Texas Bankruptcy Court Rules that Student Loans Qualify as Business Debts for Chapter 7 Eligibility Purposes

Summary:  On December 6, 2013, the court in In re Cunae, United States Bankruptcy Court for the Southern District of Texas, Case No. 12037424, denied the US Trustee’s motion to dismiss a Chapter 7 petition under §707(b) for substantial abuse on the basis that the debtor’s debts were primarily consumer debts.  The debts at issue were student loans incurred by the debtor for attending dental school.  In ruling that the dental school loans were business debts, the Court utilized the Fifth Circuit’s “profit motive” test in finding that the debtor incurred the student loans with an eye toward profit, and not for personal, family, or household purposes.  Although the debtor’s dental school education may have provided him with personal enhancement, the court determined that the debtor’s primary motive in pursuing his dental school education was profit oriented because it was done to enhance his ability to earn a future living.

Why the case is important:  The case can almost surely be extended to include other post-graduate student loans for law school and MBA programs, and possibly even undergraduate education loans to obtain a bachelor’s degree in fields such as engineering and accounting, and potentially any degree that is pursued with the primary motive being to obtain a job and make money.

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