Erin K. Healy, it Depends: Prioritizing Function Over Form to Evaluate a Debtor's Dependency Relationships in Consumer Bankruptcy

• Publication year: 2011

COMMENTS

IT DEPENDS: PRIORITIZING FUNCTION OVER FORM TO EVALUATE A DEBTOR'S DEPENDENCY RELATIONSHIPS IN CONSUMER BANKRUPTCY

INTRODUCTION

Imagine that the character Richard O. Thornhill from North by Northwest found himself in personal bankruptcy. As the U.S. Trustee and the bankruptcy court examine his petition, they ask him about his income and expenses. He replies, "I'm an advertising man . . . I've got a job, a secretary, a mother, two ex-wives, and several bartenders dependent on me."¹Now the court must decide which, if any, of Thornhill's dependency relationships are relevant to his bankruptcy petition.

Arguably, Thornhill is as dependent upon his job for income as his boss and secretary are for the work that he produces. His mother may be emotionally, financially, or physically dependent upon him. Thornhill's ex- wives may depend on the alimony or child support they receive from him. Moreover, they may count on him to physically care for their shared children on occasion. Thornhill's relationship with his bartenders could surely be characterized as interdependent-they rely on him for cash; he relies on them for stiff drinks. The U.S. Bankruptcy Code ("Code") allows Thornhill to support his "dependents" in bankruptcy, but does not identify exactly who may be a dependent. Such relationships, however, may dictate the course of an individual debtor's petition.

Without statutory instructions,²bankruptcy courts have not interpreted the word "dependent" uniformly. In some courts, a "dependent" is a person to whom the debtor owes a legal obligation of support, such as the debtor's spouse or a minor, biological child.³In others,⁴a "dependent" is one who fits the Black's Law Dictionary definition as "[o]ne who relies on another for support; one not able to exist or sustain oneself without the power or aid of someone else."⁵This dependent is someone who actually relies upon the debtor for support, but to whom the debtor may not owe a legal obligation of support, like grandchildren, godchildren, elderly parents, domestic partners, and any other dependent individuals unrelated to the debtor by blood or legal ties.⁶Because bankruptcy courts have interpreted "dependent" differently, debtors with similarly situated dependency relationships are treated differently.

A similar pattern of inconsistent treatment arose when bankruptcy courts assessed the economic relationships in which the debtor was at least partially dependent on someone else.⁷In some contexts, the court included as part of the debtor's income financial support from a person upon whom she was dependent.⁸In others, the court would not include money from a non-filing person in its assessment of the debtor's income, even when the non-filing person contributed to the debtor's maintenance.⁹This different treatment regarding expenses and income did not arise from variances in state law or local practices that fall within the purview of the judges' discretion.¹⁰Rather, they stem from the very different biases and prejudices of different judges that dictate what each individual judge sees as a "valid" dependency relationship under the Code.¹¹

This Comment identifies these inconsistencies and offers a solution to them. Part I examines the way in which a debtor's dependency relationships are implicated in bankruptcy law, both as it existed before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") and after. Because courts lacked a coherent paradigm to analyze dependency relationships, opinions from different courts resulted in different treatment of similarly situated debtors.¹²While BAPCPA draws some helpful distinctions to determine Congressional intent as to which dependency relationships qualify for protection in bankruptcy,¹³it does not provide a complete method with which to analyze them. Thus, the treatment of dependency relationships under BAPCPA may remain unclear. Part II demonstrates Congress is not similarly indefinite about defining dependency relationships in other federal contexts. Part III shows relationships based on legal obligations of support are neither necessary nor sufficient to determine a debtor's actual dependency relationships. Part IV concludes, while BAPCPA attempted to make some positive changes with respect to a debtor's dependency relationships, ultimately it could perpetuate the pre-BAPCPA muddle. Thus, bankruptcy courts should take an expansive view of dependency relationships to account for a debtor's financial reality and ensure fairness.

I. ANALYZING A DEBTOR'S DEPENDENCY RELATIONSHIPS UNDER

BAPCPA-THE GHOST OF BANKRUPTCY LAW PAST

Before BAPCPA went into effect, bankruptcy courts routinely evaluated the dependency relationships of individual debtors.¹⁴They did so without statutory guidance as to the definition of "dependent" and without knowing whether Congress intended to protect the debtor's legal dependents or actual dependents.¹⁵Thus, what may have appeared to be an uncontroversial concept when the Code was drafted-dependency-has become loaded with meaning and subject to varying interpretations depending on the biases of the judge.¹⁶

Additionally, similarly situated debtors with similar dependency relationships were treated differently in different courts. Although BAPCPA is now in effect, courts will continue to evaluate a debtor's dependency relationships without explicit statutory guidance.¹⁷

A. The Dependency Relationships of Individual Debtors Are Implicated in

Petitions Under Chapter 7 and Chapter 13

In the course of any individual petition for bankruptcy, there are numerous instances when a court must evaluate a debtor's dependency relationships.¹⁸

This Comment will focus on the manner in which a debtor's dependency relationships are treated in the chapter 7 means test and the chapter 13 regular income and disposable income analyses.

1. The Chapter 7 Means Test

Chapter 7, or liquidation bankruptcy, provides relief for a debtor who cannot pay her debts as they come due.¹⁹When she files for bankruptcy, the court appoints a trustee to collect and then liquidate the property of the bankruptcy estate.²⁰The trustee then distributes the proceeds of liquidation to the debtor's creditors.²¹After distribution, the court immediately and unconditionally discharges the debtor from any further liability to her creditors on her prepetition debt, regardless of whether her creditors received full satisfaction of their claims.²²

Before BAPCPA, bankruptcy courts had discretion to dismiss an individual petition for liquidation if granting such relief was a "substantial abuse" of chapter 7.²³The old Code did not define "substantial abuse," and there was little guidance about the term in the legislative history.²⁴The majority approach to substantial abuse examined the totality of the debtor's circumstances to determine whether a petition was filed in bad faith or with fraudulent intent.²⁵Major components of the debtor's circumstances are (1) the income available to her (either her own, money contributed from someone upon whom she is dependent, or both) and (2) the cost of supporting those dependent upon her.²⁶

Under the pre-BAPCPA Code, the starting point for the substantial abuse analysis was the debtor's schedule of expenses, which she was required to file with the bankruptcy court.²⁷The court would evaluate the expenses for "reasonableness."²⁸Reasonableness was dictated by the nature of the expense, the amount of money claimed for it, and whom it benefited.²⁹If the debtor claimed an expense for a dependent, the court would evaluate their relationship and the dependent's actual need for the money.³⁰Thus, any court faced with a motion to dismiss for substantial abuse had to decide which of a debtor's dependency relationships were valid enough to recognize in bankruptcy.

Now, upon filing for chapter 7 relief, the debtor must show her petition is not an abuse-as opposed to a "substantial" abuse-of liquidation bankruptcy by demonstrating she does not have the ability to repay her debts.³¹The debtor begins the means test calculations by identifying her current monthly income ("CMI").³²A debtor's CMI is the average of her monthly income "from all sources that the debtor receives," regardless of whether the income is taxable, and is derived during a specified six-month period.³³It includes "any amount paid by any entity other than the debtor . . . on a regular basis for the household expenses of the debtor or the debtor's dependents" but excludes certain governmental benefits.³⁴The debtor may then take certain allowed deductions.³⁵If the debtor shows, after the deductions, her income is equal to or less than her state's median income for a family of her size, only the judge, U.S. Trustee, or bankruptcy administrator may file a motion seeking to have her petition dismissed as an abuse of chapter 7.³⁶If the debtor shows she has insufficient disposable income under the means test to allow her to repay some or all of her debts, she may stay in liquidation bankruptcy,³⁷absent other allegations of abuse.³⁸

Under BAPCPA, the debtor's allowed deductions from her CMI for purposes of the means test are only those items enumerated in

Sec. 707(b)(2)(A)(ii). Some expenses "shall" be included in the debtor's expenses while others are discretionary.³⁹A debtor is entitled to deduct the allowed monthly expenses specified in the IRS-issued National Standards and Local Standards, as well as her actual monthly expenses for the categories identified as Other Necessary Expenses (also issued by the IRS).⁴⁰These deductions may be taken for expenses paid to maintain "the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise dependent."⁴¹She may also claim, without contest, "reasonably necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse of the debtor, or the dependents of the debtor."⁴²Further, the debtor may automatically...