Section 704(b) (2): The Back Door into Chapter 7 for the Above-Median Debtor.

Author:Bartell, Laura B.
 
FREE EXCERPT

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), (1) which made extensive changes to the provisions of the Bankruptcy Code (2) governing chapter 7 bankruptcies filed by individual debtors. Most significant were modifications to [section] 707(b), a section which allows the court, "on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest" (3) to dismiss a chapter 7 bankruptcy case "filed by an individual debtor ... whose debts are primarily consumer debts" (4) if the granting of relief under chapter 7 "would be an abuse of the provisions of [chapter 7]" (5) In applying the standard of abuse, Congress inserted new language (often called the "means-testing" provision (6)) that requires that "the court shall presume abuse exists" (7) if the debtor's "current monthly income" (as defined in [section] 101(10A) of the Code (8)) reduced by certain specified monthly expenses (9) and multiplied by sixty (10) is not less than certain dollar amounts specified in the legislation. (11) A motion based on the presumption of abuse may be brought only against an above-median debtor. If the "current monthly income of the debtor ... and the debtor's spouse combined, as of the date of the order for relief, when multiplied by 12, is equal to or less than" (12) the median family income of the applicable state for a family of the same size as the debtors family, neither the judge, United States trustee (or bankruptcy administrator, if any), (13) trustee, or other party in interest may file a motion to dismiss based on the presumption of abuse. (14)

In order to alert the court and all parties in interest to potential cases of abuse, the United States trustee is required by [section] 704(b)(1) to "review all materials filed by the [individual] debtor and, not later than 10 days after the date of the first meeting of creditors, file with the court a statement as to whether the debtors case would be presumed to be an abuse under section 707(b)." (15) The court is directed to provide a copy of the statement to all creditors not later than seven days after receiving it. (16) In addition, if the debtor is an above-median debtor and the United States trustee determines that the debtors chapter 7 case is presumed to be abusive under [section] 707(b), the United States trustee must, pursuant to [section] 704(b)(2), either file a motion to dismiss not later than thirty days after filing the initial statement of abuse, or alternatively, file another statement "setting forth the reasons the United States trustee ... does not consider such a motion to be appropriate." (17)

If the United States trustee (or the court, trustee, or any other party in interest) files a motion to dismiss the debtor's chapter 7 case, the debtor may attempt to rebut the presumption created by [section] 707(b)(2), but the grounds for rebutting the presumption are narrow:

[T]he presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that [sic] justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. (18) The debtor may show such special circumstances only if the debtor "itemizes] each additional expense or adjustment of income" (19) and "attest[s] under oath to the accuracy of any information provided to demonstrate that additional expenses or adjustments to income are required." (20) Even if the debtor meets these requirements, the debtor may rebut the presumption only if those additional expenses or adjustments to income cause the debtor to pass the means test (meaning the debtor's income available to pay unsecured creditors is less than the statutory amounts). (21)

One might assume that the United States trustee would bring a motion to dismiss the chapter 7 case of an above-median debtor whenever the bankruptcy petition and associated schedules filed by such a debtor demonstrates failure of the means test, that is, when the computations described in [section] 707(b)(2)(A), which are included in Official Form 122A-2, (22) result in a dollar amount available to pay unsecured creditors in excess of the amount specified by Congress as creating a presumption of abuse. At the very least, one would think that the United States trustee would decline to file a motion to dismiss under [section] 704(b)(2) only if the debtor establishes to the satisfaction of the United States trustee that the debtor would be able to rebut the presumption of abuse under [section] 707(b)(2)(B)(i). But in fact, that is not the case. In most cases, the United States trustee does not bring a motion to dismiss a chapter 7 case filed by an above-median debtor even if the above-median debtor cannot pass the means test and even if nothing in the record demonstrates that the debtor would be able to meet the stringent requirements necessary to rebut the presumption of abuse.

In Part I of this article, I discuss the history of the role of the United States trustee in implementing the means-testing provisions. I note that, under the language adopted by Congress, the strict standards for rebutting a presumption of abuse in [section] 707(b)(2)(B)(i) apply only to the court, not to the United States trustee. Therefore, even if an above-median chapter 7 debtor would be unable to rebut the presumption of abuse, the United States trustee is free to determine under [section] 704(b)(2) not to file a motion to dismiss. In Part II, I look at a sample of the actual decisions made by United States trustees in chapter 7 cases of above-median debtors who fail to satisfy the means test. I found that, in most cases in the sample, even if the debtor failed the means test, the United States trustee declined to bring a motion to dismiss. In the cases in the study in which the debtor filed a document explaining why the debtor believed that he or she should be allowed to remain in chapter 7 before the United States trustee decided whether to file a motion to dismiss (what I call a "preemptive rebuttal of presumption"), the United States trustee declined to file such a motion in a very high percentage of the cases. In all cases in the study, the United States trustee most often explained a decision not to file a motion to dismiss by noting that the debtor had experienced a reduction in income from that used to make the computation of "current monthly income" under the means test. Therefore, I conclude that the United States trustees are utilizing their discretion under [section] 704(b)(2) to provide access to chapter 7 to those debtors whose financial circumstances differ from those reflected in the mathematical computations used to determine the presumption of abuse, discretion that Congress removed from the bankruptcy judges when it amended [section] 707(b) in 2005.

  1. CREATING A ROLE FOR THE UNITED STATES TRUSTEE IN IMPLEMENTING THE MEANS TEST

    From the time of its enactment in 1978, the Bankruptcy Code has permitted the bankruptcy judge to dismiss chapter 7 cases under certain circumstances. The original standard enacted by Congress in [section] 707 of the Code was dismissal "only for cause, including-(1) unreasonable delay by the debtor that is prejudicial to creditors; and (2) nonpayment of any fees and charges required under chapter 123 of title 28." (23) After a series of oversight hearings on consumer bankruptcy, (24) Congress added a new provision to [section] 707, allowing the court to dismiss a chapter 7 bankruptcy case filed by an individual debtor whose debts were primarily consumer debts for "substantial abuse." (25) However, under the new provision only the court on its own motion (but not at the request of a party in interest) could seek such a dismissal, and Congress directed that there would be a presumption in favor of allowing the debtor to remain in chapter 7. (26)

    When the nationwide program of United States trustees was implemented in 1986, Congress amended [section] 707(b) to permit the United States trustee to bring a motion to dismiss a consumer debtor chapter 7 case for substantial abuse, thus giving the Office of the United States Trustee authority to implement the means test. (27) Nevertheless, because of the statutory presumption in favor of permitting chapter 7 filings by consumer debtors, the United States trustees rarely brought such motions. (28) When the United States trustees did file motions, the bankruptcy courts denied them in a significant number of the cases. (29)

    The National Bankruptcy Review Commission, established pursuant to the Bankruptcy Reform Act of 1994, (30) issued its report on the operation of the Bankruptcy Code in 1997. (31) Over the objection of four dissenting commissioners, the report included no suggestions to curb abuse by consumer debtors, such as a mechanism for determining whether such debtors had resources to fund a chapter 13 plan (so-called "means-testing" provisions). (32) Dissenting commissioners James I. Shepard and The Hon. Edith H. Jones recommended that [section] 707(b) be amended to "require that the court dismiss or convert the case of a debtor who has filed for Chapter 7 if ... it is found that the debtor has the ability to repay a portion of his debts in Chapter 13." (33)

    Over the next two years, various members of Congress introduced a series of bills intended to limit access to chapter 7 by debtors who could afford to pay creditors in chapter 13. The bills generally either sought to amend [section] 109(b) to limit chapter 7 access to individual debtors who had income available to pay creditors (as determined by some sort of a means test) (34) or to provide grounds for dismissing a filed chapter 7 case if the debtor failed such a test. (35) The early bills also proposed to modify [section] 704 of the...

To continue reading

FREE SIGN UP