Consumer Debtor – Chapter 7 Consumer Debtor – means one whose debts were incurred primarily for a personal, family or household purpose. Consumer cases represent about 95% of all bankruptcy cases and typically have few if any assets to distribute. As originally enacted in 1978, the Code provided free access to chapter 7and the promise of a discharge. The Code also provided consumer debtor’s with two alternatives:  Chapter 7 with the surrender of all non-exempt assets and the entry of a discharge  Chapter 13 where debtor’s devoted a portion of their income over 3 years to pay a portion of the debt but retain control of all assets and receive a very broad discharge, sometimes referred to as the “super discharge.” Policy: to encourage debtors to opt for chapter 13 and its potential to pay more to unsecured creditors. As life under the 1978 Code evolved creditor groups were quick to point out that in some instances debtors had enough funds to pay a significant portion of their pre-petition debts over time.  The issue, which eventually culminated in the 2005 Act, was how to deal with these cases. Many believed the solution was mandatory conversion to chapter 13 and no discharge until plan payments were completed.  Early efforts to enact a means test were rebuffed. For individuals with sufficient income to pay debts over time, in 1984, Congress enacted the “substantial abuse” test of 11 U.S.C. §707(b). Originally only the judge could raise the issue an amendment conferred standing on the OUST to bring 707(b) motion.

Substantial Abuse Test – 707(b)  Originally, 11 U.S.C. §707 Provided for Dismissal of the Case. Conversion whether by the debtor or a creditor was provided for under 11 U.S.C. §706. Prior to the 2005 Act dismissal for “substantial abuse” under 707(b) could be brought by motion of the Court itself or by the OUST. Moreover, 707(b) used to contain a presumption in favor of granting the relief requested by the debtor. The Code did not spell out what was meant by “substantial abuse.” In re Green (4 th Cir. 1991) [Supp. Pg. 42]  Facts: Debtor a bus driver with no dependents Steady employment earning $46,000 in 1988 which provided at least $638 in excess of monthly living expenses Debtor had $40,000 in unsecured debt some of which the court assumed were for luxury purchases. Debtor had previously filed for bankruptcy. Debtor contends that $20,000 of his income resulted from overtime and that a bad leg precluded him from working overtime in the future OUST brought a 707(b) Motion.

2005 Act – Means Testing And New “Gatekeeper Provisions  The 2005 Act ushers in a new era where debtors now face significant barriers to obtaining a chapter 7 discharge they include: Credit Counseling: In order for an individual to be eligible to file a case under any chapter, the debtor must obtain a briefing from an approved credit counseling agency (or an individual or group briefing (by telephone or internet) outlining the opportunities for available credit counseling and assisting the individual in performing a budget analysis within 180 days before the filing. 11 U.S.C.§109(h)(1). Detailed Filings About Expenses and Income: At the time the debtor files a petition the debtor must provide detailed information about current income and expenses in order the OUST to screed for the Means Test. Potential Application of the Means Test: If the means test applies and the debtor fails the case will be dismissed, or with debtor’s consent, converted to chapters 11 or 13. Financial Management Course: Before receiving a discharge under chapters 7, 11 or 13 an indivuidual must complete a course in financial management. §§727(a)(11), 1141(3)(C) and 1328(g).

Means Test - §707(b) Means test is centerpiece of 2005 Act with respect to consumer debtors. It is used to identify those debtors who are “abusing” credit and to deny them access to chapter 7. The means test is found in §707(b) in a convoluted maze of amendments: –§707(b)(1) states a broad general power: the bankruptcy court, on its own motion or on that of the OUST, the panel trustee or a party in interest (a creditor), may dismiss or with the consent of the debtor (whose debts are primarily consumer debts), convert the case if it finds that granting relief “would be an abuse of this chapter.” There is no definition of abuse and even the modifier “substantial” that appeared in the 1984 version was dropped. Also omitted is the sentence “There shall be a presumption in favor of granting the relief requested by the debtor.” –Presumption of Abuse. Every individual debtor filing chapter 7, whose debts are consumer debts, must be screened by the means test. Section 101(8) defines consumer debt as that which is “incurred by an individual primarily for a personal, family or household purpose.” –Primarily Consumer Debts. The first level of inquiry is whether the Debts are “Primarily Consumer Debt.” – Presumption of Abuse. Assuming that the Debtor’s debts are primarily consumer debts, then the next inquiry is whether the presumption of abuse arises. §707(b)(2) sets out the circumstances under which a rebuttable presumption of abuse arises under the means test. Essentially, if the debtor has sufficient projected income, after paying certain allowable expenses, to pay a prescribed amount of unsecured debt over a 5 year period the presumption of abuse arises.

Presumption of Abuse - §707(b)(2)(A) §707(b)(2)(A)(i) provides: In considering under paragraph (b)(1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume that abuse exists if the debtor’s current monthly income reduced by amounts determined under clauses (ii), (iii) and (iv), and multiplied by 60 is not less than the lesser of the following: –25 percent of the debtor’s non-priority unsecured claims in the case, or $6,000, whichever is the greater, or –$10,000. Essentially, the formula in §707(b)(2)(A)(i) compares the amount of the debtor’s projected income over the next 5 years (60 months) with the debtor’s projected expenses during this period. –Income. The debtor’s income projection is based on the debtor’s average monthly income over the 6 months before filing (“Current Income” §101(10A)). In computing the means test the debtor’s current monthly income is multiplied by 60 months. –Presumption of abuse: For debtor’s with more than $40,000 in unsecured debt the presumption arises if their presumed net income exceeds $10,000 (or $167 per month) over the next 60 months no matter how small a percentage this may be of debtor’s unsecured debt. Debtors with net presumed income of less than $6,000 ($100 per month) over the next 60 months are not subject to the presumption of abuse no matter how great a percentage of their debts they may have been able to pay. For Debtor’s who have between $24,000 and $40,000 in debt, the presumption will arise if their presumed net income over the next 60 months exceeds 25% of their total non-priority unsecured debt.

Monthly Expenses Current Monthly Income Median Annual Family Income Above Median Primarily Consumer Debt Monthly Disposable Income Over $ (over $10,000 in 5 yrs) $ ($6,000 over 5 yrs.) - $ Will it pay 25% to non- priority unsecured? Presumption Yes Below Median: STOP § 707(b)(2); Consider § 707(b)(3) Under $100. STOP § 707(b)(2); Consider § 707(b)(3) No. STOP § 707(b)(2); Consider § 707(b)(3) UST files Statement w/in 10 days of § 341(a) meeting Special Circumstances? Debtor may explain at or w/in 30 Days after § 341(a) meeting UST Disagrees and files § 707(b)(2) motion w/in 30 days UST Agrees and files Statement w/in 30 days why motion not appropriate; Consider § 707(b)(3) Burden of Proof on Debtor to rebut Presumption by establishing “special circumstances” & UST must show only “abuse” (not “substantial”) OpposeConvert to Ch. 13 Means Test Flowchart - § 704, § 707(b)(2)