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LEGISLATIVE UPDATE Section 102 (Dismissal or conversion)

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This month's column includes excerpts from an analysis, prepared by Hon. Eugene R. Wedoff (N.D. Ill.), of the needs-based consumer bankruptcy provisions of H.R. 833, as passed by the House of Representatives. This excerpt focuses on the means-testing provisions. For the full text of the complete analysis, search

§102 ("Dismissal or conversion")

Changes. Section 102, the central provision for the "needs-based" bankruptcy approach of H.R. 833, operates by broadening §707(b). Section 707(b) currently provides for dismissal of chapter 7 cases if granting relief under chapter 7 would be a "substantial abuse" of the provisions of chapter 7. "Substantial abuse" is not defined, and standing to bring a motion for dismissal under §707(b) is limitedÑit may be brought only by the United States trustee or by the court, and "not at the request or suggestion of any party in interest." Section 102 would change §707(b) in the following respects:

  1. The proposal would change the ground for relief from "substantial abuse" to simple "abuse" of the provisions of chapter 7, and would remove the current presumption in favor of the form of bankruptcy relief chosen by the debtor.
  2. If abuse is found, the proposal would allow, with the debtor's consent, conversion to chapter 13 (but not chapter 11) as an alternative to dismissal.
  3. Although "abuse" would continue to be undefined, two sets of considerations would apply in a court's determination of §707(b) motions: (a) a presumption of abuse would arise in defined circumstances, and (b) general factors would be applicable where the presumption did not arise.
  4. The presumption of abuse would arise under an amended §707(b)(2) where the debtor's "current monthly income"Ñafter specified deductionsÑwas at least $100 ($6,000 over 60 months). "Current monthly income" would be 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, but not including war crime reparations or Social Security benefits. Five deductions would be made from this amount:
    (a) "Estimated administrative expenses and attorneys' fees." This deduction would be defined as "10 percent of projected payments under a chapter 13 plan."
    (b) Monthly living expenses as prescribed under standards issued by the Internal Revenue Service for collection of unpaid taxes, with modifications. The expense allowances under the IRS collection standards fall into three categories: National Standards, covering food, housekeeping supplies, clothing, services, personal care products and miscellaneous expenses; Local Standards, covering housing and transportation; and Other Necessary Expenses, covering taxes, health care, court-ordered payments, involuntary wage deductions, accounting and legal fees and other expenses necessary to produce the debtor's income.1 Debtors would be limited to deducting the amounts set out in the national IRS standardsÑexcept that the IRS allowances for food and clothing could be increased by up to 5 percent "if it is demonstrated that it is reasonable and necessary." Debtors would also be limited to deductions for housing and transportation set out in the IRS local standards, without including payment of debt (such as home mortgages and auto loans). Finally, for items in the IRS's "other necessary expenses" category, debtors would be allowed to deduct their actual expenses, including "the continuation of actual expenses of a dependent child under the age of 18 for tuition, books and required fees at a private elementary or secondary school, not exceeding $10,000 per year."
    (c) 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.
    (d) Monthly priority debt payments, defined as the total amount of priority debt divided by 60.
    (e) Monthly charitable contributions. Section 707(b), as amended by H.R. 833, would continue to provide that in determining whether to dismiss a case under §707, the court may not "take into consideration whether a debtor has made, or continues to make, charitable contributions." "Charitable contributions" are defined to allow up to 15 percent of a debtor's gross income to be paid to any tax-qualified charitable organization.
  5. Where the presumption aroseÑthat is, where the debtor's "current monthly income," less the five categories of deductions, was at least $100Ñthe debtor would be able to prevail against a §707(b) motion only "by demonstrating extra-ordinary circumstances that require additional expenses or adjustment of current monthly income" and showing that these extraordinary circumstances were sufficient to reduce the debtor's income after allowable expenses to less than $100 monthly. In order to make such a demonstration, the debtor would have to "itemize each additional expense or adjust-ment of income and provide documentation for such expenses or adjustment of income and a detailed explanation of the extra-ordinary circumstances which make such expenses or adjustment of income nec-essary and reasonable," and the accuracy of all such itemized information would have to be attested to, under oath, by the debtor and the debtor's attorney.
  6. Where the presumption did not ariseÑthat is, where the debtor's "current monthly income," less the five categories of deductions, was less than $100Ñor where the presumption was rebutted, a court ruling on a §707(b) motion would be required to consider (a) whether the debtor filed the petition in bad faith, and (b) whether the "totality of the circumstances...demonstrates abuse."
  7. The debtor's schedules of current income and expenses (currently set out on Schedules I and J) would be required to include a statement of "current monthly income," together with calculations showing whether there would be a presumption of abuse under §707(b). The Federal Rules of Bankruptcy Procedure would be required to be amended so as to prescribe a form for these schedules. The trustee would be required to review the materials submitted by the debtor, and, within 10 days after the §341 meeting of creditors, file a statement with the court as to whether the debtor's schedules would give rise to a presumption of abuse. The court would be required to provide a copy of the statement regarding the presumption to all creditors within five days of its filing.
  8. If the presumption applied, and if the debtor's income was at least equal to a defined national median, then the trustee would have the obligation to file either a motion under §707(b) or a statement as to why such a motion was not being filed.2
  9. The current limitation on standing to bring a motion under §707(b) would be reversed, with amended §707(b)(1) affir-matively providing that the motion could be made by "the trustee or any party in interest." However, there would be different limitations on standing to bring a motion under §707(b), depending on whether the presumption was involved. In order for the presumption to be invoked by any party, the debtor's income would have to be above a defined regional median.3 But for a creditor to bring any motion under §707(b)Ñeven a motion that did not involve the pre-sumptionÑthe debtor's income would have to at least equal to the national median applicable to the trustee's mandatory filing.4
  10. If a panel trustee brought a successful motion under §707(b), and if the debtor's attorney violated Fed.R.Bankr.P. 9011 by filing the case under chapter 7, the court would be required to award damages against the debtor's attorney, which could include both reimbursement of the trustee's expenses and an award of a civil penalty to the trustee. The signature of the debtor's attorney on a bankruptcy petition would be declared to constitute a certificate that the debtor's "petition, lists, schedules, and documents" are "well grounded in fact."
  11. If a party other than a trustee or U.S. trustee brought an unsuccessful motion under §707(b), and if the court found that the motion was not sub-stantially justified or that the party brought the motion solely to coerce the debtor into waiving a right under the Bankruptcy Code, the court would be authorized to award the debtor all reasonable costs in contesting the motion, including attorneys' fees.
  12. Within three years of the enactment of the amendments, the Director of the Executive Office for the United States Trustees (EOUST) would be required to submit a report to Congress on the utility of the IRS collection standards in measuring abuse under §707(b).


1 The IRS collection standards are set out in Volume 2 of the Internal Revenue Manual (Manual) §5323 (CCH 1995), and incorporate a number of exhibits also set out in the Manual (Exhibits 5300-45 to 5300-51). The Manual is also available in the Westlaw library FTX-IRM. More recent versions of some of the exhibits may be found at the IRS website, for example: Return to article

2 For this purpose, the median income is defined as "the highest national median family income last reported by the Bureau of the Census for a family of equal or lesser size [than the debtor's family], or in the case of a household of one person, the national median household income for one earner," except that, for a family of more than four, the applicable median would be "the national median family income last reported by the Bureau of the Census for a family of four individuals plus $583 for each additional member of the family." Return to article

3 An amended §707(b)(2)(C) would provide that no one would be allowed to bring a motion "under this paragraph" [that is, based on the presumption of abuse defined in paragraph (b)(2)] if the debtor's income was not greater than "the regional median household monthly income calculated on a semiannual basis for a household of equal size," except that "for a household of more than four individuals, the median income shall be that of a household of four individuals plus $583 for each additional member of that household." Return to article

4 For all motions under §707(b), amended §707(b)(6) would provide that "only the court, the United States trustee, or the [case] trustee" would have standing if the debtor's income was less than the defined national median. Return to article

Journal Date: 
Wednesday, September 1, 1999

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