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The following recommendations for reform of consumer bankruptcy law have been prepared by the Consumer Bankruptcy Legislative Group—a group of individuals assembled to represent diverse interests affected by consumer bankruptcy law. The recommendations presented here reflect only the positions of the individual members of the group, and not the positions of any of the organizations with which the group members are associated. The group members have worked together for nearly a year with the understanding that their discussions would be frank, open to compromise and confidential. The recommendations resulting from this process address many of the aims of legislation introduced in the 105th and 106th Congresses, including H.R. 833 and S. 625, now pending. Each recommendation reflects a consensus of the entire group. While none of the group members necessarily believes that these recommendations constitute the best possible bankruptcy policy or that they address all of the issues that should be considered in connection with consumer bankruptcy reform, all members of the group believe that these recommendations—made as compromises reflecting the many viewpoints of the group members—will result in legislation that is fair, workable and efficient.

H. Elizabeth Baird, Esq.
Hon. William Houston Brown
Robert M. Fishman, Esq.
Henry E. Hildebrand, Esq.
Gary Klein, Esq.
Ronald R. Peterson, Esq.
Stanley P. Spence, Esq.
Hon. Eugene R. Wedoff1

Recommendation 1: Means-testing2

Background: The aim of means-testing is to identify those individuals who have a substantial ability to repay general unsecured debt, and to provide a mechanism for denying them chapter 7 relief. Means-testing has three essential components: first, a method for determining the amount of income available to an individual for repayment of general unsecured debt; second, a definition of the level of income available for debt repayment that is sufficient to deny an individual chapter 7 relief; and third, a procedure by which a chapter 7 filing can be dismissed (or converted to chapter 13) if the debtor's available income exceeds the defined level.

Current proposals: H.R. 833 and S. 625 use essentially the same method for measuring how much income an individual debtor has available to repay general unsecured debt. The method begins with a calculation of the individual's "current monthly income." This is defined as the monthly income received by the debtor (and the debtor's spouse in a joint case), averaged over the 180 days "preceding the date of determination," together with amounts regularly contributed by others to the debtor's household expenses. Then, to determine what part of this monthly income is available for the repayment of general unsecured debt, four deductions would be made. Three of these deductions are expressly stated in both bills: (1) monthly living expenses as prescribed under standards issued by the Internal Revenue Service (IRS), but without including allowances for the repayment of debt; (2) monthly secured debt payments, defined as all secured debt payments contractually due in the 60 months following the filing of the bankruptcy petition, divided by 60; and (3) monthly priority debt payments, defined as the total amount of priority debt divided by 60. A fourth deduction, for charitable contributions of up to 15 percent of the debtor's gross income, would also be allowed. The income remaining after the four deductions are taken from "current monthly income" is presumptively available to pay general unsecured indebtedness.

Level of available income sufficient for denial of chapter 7 relief. Under both H.R. 833 and S. 625 the level of income available to pay general unsecured debts that will result in a denial of chapter 7 relief is determined on the basis of a five-year (60-month) accumulation of such income. Thus, under both bills, monthly income available to pay general unsecured debt is multiplied by 60. Under H.R. 833, a debtor would presumptively be denied relief under chapter 7 if the five-year income available to pay general unsecured debt is equal to or greater than $5000 (i.e., $83.33 per month). Under S. 625, a debtor would presumptively be denied chapter 7 relief if the five-year available income is equal to or greater than $15,000 ($250 per month). In addition to this presumptive denial of chapter 7 relief based on a fixed amount of income available to pay unsecured debt, both bills also provide for a presumptive denial if the debtor's income, after properly deducting expenses, would allow repayment of at least 25 percent of the debtor's general unsecured indebtedness.

Procedure for dismissal or conversion. Both H.R. 833 and S. 625 effectuate the denial of chapter 7 relief to debtors with the defined ability to repay general unsecured debt through §707(b) of the Bankruptcy Code. This subsection, which now provides for the dismissal of chapter 7 cases that would be a "substantial abuse" of the provisions of chapter 7, would be amended to provide for either dismissal or (with the debtor's consent) conversion to chapter 13, based on simple "abuse," which would be presumed if the debtor's schedules showed income available to pay general unsecured debt at greater than the defined levels. The procedure under the amended §707(b) would have several steps, and differs somewhat between the two bills.


Scheduling of monthly income. The debtor's schedules should list "current monthly income," as defined in the pending bills, except that the "180-day" average should be the average income during the six calendar months preceding the date of filing. If current monthly income does not reflect the income that will actually be available to the debtor at the time of the bankruptcy filing, the debtor should be required to state the amount of income that will actually be available, and the reasons why current monthly income does not reflect the actually available monthly income.

Scheduling of expenses. Deductions from income should be scheduled for (1) secured debt payments, including arrearages, (2) priority debt payments and (3) charitable contributions, again, as defined in the pending bills. Finally, the other living expenses of the debtor should be measured against average expenditure levels, based on data compiled by the Bureau of Labor Statistics (BLS). Specifically, (1) Federal Rules of Bankruptcy Procedure and Official Forms should be adopted to require the scheduling of expenses in categories corresponding to those in which consumer expenditure data is collected by BLS; (2) the U.S. Trustees and bankruptcy administrators should be required to designate and publish, on an annual basis, tables of average expenditure levels, applicable within their districts, for the categories specified in the rules and forms, based on BLS data; (3) a reasonable allowance should be designated by law for discretionary expenditures; and (4) debtors should be required to schedule their living expenses within the specified categories, compare their expenditures to the designated level in each category, and provide a specific explanation for any expenditure that is greater than the designated level. Debtors should also be required to enumerate and explain any necessary expenses for which average expenditure data cannot be designated, such as the costs of child care and future support payments, and the expenses of operating a business owned by the debtor.

Level of available income sufficient for denial of chapter 7 relief. Debtors should be subject to denial of relief under chapter 7 when their income available to pay general unsecured claims reaches a defined level of between $83 and $250 on a monthly basis ($5,000 to $15,000 over five years). There should be no denial of chapter 7 relief based on the percentage of general unsecured debt that the debtor's income would allow to be paid.

Procedure for dismissal or conversion. There should be no additional filing obligations imposed on case trustees, U.S. Trustees or bankruptcy administrators. Rather, case trustees should be given an incentive to pursue meritorious motions under §707(b).

Standing and time for filing. Standing to bring §707(b) motions should be as provided in the pending bills: case trustees (not limited to panel trustees) as well as judges, bankruptcy administrators, and U.S. Trustees should be allowed to bring §707(b) motions in any chapter 7 case.

Burden of proof. On a motion brought under §707(b), the court would be required to convert or dismiss the chapter 7 case if the debtor's schedules themselves reflected income available to pay general unsecured claims in excess of the defined level, unless the debtor established that reductions in current income or increases in appropriate expenses, resulting from events subsequent to the filing of the schedules, reduced available income below the defined level.

Reasons for the recommendation:

1. Definition of "current monthly income" scheduling of actually available income. Both of the pending bills define "current monthly income" as the monthly average of income derived during the 180-day period "preceding the date of determination." This definition fails to make clear the period during which income should be averaged. The period should be specified as the six months ending with the calendar month preceding the bankruptcy filing, so as to deal with full calendar months of income data and to give a cut-off date prior to the bankruptcy filing.

2. Designated levels of consumer expenditures. The best standard for reasonable expenses is the data collected by the BLS on average consumer expenditures. The pending bills both employ collection standards of the IRS, which are largely based on BLS data. However, there are at least three difficulties with using the IRS collection standards instead of BLS data itself. First, the IRS standards omit several items of consumer expenditures included in BLS reports. Second, the IRS housing allowance does not separately designate an appropriate level of expense for the operation and maintenance of a dwelling. Third, in several other respects, the IRS standards also combine distinct expense items in a single category, making determinations of reasonableness more difficult.

3. Required filings; deadline for §707(b) motions. The pending bills require either that the case trustee or U.S. Trustee prepare a statement as to whether the debtor's schedules reflect a level of income available to pay general unsecured debt that would require denial of chapter 7 relief. This is an unnecessary burden. If means-testing is enacted, it can be expected that very few chapter 7 debtors would submit schedules that reflected more than the amount of available income defined as giving rise to a presumption of abuse. Rather, debtors would assert sufficient "other necessary expenses"—that is, expenses in categories not covered by IRS standards, such as medical expenses and child care—to reduce available income to a level below the defined amount. It would be only after the meeting of creditors, where the debtor could be asked about budget items, that a judgment could be reached about the income actually available to the debtor to pay general unsecured debt.

4. Disqualifying level; elimination of percentage test. The pending bills recognize that a finding of abuse should be based on the ability to pay general unsecured claims only where there the ability to repay is significant. H.R. 833 measures this level at $83 per month, and S. 625 measures it at $250. The group makes no recommendation regarding the appropriate level within this range, but does recommend against defining abuse in terms of an ability to repay a particular percentage of unsecured debt, for two reasons. First, such a requirement could result in very small payments through a chapter 13 plan—not justifying the administrative costs of pursuing the motion. Second, and more important, such a requirement gives the debtor an incentive to incur more debt prior to filing the case.

5. Burden of proof. For purposes of §707(b) motions, the debtor's ability to pay general unsecured debts should be based on income actually available at the time of the hearing on the motion; "current monthly income," as stated in the debtor's schedules, should be evidence of the income actually available, but evidence of changes in the debtor's situation resulting in either increases or decreases in available income should also be considered by the court. The burden of establishing the relevant facts should vary, depending on which of three circumstances exists:

  1. Where the debtor's schedules themselves reflect income available to pay general unsecured debt at or above the defined level for abuse, the debtor should have the burden of establishing sufficient decreases in income or increases in expenses, occurring after the filing of the schedules, to reduce the available income below the defined level.
  2. Where the schedules reflect less than the defined level of available income for abuse, but budget items are in dispute, a debtor with current monthly income greater than the applicable median should have the burden of establishing the income actually available to the debtor and the appropriateness of all challenged expenditures that are either in excess of the designated amounts or in categories for which there is no designated amount.
  3. Where there is a dispute regarding schedules that reflect less than the defined amount of income for abuse, and the debtor's current monthly income is less than the applicable median, the moving party should have the burden of proof on all of the disputed budget items.


1 H. Elizabeth Baird is Assistant General Counsel of Bank of America; William Houston Brown is a bankruptcy judge in the Western District of Tennessee; Robert M. Fishman is a partner with Shaw, Gussis, Domanskis, Fishman & Glantz; Henry E. Hildebrand is the Chapter 13 Trustee in Nashville, Tenn.; Gary Klein is an attorney with the National Consumer Law Center; Ronald R. Peterson is a Chapter 7 Trustee in Chicago; Stanley P. Spence is Associate General Counsel for Pentagon Federal Credit Union; and Eugene R. Wedoff is a bankruptcy judge in the Northern District of Illinois. Return to article

2 The other recommendations cover (a) awards of fees and costs in connection with §707(b) motions, (b) timing of events in chapter 13, (c) treatment of secured claims in chapter 13, (d) length of chapter 13 plans, (e) chapter 13 discharge, (f) reaffirmation, (g) priority of support payments, (h) limitation on successive discharge, (i) debtor education, (j) consumer credit counseling, (k) notice to creditors, (l) filing of debtor's tax returns, (m) audits of debtor's schedules, (n) exemptions and (o) appeals of bankruptcy court decisions. Return to article

Journal Date: 
Saturday, May 1, 1999