This article challenges the conclusions set forth in Justin H. Dion's article, "Timing Is Everything...or Is It?: Cortez Challenges the 'Snapshot' Approach to Analyzing Abuse Pursuant to §707(b),"¹ which appeared in the October 2006 issue of the ABI Journal. In his article, Dion argues that, pursuant to the decision set forth by the U.S. Court of Appeals for the Fifth Circuit in U.S. Trustee v. Cortez,² post-petition changes in a debtor's financial circumstances must be considered for purposes of evaluating a §707(b)(1) abuse dismissal motion.

Cortez involved a chapter 7 case that was filed prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and that was sought to be dismissed pursuant to the pre-BAPCPA version of §707(b). Dion asserts that the amendments made to §707(b) by BAPCPA were insubstantial and would not have altered the outcome had it been analyzed pursuant to the BAPCPA version of §707(b).³ The argument that BAPCPA did not effectuate substantive changes to §707(b) leads Dion to overestimate Cortez with respect to the decision's impact on future §707(b)(1) abuse dismissal motions. If one properly takes account of the significant structural changes made to §707(b) by BAPCPA and their impact on judicial discretion, it becomes clear that these changes have rendered Cortez largely inapplicable in a post-BAPCPA world.

Judicial Discretion under §707(b)

One of the most significant BAPCPA amendments to Code §707(b) was the broadening of the standard pursuant to which an individual debtor's chapter 7 case may be dismissed—namely, from substantial abuse to abuse. In conjunction with the expansion of the dismissal standard, Congress constrained in various ways the opportunity for judges to exercise their discretion to define what constitutes abuse. First, Congress created a mechanical and formulaic means test that gives rise to a presumption of abuse if a debtor's disposable monthly income exceeds certain amounts,⁴ a presumption that may be rebutted only under a narrow set of circumstances and pursuant to highly specific, statutorily-defined procedures.⁵ Second, for those cases where the presumption of abuse does not arise or is rebutted, Congress has mandated that a court consider whether the debtor filed for bankruptcy in bad faith or whether the totality of the circumstances of the debtor's financial situation demonstrates abuse.⁶ Since the Code neither defines what constitutes bad faith nor provides an evaluative framework for courts to consider when the totality of circumstances demonstrates abuse, in those instances where the means-test presumption of abuse has not arisen or has been rebutted, judges retain some discretion to identify within the constraints of bad faith and totality of the circumstances—both vague and indeterminate standards—abuse that would justify dismissal of an individual debtor's chapter 7 case. A more detailed exploration of the manner in which judicial discretion may be exercised by a court in making the finding of abuse under §707(b)(1) will reveal why the Fifth Circuit's decision in Cortez does not have the far-reaching implications Dion suggests.

BAPCPA's Codification of the "Snapshot Approach"

Dion's argument builds on the straightforward and unquestionable proposition that the Cortez decision rejected the doctrine that had developed prior to BAPCPA for analyzing §707(b) dismissal motions—namely, the "snapshot approach" according to which "most post-petition changes in the debtor's finances such as incurring new debt, purchasing assets and incurring a fluctuation (either up or down) in monthly expenses and/or income are irrelevant for purposes of determining eligibility to obtain a chapter 7 discharge."⁷ But irrespective of whether the Fifth Circuit correctly decided Cortez, one need look no further than the statutory language of the Code itself, as amended by BAPCPA, to reach the ineluctable conclusion that the decision's command—that is, that "post-petition improvements in earnings can be taken into account and should be taken into account up until the point at which the discharge is entered"⁸—has limited applicability for purposes of evaluating §707(b)(1) abuse dismissal motions. More specifically, by virtue of the statutory definition of "current monthly income," determining abuse pursuant to the means test generally prohibits judicial inquiry into upward post-petition increases that the debtor experiences in his or her income. On the other hand, such increases may be relevant and appropriately considered for purposes of determining whether the debtor filed the petition in bad faith or whether the totality of the debtor's financial circumstances demonstrates abuse. Each of these situations will be considered in turn.

The thrust of Dion's argument (i.e., that "Cortez has discredited the snapshot theory as it applies to examining a debtor's income"⁹) targets the consequences of Cortez for application of the means test.¹⁰ However, calculation of current monthly income, a central component to the means test,¹¹ makes it clear that statutory constraints will generally preclude a court from considering post-petition income fluctuations in screening for abuse under the means test. The Code defines "current monthly income" as the average monthly income received by the debtor from all sources, irrespective of whether taxable, during one of two possible six-month periods: For those debtors who file with the court a current schedule of income and expenditures,¹² the six-month period will end on the last day of the calendar month immediately preceding the petition date;¹³ for those debtors who do not file such a schedule, the six-month period will end on the date on which the court calculates the debtor's current income.¹⁴ Given that failure to file such a schedule will prompt dismissal of the debtor's case, either by motion of the U.S. Trustee¹⁵ or by virtue of automatic dismissal,¹⁶ it seems reasonable to conclude that the bulk of cases in which an abuse dismissal motion alleges that the debtor flunks the means test (i.e., the debtor's current monthly income, reduced by certain specified amounts and then multiplied by 60, is greater than or equal to the statutory amount equated to an ability to repay) will involve a calculation of current monthly income based solely on pre-petition income received by the debtor—that is, income received during the six-month period ending on the last day of the calendar month immediately preceding the petition date.¹⁷ Accordingly, the Code's definition of "current monthly income" implements a snapshot of a debtor's financial situation, a snapshot that encompasses a six-month period that will definitionally exclude post-petition income in the majority of cases. BAPCPA's codification of a snapshot approach to defining "current monthly income" has thus largely eliminated judicial discretion to consider post-petition income fluctuations for purposes of the means test.¹⁸ This, in turn, has displaced and rendered partly inapplicable the mandate imposed by Cortez vis-à-vis §707(b)(1) abuse dismissal motions.

BAPCPA's Exceptions to Codification of the "Snapshot Approach"

There remain two important caveats regarding judicial discretion to consider post-petition income fluctuations for abuse dismissal purposes, but it is only by virtue of the second caveat that Cortez may have some vitality notwithstanding BAPCPA's codification of the "snapshot approach." First, for a debtor to whom the presumption of abuse under the means test applies, such a debtor may rebut the presumption "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 justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative."¹⁹ Assuming that the debtor can demonstrate special circumstances, the presumption of abuse will only be rebutted if the additional expenses or income adjustments allow the debtor to pass the means test (i.e., the debtor's current monthly income, reduced by certain specified amounts and then multiplied by 60, is less than the statutory amount equated to an ability to repay).²⁰ When one considers the mathematical structure of the means-test formula, it becomes clear that the presumption of abuse will be rebutted only when the debtor alleges one of three scenarios that result in the debtor's inability to repay the enumerated statutory amounts:²¹ (1) special circumstances justifying a decrease in current monthly income, (2) special circumstances justifying an increase in additional expenses, or (3) special circumstances justifying (a) a decrease in current monthly income and (b) an increase in additional expenses. As none of these scenarios involves an increase in current monthly income, the type of fluctuation upon which the Fifth Circuit focused in Cortez, it seems that the judicial discretion to consider current monthly income adjustments under §707(b)(2)(B) will remain confined to consideration of downward fluctuations.²² Given that Congress statutorily authorized departure from the "snapshot approach" for those instances in which a debtor seeks to rebut the presumption of abuse under the means test, and given that Congress did not enact a similar provision for those instances in which a party in interest would seek to establish that a post-petition income fluctuation would render a debtor ineligible for chapter 7 pursuant to the means test,²³ one must conclude that, contrary to Cortez, a court ought not consider upward post-petition fluctuations in income (except as required by the statutory definition of "current monthly income") when considering abuse dismissal motions predicated on an alleged violation of the means test.

There remains one exception to BAPCPA's codification of the "snapshot approach," an exception that seemingly would permit a court to consider both upward and downward post-petition income fluctuations in determining whether abuse sufficient to dismiss a debtor's chapter 7 case exists. If the presumption of abuse does not arise under the means test or if the presumption is rebutted, a court may nonetheless dismiss an individual debtor's chapter 7 case based on its finding that the debtor's bad faith in filing the petition or the totality of the debtor's financial circumstances indicates abuse.²⁴ Given the lack of statutory definitions or statutorily enumerated elements for making such a finding, Congress has arguably left the door open for a court to exercise its discretion in this context—including consideration of upward post-petition income fluctuations.²⁵ It would thus appear that Cortez remains applicable to those abuse dismissal motions predicated on bad faith or totality of the circumstances—a point overlooked by Dion in his article.

Conclusion

BAPCPA's changes to §707(b) undoubtedly have had a substantive impact on the provision's operative effect, particularly with respect to the manner in which courts retain discretion to define the requisite abuse for dismissal of an individual debtor's chapter 7 case. As outlined above, for abuse dismissal motions based on the means test, the statutory definition of "current monthly income" virtually eliminates judicial discretion for consideration of post-petition income fluctuations. Where the presumption of abuse arises under the means test and is sought to be rebutted by the debtor, the possibility will exist for consideration of downward fluctuations in the debtor's post-petition income. Only when the presumption does not arise or when it has been rebutted does it appear that a court will have a meaningful opportunity to evaluate the effect of a post-petition increase in the debtor's income. In light of these considerations, Cortez should have a limited effect on the manner in which courts analyze §707(b)(1) abuse dismissal motions.

Footnotes

1 Dion, Justin H., "Timing Is Everything...or Is It?: Cortez Challenges the "Snapshot" Approach to Analyzing Abuse Pursuant to §707(b)," Am. Bankr. Inst. J., Oct. 2006, at 1.

2 457 F.3d 448 (5th Cir. 2006).

3 Dion, supra note 1, at 46 n.2.

4 11 U.S.C. §707(b)(2)(A)(i).

5 Id. §707(b)(2)(B).

6 Id. §707(b)(3)(A), (B).

7 See Dion, supra note 1, at 46.

8 Cortez, 457 F.3d at 458.

9 See Dion, supra note 1, at 47.

10 See Id. ("[D]ebtors who were eligible for chapter 7 relief pursuant to the means test on the day the petition was filed may suddenly find themselves ineligible for chapter 7 relief if they experience a post-petition/pre-discharge change in income." (emphasis added)).

11 The means test provides: In considering under [§707(b)(1)] whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii) and (iv) [of §707(b)(2)(A)], and multiplied by 60 is not less than the lesser of...25 percent of the debtor's nonpriority unsecured claims in the case, or $6,000, whichever is greater; or...$10,000. 11 U.S.C. §707(b)(2)(A)(i) (emphasis added).

12 Among the duties imposed on a debtor when filing for bankruptcy, he or she must file with the court a schedule of current income and expenses. 11 U.S.C. §521(a)(1)(B)(ii).

13 Id. §101(10A)(A)(i).

14 Id. §101(10A)(A)(ii).

15 Section 707(a)(3) gives standing to the U.S. Trustee to move for dismissal of a chapter 7 debtor's case on the basis that the debtor failed to file within 15 days after the petition date (unless the court allows additional time) the documentation "required by paragraph (1) of §521." Id. §707(a)(3). While BAPCPA renumbered former Code §521(1) as Code §521(a)(1), it failed to update other provisions of the Code, such as §§707(a)(3) and 1307(c)(9), to reflect this change. While a literal-minded reader might be inclined to say that such provisions are now inoperative since they reference a nonexisting provision (i.e., §521(1)), a more reasonable interpretation would be that those provisions continue to have operative effect and should be read in light of the renumbering of Code §521.

16 See Id., §521(i)(1) (providing that individual debtor's chapter 7 case will be automatically dismissed on the 46th day after petition date if debtor fails to file all information required under Code §521(a)(1)). But see id., §521(i)(4) (providing that the court may decline to dismiss individual debtor's chapter 7 case if the court finds, among other things, that the best interests of creditors would be served by continued administration of the case).

17 Cf. Wedoff, Eugene R., "Means Testing in the New §707(b)," 79 Am. Bankr. L.J. 231, 248 (2005) ("If the debtor does not file schedules required by §521(a)(1)(B)(ii), it is likely that the case will be dismissed for cause under §707(a)(3), making it unnecessary to pursue dismissal under any of the provisions of §707(b). Accordingly, the six calendar months prior to filing will be the period for measuring [current monthly income] in nearly every case." (footnote omitted)). It would be appropriate, of course, for a court to consider post-petition changes in the debtor's income for those cases where the six-month period used to calculate current monthly income ends on a day subsequent to the petition date. The statute clearly commands that income received by the debtor from all sources during the six-month period be incorporated into the current monthly income calculation regardless of when that period ends.

18 Admittedly, courts do retain some discretion to define current monthly income. For example, the statutory definition does not define what it means for a debtor to "receive" income. Does this include income that was due to the debtor during the six-month period but never actually received? More importantly, the Code does not define "income," thus permitting a court to define which monies received by a debtor during the applicable six-month period should be included in the current monthly income calculus.

19 11 U.S.C. §707(b)(2)(B)(i).

20 Id. §707(b)(2)(B)(iv).

21 That is, the lesser of (1) 25 percent of the debtor's nonpriority unsecured claims, or $6,000, whichever is greater; or (2) $10,000.

22 See Wedoff, supra note 17, at 279 (noting that, for purposes of rebutting presumption of abuse under means test, "courts will be required to make discretionary determinations as to whether the claimed [special] circumstances justify...a reduction in income" (emphasis added)). It may be necessary for a court to consider an upward post-petition income fluctuation when presented as evidence contesting the debtor's assertion that special circumstances warrant a downward adjustment of current monthly income. Such evidence, however, would only be presented in a case where the presumption of abuse under the means test had already arisen.

23 It is patently clear that, when it so desires, Congress knows how to draft a Code provision relating to a post-petition increase in a debtor's income. See 11 U.S.C. §521(a)(1)(B)(vi) (providing that debtor must file "a statement disclosing any reasonably anticipated increase in income or expenditures over the 12-month period following the date of the filing of the petition").

24 Id., §707(b)(3).

25 See Wedoff, supra note 17, at 281 ("Motions under §707(b) will continue to be determined by exercises of judicial discretion, under the totality of the circumstances and bad faith standards that apply when the means-test presumption does not arise or has been rebutted").