Opinion ID: 948912
Heading Depth: 3
Heading Rank: 1

Heading: Statement of the Law

Text: Section 707(b) was added to the Bankruptcy Code in 1984 with other amendments intended to address consumer credit and was “more than a needless duplication of the ‘other provisions of the Code that have always required petitioners to file in good faith.’ ” In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989) (quoting In re Walton, 866 F.2d 981, 983 (8th Cir. 1989)). Section 707(b)(1) states that “[a]fter notice and a hearing, the court, on its own motion or on a motion by the United States trustee . . . may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.” 11 U.S.C. § 707(b)(1). When the UST moves to dismiss a case under § 707(b), it has the burden of proving abuse by a preponderance of the evidence. In re Kehl, 463 B.R. 18, 21 (Bankr. E.D. Mich. 2011) (citing In re Beckerman, 381 B.R. 841, 844 (Bankr. E.D. Mich. 2008)). In Congress’s most recent significant amendment of the Bankruptcy Code, it made three notable changes to § 707(b). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”): 1) changed the former standard of “substantial abuse” to a lesser standard of “abuse;” 2) eliminated the presumption in favor of granting bankruptcy relief to debtors; and 3) added a “means test” to Chapter 7 through § 707(b)(2) which creates a statutory presumption of abuse if a debtor has a defined minimal “current monthly income” remaining after the deduction of certain allowed expenses. These changes reflect Congress’s intent to limit the availability of Chapter 7 bankruptcy relief to those deserving of a fresh start. 7 11 U.S.C. § 707(b)(2)(A)(iv) (“The debtor’s expenses for payment of all priority claims . . . shall be calculated as the total amount of debts entitled to priority, divided by 60.”). 7 While much of the focus following the enactment of BAPCPA has related to the mechanical application of the means test, even if the calculated presumption of abuse provided for by § 707(b)(2) does not arise or is rebutted, a debtor’s chapter 7 case may still be found to be abusive under § 707(b)(3). Schulz v. United States, 529 F. 3d 343, 348 (6th Cir. 2008); In re Mestemaker, 359 B.R. 849, 855 (Bankr. N.D. Ohio 2007). Section 707(b)(3) states, in relevant part, that “[i]n considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in paragraph (2)(A)(i) does not arise or is rebutted, the court shall consider . . . (A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances . . . of the debtor’s financial situation demonstrates abuse.” 11 U.S.C. § 707(b)(3). Although BAPCPA changed the standard of substantial abuse to abuse and eliminated the presumption in favor of the debtor being granted relief, § 707(b)(3) otherwise essentially codifies the principles of pre-BAPCPA case law concerning § 707(b). In re Goble, 401 B.R. 261, 276 (Bankr. S.D. Ohio 2009) (totality of the circumstances test codifies case law prior to BAPCPA (citing In re Oot, 368 B.R. 662, 665 (Bankr. N.D. Ohio 2007)). In the Sixth Circuit, the two seminal § 707(b) cases are Krohn, 886 F.2d 123 and Behlke, 358 F.3d 429. The Behlke decision reaffirms the principles of Krohn. Behlke, 358 F.3d at 433-36. In Krohn the Sixth Circuit determined that Congress sought to curb “substantial abuse” by denying Chapter 7 relief to the dishonest or non-needy debtors. Krohn, 886 F.2d at 126 (citing In re Walton, 866 F.2d 981, 983 (8th Cir. 1989)). Thus, a finding of abuse under the totality of the circumstances test provided by § 707(b)(3)(B) can be predicated upon either lack of honesty, want of need or both. Beckerman, 381 B.R. at 844-45. The factors outlined in Krohn for assessing the debtor’s honesty and need for bankruptcy relief combine to serve as the framework for determining the totality of the circumstances of the debtor’s financial situation. See In re Schubert, 384 B.R. 777, 780 (Bankr. S.D. Ohio 2008) (listing the combined factors). An honest debtor is one whose “relationship with his creditors has been marked by essentially honorable and undeceptive dealings.” Krohn, 886 F.2d at 126. Factors that may be relevant to ascertaining a debtor’s honesty include the debtor’s forthrightness in preparing and filing his schedules and other documents, whether he has made substantial purchases on the eve of 8 bankruptcy, and whether the Chapter 7 filing was caused by unforeseen or catastrophic events. Id. The court’s summary of the purpose of § 707(b) sheds light on the “honesty” element of § 707(b): In essence, § 707(b) allows a bankruptcy court to deal equitably with the unusual situation where an unscrupulous debtor seeks to enlist the court’s assistance in a scheme to take unfair advantage of his creditors; it serves notice upon those tempted by unprincipled accumulation of consumer debt that they will be held to at least a rudimentary standard of fair play and honorable dealing. Id. The spectrum of debtors that fall into the “dishonest” category described by Krohn covers a broader swath than what may be typically envisioned as dishonest people, sweeping in those debtors who seek to take unfair advantage of their creditors, including through the discharge of unbridled accumulation of consumer debt. See Schubert, 384 B.R. 777; In re Ragan, 171 B.R. 592 (Bankr. N.D. Ohio 1994) (pre-BAPCPA);8 and In re Barnes, 158 B.R. 105 (Bankr. W.D. Tenn. 1993) (preBAPCPA) (all standing for the proposition that a debtor living beyond his means and refusing to adjust his budget and change his lifestyle support dismissal for abuse under § 707(b)(3)). A “needy” debtor is one whose “financial predicament warrants the discharge of his debts in exchange for liquidation of his assets.” Krohn, 886 F.2d at 126. In determining whether the debtor is “needy” the court may consider whether the debtor can repay his debts out of future earnings. Id. “Other factors relevant to need include whether the debtor enjoys a stable source of future income, whether he is eligible for adjustment of his debts through Chapter 13 . . . , whether there are state remedies with the potential to ease his financial predicament, the degree of relief obtainable through private negotiations, and whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities.”9 Id. at 126-27. 8 “Debtor’s acts within the two (2) years preceding the filing of his Petition of incurring debts which he could not afford to repay but for his retirement income, exhibit bad faith in filing of the Petition and constitute ‘lack of honesty’ which is tantamount to the substantial abuse requirement of Section 707(b).” Ragan, 171 B.R. at 595. 9 Although the W eixels are ineligible for Chapter 13, their ineligibility is not dispositive and the court may consider other factors to determine neediness. Krohn, 886 F.2d at 127. 9