§ 8.6     11 U.S.C. § 707(b) Problems Are Likely
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 8.6, at ¶ ____, LundinOnChapter13.com (last visited __________).

With the enactment of 11 U.S.C. § 707(b) in 1984, Congress sought to limit access to Chapter 7 for debtors considered “abusive” of Chapter 7. As amended in 1986, after notice and a hearing, on the court’s own motion or on the motion of the U.S. trustee, § 707(b) provided that the court “may dismiss” a case filed by an individual debtor with primarily consumer debts if the granting of relief under Chapter 7 would be a “substantial abuse” of Chapter 7.1 As fleshed out in the legislative history2 and court interpretations of § 707(b), substantial abuse could be as ordinary as an individual debtor with primarily consumer debts whose disposable income was sufficient to fund a hypothetical Chapter 13 plan.3


In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)4 further restricted access to Chapter 7 by reducing “substantial abuse” to “abuse” and adding a presumption of abuse when the debtor’s current monthly income, as defined in § 101(10A), exceeds the statutory formula found in § 707(b)(2). The content of § 707(b) and its strange application in Chapter 13 cases are discussed in detail elsewhere.5 The “legislative history”6 of BAPCPA is replete with the notion that “those who can pay, should pay,”7 and the abuse test in § 707(b) was the centerpiece of congressional intent to block can-pay debtors from using Chapter 7 to discharge their debts.


After the 2005 amendments, debtors’ counsel must carefully consider whether a Chapter 7 debtor is eligible and could fund a Chapter 13 plan and, if so, whether the court will permit the debtor to proceed in Chapter 7. The requirement that the debtor file a schedule of income and expenses—added to 11 U.S.C. § 521(1) in 1984 at the time of enactment of § 707(b) and now found in Official Forms 106I, 106J and 106J-2—and the BAPCPA requirement that Chapter 7 debtors file Official Form 122A-1 to address the abuse test, ensure that the information necessary to assess whether the debtor could fund a Chapter 13 plan will be available to the court, creditors and U.S. trustee in every Chapter 7 case.


There is no solid statistical evidence that the abuse test in § 707(b) has forced more than a handful of debtors to file Chapter 13 instead of Chapter 7.8 But, anecdotally, debtors’ attorneys report they always have one eye on § 707(b)—especially when counseling higher-income clients about chapter selection. The threat of (costly) § 707(b) litigation is substantial incentive to consider Chapter 13. This view is supported by the 1984 enactment of the requirement that debtors acknowledge being advised of Chapter 13 as an alternative.9 The Bankruptcy Reform Act of 1994 added a requirement that the Chapter 7 trustee question every Chapter 7 debtor at the meeting of creditors with respect to the debtor’s eligibility for Chapter 13 relief.10 In 2005, BAPCPA pumped up the abuse test to further screen for Chapter 7 eligibility.11 Many § 707(b) cases discuss disposable income and other concepts found in Chapter 13. Failure to “pass” the § 707(b) abuse test results in dismissal or, if the debtor consents, in conversion to Chapter 13. The possibility of success in a Chapter 13 case is a major indicator of abuse of Chapter 7. Some reported § 707(b) decisions delay dismissal of the Chapter 7 case to give the debtor an opportunity to consider conversion to Chapter 13.12


Filing Chapter 13 in the first instance avoids § 707(b) problems because the abuse test applies only in Chapter 7 cases.13 Even an “abusive” Chapter 7 debtor can confirm a Chapter 13 plan that provides substantial debt relief.


1  11 U.S.C. § 707(b) was again amended in 1998 by the Religious Liberty and Charitable Donation Protection Act of 1998, Pub. L. No. 105-183, § 4, 112 Stat. 517 (1998). The 1998 amendment prohibits the bankruptcy court from considering in the “substantial abuse” calculus “whether a debtor has made, or continues to make, charitable contributions” within certain limits. Related amendments with respect to the recovery of fraudulent conveyances and the calculation of disposable income at confirmation of a Chapter 13 plan are discussed in § 50.3  Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances and § 91.3  Reasonably Necessary for Maintenance or Support.


2  See S. Rep. No. 98-65, at 43 (1983).


3  See In re Walton, 866 F.2d 981 (8th Cir. Jan. 19, 1989) (McMillian, Fagg, Bowman); Zolg v. Kelly (In re Kelly), 841 F.2d 908 (9th Cir. Mar. 2, 1988) (Schroeder, Poole, Kozinski); In re Andrus, 94 B.R. 76 (Bankr. W.D. Pa. Dec. 13, 1988) (Cosetti); In re Bell, 56 B.R. 637 (Bankr. E.D. Mich. Jan. 13, 1986) (Rhodes); In re Grant, 51 B.R. 385 (Bankr. N.D. Ohio July 22, 1985) (White).


4  Pub. L. No. 109-8, 119 Stat. 23 (2005).


5  See § 94.1  Big Picture: Too Many Issues, § 94.2  Netting Issues, Including Exclusion of Payments for Debts, § 94.3  Accounting for Spouses, § 95.1  In General, § 95.2  National Standards, § 95.3  Local Standards: Housing and Transportation, § 95.4  Other [Necessary] Expenses—In General; All Categories, § 95.5  Other [Necessary] Expenses—Accounting and Legal Fees, § 95.6  Other [Necessary] Expenses—Charitable Contributions, § 95.7  Other [Necessary] Expenses—Child Care, § 95.8  Other [Necessary] Expenses—Court-Ordered Payments, § 95.9  Other [Necessary] Expenses—Dependent Care, § 95.10  Other [Necessary] Expenses—Education, § 95.11  Other [Necessary] Expenses—Health Care, § 95.12  Other [Necessary] Expenses—Involuntary Deductions, § 95.13  Other [Necessary] Expenses—Life Insurance, § 95.14  Other [Necessary] Expenses—Secured or Legally Perfected Debts, § 95.15  Other [Necessary] Expenses—Unsecured Debts, § 95.16  Other [Necessary] Expenses—Taxes, § 95.17  Other [Necessary] Expenses—Optional Telephones and Services, § 95.18  Other [Necessary] Expenses—Student Loans, § 95.19  Other [Necessary] Expenses—Internet Provider/E-mail, § 95.20  Other [Necessary] Expenses—Repayment of Loans to Pay Federal Taxes, § 95.21  Health and Disability Insurance, § 95.22  Family Violence Expenses, § 95.23  Five Percent More Food and Clothing, § 95.24  Elderly, Ill or Disabled, § 95.25  Administrative Expenses, Sorta, § 95.26  Education Expenses, § 95.27  Home Energy Costs, § 95.28  ABLE Program Contributions, § 96.1  Average Monthly Payments on Account of Secured Debts, § 97.1  Total Priority Debts and Divide by 60 and § 98.1  Additional Expenses or Adjustments to CMI.


6  See § 2.2  Brief History, Including “Legislative History,” of BAPCPA.


7  See § 3.2  One: Those Who Can Pay Should Pay.


8  The number of 11 U.S.C. § 707(b) actions actually filed by the U.S. trustee to dismiss “abusive” Chapter 7 cases is minuscule.


9  In re Grant, 51 B.R. 385 (Bankr. N.D. Ohio July 22, 1985) (White). See 11 U.S.C. § 342(b), which requires that the clerk of the bankruptcy court “give written notice . . . that indicates each chapter of this title under which such individual may proceed.”


10  Section 115 of the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 115, 108 Stat. 4106 (1994), added a new 11 U.S.C. § 341(d), which states that the Chapter 7 trustee “shall orally examine the debtor to ensure that the debtor in a case under Chapter 7 of this title is aware of . . . (2) the debtor’s ability to file a petition under a different chapter of this title.”


11  11 U.S.C. § 707(b)(2); see Official Forms 122A-1 and 122A-2.


12  See, e.g., In re Heffernan, 242 B.R. 812 (Bankr. D. Conn. Dec. 27, 1999) (Krechevsky) (In a Chapter 7 case, court orders dismissal for substantial abuse under § 707(b) but grants the debtors 20 days in which to convert to Chapter 13.); see 11 U.S.C. § 707(b)(2) for the option of conversion of the Chapter 7 case to Chapter 13, upon a finding of abuse, if the debtor consents.


13  See § 142.3  Application of § 707(b) Abuse Test at Conversion for controversy with respect to application of the 11 U.S.C. § 707(b) abuse test at conversion to Chapter 7.