Article I, §8 of the U.S. Constitution grants Congress the power to establish "uniform laws on the subject of bankruptcies throughout the United States." Does the so-called "means test" contained in §707(b) as enacted by BAPCPA violate the Bankruptcy Clause of the Constitution?¹

The means test is "the heart" of BAPCPA's consumer bankruptcy reforms and provides an eligibility screening for chapter 7 relief based on a debtor's ability to pay.² An individual debtor fails the means test by having excess income remaining after applying the income/expense test of §707(b).³ In the absence of "special circumstances,"⁴ the case is presumed an abuse of Title 11⁵ and may be dismissed.⁶ If the debtor's "current monthly income" as defined in §101(10A) is less than the median family income reported by the Bureau of the Census for the applicable state,⁷ then the debtor is excluded under §707(b)(7) from the means test of §707(b)(2).

It is this lack of uniformity of the exclusion under §707(b)(7), which is based on disparate median family income, that renders the means test constitutionally suspect.⁸

Application of the Means Test

The first inquiry under §707(b) is whether the debtor's current monthly income is less than the applicable state median family income as determined by the Bureau of the Census for the family size.⁹ If so, then the debtor is excluded under §707(b)(7) from the presumption of abuse under §707(b)(2). If not, then the U.S. Trustee is required by §704(b) to either file a motion to dismiss or a statement as to why such motion is not being filed. Any creditor or party in interest may also file a motion to dismiss for abuse pursuant to §707(b)(1).

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BAPCPA gives debtors differing opportunities for a fresh start based solely on the state in which the debtor happens to live.

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The median family income varies widely among the states.¹⁰ Although outside the scope of this article, such variances cannot be explained as merely cost-of-living disparities. Obviously, the economic conditions of a state, including manufacturing activity, employment base, unemployment rate, percent of minority population, number of illegal immigrants and numerous other factors are reflected in its median family income. Because of the disparities in median family income, a single debtor with an annual income under the means test of $50,000 in Connecticut would be excluded under §707(b)(7) from the presumption of abuse, while a debtor earning the same in Mississippi would be subject to a presumption of abuse and possible dismissal of his case.¹¹ As a result, in qualifying for the §707(b)(7) exclusion, the means test lacks uniformity among the states for a class of debtors with the same current monthly income for the same household size.

The second glaring lack of uniformity under the means test is determination of the allowable living expenses when the debtor's current monthly income exceeds the applicable median family income and thus fails to qualify for the §707(b)(7) safe harbor.

The determination of living expenses is primarily based on national and local standards of the Internal Revenue Service (IRS) for various categories of expenditures.¹² These expense allowances can be obtained also from the U.S. Trustee Web site or from the IRS.

The expense deductions determine whether debtors who do not qualify for the exclusion under §707(b)(7) can still qualify for chapter 7 relief because the remaining excess income after deducting the allowable expenses from the current monthly income is too small to raise the presumption of abuse.¹³

The first expense is the national standard for food, clothing and other items allowed based on the size of the debtor's household and the amount of the debtor's gross income.¹⁴ However, there is a separate determination for Alaska and Hawaii "due to their unique geographic circumstances and higher cost of living."¹⁵ Otherwise, the standards are the same throughout the country. However, this does mean that debtors living in states other than Alaska or Hawaii are more likely to be subject to the means test.¹⁶ This in turn lacks uniformity among the various states.

The next allowable expense is the local standards for housing and utilities. These standards are probably the most nonuniform, as the allowances not only vary by state, but also by each county within a state. Thus, debtors in the same judicial district will have a different standard for determining abuse. For example, a family of four in Hamilton County, Tenn., would have an allowable monthly expense of $1,242, while a similar family in Polk County, which is in the same judicial district, would have an allowable expense of only $935. This results in a lack of uniform application of the presumption of abuse under §707(b)(2) for households of the same size with the same income in different counties within the same judicial district.

Under BAPCPA, debtors with the same income and the same family size are treated differently for purposes of determining eligibility for chapter 7 and for purposes of filing dismissal motions by the U.S. Trustee or any creditor. Such disparate treatment is clearly not uniform among the various states for individual debtors of the same class.

The Requirement of Uniformity

The U.S. Supreme Court has addressed the requirement of uniformity of bankruptcy laws on numerous occasions. In Hanover National Bank v. Moyses,¹⁷ the court held that the Bankruptcy Act of 1898 did not lack uniformity when the debtor's exemptions in bankruptcy were determined by state law. The Court specifically held that:

[T]he system is, in the constitutional sense, uniform throughout the United States when the trustee takes in each state whatever would have been available to the creditors if the bankrupt[cy] law had not been passed. The general operation of the law is uniform, although it may result in certain particulars [being different] in different states.¹⁸

In allowing exemptions to be based on the state law of the debtor's residence at the time of filing, the Court observed "this provision was not in derogation of the limitation of uniformity because all contracts were made with reference to existing laws, and no creditor could recover more from his debtor than the unexempted part of his assets."¹⁹

The Court described the uniformity requirement thusly:

One of the effects of a bankrupt law is that of a general execution issued in favor of all of the creditors of the bankrupt, reaching all his property subject to levy and applying it to the payment of all his debts according to their respective priorities... A rule that operates to this effect throughout the United States is uniform within the meaning of that term, as used in the Constitution.²⁰

In the case of Stellwagen v. Clum,²¹ the Court dealt with the constitutionality of the granting to the trustee the rights and powers of creditors provided by the state law of the debtor's residence. In upholding Congress' grant to the trustee to utilize state statutes for the benefit of creditors, even though results may vary, the Court held as follows:

Notwithstanding this requirement as to uniformity, the bankruptcy acts of Congress may recognize the laws of the state in certain particulars, although such recognition may lead to different results in different states. For example, the Bankruptcy Act recognizes and enforces the laws of the states affecting dower, exemptions, the validity of mortgages, priorities of payment and the like. Such recognition in the application of state laws does not affect the constitutionality of the Bankruptcy Act, although in these particulars the operation of the Act is not alike in all the states.²²

In the case of Vanston Bondholder Protective Committee v. Green,²³ the Court determined that the existence of a claim was a matter of state law, but whether that claim bore interest after a petition was filed was an issue of federal law.²⁴ In a concurring opinion, Justice Frankfurter described the application of nonuniform state laws in bankruptcy as follows:

The existence of a debt between the parties to an alleged creditor-debtor relation is independent of bankruptcy and precedes it. Parties are in a bankruptcy court with their rights and duties already established, except insofar as they subsequently arise during the course of bankruptcy administration or as part of its conduct. Obligations to be satisfied out of the bankrupt's estate thus arise, if at all, out of tort or contract or other relationship created out of applicable law, and the law that fixes legal consequences to transactions is the law of the several states.²⁵

Dependence upon state law to determine the property of the estate, the power of the trustee to recover fraudulent transfers and the debtor's allowable exemptions do not render bankruptcy acts constitutionally infirm, even though results may vary by state because these matters attached to the debtor-creditor relationship prior to the bankruptcy proceeding and are not variances created by Congress. This contrasts sharply with BAPCPA, which creates different standards for application of the means test for debtors with the same income and same household size that happen to be living in different states or even different counties within the same judicial district. The different standards are not based on variations of state law as applied to the debtor-creditor relationship prior to bankruptcy, but rather on the economic well-being and cost of living among the various states. As observed by the Court in Stellwagen:

The federal system of bankruptcy is designed not only to distribute the property of the debtor, not by law exempted, fairly and equally among his creditors, but as a main purpose of the act, intends to aid the unfortunate debtor by giving him a fresh start in life, free from debts, except of a certain character, after the property in which he owned at the time of bankruptcy has been administered for the benefit of creditors. Our decisions lay great stress upon this feature of the law—as one not only of private but of great public interest in that it secures to the unfortunate debtor, who surrenders his property for distribution, a new opportunity in life.²⁶

BAPCPA gives debtors differing opportunities for a fresh start based solely on the state in which the debtor happens to live. Such disparity, which is not based on state debtor-creditor law but rather on the median family income of the applicable state, appears on the surface at least to violate the Bankruptcy Clause of the Constitution.

Thus far, the Court has invalidated only one act for violation of the Bankruptcy Clause. In Railway Labor Executives Association v. Gibbons,²⁷ the Court held that it was inappropriate for Congress to pass a statute to provide economic benefits from the assets of one bankrupt railroad's estate to its former employees not hired by other carriers while not extending the same benefits to all railroads in bankruptcy. In a unanimous opinion, Justice Rehnquist rejected any suggestion that Congress could enact nonuniform bankruptcy legislation under the Commerce Clause:

Thus, if we were to hold that Congress had the power to enact nonuniform bankruptcy laws pursuant to the Commerce Clause, we would eradicate from the Constitution a limitation on the power of Congress to enact bankruptcy laws.²⁸

Justice Rehnquist summarizes prior Supreme Court holdings on the uniformity requirement as follows:

The uniformity requirement is not a straitjacket that forbids Congress to distinguish among classes of debtors, nor does it prohibit Congress from recognizing that state laws do not treat commercial transactions in a uniform manner. A bankruptcy law may be uniform and yet "may recognize the laws of the state in certain particulars, although such recognition may lead to different results in different states" (citation omitted). Thus, uniformity does not require the elimination of any differences among the states in their laws governing commercial transactions (citation omitted)... The uniformity requirement, moreover, permits Congress to treat "railroad bankruptcies as a distinctive and special problem" and "does not deny Congress power to take into account differences that exist between different parts of the country, and to fashion legislation to resolve geographically isolated problems" (citation omitted). In the 3R Act cases, we upheld Congress' response to the then-existing rail transportation crisis in the Northeast.²⁹

The Court, in summarizing its holding, clearly contrasts the difference between what the Bankruptcy Clause allows and what BAPCPA provides:

Our holding today does not impair Congress' ability under the Bankruptcy Clause to define classes of debtors and to structure relief accordingly. We have upheld bankruptcy laws that apply to a particular industry in a particular region (citation omitted). The uniformity requirement, however, prohibits Congress from enacting a bankruptcy law that, by definition, applies only to one regional debtor. To survive scrutiny under the Bankruptcy Clause, a law must at least apply uniformly to a defined class of debtors.³⁰

There is no doubt that in many respects BAPCPA results in different treatment under the means test of individuals making the same income with the same household size dependent solely upon the state, or even the county within the same judicial district, in which the debtor happens to reside. The question to be resolved is whether such different treatment sufficiently lacks uniformity as to violate the Bankruptcy Clause.³¹

Footnotes

¹ Board Certified in Business Bankruptcy Law and Consumer Bankruptcy Law by the American Board of Certification. Return to article

² Bankruptcy Abuse Prevention and Consumer Act of 2005; S.256; Pub. L. No. 109-8, 119 Stat. 23 (2005). Return to article

³ H.R. Rep 109-31, p.2 (2005). Return to article

⁴ Although in certain circumstances it is less, $167 per month is the maximum allowable remaining sum under §707(b)(2)(A)(ii) after deducting the allowed expenses from the current monthly income. Return to article

⁵ §707(b)(2)(B). Return to article

⁶ §707(b)(2)(A)(I). Return to article

⁷ Although §707(b)(1) does not require dismissals even if found abusive, it is likely that dismissal will result. Return to article

⁸ The "applicable state" is not defined. Is it the state of the debtor's residence, domicile or location of principal assets, since any of them is the proper venue under 28 U.S.C. §1409, or is it the state for determination of exemptions under §522(h)(3)(A)? Return to article

⁹ Comparison of the debtor's current monthly income to the applicable state median family income also determines the required length of the debtor's chapter 13 plan under §1325(b)(4). Other provisions such as different living expense allowances under National and Local Standards of the IRS also lack uniformity but may be more defensible as merely reflecting cost of living adjustment. See U.S. Trustee's Web site at http://www.doj.gov/ust or the Census Bureau for the median family income by state. Return to article

¹⁰ The median family income for a single person based on 2004 data in Mississippi is $28,288, while in Connecticut it is $52,530. Similarly, the disparity for a four-person household is even greater, ranging between $47,256 in New Mexico and $88,401 in New Jersey. No two states are the same. Return to article

¹¹ Put another way, debtors are subject to the presumption of abuse in Mississippi if the annualized current monthly income is as little as $28,289, but in Connecticut it can be as high as $52,531 before the presumption may arise. Return to article

¹² §707(b)(2)(A)(ii)(I). Return to article

¹³ §707(b)(2)(A)(I). Return to article

¹⁴ As pointed out by others, apparently it costs less to feed and clothe poor people than it does for those with more substantial income. See Lundin, Hon. Keith, "Ten Principles of BAPCPA: Not What Was Advertised," ABI Journal, September 2005, p. 1. Return to article

¹⁵ For example, a family of four with gross monthly income in excess of $5,834 is allowed an expense for food, clothing and personal expenses in the amount of $953, while in Alaska it is $1,105. Return to article

¹⁶ The author recognizes that this is the most defensible variation among the states, as the table itself reflects it is based on "higher cost of living" in Alaska and Hawaii. Return to article

¹⁷ 186 U.S. 181 (1902). Return to article

¹⁸ Id. at 190. Return to article

¹⁹ Id. at 189. Return to article

²⁰ 186 U.S. at 189-190. Return to article

²¹ 245 U.S. 605 (1917). Return to article

²² Id. at 615. Return to article

²³ 329 U.S. 156 (1946). Return to article

²⁴ Id. at 161. Return to article

²⁵ 329 U.S. at 169. Return to article

²⁶ 245 U.S. at 617. Return to article

²⁷ 455 U.S. 457 (1982). Return to article

²⁸ Id. at 468-469. Return to article

²⁹ 455 U.S. at 469-470. Return to article

³⁰ Id. at 473. Return to article

³¹ The author is mindful of a contrary analysis expressed by Prof. Chemerinsky in his recently published article "Constitutional Issues Posed in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," 79 Am Bank. L.J. 571. Prof. Chemerinsky emphasizes the Supreme Court's reference in Moyses "that uniformity is geographical and not personal." 186 U.S. at 188. This statement is accurate when applying state debtor-creditor law. Under Prof. Chemerinsky's analysis, Congress could conceivably pass bankruptcy laws applicable to citizens of some states, but not to others. It is doubtful that Congress can define a class of debtors based solely on geographic location. Return to article