Student Loans and the Means Test in Chapter 7 Bankruptcy

The Chapter 7 “means test” determines whether your income qualifies you for a Chapter 7 bankruptcy. Otherwise known as the Chapter 7 Statement of Your Current Monthly Income, the means test prevents debtors with higher-than-median income from filing Chapter 7 bankruptcy. The interaction of student loans and the means test often requires careful consideration to maximize the effects of the bankruptcy discharge. 

Qualifying for Chapter 7 with Student Loans

If your household income exceeds the median income of your jurisdiction, then you fail the initial means test. In that case, the Bankruptcy Code gives rise to a presumption that you are are abusing the bankruptcy process. The presumption is that you should file a Chapter 13 instead of a Chapter 7. While Chapter 7 entails the quick and simple elimination of debts, Chapter 13 requires an extended repayment plan.

Unfortunately, the Chapter 7 means test does not allow deductions for student loan payments. Because student loans can also be paid through a Chapter 13, monthly student loan payments may not be used to reduce disposable income in the Chapter 7 means test. Student loan payments, no matter how massive, do not affect your eligibility for Chapter 7 on the means test.

On the other hand, if your student loans dwarf the rest of your debts, then you may not have to complete the Chapter 7 means test at all. If you incur your student loans for a professional degree, for instance, then those loans are considered “business” debts. Debtors with primarily business debt (as opposed to consumer debt) need not complete the means test. See 11 U.S.C. 707(b).

Finally, student loans may not be listed as “special circumstances” on the means test as provided for by 11 U.S.C. 707(b)(2)(B). Most courts interpret the “special” circumstances section of the means test to require a debtor to prove “extraordinary” expenses. Student loans are not considered extraordinary expenses for means test purposes. Thus, neither the nondischargeability of the student loans nor the long-term obligation to pay them renders student loan special enough for the Chapter 7 means test.

Student Loans and the Means Test in Chapter 7 Bankruptcy

If you experience difficulty attempting to balance your budget with large student loan payments, consider consulting an experienced bankruptcy attorney. The issues are complex, and still evolving, but there are solutions. Talk it over and assess your options before you make any big decisions or just give up altogether.