In the case of In re Ruff, 2022 B.R. 1638964, Ch. 7 Case No. 20-68855-pwb (Bankr. N.D.Ga. March 31, 2022) (click here for .pdf) the issue was whether the educational loans owed by the Debtor were “consumer” debts as defined by 11 U.S.C. §101(8) of the Bankruptcy Code, and incorporated into 11 U.S.C. §707(b).  If the student loan debt is a “consumer debt” the Debtor would not qualify for Chapter 7 as her consumer debt would be more than her non-consumer/business debt.  The United States Trustee opposed the Debtor’s position that the debt was not a consumer debt, and moved for dismissal of the Chapter 7 case.

Debtor attended college from 1995-1999 but never received a degree. She had no outstanding debt from her initial stint in college. In 2011, Debtor had a “midcareer evaluation” and decided to return to school and get a degree in Organizational Management.  The degree was not a requirement for her employment, but she believed it was necessary to advance to a better position in the insurance underwriting field.  In pursuit of her degree, which she received in 2014, she incurred student loans with a current balance of around $55,000.  In 2017 she was laid off, but subsequently obtained a position in the same insurance underwriting field. The new position, which she still holds, did not require a degree. Debtor also had a side business in 2016, but it failed in 2020. Debtor filed a Chapter 7 case in July 2020, scheduling $55,586.00 in educational loans and $22,573.00 in other unsecured debt and stated in her petition that her debts were not primarily consumer debts.  The categorization of the student loans as non-consumer/business debt was opposed by the U.S. Trustee.

Section 707(b)(1) provides that, after notice and a hearing, the Court may dismiss a case filed by individuals “whose debts are primarily consumer debts” if it finds that “the granting of relief would be an abuse of the provisions of chapter 7” unless the debtor consents to conversion of the case to chapter 11 or 13.  Judge Bonapfel noted that the Eleventh Circuit had not addressed a “test” for the issue of whether an educational loan is a consumer debt, but no court has held they are per se consumer debts.

If a student loan is not per se a consumer debt, the question becomes how to determine what exactly it is. A student loan is a debt with a somewhat esoteric quality; it is a debt incurred by an individual, but it is not a good that one purchases or an investment one makes in a tangible thing. It is a personal debt, yet it does not fit neatly within the definition of “consumer debt.” In other contexts, courts have adopted a “profit motive” test to determine whether a debt was incurred primarily for personal, family, or household purposes.

In In re Booth, 858 F.2d 1051 (5th Cir. 1988) the Fifth Circuit held, “the test for determining whether a debt should be classified as a business debt, rather than a debt acquired for personal, family or household purposes, is whether it was incurred with an eye toward profit.” The definition of consumer debt was adapted from consumer protection laws and that cases decided under the Truth in Lending Act “indicate that when the credit transaction involves a profit motive it is outside the definition of consumer credit.”  The Circuit “also rejected the district court’s determination that a signature loan, no matter what it is used for, is a consumer debt,” as it was inconsistent with the “profit motive test.”

“In In re Stewart, 201 B.R. 996 (Bankr. N.D. Okla. 1996) (‘Stewart I’), the debtor, a physician, owed approximately $837,000, including $218,000 in student loans from commercial lenders and $320,000 owed to his former in-laws that helped fund his education.”

The bankruptcy court acknowledged that courts have held that a consumer debt is one that the debtor incurred with no “profit motive.” The court noted that “profit motive is relevant but not necessarily decisive.” Stewart I, 201 B.R. at 1004. Under the circumstances of the case, the court concluded that the student loan debt and the debt to the in-laws were consumer debts because the evidence showed that a majority of the funds went to pay for living expenses for the debtor and his family during his lengthy education and a minority of the money was used for direct educational costs. The court emphasized that it was improper to substitute an “oversimplified judicial catch-phrase” such as profit motive for the definition Congress enacted for “consumer debt” .. Although the court noted that the case involved “peculiar facts,” it observed that student loans in general should be treated as consumer debt in the absence of unusual facts or factors.

On appeal, the 10th Circuit affirmed but broadened the scope of the profit motive test. Stewart v. United States Trustee (In re Stewart), 215 B.R. 456 (10th Cir. B.A.P. 1997) (“Stewart II”).

The BAP concluded (1) that student loans are not consumer debts per se; and (2) that the primary purpose for which the debt was incurred must be determinative. To that end, the BAP observed, “There may be circumstances in which the debtor can demonstrate that the student loan was incurred purely or primarily as a business investment, albeit an investment in herself or himself, much like a loan incurred for a new business.”

The Tenth Circuit Court of Appeals affirmed in Stewart v. United States Trustee (In re Stewart), 175 F.3d 796 (10th Cir. 1999) (“Stewart III”). The Tenth Circuit, however, focused less on the concept of “profit motive” and instead examined how much of the intra-family loans and the student loans the debtor used for family and personal purposes. The evidence was clear that the intra-family loans were used predominately for house payments, groceries, children’s activities, and vacations; nothing in the record showed that the main purpose of the loans was to finance the debtor’s education. Based on the use of the loan proceeds for personal and household expenses, the court concluded, the intra-family loans were consumer debts.

In Palmer v. Laying, 559 B.R. 746 (D.Colo. 2016) the District Court, on appeal, emphasized that “the primary purpose for which the debt was incurred must be determinative.”

The Palmer II district court emphasized that the fact that the employer did not require the debtor to obtain the degree or that it did not benefit the employer in some demonstrable way is “irrelevant as to whether Mr. Palmer had a profit motive in undertaking the doctorate.” Id. at 756 (emphasis in original). His motive, the district court concluded, was clear from his unequivocal testimony: to own a business. That, coupled with his testimony that his courses helped him understand how to attract customers, build relationships, and run a profitable business, demonstrated that his student loan debt was incurred with a profit motive.

Judge Bonapfel then reviewed other cases interpreting the profit motive test in varying ways, before concluding that the holding of the District Court in Palmer was was the better approach.  The Debtor in this case 1) incurred the loans and used the proceeds for tuition, not living expenses; 2) the degree was not required for her existing job, or for advancement with the employer; and 3) the purpose of the degree was to improve her skills and enhance her opportunities to make more money.  Therefore, the Debtor’s student loan was not a “consumer debt” and and the means test did not apply.


Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or  For more information, click here.