankruptcy court’s rationales for considering the student loans to be consumer debt, the district court determined the following:

1. The debtor does not need to “demonstrate a tangible benefit to an existing business.” That would “[flip] the inquiry and places the focus upon the benefit to (or investment in) the employer [instead of the debtor]. This is not the focus of the profit motive test.” (559 BR 746, 751.)

2. The debtor does not need to “show some requirement for advancement or greater compensation in a current job or organization. . . . [T]here is . . . no suggestion in [the 10th Circuit Stewart case cited above] that a debtor must have incurred student debt or pursued education while being currently employed.” (559 BR 746, 751.)

3. The education received by the debtor does not need to be required by an employer. This would “[remove] any semblance of employee initiative from the decision to seek further education.” (559 BR 746, 751.)

4. The profit motive should not “be interpreted narrowly because it is ‘in keeping with the intent of the changes made to the [Bankruptcy] Code in 2005,’ specifically the ‘means test’ . . . . [T]he weeding out of undeserving debtors is done by the “means test,” not in deciding whether a debtor has “primarily consumer debts.” (559 BR 746, 752.)

5. The profit motive should also not be narrowly construed because there is no presumption that student loans are consumer loans. The profit motive is not an exception to that presumption. Instead “it is a way of differentiating between consumer and non-consumer debt.” (559 BR 746, 753.)

6. The profit motive should also not be narrowly construed because it would “be ‘problematic’ to determine which facts equated to a business investment rather than a personal investment. . . . . [T]his Court does not see why such inquiries would be any more problematic than in any other context where a court must inquire into the purpose of incurring a debt.” (559 BR 746, 753.)

7. “[P]rofit motive does not mean profit realized. Motive necessarily looks to the reasons behind a course of action, it does not suggest that the course of action need come to fruition. Thus, provided that a debtor can show that he or she took steps to realize the potential of his or her education, there is no reason why such evidence would not show that the debtor had a profit motive in incurring his or her student debt.” (559 BR 746, 754.)


Yes, although this Palmer v. Laying court opinion is not directly binding on the local bankruptcy courts, it could have a positive effect in at least two ways.

First, in questions of law without direct local precedent, well-reasoned court opinions on that question in other jurisdictions have persuasive value. This is especially true if the opinion is an appellate one, as is Palmer v. Laying, not just a trial-level bankruptcy court opinion. It may also be helpful that this case arose in the federal circuit geographically adjoining our 9th Circuit, and is quite recent. More importantly, the analysis in Palmer v. Laying is extensive and compelling.

Second, this federal district court in Colorado overturned the bankruptcy court opinion which had provided essentially the entire legal foundation for a California bankruptcy court’s very unfavorable opinion for debtors with student loans. In my last blog post I referred to a published opinion from February 2016 by a bankruptcy judge in Sacramento, In re Ferreira, 549 B.R. 232 (E.D. Calif.). That Sacramento judge’s opinion relied very heavily on the Colorado bankruptcy court’s opinion, In re Palmer, 542 B.R. 289 (Bankr.D.Colo. 2015), that was so emphatically rejected and overturned on appeal to the federal district court in Palmer v. Laying a few months later. Although In re Ferreira was never binding on bankruptcy courts in Southern California, it was quite unhelpful to have another 9th Circuit bankruptcy court, much less one in California, adopting such an extremely narrow interpretation of the profit motive for student loans. Having the foundation of In re Ferreira torn out from under it and supplanted by the infinitely friendlier, though also unbinding, Palmer v. Laying opinion can only help.


This is an evolving area of bankruptcy law, one that may make a tremendous difference for you if you have substantial student loan debts. So it is worth looking closely at what courts are saying outside our 9th Circuit. This is particularly true when, as here, what they are saying supports our pro-debtor arguments and undercuts an adverse opinion within our Circuit.

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Bankruptcy Attorney Norma DuenasOrange County and Riverside bankruptcy attorney Norma Duenas has represented more than 3,000 individuals and couples in filing for Chapter 7 and Chapter 13 bankruptcy. Her focus is on ensuring that clients understand how bankruptcy works and whether it is the right option for their unique financial circumstances.

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