We have discussed the Means Test in detail in this post. “Passing” the Means Test is the key to qualifying for Chapter 7 Bankruptcy, which is a much better option than Chapter 13 for many people. It allows people to get in and out of Bankruptcy in a few months, with no 3-5 year payment plans. While most people have to pass the test by using their household income and expenses, a second way to qualify for Chapter 7 is to show that your business debt is greater than your personal debt. This is simply adding up your business debt (business loans, business credit cards, guaranteed debt, etc.) and your personal debts (home and vehicle loans, credit cards, etc.) and comparing the totals. If business debts are at least a dollar more than personal debts, you skip the Means Test and qualify for a Chapter 7. Student loans have traditionally been viewed as personal debt. After all, the money goes for your personal education and not into a business, right? Maybe not! A Bankruptcy Court in Texas recently ruled that student loans used to pay for the debtor’s tuition and other educational expenses (not including living expenses) for dental school were business debts because “the education received will enhance the borrower’s ability to earn a future living.”
It remains to be seen how many courts will follow this opinion. Will it apply equally to undergraduate and post-graduate loans? All we know now is that the Texas court has broken the ice, and Bankruptcy lawyers in other states can probably make a good faith argument that their clients’ student loans are business debts in many cases. Of course, those lawyers will probably want a Plan B, such as Chapter 13, in case the court does not follow the Texas case but it is worth a shot for many clients. If you are facing Bankruptcy and Chapter 7, and have significant student loans, a good Bankruptcy lawyer will discuss this with you. Please note that using the loans to qualify for Chapter 7 is a completely different issue that getting a discharge of those student loans.