By: Donald L Swanson
The hits keep coming for student loans in bankruptcy.
This time the hit is this:
- student loans for attending medical school do not qualify as “commercial or business” loans for Subchapter V eligibility.
The central finding, for a medical student who worked as an employee for ten years before becoming an entrepreneur, is this:
- “the gap between incurring the debt and actually engaging in . . . commercial or business activity as an owner is simply too great.”
Background
Here’s how the hit happens this time.[Fn. 1]
A Subchapter V eligibility requirement is this: “not less than 50 percent” of debtor’s total indebtedness must have arisen “from the commercial or business activities of the debtor.”[Fn. 2]
The Debtor:
- incurs a large amount of student loan debt while attending medical school;
- then, works for ten years as a medical doctor for various employers;
- then, sets up an independent medical practice during the Covid pandemic; but
- the new practice fails for a variety of reasons, including Debtor’s own health issues.
So, Debtor files Subchapter V and claims that the medical school loans, totaling $645,869.89, qualify as “commercial or business” debt for Subchapter V eligibility. Debtor’s total debt load is $1,081,011.73.
The Bankruptcy Court dismisses Debtor’s Subchapter V case because Debtor’s “student loan debt” did not “arise from commercial or business activities.”
Say what?!
Obviously, Debtor could not practice medicine at all—as an entrepreneur or otherwise—without the medical school education that the student loans provided.
Rationale
Here’s the Bankruptcy Court’s rationale for finding that “Debtor is not an eligible” for Subchapter V relief.
The question is: Did the student loans arise from Debtor’s commercial or business activities?
It’s a backward looking question.
Statutory language does not require a direct linkage between, (i) Debtor’s commercial or business activities on the petition date, and (ii) the commercial or business activities from which the debt arose.
So, the next question is: Did the student loan debt arise from Debtor’s commercial or business activities?
–A Definition
“Commercial or business activities” is not defined in the Bankruptcy Code.
One definitions used by the courts for such term is:
- “any private sector actions related to buying, selling, financing, or using goods, property, or services, undertaken for the purpose of earning income.”
–The Definition Applied
When Debtor incurred the medical school debt, she intended to practice medicine as a doctor, and a medical school education is required to be licensed as a doctor.
Back in medical school, Debtor hoped to open her own practice at some point, but residency is required first and learning to practice within an established group is advantageous.
Yet, the Bankruptcy Court makes these declarations:
- Considering the totality of circumstances, it is “hard to conceive” that Debtor’ student loans “incurred to attend medical school fully ten years before opening a business can be construed as ‘purchasing or selling of goods or services for a profit’”;
- “Debtor’s education had nothing to do with buying, selling, financing, or using goods, rather it gave Debtor the opportunity, as a person, to practice a profession”;
- “Debtor did not operate a private business before going to medical school and did not operate a business after obtaining her medical degree until more than a decade had passed”;
- Rather, Debtor “was a student who hoped to gain employment and had aspirations of opening her own practice at some future time”;
- When Debtor began borrowing, “Debtor did not have any specific opportunity in mind, nor did she have any employment lined up”;
- Further, after graduating and completing her residency, Debtor “worked for four employers in three states before creating an LLC in 2020 and opening her practice in 2021”—the majority of courts reject the argument that working as an employee constitutes “commercial or business activities” for Subchapter V eligibility;
- “Here, the gap between incurring the debt and actually engaging in any sort of commercial or business activity as an owner is simply too great to find that the student loans at issue arose from Debtor’s commercial or business activities”; and
- “Accordingly, Debtor’s student loans do not qualify as business debts, rendering her ineligible to proceed as a Sub V debtor.”
Clarification
The Bankruptcy Court’s opinion adds this clarification:
- “the Court does not foreclose all debt which arises prior to a business opening” qualifying for Subchapter V relief;
- “Nor does the Court announce any sort of per se rule that student loan debt can never qualify as debt arising from commercial or business activities to satisfy Sub V eligibility”; and
- “Simply put, the student loan debt at issue here, incurred over ten years prior to opening the medical practice, is simply too far removed for Debtor to qualify for Sub V relief.”
Conclusion
Once again, help under the Bankruptcy Code is denied to a student loan debtor.
And that is, once again, a shame.
———————–
Footnote 1. The opinion on how student loans fit into Subchapter V eligibility requirements is In re Reis, Case No. 22-00517 in Idaho Bankruptcy Court (opinion issued May 2, 2023, Doc. 63).
Footnote 2. 11 U.S.C. ¶ 1182(1)(A) contains this Subchapter V eligibility requirement (emphasis added): “a person . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . not less than 50 percent of which arose from the commercial or business activities of the debtor.”
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
MEDIATBANKRY 