ABUSE UNDER CHAPTER 7 OF THE BANKRUPTCY CODE: A RATIONAL APPROACH TO WEIGHING ABILITY TO PAY

Robert J. Landry, III*

I. INTRODUCTION .................................................................................... 1 II. STATUTORY FRAMEWORK OF 11 U.S.C. § 707 .................................... 3

A. Development of 11 U.S.C. § 707 ................................................ 3 B. Current Framework of 11 U.S.C. § 707(b) ................................ 6

1. Presumptive Abuse .............................................................. 8 2. Actual Abuse ....................................................................... 9

III. THE APPLICABILITY OF ABILITY TO PAY UNDER THE TOTALITY TEST .................................................................................................. 12

A. Fourth Circuit: In re Calhoun ................................................. 13 B. Eleventh Circuit: In re Witcher ............................................... 13 C. Ninth Circuit Bankruptcy Appellate Panel: In re Ng .............. 15 D. Analysis of Applicability of Ability to Pay ............................... 16

IV. THE WEIGHT OF ABILITY TO PAY UNDER THE TOTALITY TEST ....... 18 A. Appellate Courts ...................................................................... 19 B. Bankruptcy Courts ................................................................... 20

1. Ability to Pay Must be Coupled with Other Factors ......... 20 2. Ability to Pay May be Dispositive ..................................... 21

V. A RATIONAL APPROACH TO WEIGHING ABILITY TO PAY ................. 22 A. Arguments Against Coupling Ability to Pay with Another

Factor ...................................................................................... 23 B. Arguments Against a Per Se Rule Mandating Dismissal if There is Ability to Pay ............................................................. 23 C. Proposed Statutory Solution .................................................... 25

VI. CONCLUSION ..................................................................................... 26

I. INTRODUCTION

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)1 was the most extensive reform of the Bankruptcy Code2

* Associate Professor of Finance, College of Commerce and Business Administration, Jacksonville

State University. 1 Pub. L. No. 109-8, 119 Stat. 23 (2005) (codified as amended in scattered sections of 11 U.S.C.). 2 11 U.S.C. § 101 et seq. (2000 & Supp. V 2006). Unless otherwise noted, all references to

Bankruptcy Code, Code or Section are to Title 11 of the United States Code, including amendments made by BAPCPA as are codified in Supplement V to the 2000 edition of the U.S. Code (Jan. 2, 2006).

2 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 (Code) since the Code’s enactment.3 The core purpose of BAPCPA was to “correct perceived abuses of the bankruptcy system.”4 The statutory means test5 is the primary mechanism to address the perceived abuses in consumer bankruptcy.6 Although its purpose is clear, the application of the means test is quite difficult in practice, as evidenced by the scores of decisions addressing a panoply of means test issues.7

This paper does not address specific issues under the means test itself, but addresses situations when debtors pass the means test8 or are not subject to the means test.9 In such instances, a debtor may still be subject to dismissal for abuse under the Code.10 Without clear statutory standards for a finding of abuse, courts have struggled with defining the exact parameters of what constitutes abuse.11

A particularly important debate has ensued regarding whether the statutory means test is conclusive of ability to pay in an abuse analysis of a Chapter 7 case, and if not, what weight should be given to ability to pay.12 Bankruptcy courts have reached conflicting decisions,13 and now three appellate courts have weighed in.14 Although the appellate courts have consistently held that ability to pay is relevant under the totality test, the

3 See Lawrence A. Young & Heather Heath McIntyre, The Impact of BAPCPA—An Overview, 63

CONSUMER FIN. L.Q. REP. 32, 32 (2009) (“The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 . . . constituted the most dramatic revision of the United States Bankruptcy Code . . . in twenty-seven years.”); Dorothy Hubbard Cornwell, To Catch a KERP: Devising A More Effective Regulation Than § 503(c), 25 EMORY BANKR. DEV. J. 485, 486 (2009) (recognizing that BAPCPA was one of "the most comprehensive overhauls of the Bankruptcy Code in more than 25 years").

4 Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229, 231–32, 130 S. Ct. 1324, 1329 (2010) (“Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA or Act) to correct perceived abuses of the bankruptcy system.”).

5 11 U.S.C. § 707(b)(2) (2006) (the means test provisions); see also infra Part II.B.1 (discussing means test generally).

6 The Supreme Court in reviewing the legislative history has recognized the role of the “means test” as ensuring that debtors who have the ability to pay creditors, actually do so. See Ransom v. FIA Card Servs., N.A., __ U.S. __, 131 S. Ct. 716, 721 (2011) (“In particular, Congress adopted the means test—‘[t]he heart of [BAPCPA's] consumer bankruptcy reforms,’ H.R.Rep. No. 109–31, pt. 1, p. 2 (2005) . . . to help ensure that debtors who can pay creditors do pay them.”).

7 There are literally hundreds of published bankruptcy decisions since the enactment of BAPCPA pertaining to issues under the mean test. The difficulty in defining the exact parameters of the means test is evident with the numerous appellate level decisions since BAPCPA, including several U.S. Supreme Court decisions pertaining to means test issues. For example, see Ransom 131 S.Ct. 716 (2011) (analyzing projected disposable income and the proper deduction of car related expenses under the means test); Hamilton v. Lanning, 130 S. Ct. 2464, 177 L.Ed.2d 23 (2010) (analyzing the definition of projected disposable income in a Chapter 13 case which relies on the statutory means test provisions in Chapter 7).

8 See infra notes 66–78 and accompanying text. 9 See infra notes 78. 10 See infra notes 80–81 and accompanying text. 11 See infra notes 82–95 and accompanying text. 12 See infra Part IV.A & B. 13 See infra notes 167–92 and accompanying text. 14 See In re Witcher, 702 F.3d 619 (11th Cir. 2012) (holding that ability to pay is a relevant factor

under the totality test, but did not rule on the proper weight of this factor); In re NG, 477 B.R. 118 (B.A.P. 9th Cir. 2012) (after considering pre-BAPCPA case law the court held that ability to pay continues to be the primary factor in an abuse analysis and it may justify dismissal alone); In re Calhoun, 650 F.3d 338 (4th Cir. 2011) (holding that ability to pay is relevant under the totality test but did not make a determination regarding the property weight of that factor).

2014] WEIGHING ABILITY TO PAY 3 important question, whether there is proper weight to give ability to pay and if it is sufficient in and of itself to warrant a finding abuse, is unanswered. Eventually, the United States Supreme Court will most certainly answer the question presented to the appellate courts and hopefully provide answers to the lingering issues. This paper examines the appellate courts’ analyses and offers an approach to answering the lingering issues in the context of the current statutory framework, legislative history, and consistency with the underlying policy behind BAPCPA.

Following this introduction is an overview of the statutory framework of § 707 and evolution of § 707(b). Part III analyzes the applicability of ability to pay under the totality of circumstances test embodied in § 707(b)(3).15 The case law approaches the weight given to ability to pay under the totality of circumstances test—this article contemplates this issue in Part IV.16 Part V argues for a rational approach to considering that ability to pay under the totality test and offers a statutory solution to advance this approach.17 Finally, the conclusion addresses other areas of research and identifies specifics.

II. STATUTORY FRAMEWORK OF 11 U.S.C. § 707

A. Development of 11 U.S.C. § 707

When the Bankruptcy Code was passed in 1978, the only basis for dismissal of a Chapter 7 case was for “cause.”18 Section 707, as originally enacted, merely provided as follows:

The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—

(1) unreasonable delay by the debtor that is prejudicial to creditors; and (2) nonpayment of any fees and charges required under Chapter 123 of Title 28.19

The grounds enumerated are just illustrative;20 however, the legislative history expressly provides that § 707, as originally enacted, did not give

15 See infra Part III. 16 See infra Part IV. 17 See infra Part V. 18 Adam J. Ruttenberg, The Totality of What Circumstances? How Courts Determine Whether

Granting Bankruptcy Relief Would Be an Abuse, 2009 ANN. SURV. BANKR. L. 18 (2009). 19 11 U.S.C. § 707 (1978) (current version at 11 U.S.C. § 707(a) (2006)); see also In re Griggs, 679

F.2d 855, 856 (11th Cir. 1982). 20 In re Amir, 436 B.R. 1, 16 (B.A.P. 6th Cir. 2010) (noting that the three examples of “cause” listed

are illustrative only.); see also Huckfeldt v. Huckfeldt (In re Huckfeldt), 39 F.3d 829, 831 (8th Cir. 1994) (explaining that the enumerated grounds for a “for cause” dismissal are nonexclusive); Indus. Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1126 (6th Cir. 1991) (“‘[I]ncluding’ is not meant to be a limiting word”).

4 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 bankruptcy courts the power to dismiss a case based on ability to repay debts in whole or in part.21 Without any specific definition of what constituted cause, courts determined what constituted cause on a case-by-case basis based largely on equitable principles.22 In 1984, after a strong lobbying effort by the credit industry23 and consumer filings doubled in numbers from 1978 to 1982,24 the Bankruptcy Amendments and Federal Judgeship Act of 1984 substantially modified §

707.25 The existing § 707 was reclassified as § 707(a)26 and subsection (b) was added.27 Section 707(b) added substantial abuse as a basis for dismissal of consumer cases.28 Section 707(b), as enacted in 1984, provided as follows:

After notice and a hearing, the Court, on its own motion and not at the request of any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter. There shall be a presumption in favor of granting the relief requested by the debtor.29

The legislative history to § 707(b) expressly provided that ability to pay debts was a basis for dismissal under the substantial abuse standard.30 In pertinent part, the Senate Report states as follows: “However, if a debtor can meet his debts without difficulty as they come due, use of Chapter 7 would represent a substantial abuse.”31 The legislation was in response “to concerns that some debtors who could easily pay their creditors might resort to chapter 7 to avoid their obligations.”32 Section 707(b) was “designed to

21 Ruttenberg, supra note 18. The legislative history provides: “The section does not contemplate,

however, that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal . . . The Committee has rejected that alternative in the past, and there has not been presented any convincing reason for its enactment in this bill.” Id. (citing H.R. REP. NO. 95-595 at 280 (1977), reprinted in 1978 U.S.C.A.A.N. 5963).

22 Laura A. Pawloski, The Debtor Trap: The Ironies of Section 707(a), 7 BANKR. DEV. J. 175, 181 (1990).

23 Wayne R. Wells, Janell M. Kurtz, & Robert J. Calhoun, The Implementation of Bankruptcy Code Section 707(b): The Law and the Reality, 39 CLEV. ST. L. REV. 15, 17 (1991).

24 Wells, Kurtz, & Calhoun, supra note 23, at 17 (noting that filings doubled from 1978 to 1982, that fueled the lobbying effort by the credit industry).

25 Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, §§ 312, 475, 98 Stat. 333 (1984).

26 Additionally, the “and” between subparagraphs (1) and (2) was changed to an “or.” Gregory Germain, Due Process in Bankruptcy: Are the New Automatic Dismissal Rules Constitutional? 13 U. PA. J. BUS. L. 547, n.2 (2011).

27 See Ruttenberg, supra note 18; Germain, supra note 26, at n.2. 28 Germain, supra note 26, at n.2. 29 11 U.S.C. § 707(b) (1984) (current version at 11 U.S.C. § 707(b)(2006)) (emphasis added). 30 Ruttenberg, supra note 18. 31 S. REP. NO. 98-65, 98th Cong., 1st Sess. 54 (1983). 32 H.R. REP. NO. 109-31(I), at 12 (internal quotation omitted) (reprinted in 2005 U.S.C.A.A.N. 88,

98).

2014] WEIGHING ABILITY TO PAY 5 reduce perceived abuses in the use of Chapter 7.”33

The courts recognized the purpose of enacting § 707(b) was to ensure that individuals filing Chapter 7 were using the bankruptcy system in a fair way.34 The Sixth Circuit succinctly summarized the purpose of § 707(b) as follows:

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.35

Prior to § 707(b), other than exceptions to discharge,36 objections to discharge,37 or dismissal under § 707(a),38 individuals had “an unfettered right to a ‘fresh start’ under Chapter 7, in exchange for liquidating their nonexempt assets for the benefit of their creditors.”39 Under § 707(b), judges were given discretion to dismiss cases if the case was deemed to be substantial abuse.40 In 1986, the legislature modified § 707(a) to enumerate a third ground for dismissal based on cause.41 Section 707(a)(3) provided dismissal for cause including “failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521, but only on a motion by the United States Trustee.”42

The legislature modified section 707(b) in 1986.43 Up until 1986, only the court had authority to bring a motion under § 707(b).44 The legislature modified section 707(b) to give the U.S. Trustee standing to

33 6 LAWRENCE P. KING ET AL., COLLIER ON BANKRUPTCY § 707.LH[2], at 707–30 (15th ed. Rev.

2000). 34 See In re Krohn, 886 F.2d 123 (6th Cir. 1989). 35 Id. at 126. 36 11 U.S.C. § 523(a) (2006). 37 Id. at § 727. 38 Id. at § 707(a). 39 Krohn, 886 F.2d at 126. 40 Id. Congress did not define or provide specific guidance on the exact parameters of what constitutes

substantial abuse. Wells, Kurtz, & Calhoun, supra note 23, at 17–18. As such, courts had substantial discretion in the application of the substantial abuse standard. See, e.g., In re Attanasio, 218 B.R. 180, 184 (Bankr. N.D. Ala. 1998) (“Clearly absent is any guidance on the meaning of ‘substantial abuse,’ the section's key provision. As a consequence, after enactment of the section in 1984, bankruptcy courts were free to divine the parameters of § 707(b) and to define ‘substantial abuse.’”).

41 Germain, supra note 26, at n.2. 42 Bankruptcy Judges, U.S. Trustees, & Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554,

§ 219 100 Stat. 3088, 3101 (1986). 43 11 U.S.C. § 707(b). 44 David Gray Carlson, Means Testing: The Failed Bankruptcy Revolution of 2005, 15 AM. BANKR.

INST. L. REV. 223, 238 (Spring 2007).

6 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 bring § 707(b) motions.45 Otherwise, there were no substantive changes to § 707(b).46

In 1990, the amendments expanded the meaning of standing in § 707(b) to include bankruptcy administrators.47 The Federal Courts Study Committee Implementation Act of 1990 gave bankruptcy administrators standing to appear and the court to hear such administrators on any issue.48 This broad standing would include § 707(b) motions.49

The legislature modified section 707(b) in 1997 to protect a debtor’s ability to tithe post-petition in the context of a substantial abuse analysis under § 707(b).50 Other than expressly protecting the right to tithe post-petition, there were no other substantive changes to § 707(b).51

B. Current Framework of 11 U.S.C. § 707(b)

From 1986 to 2005, no substantive statutory changes were made to

§ 707(b). However, during this time frame consumer bankruptcy was a matter of great debate by scholars52 and policymakers.53 Congress identified

45 Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L.

No. 99-554, § 219, 100 Stat. 3088, 3101; Oliver B. Pollak & Bearnad in den Bosch, Substantial Abuse and Dismissal: Developments in Section 707(b), 1995 ANN. SURV. OF BANKR. LAW 50 (1995).

46 11 U.S.C. § 707(b). 47 Bankruptcy administrators exist in Alabama and North Carolina, which do not have U.S. Trustees.

They perform function similar to U.S. Trustees. Arnold B. Cohen, Pot Plans Should be Replacing Percentage Plans in Chapter 13, 4 J. BANKR. L. & PRAC. 305, n.52 (1995). The Judicial Conference of the United States established the bankruptcy administrator program pursuant to statutory authority in § 302(d)(3)(i) of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3119, 3123. See also Catherine E. Vance, Attorneys and the Bankruptcy Reform Act of 2001: Understanding the Imposition of Sanctions Against Debtors’ Counsel, 106 COM. L.J. 241, n.37 (2001) (briefly discussing the statutory authority of the bankruptcy administrator program).

48 Federal Courts Study Committee Implementation Act of 1990, Pub. L. No. 101-650, Title III, § 317(b), Dec. 1, 1990, 104 Stat. 5115, provided that: “A bankruptcy administrator may raise and may appear and be heard on any issue in any case under title 11, United States Code, but may not file a plan pursuant to section 1121(c) of such title.” U.S. Trustees already had this broad statutory standing. 11 U.S.C. § 307 (2006). The legislative history to § 317(b) of the Federal Courts Study Committee Implementation Act of 1990 provided that the intent of the legislation was “to give bankruptcy administrators in the six districts standing to raise issues and appear and be heard in the same manner as U.S. Trustees.” 136 Cong. Rec. S17,582 (daily ed. Oct. 27, 1990) (Section-By-Section Analysis).

49 Courts have heard and ruled on § 707(b) motions brought by bankruptcy administrators, thus, at least implicitly concluding bankruptcy administrators have standing to bring such motions. See In the Matter of Blair, 180 B.R. 656 (Bankr. N.D. Ala. 1995). Note that BAPCPA amended, § 707(b) to expressly provide standing for bankruptcy administrators. See 11 U.S.C. § 707(b)(1) (2006).

50 Religious Liberty and Charitable Donation Protection Act of 1998, Pub. L. No. 105-183, 112 Stat. 517, § 707 (1998).

51 Id. 52See generally Richard M. Hynes, Bankruptcy and State Collections: The Case of the Missing

Garnishments, 91 CORNELL L. REV. 603, 609–19 (2005–2006) (providing a concise overview of the policy debate by scholars).

53 For example, in 1994 Congress created the National Bankruptcy Review Commission to review and make recommendations on improving and updating the Bankruptcy Code. H.R. REP. NO. 103-835, at 59 (1994). After three years the commission issued a report detailing scores of legislative proposals. See NAT'L BANKR. REV. COMM'N, BANKRUPTCY: THE NEXT TWENTY YEARS (1997), available at govinfo.library.unt.edu/nbrc/report/01title.html.

2014] WEIGHING ABILITY TO PAY 7 two particular problems with the statutory framework.54 First, the “inherent[] vague[ness]” of the “substantial abuse” standard, which led to disagreement in the courts about whether a debtor's ability to repay a significant portion of his or her debt out of future earnings constituted substantial abuse, meriting dismissal.55 Second, the presumption under § 707(b) in favor of the debtor influenced bankruptcy courts’ decisions on whether a case constituted substantial abuse.56 Congress held numerous hearings regarding necessary reforms to the consumer bankruptcy system that resulted in the passage of BAPCPA in 2005.57

The heart of the reforms was completely rewriting § 707(b)58 to include the new means test for Chapter 7 filers.59 Congress also relaxed the standard under § 707(b) from “substantial abuse” to “abuse” and removed the presumption in favor of granting relief with the passage of BAPCPA.60 Amended § 707(b) provides that a court may dismiss a consumer Chapter 7 case or, with the debtor's consent, convert it into a Chapter 11 or a Chapter 13 case if a court finds that “the granting of relief would be an abuse of the provisions” of Chapter 7.61 Section 707(b)(1) states in relevant part as follows:

After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or

54 H.R. REP. NO. 109-31(I) (2005). 55 Id. at 12. 56 Id. There was a concern that courts were not excising discretion to dismiss cases for substantial

abuse. See, e.g., Lauren E. Tribble, Judicial Discretion and the Bankruptcy Abuse Prevention Act, 57

DUKE L.J. 789, 799 (2007). There was a view “that bankruptcy judges were unable or unwilling to clamp down on abusive debtors.” Id. at n.82. Some have characterized the concern about the degree of discretion a bankruptcy judge exercise as a “deep mistrust of the pre-BAPCPA discretion that has been exercised by the bankruptcy judiciary in its gatekeeper role under the substantial abuse dismissal regime . . . .” Rafael I. Pardo, Eliminating the Judicial Function in Consumer Bankruptcy, 81 AM. BANKR. L.J. 471, 472–73 (2007).

57 See Susan Jensen, A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 AM. BANKR. L.J. 485 (2005) (providing a comprehensive treatment of the legislative road leading to BAPCPA).

58 Richard E. Flint, Consumer Bankruptcy Policy: Ability to Pay and Catholic Social Teaching, 43 ST. MARY’S L.J. 333, 389 (2011–2012).

59 See In re Maura, 491 B.R. 493, 498 (Bankr. E.D. Mich. 2013); see also Kathleen Murphy & Justin H. Dion, “Means Test” or “Just a Mean Test”: An Examination of the Requirement that Converted Chapter 7 Bankruptcy Debtors Comply with Amended Section 707(b), 16 AM. BANKR. INST. L. REV. 413, 434 (2008) (“The main tool that BAPCPA developed to prevent the claimed abuse was the means test.”).

60 In re Weixel, 494 B.R. 895, 901 (B.A.P. 6th Cir. 2013) (noting that the standard changed from substantial abuse to abuse under BAPCPA); In re Hardigan, 490 B.R. 437, 451 (Bankr. S.D. Ga. 2013) (“Clearly, with BAPCPA the bar was lowered from ‘substantial abuse’ to ‘abuse,’ and a debtor enters Chapter 7 with no presumption in his favor.”); see also Ruttenberg, supra note 18 (recognizing that BAPCPA “removed the presumption against dismissal, permitted any party in interest to seek dismissal, and lowered the standard for dismissal from ‘substantial abuse’ to ‘abuse’”); David P. Eron, Social Security Benefits Must be Included in a Debtor’s Ability to Repay Under BAPCPA, 30 AM. BANKR. INST. J. 34, 34 (Sept. 2011) (“Under the 1994 Bankruptcy Code, there existed a presumption in favor of granting a debtor a discharge in chapter 7, and a requirement that any abuse be ‘substantial’ in order to justify dismissal under § 707(b). Both were eliminated by BAPCPA . . . . ”).

61 11 U.S.C. § 707(b)(1) (2006). See also Witcher, 702 F.3d at 621 (summarizing basic framework of 11 U.S.C. § 707(b)(1)).

8 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1

bankruptcy administrator, if any), or any party in interest, 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….62

There are two distinct statutory methods for determining whether an abuse arises under § 707(b)(1).63 The first method for determining abuse is based on the statutory means test in § 707(b)(2),64 i.e., presumptive abuse, and the second method is actual abuse under § 707(b)(3).65

1. Presumptive Abuse

The statutory means test66 is a mathematical formula that, if satisfied, requires a court to presume abuse.67 The means test is an analysis of historical income and expenses.68 Under the means test, if a debtor’s annualized income69 is greater than the applicable state median family income,70 a presumption of abuse arises if the debtor can repay the lesser of 25% of the debtor’s non-priority unsecured claims, or $11,725, over a five-year period.71 The code determines the ability to pay by considering allowed statutory expenses.72 If the presumption arises, the court will dismiss a case as abusive or convert it to Chapter 13 with the debtor’s consent,73 unless, however, there is a showing of special circumstances

62 11 U.S.C. § 707(b)(1) (emphasis added). 63 In re Henebury, 361 B.R. 595, 603–04 (Bankr. S.D. Fla. 2007); see also In re Rivers, 466 B.R. 558,

569 (Bankr. M.D. Fla. 2012) (recognizing that § 707(b) provides two methods for possible dismissal of a Chapter 7 case).

64 11 U.S.C. § 707(b)(2) (2006). For an overview of the mechanics of the means test, see generally Carlson, supra note 44, at 250–98 (providing a comprehensive examination of the means test); Ned W. Waxman & Justin H. Rucki, Chapter 7 Bankruptcy Abuse: Means Testing is Presumptive, but “Totality” is Determinative, 45 HOUS. L. REV. 901, 904–08 (2008) (summarizing the key aspects of the means test); Eugene R. Wedoff, Means Testing in the New § 707(b), 79 AM. BANKR. L.J. 231, 240–77 (2005) (providing a comprehensive treatment of the means testing process and potential problems).

65 See Eron, supra note 60, at 34 (recognizing that presumptive abuse and actual abuse are the two ways to find abuse).

66 The means test states in pertinent part: [T]he court shall presume abuse exists if the debtor's current monthly income reduced by the [allowed deductions] . . . and multiplied by 60 is not less than the lesser of: (I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $7,025, whichever is greater; or—(II) $11,725. 11 U.S.C. § 707(b)(2)(A)(i) (2006).

67 Id. at § 707(b)(2). 68 In re Hardigan, 490 B.R. 437, 451 (Bank. S.D. Ga. 2013). 69 11 U.S.C. § 707(b)(6)–(7)(A) (2006). 70 Id. at § 707(b)(6)(A)–(C), (7)(A)(i)–(iii). 71 Id. at § 707(b)(2)(A)(i); In re Andersen, 2009 WL 9085558, at *3 (Bankr. E.D. Cal. 2009). 72 11 U.S.C. § 707(b)(2)(A) (2006); Andersen, 2009 WL at *3. 73 11 U.S.C. § 707(b)(1)–(2) (2006). It is important to note that there is a dispute among the courts

about whether a finding of presumptive abuse mandates dismissal or courts still have discretion to not

2014] WEIGHING ABILITY TO PAY 9 rebutting the presumption of abuse by the debtor.74

The mechanics of calculating the ability to repay under the statutory means test is done by debtors completing Official Form 22A.75 The complexity of the statutory means test and Official Form 22A has been a highly litigated area in consumer bankruptcy since BAPCPA’s passage.76 Even so, most debtors are able to successfully satisfy the means test with no resulting presumption, thus, making the analysis under the second prong of finding abuse even more important.77

2. Actual Abuse

If a debtor “passes” the means test, either because the presumption

of abuse never arose78 or because he rebutted that presumption,79 he is still subject to scrutiny under subsection § 707(b)(3), the second statutory method for determining actual abuse.80 Section 707(b)(3) provides that the

dismiss a case in the face of an unrebutted presumption. See In re Maura, 491 B.R. 493, 516–18 (Bank. S.D. Mich. 2013) (analyzing the case law authorities on this issue).

74 11 U.S.C. § 707(b)(2)(B) (2006). The courts have applied a strict construction to what satisfies special circumstances. See, e.g., In re Johns, 342 B.R. 626 (Bankr. E.D. Okla. 2006) (The bankruptcy court found that under the debtors’ own numbers the presumption of abuse arose. The court held that a “potential payback of zero percent to unsecured creditors in a Chapter 13 is not a special circumstance . . . ” The circumstances of the debtors were not of the same degree of seriousness as the examples in the statute: serious medical illness or called to duty in the Armed Forces.).

75 Murphy & Dion, supra note 59, at 435. Official Form 22A is colloquially referred to as the “means test.” It details the calculations required by individual debtors filing for relief under Chapter 7. The form incorporates the required calculations set forth in 11 U.S.C. § 707(b)(2). See also FED. R. BANKR. P. 1007(b)(4) (requiring the filing of the Official Form incorporating the statutory calculation in § 707(b)(2)).

76 Consider for example the detailed treatment of the means test calculation conducted by the bankruptcy court in Maura, 491 B.R. at 498–515. A cursory review of that case and analysis shows how complex and challenging the actual application of the means test is. Hundreds of decisions have been published on various aspects of the means testing provisions.

77 In 2012, the court presumed only 6% of Chapter 7 debtor consumer cases to be abusive under the means test. U.S. DEPARTMENT OF JUSTICE, UNITED STATES TRUSTEE PROGRAM ANNUAL REPORT 23 (2012), available at http://www.justice.gov/ust/eo/public_affairs/annualreport/docs/ar2012.pdf. The U.S. Trustee only sought dismissal in 40% of those cases. Id. Therefore, in only 2.4% of the Chapter 7 cases filed were § 707(b) motions filed for presumptive abuse. Id.

78 The presumption never arises if the debtor’s annualized income is less than the applicable median household income, does not have sufficient funds to repay creditors after taking into account permitted expenses, or falls within a safe harbor provision of the statutory means test. See, e.g., Robert J. Landry, III, The Means Test: Finding a Safe Harbor, Passing the Means Test, or Rebutting the Presumption of Abuse May Not be Enough, 29 N. ILL. U. L. REV. 245, 254–55 (2008–2009) (providing a concise overview of statutory scenarios when the presumption does not arise).

79 11 U.S.C. § 707(b)(2)(B) (2006). 80 Debtors have raised the argument that passing the means test prevents consideration of dismissal

under the test provided under § 707(b)(3), but the courts have rejected this argument. It is well settled in the case law that when the presumption does not arise or is rebutted under § 707(b)(2) then the provisions of § 707(b)(3) are applicable. In re Henebury, 361 B.R. 595, 601 (Bankr. S.D. Fla. 2007); In re Reed, 422 B.R. 214, 230 (C.D. Cal. 2009); In re Singletary, 354 B.R. 455, 461–62 (Bankr. S.D. Tex. 2006) (recognizing that if a debtor passes the means test or rebuts the presumption, the debtor could still face a motion to dismiss under § 707(b)(3)). See also Eron, supra note 60, at 34 (“Courts universally consider the ability of debtors to repay their debts under § 707(b)(3)(B) irrespective of the lack of presumptive abuse.”).

The Fourth Circuit Court of Appeals directly considered this issue and found that passing the means test or rebutting a presumption does not bar a court from considering whether a case is still an abuse

10 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 court may determine a petition to be an abuse in one of two ways.81 The relevant portion of § 707(b)(3) provides as follows:

(3) In 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 subparagraph (A)(I) of such paragraph 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 (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor's financial situation demonstrates abuse.82

a. Bad Faith

Section 707(b)(3)(A), as amended by BAPCPA, expressly provides that if a debtor engages in bad faith the case is subject to dismissal.83 The burden of proving bad faith is on the movant, but once it is established the burden shifts to the debtor to show good faith.84 Bad faith is not defined in the Bankruptcy Code;85 however, there is a significant body of case law defining the parameters of bad faith in Chapter 11 and Chapter 13 that is applicable in the Chapter 7 context.86 Courts have found that bad faith is shown in a variety of ways including: excessive continued expenditures, intention to avoid large single debt, concealment or misrepresentation of income or assets, lavish lifestyle or failure to modify lifestyle to repay

under § 707(b)(3). Calhoun v. U.S.Tr. 650 F.3d 338, 341 (4th Cir. 2011) . Likewise the Ninth Circuit Court of Appeals has reached the same conclusion. See In re Egebjerg, 574 F.3d 1045, 1048 (9th Cir. 2009) (“[e]ven if a debtor's financial situation does not create a presumption of abuse (or if the presumption is rebutted), the bankruptcy court may still dismiss the petition if the debtor filed the petition in bad faith or if the ‘totality of the circumstances’ demonstrates ‘abuse’ of Chapter 7.”); Blausey v. U.S. Trustee, 552 F.3d 1124, n.1 (9th Cir. 2009) (“If the presumption does not arise, the bankruptcy court may still find abuse under § 707(b)(3) based on the totality of the circumstances.”).

The courts base their conclusion on a plain reading of the statute and the framework of § 707(b), but the conclusion is also consistent how § 707(b) operates on a daily basis in Chapter 7. Section 707(b)(2) is not infallible; that is, the statute provides that the courts will not dismiss some presumptively abusive cases for abuse and that some cases the court deems to be abusive. In cases that courts presume abusive, Congress provided debtors the ability to rebut the presumption. Likewise, § 707(b)(3) provides for dismissal or conversion where the presumption of abuse does not arise or is rebutted.

81 See Waxman & Rucki, supra note 64, at 918 (recognizing that § 707(b)(3) provides two independent grounds for dismissal).

82 11 U.S.C. § 707(b)(3) (2006) (emphasis added). 83 11 U.S.C. § 707(b)(3)(A) (2006) (In determining if granting relief is an abuse, “the court shall

consider whether the debtor filed the petition in bad faith.”). 84 Hardigan, 490 B.R. at 444. 85 In re Citta, 2012 WL 6624690, at *3 (D.N.J. 2012). 86In re Mitchell 357 B.R. 142, 153–54 (Bankr. C.D. Cal. 2006).

2014] WEIGHING ABILITY TO PAY 11 creditors.87 The focus of a court’s inquiry in the context of § 707(b)(3)(A) in on a debtor’s conduct.88 Courts typically limit a bad faith finding to the most egregious cases.89

A court looks to the intent and conduct of the debtor without the need to consider the debtor’s financial situation.90 Although, it seems that often the financial situation will overlap with non-financial factors91—a debtor that does not have an ability to repay debts or may need relief from a financial perspective could be denied relief if the debtor’s conduct rises to a level of bad faith.

b. Totality Test

Section 707(b)(3)(B), as amended by BAPCPA, provides that a

court must consider whether the “totality of the circumstances . . . of the debtor's financial situation demonstrates abuse.”92 Courts employ a host of non-exclusive factors under the totality test that tend to overlap and be redundant.93 The bankruptcy court in the Southern District of Georgia recently succinctly stated the factors as follows:

(1) Can Debtor, from anticipated income and reasonable budget adjustments, repay a meaningful amount of his debt? Is Debtor eligible for a Chapter 13 or Chapter 11 case that hypothetically would pay a substantial or meaningful dividend to creditors over a five-year repayment period? (2) Does Debtor have a stable source of future income sufficient to repay a meaningful amount of debt and still provide an opportunity to restore himself to a stable financial position? (3) Did Debtor experience some unforeseeable calamity that triggered the filing? (4) Were the debts incurred over a significant period of

87 In re Hardigan, 490 B.R. 437, 444 (Bankr. S.D. Ga. 2013). 88 Citta, 2012 WL at *3. Effectively courts employ a totality of the circumstances test to determine

bad faith. See e.g., Mitchell, 357 B.R. at 153–55, n.11 (In a pure bad faith case bought only under § 707(b)(3)(A) Judge Robles considered a host of factors to determine if bad faith existed. Judge Robles expressly recognized possible confusion of this type of analysis with the new “totality of the circumstances” and avoided charactering the bad faith test employed under Section 707(b)(3)(A) as a “totality of circumstances test.”).

89 See Haney v. Clippard, 2007 WL 781321, at *3 (W.D. Ky. 2007). 90 In re Hornung, 425 B.R. 242, 249 (Bankr. M.D.N.C. 2010); In re Hageney, 422 B.R. 254, 259–60

(Bankr. E.D. Wash. 2009). 91 For example, see Hornung, 425 B.R. at 248–55, where the court analyzed the case for abuse, both

bad faith and financial factors. The factors tend to overlap and support a finding of abuse under either bad faith or the totality test. In reality, it is hard to keep the tests separate and distinct.

92 11 U.S.C. § 707(b)(3)(B) (2006). 93 Hardigan, 490 B.R. at 448. The factors employed in the post-BAPCPA era are largely based on the

totality of the circumstances test employed in the context of a substantial abuse analysis in the pre-BAPCPA era. See, e.g., Charles J. Tabb & Jillian K. McClelland, Living with the Means Test, 31 S. ILL. U. L. J 463, 501 (Spring 2007).

12 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1

time, consistent with Debtor's ability to manage them, or were they the result of recklessness or unrealistic expectations about ability to repay, such as occurs in a pre-bankruptcy spending spree? (5) Did Debtor make good faith efforts prior to filing to deal with the debt without resorting to bankruptcy? (6) Is Debtor using the bankruptcy process to restore Debtor's financial stability and obtain a fresh start, or to improve Debtor's financial standing, for example, by retaining all valuable property secured by outstanding debts and discharging unsecured debt in order to enable the retention of substantial assets? (7) Are there other factors concerning the nature of Debtor's obligations that aggravate or mitigate the impact of Debtor's past behavior or future prospects?94

In the post-BAPCPA era, there are scores of bankruptcy court decisions employing these and other factors under the totality test.95 As with most bankruptcy issues in which the appellate courts have not fully addressed, specific bankruptcy decisions will run the gamut and variances in outcomes can typically be justified by the unique facts of a case before it. This is expected because the determination of abuse under the totality test is a highly fact sensitive inquiry well within in the discretion of the bankruptcy judge.

However, as discussed in the next two sections, the role of ability to pay under the totality test has been particularly challenging. Section III addresses how the appellate courts have addressed the issue of whether ability to pay is an appropriate consideration at all under the totality test. The approaches courts have employed to weigh ability to pay, under the totality test, is discussed in Section IV.

III. THE APPLICABILITY OF ABILITY TO PAY UNDER THE TOTALITY TEST

Some debtors have argued that the determination of ability to pay general unsecured creditors under the means test in § 707(b)(2) cannot be re-examined under the totality test of § 707(b)(3).96 To date, three appellate courts have addressed this issue, and all three agree that ability to pay is a

94 Hardigan, 490 B.R. at 448. 95 See In re Christians, 2012 WL 4846538, at *3–8 (Bankr. E.D.N.C. 2012) (employing a multitude of

factors under the totality test); In re Truax, 446 B.R. 638, 642 (Bankr. S.D. Ga. 2010); In re Allen, 411 B.R. 913, 921–22 (Bankr. S.D. Ga. 2009); In re Baker, 400 B.R. 594, 597–98 (Bankr. N.D. Ohio 2009) (considering a variety of factors under the totality test); In re James, 414 B.R. 901, 914 (Bankr. S.D. Ga. 2008).

96 In re Witcher, 702 B.3d 619, 622 (11th Cir. 2012) (debtors argued that ability to pay cannot be considered under § 707(b)(3)(B)).

2014] WEIGHING ABILITY TO PAY 13 relevant inquiry under the totality test to determine abuse.97

A. Fourth Circuit: In re Calhoun In In re Calhoun, the Fourth Circuit was presented with the argument by the debtors that ability to pay was insufficient to warrant dismissal under the totality test of § 707(b)(3).98 The debtors’ argument was premised on pre-BAPCPA case law in the Fourth Circuit that required a finding of something more than ability to pay to warrant a dismissal under the judicially created totality of circumstances test, which the court employed to determine if granting relief constituted substantial abuse99 of the provisions of Chapter 7.100 The Fourth Circuit did not expressly state that ability to pay could be re-examined under the totality test.101 However, the Fourth Circuit affirmed the bankruptcy court analysis that found a host of factors present, including ability to pay, to warrant dismissal.102 Because the Fourth Circuit did not discern any error in the bankruptcy court analysis,103 which included a finding of ability to pay based on a multitude of factors, ability to pay continues to be a relevant inquiry under the totality test in the post-BAPCPA era.104

B. Eleventh Circuit: In re Witcher In a matter of first impression, In re Witcher directly presented the issue of applicability of ability to pay to the Eleventh Circuit.105 The Witchers filed for Chapter 7 bankruptcy relief and the presumption of abuse did not arise under the means test when the applicable deductions, including the secured debts the Witchers were reaffirming, were factored into the

97 See infra Part III .A–C. 98 In re Calhoun, 650 F.3d 338, 342 (4th Cir. 2011). 99 11 U.S.C. § 707(b) (1984) (prior version of statute that employed “substantial abuse” as the

standard for dismissal). See also supra text accompanying notes 23–40 (discussing prior version of § 707(b) which employed “substantial abuse” as the standard for dismissal).

100 Calhoun v. U.S.Tr., 650 F.3d 338, 341–42 (4th Cir. 2011). Under the prior version of § 707(b), which employed substantial abuse as the standard for dismissal, the Fourth Circuit adopted a “totality of the circumstances” test to determine if a case constituted “substantial abuse” of Chapter 7. Id. at 341, n.2 (citing Green v. Staples (In re Green), 934 F.2d 568, 572 (4th Cir. 1991)). The factors the Fourth Circuit relied on in the pre-BAPCA era were: (1) Whether the bankruptcy petition was filed because of sudden illness, calamity, disability, or unemployment; (2) Whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay; (3) Whether the debtor's proposed family budget is excessive or unreasonable; (4) Whether the debtor's schedules and statement of current income and expenses reasonably and accurately reflect the true financial condition; and (5) Whether the petition was filed in good faith. Green, 934 F.2d at 572.

101 Calhoun, 650 F.3d at 341–42. 102 Id. at 342. 103 Id. 104 Id. 105 In re Witcher, 702 F.3d 609, 621 (11th Cir. 2012). (“The sole question presented on appeal is

whether consideration of the debtors’ ability to pay their debts under § 707(b)(2) precludes consideration of their ability to pay under § 707(b)(3)(B).”).

14 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 means test.106 The Witchers proposed to reaffirm all secured debts, including three vehicles, a pontoon boat and trailer, a tractor, and a 2008 Sandpiper Forest River Motor Home, with the payments on such secured debts totaling $2,267, per month.107 The Bankruptcy Administrator filed a motion to dismiss, or in the alternative motion to convert the case to Chapter 13, asserting that the case was an abuse of the provisions of Chapter 7.108 The Bankruptcy Administrator alleged that without the boat and motor home, the Witchers could pay $585 per month, or approximately $35,100, over a sixty-month period, giving unsecured creditors an approximate 50% return less administrative expenses.109 The bankruptcy court found that “a meaningful distribution to unsecured creditors could be made by simply surrendering those items that are being kept for merely recreational purposes.”110 The bankruptcy court concluded that the Witchers’ “ability to pay, as well as their reluctance to change their lifestyle in order to provide a distribution to creditors, together indicate that granting relief in this Chapter 7 case would be an abuse.”111 Specifically, the Witchers’ proposal to keep “‘unnecessary luxury items’ showed that they were not prepared to earnestly engage in the ‘give and take process’ of bankruptcy.”112 Based on these factual findings the bankruptcy court found that granting relief under Chapter 7 would be an abuse and gave the Witchers fourteen days to convert their case to Chapter 13 or the court would dismiss the case.113 The Witchers did not convert the case and the court dismissed it.114 The district court affirmed the bankruptcy court’s dismissal of the case.115

The Eleventh Circuit rejected the Witchers’ statutory argument.116 The Eleventh Circuit found that the language of § 707(b)(3)(b) “surely intended to include the debtor’s ability to pay his or her debts.”117 Section 707(b)(3)(B) mandates when a court is determining if an abuse arises that it consider whether “the totality of the circumstances . . . of the debtor's financial situation demonstrates abuse.”118 The Witchers’ statutory construction argument contradicted the plain language of § 707(b)(3),

106 Id. 107 Id. at 620; In re Witcher, No. 10-40227, slip op. at 2 (Bankr. N.D. Ala. Aug. 3, 2010). 108 Witcher, slip op. at 2. 109 Id. 110 Witcher, 702 F.3d at 620. 111 Id. 112 Id. 113 Id. at 620–21. 114 Id. at 621. The Witchers filed a motion to amend or alter the bankruptcy court’s order due to a

change in financial circumstances. The bankruptcy court denied the motion as the changes were not material. Id.

115 Id. 116 Witcher, 702 F.3d at 622. 117 Id. See also In re Lenton, 358 B.R. 651, 663 (Bankr. E.D. Pa. 2006) (The court recognized that the

statutory mandate “clearly encompasses a debtor’s ability to pay.”); In re Pak, 343 B.R. 239, 243 (Bankr. N.D. Cal. 2006).

118 11 U.S.C. § 707(b)(3)(B) (2006) (emphasis added).

2014] WEIGHING ABILITY TO PAY 15 which is clear and unambiguous.119 The Eleventh Circuit, and every other court except for one, found that ability to pay is relevant under the totality of circumstances test under § 707(b)(3)(B).120

C. Ninth Circuit Bankruptcy Appellate Panel: In re Ng

The bankruptcy court in the Ng case found that the debtors passed the statutory means test, so no presumption of abuse arose.121 The bankruptcy court then considered the U.S. Trustee’s motion to dismiss for abuse under § 707(b)(3), the totality of circumstances test.122 The bankruptcy court, after considering the financial circumstances of the debtors, found that the debtors could repay their creditors.123 The bankruptcy court based its decision on pre-BAPCPA case law from the Ninth Circuit, holding that ability to pay itself can justify dismissal under the totality of circumstances test employed to determine if granting relief was substantial abuse of the Chapter 7 provisions.124 The Bankruptcy Appellate Panel (BAP) affirmed the bankruptcy court.125 The BAP reasoned that amended § 707(b) was a codification of pre-BAPCPA case law; therefore, pre-BAPCPA cases should be applied in analyzing dismissal for abuse under the totality of circumstances test.126

119 See, e.g., Lenton, 358 B.R. at 663 (Bankr. E.D. Pa. 2006) (The debtor made the same exact

argument the Witchers made and the court found that “[t]he language of the statute itself contradicts the Debtor’s position.”); see also Tabb et al., supra note 93, at 468 (recognizing this argument in counter to a plain reading of the statute).

120 Witcher, 702 F.3d at 623; see also In re Reed, 422 B.R. 214, 233 (C.D. Cal. 2009) (The district court found that the statutory language “of the debtor’s financial situation” required “an examination of the debtors’ ability to pay in addition to other factors.”) (citation omitted)); In re Lanza, 450 B.R. 81, 86–87 (Bankr. M.D. Pa. 2011); In re Keller, No. 09–21519, 2010 WL 4386850, at *2 (Bankr. S.D. Ga. Sept. 2, 2010); In re Perelman, 419 B.R. 168, 176 (Bankr. E.D.N.Y. 2009) (The plain reading of § 707(b)(3), along with § 707(b)(1) and (2), “compels a conclusion that a court consider a debtor’s actual debt-paying ability where the presumption of abuse does not arise . . . [i]ndeed . . . a debtor’s ability to pay still plays a critical role when applying the totality of circumstances test under § 707(b)(3).); In re James, 414 B.R. 901, 914 (Bankr. S.D. Ga. 2008); In re Talley, 389 B.R. 741, 745 (Bankr. W.D. Wash. 2008); In re Cribbs, 387 B.R. 324, 334 (Bankr. S.D. Ga. 2008); In re Barnett, No. 06–62414, 2007 WL 4510277, at *4(Bankr. N.D. Ohio Dec. 18, 2007); In re Henebury, 361 B.R. 595, 607 (Bankr. S.D. Fla.. 2007); In re Lenton, 358 B.R. 651, 664 (Bankr. E.D. Pa. 2006); In re Nockerts, 357 B.R. 497, 507 (Bankr. E.D. Wis. 2006) (involving above-median income debtor in which the court found that debtor’s ability to pay, in and of itself, is not enough to warrant dismissal under the totality of the circumstances test); In re Pak, 343 B.R. 239, 244 (Bankr. N.D. Cal. 2006); In re Barnett, 2007 WL 4510277, at *4 (Bankr. N.D. Ohio 2007) (The bankruptcy court found that § 707(b)(3) “opens the door to review of the ability to pay . . . ”); In re Mestemaker, 359 B.R. 849, 854–55 (Bankr. N.D. Ohio 2007) (recognizing that abuse can be found for above-median-income debtors that pass or rebut the means test when income is in excess of monthly expenses); In re Green, 431 B.R.187, 190 (Bankr. S.D. Ohio 2010) (“Reported decisions have consistently rejected the theory that the ability to pay could not be considered under § 707(b)(3)(B) because means testing under § 707(b) already tests ability to pay.”).

121 In re Ng, 477 B.R. 118, 123 (B.A.P. 9th Cir. 2012). 122 Id. at 123–25. 123 Id. at 125. 124 Id. at 124–26, 130 (The bankruptcy court “applied the criteria in Price v. U.S. Tr. (In re Price), 353

F.3d 1135, 1139–40 (9th Cir. 2004), to determine if the totality of the circumstances justified dismissal under § 707(b)(3).”).

125 Id. at 134. 126 Id. at 126.

16 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 Courts in the Ninth Circuit applied a host of factors,127 but it was well settled that ability to pay, without more, can warrant dismissal.128 As such, the BAP affirmed the bankruptcy court’s dismissal and the continued applicability of ability to pay under the amended § 707(b). 129

D. Analysis of Applicability of Ability to Pay

The interpretation by the appellate courts of the continued applicability of ability to pay is supported by the fact that § 707(b)(3), by its express terms, applies to all debtors subject to § 707(b). Nowhere does § 707(b)(3) exclude debtors who pass § 707(b)(2)’s means test. If Congress wanted to eliminate consideration of ability to pay under the totality of circumstances test of § 707(b)(3)(B), “it would have done so expressly or by explicit reference to § 707(b)(2)(A)” in § 707(b)(3)(B).130 Congress has expressly incorporated § 707(b)(2)(A) in other parts of the Code.131 For example, in Chapter 13, reasonably necessary expenses in determining disposable income under § 1325(b)(2)132 are determined under § 1325(b)(3),133 which expressly requires that the predetermined set of expenses listed in the § 707(b)(2) means test be subtracted from a debtor’s current monthly income.134 “[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the

127 Id. The factors employed by the courts in the Ninth Circuit in the pre-BAPCPA era included: “(1)

Whether the debtor has a likelihood of sufficient future income to fund a Chapter 11, 12, or 13 plan which would pay a substantial portion of the unsecured claims; (2) Whether the debtor's petition was filed as a consequence of illness, disability, unemployment, or some other calamity; (3) Whether the schedules suggest the debtor obtained cash advancements and consumer goods on credit exceeding his or her ability to repay them; (4) Whether the debtor's proposed family budget is excessive or extravagant; (5) Whether the debtor's statement of income and expenses is misrepresentative of the debtor's financial condition; and (6) Whether the debtor has engaged in eve-of-bankruptcy purchases.” Id. (quoting Price, 353 F.3d at 1139–40).

128 Id. (recognizing that prior Ninth Circuit precedent found that ability to pay in and of itself warrants dismissal under § 707(b)); see also Price, 353 F.3d at 1140 (“The primary factor defining substantial abuse is the debtor's ability to pay . . . Thus, we have concluded that a ‘debtor's ability to pay his debts will, standing alone, justify a section 707(b) dismissal.’”) (quoting In re Kelly, 841 F.2d 908, 914 (9th Cir. 1988)).

129 Ng, at 134. 130 Lenton, 358 B.R. at 663. The Eleventh Circuit recognized this fact and found that Congress could

have easily eliminated consideration of factors considered under § 707(b)(3); see also Witcher, 702 F.3d at 622 (“Congress could have, for example, drafted § 707(b)(3)(B) to read that ‘the court shall consider . . . the totality of the circumstances . . . of the debtor's financial situation— except for the circumstances that the court has already considered under § 707(b)(2).’ But that is not what Congress enacted; the italicized language is not actually in the statute, and we decline to add it by judicial interpretation.”).

131 See 11 U.S.C. § 1325 (2006). 132 Id. at § 1325(b)(2). 133 Id. 134 For an overview of the determination of disposable income in Chapter 13, see Alane A. Becket &

William A. McNeal, Projected Disposable Income in Chapter 13: A Menu of Fact, Fiction and Forms, 26 AM. BANKR. INST. J. 20, 20 (May 2007); W. HOMER DRAKE, PAUL W. BONAPFEL & ADAM M. GOODMAN, CHAPTER 13 PRACTICE AND PROCEDURE, § 9F:26 (Nov. 2012).

2014] WEIGHING ABILITY TO PAY 17 disparate inclusion or exclusion.”135 Because Congress did not incorporate § 707(b)(2)(A) in § 707(b)(3)(B), and expressly requires the consideration of the debtor’s financial situation, this, “[l]ogically . . . must include Debtor’s ability to pay his debts.”136

This is consistent with basic rules of statutory interpretation, which require that the analysis begin with the language of the statute itself.137 The language of § 707(b)(3)(B) simply directs a bankruptcy court to consider the “totality of the circumstances . . . of the debtor's financial situation.” 138 By using the word “totality” in the phrase “totality of the circumstances,” Congress intended the court to conduct an inquiry into the debtor's financial circumstances.139 Totality means “the whole of something.”140 The plain language of the statute indicates that the court can consider any and all facts relevant to the debtor's financial situation, which should certainly include ability to pay. This statutory interpretation is consistent with the underlying policy and legislative history of BAPCPA. The legislature designed the amendments to § 707(b) to catch “can-pay” debtors.141 Senator Charles Grassley explained that the purpose of BAPCPA was to steer individuals who can repay their debts out of Chapter 7 and into Chapter 13.142 To exclude actual ability to pay under the totality test actually encourages

135 Lenton, 358 B.R. at 663 (quoting Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 300,

78 L.Ed.2d 17 (1983) (citation omitted)). 136 Lenton, 358 B.R. at 663. 137 United States v. DBB, Inc., 180 F.3d 1277, 1281 (11th Cir. 1999) (“The starting point for all

statutory interpretation is the language of the statute itself.” (citation omitted)). See also Lamie v. U.S. Tr., 540 U.S. 526, 534, 124 S. Ct. 1023, 1030 (2004)(explaining that a court’s function is to enforce the plain language of the existing statutory context); United States v. Ron Pair Enterpr., Inc., 489 U.S. 235, 241, 109 S. Ct. 1026, 1030 (1989) (In interpreting the Bankruptcy Code the inquiry “begins where all such inquiries must begin: with the language of the statute itself.”).

138 11 U.S.C. § 707(b)(3)(B). 139 Id. 140OXFORDDICTIONARIES,

http:www/oxforddictionaries.com/us/definition/american_english/totality?a=totality (last visited Oct. 10, 2013).

141 George H. Singer, The Year in Review: Case Law Developments Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 82 N.D. L. REV. 297, 346 (2006) (“The reform legislation creates a ‘means test’ in an attempt ‘to ensure that those who can afford to repay some portion of their unsecured debts are required to do so.’”); Tabb & McClelland, supra note 93, at 464 (recognizing the intent of the means test is to have “can-pay” debtors cases dismissed or converted); see generally Evan J. Zucker, The Applicable Commitment Period: A Debtor’s Commitment to a Fixed Plan Length, 15 AM. BANKR. INST. L. REV. 687 (2007).

142 Senator Grassley stated the following: “The Bankruptcy Reform Act of 2005 asks the very fundamental question of whether repayment is possible by an individual. It is this simple: If repayment is possible, then he or she will be channeled into chapter 13 of the Bankruptcy Code which requires people to repay a portion of their debt as a precondition for limited debt cancellation . . . . This bill does this by providing for a means-tested way of steering people . . . who can repay a portion of their debts, away from chapter 7 bankruptcy.” 151 Cong. Rec. S1856 (Mar. 1, 2005) (statement of Sen. Grassley).

Senator Jeff Sessions made similar comments regarding BAPCPA. “[T]here is nothing wrong with the means test. People who make high incomes—lawyers, doctors and accountants are examples—and file bankruptcy, wiping out all their debts, who don't care who got hurt by their failure to pay and they care only about themselves, this will crack down on those people . . . ” 151 Cong. Rec. S2216, S2219 (daily ed. Mar. 8, 2005) (statement of Sen. Sessions).

18 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 abuse.143 This interpretation of the totality of circumstances test is consistent with pre-BAPCPA case law. Section 707(b)(3)(B) is a codification of pre-BAPCPA case law that employed a totality of circumstances test to determine if a case was a “substantial abuse” under former § 707(b).144 The courts in the pre-BAPCPA era had varying views on what factors the court would employ.145 Those factors employed are useful in applying the current totality of circumstances test.146 One factor the courts used was ability to pay.147 However, the court used the exact application of this factor in at least three different ways.148 Some courts found that ability to pay, in and of itself, would constitute substantial abuse.149 Some courts found that ability to pay may, in and of itself, constitute substantial abuse.150 Other courts found that ability to pay, coupled with some other factor, was necessary to constitute substantial abuse.151 Regardless of the exact application of ability to pay under § 707(b)(3)(B), it was well settled that ability to pay was a key factor in a substantial abuse analysis and continues to be a key factor in determining if the totality of the circumstances of the debtor’s financial situation demonstrates abuse under § 707(b)(3).152

IV. THE WEIGHT OF ABILITY TO PAY UNDER THE TOTALITY TEST Although the appellate courts in the post-BAPCPA era are in accord that ability to pay is relevant under the totality test, what is less clear is the exact weight to afford ability to pay. As explored in this section, other than the Ninth Circuit BAP, the appellate courts have not enunciated what

143 See, e.g., Carlson, supra note 39, at 295–98 (discussing the disconnect between the purpose of

BAPCPA if “excess income,” i.e., ability to pay, is not permitted as part of the inquiry under the totality test of § 707(b)(3)(b)).

144 See In re Cribbs, 387 B.R. 324, 333 (Bankr. S.D. Ga. 2008). 145 For a concise review of the varying approaches, see generally Oliver B. Pollak & Bernard In Den

Bosch, Substantial Abuse and Dismissal Developments in Section 707(b), 1995-96 ANN. SURV. OF

BANKR. L. 1029–39 (1995–1996 ed.). 146 Id. at 333. 147 Id. at 333–34. 148 Id. at 334; see also In re Wolf, 390 B.R. 825, 831 (Bankr. D.S.C. 2008) (summarizing the three

approaches employed by the courts to apply ability to pay under the totality test used to find substantial abuse); In re Henebury, 361 B.R. at 605 (summarizing the three approaches).

149 Cribbs, 387 B.R. at 334; see also Zolg v. Kelly (In re Kelly), 841 F.2d 908, 914 (9th Cir. 1988) (holding that ability to pay debts alone justifies dismissal for substantial abuse).

150 Cribbs, 387 B.R. at 334. The First, Sixth and Eighth Circuits all found in the pre-BAPCPA era that ability to pay can warrant dismissal under the substantial abuse standard. See, e.g., In re Lamanna, 153 F.3d 1, 4–5 (1st Cir. 1998) (ruling that ability to pay does not require a finding of substantial abuse, but courts are not required to look beyond the ability to repay if that warrants dismissal in a particular case); In re Krohn, 886 F.2d 123, 126–27 (6th Cir.1989) (stating that the analysis requires a comprehensive review of circumstances including situations “. . . where disposable income permits liquidation of . . . consumer debts with relative ease”); U.S. Tr. v. Harris, 960 F.2d 74, 76 (8th Cir. 1992) (“[T]he ability to fund a Chapter 13 plan can be sufficient reason to dismiss a chapter 7 petition under § 707(b).”).

151 Cribbs, 387 B.R. at 334; see also Green, 934 F.2d at 572 (The Fourth Circuit determined that “solvency alone is not a sufficient basis for a finding that the debtor has in fact substantially abused the provisions of Chapter 7.” Rather a court must consider a “totality of the circumstances” test.).

152 James, 414 B.R. at 914 (recognizing that ability to pay is a primary factor under § 707(b)(3)(B)).

2014] WEIGHING ABILITY TO PAY 19 weight to afford ability to pay in the post-BAPCPA era.

A. Appellate Courts Both the Fourth and Eleventh Circuit Courts of Appeal avoided directly addressing the proper weight to give to ability to pay.153 In Calhoun, the Fourth Circuit did not decide what weight to afford ability to pay.154 The debtors asserted that ability to pay alone could not be the basis for dismissal under § 707(b) in reliance on In re Green, pre-BAPCPA precedent addressing the weight to afford ability to pay under the totality test employed under the substantial abuse standard.155 In Green the Fourth Circuit rejected any type of per se rule requiring a finding of substantial abuse based on ability to pay but, rather, required that bankruptcy courts apply a totality of circumstances test employing five specific factors, which include ability to pay.156 In Calhoun, the Fourth Circuit expressly did not make a determination of the continued applicability of Green.157 The bankruptcy court weighed a multitude of factors espoused in the Green case, and the Fourth Circuit found no error in the determination of abuse.158 Thus, what weight and whether ability to pay can in and of itself warrant dismissal under § 707(b)(3) remains unanswered.

In Witcher, the Eleventh Circuit recognized the continuation of the pre-BAPCPA debate on the proper weight of ability to pay under the totality of circumstances test in the post-BAPCPA era.159 The Eleventh Circuit limited its holding and did not engage in the debate as the issue was not before it.160 Whether ability to pay is dispositive under the totality test or the proper weight to give ability to pay in relation to other factors under the totality test was left to another day.161

The Ninth Circuit BAP directly considered the role of ability to pay in the post-BAPCPA era under the totality test.162 The court recognized that the reforms to § 707(b) codified the pre-BAPCPA case law.163 Ninth Circuit pre-BAPCPA precedent held that ability to pay can justify dismissal, standing alone.164 The Ninth Circuit BAP affirmed the bankruptcy court application of the pre-BAPCPA precedent.165 Thus, in the Ninth Circuit

153 See Calhoun 650 F.3d; Witcher 702 F.3d. 154 Calhoun, 650 F.3d at 338. 155 Id. at 342. For a discussion of Green, see supra note 101. 156 Green, 934 F.2d at 572. 157 Calhoun, 650 F.3d at 342. 158 Id. 159 Witcher, 702 F.3d at 622. 160 Id. at 623. 161 Id. 162 In re Ng, 477 B.R. 118. 126 (B.A.P. 9th Cir. 2012). 163 Id. 164 Id. It is important to note that a finding of ability to pay did not compel dismissal. Price, 353 F.3d

at 1139–40 (citing Kelly, 841 F.2d at 914). 165 Ng, 477 B.R. at 124, 127.

20 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 ability to pay, alone, can justify dismissal in the post-BAPCPA era.166

B. Bankruptcy Courts

The bankruptcy courts in the post-BAPCPA era are split on the

proper weight to afford ability to pay and generally fall into two camps.

1. Ability to Pay Must be Coupled with Other Factors

In the post-BAPCPA era, some courts have held that ability to pay must be coupled with some other factor to warrant a finding of abuse under § 707(b)(1).167 Courts adopting this approach reason that the totality test is not a pure mathematical formula like the statutory means, therefore, courts are not limited solely by a mathematical calculation of ability to pay.168 This reasoning is logical, but courts then leap to the conclusion that ability to pay must be linked with other factors to warrant a finding of abuse in the totality test.169 The totality test gives courts discretion170 and mandates consideration of the totality of the circumstances.171 There is no mandate that ability to pay cannot warrant a finding of abuse.172

Likewise some commentators have argued that ability to pay should not be re-examined under the totality test and dismissal is not warranted unless there is the presence of some other factor.173 The argument is that the means test determination of ability to pay effectively “trumps

166 See In re Suttice, 487 B.R. 245, 249–50 (Bankr. C.D. Cal. 2013) (The court discussed the pre-

BAPCPA case law in the Ninth Circuit, as well as Ng. Ability to pay continues to be an important factor, that can standing alone, justify dismissal, but not mandate dismissal.).

167 Cribbs, 387 B.R. at 334 (finding that ability to pay is a primary factor but, standing alone, is insufficient to warrant dismissal for abuse); see also In re Keller, 2010 WL 4386850, at * 2 (Bankr. S.D. Ga. 2010) (must show more than ability to pay to warrant dismissal under § 707(b)(3)(B)); In re James, 414 B.R. 901, 914 (Bankr. S.D. Ga. 2008); In re Allen, 411 B.R. 913, 921 (Bankr. S.D. Ga. 2009); In re Nockerts, 357 B.R. 497, 507–08 (Bankr. E.D. Wis. 2006) (involving above-median income debtor in which the court found that debtor’s ability to pay, in and of itself, is not enough to warrant dismissal under the totality of the circumstances test). In the pre-BAPCPA era, in analyzing cases for substantial abuse, some courts have also held that the ability to repay factor must be coupled with some other factor. In re Deaton, 65 B.R. 663, 665 (Bankr. S.D. Ohio 1986) (other factors beyond ability to pay are needed to warrant a finding of substantial abuse); In re Shands, 63 B.R. 121, 124 (Bankr. E.D. Mich. 1985) (ability to pay when coupled with some egregious circumstance is sufficient for a finding of substantial abuse).

168 In re Hardigan, 490 B.R. 437, 490 (Bankr. S.D. Ga. 2013). 169 Id. at 451. 170 See, e.g., id. at 451 (The court recognized that the statutory provisions do not “expressly or

impliedly eliminate a court’s duty of inquiry into future income and expenses.” This effectively granted courts a great deal of discretion under the totality test.).

171 11 U.S.C. § 707(b)(3)(B) (2006). 172 Hardigan, 490 B.R. at 451. 173 Marianne B. Culhane & Michaela M. White, Catching Can-Pay Debtors: Is the Means Test the

Only Way?, 13 AM. BANKR. INST. L. REV. 665, 666 (2005); see generally Eugene R. Wedoff, Judicial Discretion to Find Abuse under Section 707(b)(3), 71 MO. L. REV. 1035 (2006) (providing a comprehensive treatment advocating the view at the other end of the spectrum); see generally John A. E. Pottow, The Totality of the Circumstances of the Debtor’s Financial Situation in a Post-Means Test World: Trying to Bridge the Wedoff/Culhane & White Divide, 71 MO. L. REV. 1053 (2006) (providing an analysis of both viewpoints).

2014] WEIGHING ABILITY TO PAY 21 pre–BAPCPA totality-of-the-circumstances case law.”174 The premise is that Congress provided a detailed methodology to determine ability to pay; therefore, to permit a court to disregard that determination and re-examine the ability to pay outside of the means test is counter to the statutory framework.175 The means test is arguably designed to replace other measures of ability to pay in the pre-BAPCPA era.176 Advocates of this viewpoint argue that something more than ability to pay must be present to warrant dismissal under the totality test.177 The means test determines ability to pay, whereas the totality test covers debtor misconduct.178 Few courts have found that ability to pay cannot be re-examined under the totality test,179 but a substantial number find that ability pay by itself is not enough and must be coupled with some other factor.180

2. Ability to Pay May be Dispositive

Other courts have found that ability to pay, standing alone, may be

sufficient to warrant dismissal under totality of the circumstances of the debtor’s financial situation under § 707(b)(3).181 Courts in this camp base this approach largely on the plain language of the statute.182 In the pre-BAPCPA era courts applied a totality of the circumstances test to determine if a case constituted substantial abuse.183 Amended § 707(b)(3)(B)

174 Tribble, supra note 56, at 803–04. 175 Id. 176 Culhane & White, supra note 174, at 667. 177 Id. at 666 178 Id. at 667. 179 In re Walker, No. 05-15010-whd, 2006 Bankr. LEXIS 845, at *25 (Bankr. N.D. Ga. May 1,2006)

(holding that courts may not find abuse when the debtor passes the means test, even if the debtor becomes able to pay later on).

180 See, e.g., Perelman, 419 B.R. at 176 (“[A] debtor’s ability to pay still plays a critical role when applying the totality of circumstances test under § 707(b)(3).”) (collecting cases); Cribbs, 387 B.R. at 334 (“[I]n order for the United States Trustee to satisfy its burden under the 707(b)(3)(B) ‘totality of circumstances’ test, the Trustee must show more than just Debtors’ ability to pay.”); In re James, 414 B.R. 901, 914 (Bankr. S.D. Ga. 2008). (“Therefore, even though the primary factor is whether a debtor has the ability to repay a meaningful portion of his debts from future income, the United States Trustee must prove more . . . ”); In re Nockerts, 357 B.R. 497, 507 (Bankr. E.D. Wis. 2006) (holding that ability pay is not alone sufficient to constitute abuse under the totality of the circumstances test, but noting that it “may even be the primary factor to beconsidered”).

181 Henebury, 361 B.R. at 607 (“Either ability to pay or bad conduct in connection with the bankruptcy will warrant dismissal for abuse under § 707(b)(3) . . . the Court concludes that under BAPCPA the ability to pay, standing alone, is sufficient to warrant dismissal of a Chapter 7 case for abuse pursuant to 11 U.S.C. § 707(b)(3)(B).”); see also In re Stubblefield, 430 B.R. 639, 645 (Bankr. D. Or. 2010) (noting that ability to pay debts will, standing alone, justify dismissal); In re Lorenca, 422 B.R. 675, (Bankr. N.D. Ill. 2010) (recognizing that ability to pay has long been recognized as a major ground warranting dismissal and applying that standing in a post-BAPCPA case before it); In re Boule, 415 B.R. 1, 5 (Bankr. D. Mass. 2009) (recognizing that ability to pay may be sufficient to warrant dismissal in some instances); In re Haar, 373 B.R. 493, 499 (Bankr. N.D. Ohio 2007) (ability to pay alone can warrant dismissal); In re Calhoun, 396 B.R. 270, 275–76 (Bankr. D.S.C. 2008) (“This Court now holds that, while the totality of all of the debtor's financial circumstances must be examined, the ability to pay a significant dividend to creditors and the failure to do so standing alone can be an abuse of chapter 7, absent mitigating factors.”).

182 See infra text accompanying note 206. 183 Henebury, 361 B.R. at 607.

22 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 “specifically delineates the pertinent inquiry as the ‘totality of the circumstances of the debtor's financial situation,’” rather than just “totality of the circumstances.”184 The added language “financial situation” to the case law totality test in § 707(b)(3)(B) and the separate statutory ground for bad faith indicates that either the debtor’s total financial situation or bad conduct can warrant dismissal under § 707(b)(3).185

The language of § 707(b)(3) does not mandate or direct what factors to consider under the totality test, much less that any factors must be found together.186 The statute requires consideration of the “totality of the circumstances . . . of the debtor’s financial situation.”187 A court must consider all of the debtor’s financial circumstances.188 If a court considers all factors presented to it, the court has complied with the statute.

Additionally, the intent of Congress to catch can-pay debtors189 would be hampered if courts did not have discretion to find abuse when ability to pay exists in and of itself. Congress took discretion away under the means test190 but gave substantial discretion under the totality test.191

V. A RATIONAL APPROACH TO WEIGHING ABILITY TO PAY

To warrant dismissal, the court should not have to couple the ability to pay with other factors. Likewise, a finding of a debtor’s ability to pay should not mandate dismissal as some courts indicated in the pre-BAPCPA era.192 Rather than a required finding of multiple factors or a per se rule requiring dismissal, if there is an ability to pay, a permissive standard that a finding of ability to pay standing alone may warrant dismissal. The court’s

184 Id. (emphasis omitted). 185 See, e.g., id. 186 Id. 187 11 U.S.C. § 707(b)(3) (The statute provides the “court shall consider . . . the totality of the

circumstances . . . of the debtor’s financial situation demonstrates abuse.”) (emphasis added). 188 Calhoun, 396 B.R. at 275–76. 189 See Ransom v. FIA Card Servs., N.A., 131 S.Ct. 716, 721 (2011) (“Congress enacted the

[BAPCPA] to correct perceived abuses of the bankruptcy system . . . to help ensure that debtors who can pay creditors do pay them.”); In re Read, 692 F.3d 1185, 1192 (11th Cir. 2012) (The court recognized Congress’s intent with BAPCPA was to “ensure that debtors repay creditors the maximum they can afford.”).

190 In re Welsh, 711 F.3d 1120, 1130 (9th Cir. 2013) (“Before the BAPCPA, bankruptcy judges had authority to determine a debtor's ability to pay based on the individual circumstances of each case and each debtor. Congress replaced this discretion with a detailed, mechanical means test . . . ”); In re Rudler, 576 F.3d 37, 50–51 (1st Cir. 2009) (recognizing the intent of Congress to limit judicial discretion) (collecting cases); In re Fredman, 471 B.R. 540, 553 (Bankr. S.D. Ill. 2012) (recognizing Congress’s intent to limit judicial discretion under the means test).

191 In re Hilmes, 438 B.R. 897, 907 (N.D. Tex. 2010) (The court recognized that “the purpose of section 707(b)(3)(B) is to give courts greater discretion to dismiss a case that, although not abusive under section 707(b)(2)'s mechanical means test, is shown to be abusive based on its particular facts and circumstances.”); In re Bomarito, 448 B.R. 242, 247 (Bankr. E.D. Cal. 2011) (recognizing the purpose of § 707(b)(3)(B) was to give courts discretion to dismiss cases).

192 See, e.g., Price v. U.S. Tr. (In re Price), 353 F.3d 1135, 1140 (9th Cir. 2004) (“The primary factor defining substantial abuse is the debtor's ability to pay his debts as determined by the ability to fund a Chapter 13 plan. Thus, we have concluded that a ‘debtor's ability to pay his debts will, standing alone, justify a section 707(b) dismissal.’”).

2014] WEIGHING ABILITY TO PAY 23 factual determination on a case-by-case basis should be the basis of the approach bankruptcy courts employ. There are a host of reasons why the court should adopt this approach over a rule requiring the coupling of the ability to pay with some other factor or a per se rule requiring dismissal.

A. Arguments Against Coupling Ability to Pay with Another Factor

First, a rule that requires a finding of ability to pay that must be coupled with some other factor conflicts with the statutory language. The totality test requires consideration of the totality of financial circumstances.193 If a court considers the factors before it, the test has been satisfied.194 There is no indication in the Code of a requirement of multiple factors to be found to warrant dismissal.195 Requiring the plain language of the statute to require multiple factors to be found would be tantamount to judicial legislation. Second, a rule that requires ability to pay be coupled with some other factor can lead to absurd results inconsistent with one of the primary purposes of BAPCPA: “ensuring that debtors with the ability to repay a portion of their debts are compelled to do so.”196 The Witcher case is a prime example of the absurdity that can occur.197 The Witchers had an actual ability to repay their unsecured debts. That ability to pay, along with their unwillingness to surrender certain luxury items (boat and travel trailer), warranted a finding of abuse and dismissed the case.198 Effectively, if the Witchers would have surrendered the luxury items they would have had the funds to repay unsecured creditors. If ability to pay had to be coupled with some other factor, the case would not have constituted an abuse even though the debtors had an actual ability to pay with a modification of lifestyle. Permitting debtors, such as the Witchers, to obtain a discharge of debts they can repay without any mitigating factors would be an absurd result, certainly not intended by BAPCPA. Courts should not interpret statutes in a way that leads to absurd results.199

B. Arguments Against a Per Se Rule Mandating Dismissal if There is Ability to Pay

First, the view that ability to pay mandates dismissal is inconsistent

with the statutory language of the Code that requires consideration of the

193 See 11 U.S.C. § 707 (2006). 194 Id. 195 Id. 196 Eron, supra note 60, at 34. 197 In re Witcher 702 F.3d 619, 620 (11th Cir. 2012). 198 Id. 199 Crooks v. Harrelson, 282 U.S. 55, 60 (1930) (“[I]nterpretations of a statute which produce absurd

results are to be avoided if alternative interpretations consistent with the legislative purpose are available”).

24 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 totality of the financial circumstances. The plain language of the statute directs courts to look at all circumstances bearing on the debtor’s financial situation, including among actual income and reasonable expenses.200 A finding of ability to pay does not necessarily mandate dismissal. The movant has the burden of proof to show that granting of relief is an abuse under the totality of the circumstances test based on a debtor’s ability to pay.201 Even if the movant makes that showing, other factors could be in play to mitigate that particular finding. The totality test requires a “determination of and the balancing of multiple factors and stand in contrast to a per se rule.”202 Ability to pay may be the determinative factor or tipping point to be sufficient for abuse itself,203 but a per se rule requiring dismissal is inconsistent with the plain language of the statute.

Second, a rule that mandates dismissal based on one factor under the totality test would run afoul of the discretion given to bankruptcy courts under § 707(b)(3). The means test limits a court’s discretion when the presumption of abuse arises;204 however, there is the ability to rebut the presumption,205 and courts ultimately have discretion to not dismiss a case.206 There is no reason to limit discretion when a presumption does not arise. Certainly, if a court can find that special circumstances rebut the presumption of abuse based on the statutory calculation of ability to pay, then courts can consider other factors when a debtor shows an actual ability to pay. If a per se rule requiring dismissal of an ability to pay is in place, then harsh results or absurd results may occur in some cases. Consider a hypothetical debtor that, based on an analysis of his or her current income and expenses, can repay a portion of unsecured debts. There may be some other factor, however, that is relevant in the consideration of the financial circumstances test. Perhaps a member of the household has a serious medical issue that will require significant money in the near future or may affect the near future income earning ability of a debtor. A bankruptcy court should be able to weigh these types of extenuating financial circumstances and exercise its discretion in determining if granting relief constitutes abuse.

200 See, e.g., Ross-Tousey, 549 F.3d at 1162 (court may consider actual income and expenses),

overturned on other grounds by Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716 (2011); In re Mestemaker, 359 B.R. 849, 854–55 (Bankr. N.D. Ohio 2007).

201 In re Beckett, 442 B. R. 638, 645 (Bankr. N.D. Ohio 2010). 202 In re Wolf, 390 B.R. 825, 832 (Bankr. D.S.C. 2008). 203 Id. 204 It is important to recognize the means test simply results in a presumption or no presumption. It

does not mandate an outcome. 205 11 U.S.C. § 707(b)(2)(B) (2006). 206 11 U.S.C. § 707(b)(1) (2006). The statutory language in § 707(b) using “may dismiss” is

permissive and gives the court discretion.

2014] WEIGHING ABILITY TO PAY 25

C. Proposed Statutory Solution In light of the developing case law and divergent approaches to the proper weight of ability to pay under the totality test, Congress should modify § 707(b)(3)(B) to expressly delineate ability to pay as a specific ground that can warrant dismissal for abuse. Just as Congress specifically set forth bad faith as an independent ground from the judicially created totality of circumstances test, Congress can do the same with ability to pay. Rather than requiring ability to pay be coupled with some other factor or any type of per se rule requiring dismissal in the face of actual ability to pay, courts should be required to consider ability to pay and, if appropriate, let that factor in and of itself be sufficient to warrant a finding of abuse. Section 707(b)(3) could be modified as follows:

(3) In 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) whether the debtor has an actual ability to pay a meaningful portion of the debtor’s nonpriority unsecured claims over a 60 month period; or (B) (C) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor's financial situation demonstrates abuse.

The additional ground “actual ability to pay” in new subsection (B) will clarify that ability to pay can support a finding of abuse in and of itself, just as bad faith can stand alone to warrant dismissal.207 Requiring a court to consider actual ability to pay independent of bad faith or other financial factors supports the underlying intent of Congress in enacting BAPCPA-to catch can pay debtors.208 The statutory modification does not in any way limit a court’s discretion. What constitutes ability to pay is left within the discretion of the court by permitting courts to determine on a case-by-case basis what is a “meaningful portion of the debtor’s nonprioirty unsecured claims.” Furthermore, even if a court finds an actual ability to pay under new

207 See In re Mitchell 357 B.R. 142, 153 (Bankr. C.D. Cal. 2006) (recognizing that bad faith by itself

can support a finding of abuse under § 707(b)(3)(A)). Likewise, if ability to pay is added as a separate ground, it should be sufficient in and of itself to warrant a finding of abuse.

208 See supra text accompanying notes 130–32.

26 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 subsection (B), a court is not required to dismiss a case if it finds the case constitutes an abuse. Section 707(b)(1) does not require dismissal. Section 707(b)(1) plainly provides that the court “may dismiss a case . . . if it finds that the granting of relief would be an abuse . . . . ”209 This statutory modification merely requires courts to independently consider ability to pay without regard to other factors and permits courts to exercise discretion on a case-by-case basis to ensure that equitable results occur in each case before it. The totality test is retained to take into account other financial factors that may demonstrate abuse. There may be instances when there is no bad faith or an actual ability to pay, but the totality of the circumstances demonstrates abuse. For example, purchases leading up to bankruptcy may have occurred or other conduct may be present but do not rise to a level of bad faith; however, the totality of the financial factors in the context of a specific case may be an abuse, even if there is no bad faith or ability to pay. The totality test needs to remain because of the fact-sensitive nature of consumer bankruptcy. Courts need discretion to consider and weigh factors before them in a particular case.

VI. CONCLUSION The proposed statutory change addresses an area that is highly litigated and is one of the thorniest issues in the post-BAPCPA era—the weight and role of ability to pay under § 707(b)(3). Although the Fourth and Eleventh Circuit Courts of Appeals agree that ability to pay is a relevant factor under the totality test, the courts did not address the exact weight and whether it will justify dismissal in and of itself.210 The Bankruptcy Appellate Panel in the Ninth Circuit when considering this issue applied pre-BAPCPA precedent that ability pay “will, standing alone,” warrant dismissal.211 This approach—ability to pay may warrant dismissal without necessarily the finding of other factors—is consistent with the plain language of the Code and the intent of Congress with passing BAPCPA. However, outside of the Ninth Circuit, courts continue to address this issue inconsistently.212 Many courts read additional statutory requirements into the Code and fail to adhere to the plain language of the Code. Ignoring ability to pay unless some other judicially created required factor is present in the context of § 707(b) is irrational and is effectively judicial legislation. Such an approach exacerbates the potential for abuse of

209 11 U.S.C. § 707(b)(1) (2006). 210 See In re Witcher, 702 F.3d 619, 623 (11th Cir. 2012) (limiting holding to ability to pay is a factor

and not addressing weight to accord that factor); Calhoun v. U.S.Tr., 650 F.3d 338, 342 (4th Cir. 2011) (finding factors other than ability to pay were present, the court did not need to determine the exact weight of ability to pay).

211 In re Ng, 477 B.R. 118, 126 (B.A.P. 9th Cir. 2012) (reviewing pre-BAPCPA case law on the role of ability to pay and recognizing ability to pay standing alone may justify dismissal in the Ninth Circuit).

212 See supra notes 168–93 and accompanying text.

2014] WEIGHING ABILITY TO PAY 27 Chapter 7.213 Courts need to adopt an approach consistent with the Ninth Circuit BAP and apply the Code in a rational away to advance the plain language of the Code and purpose of BAPCPA. The statutory proposal herein will provide a rational and clear approach to considering ability to pay in an abuse analysis under § 707(b)(3). It will not eliminate the panoply of fact-sensitive decisions around the country on what exactly constitutes “actual ability to pay.” The reform is not designed to be a cookie-cutter approach to bankruptcy, but to ensure that judges have the discretion to evaluate cases and require consideration of ability to pay in and of itself without tying it to other factors. 214 The line of cases that require ability to pay be coupled with some other factor will be superseded by the statute. This statutory change will eliminate the need for further litigation on that issue and add some level of consistency on the weight a court should afford ability to pay under an abuse analysis.

213 If a debtor has an actual ability to pay and yet a court requires that the debtor link some other

factor to the ability to pay those debtors when ability to pay will be able to obtain Chapter 7 relief. Certainly, this was not what Congress intended when it passed BAPCPA to help catch can pay debtors. Such a scenario would result in an abuse of the Chapter 7 provisions of the Code.

214 Cookie-cutter approaches do not work well in the consumer bankruptcy domain. The means test to determine presumptive abuse is an excellent example of the problems of curbing judicial discretion with a mechanical one-size-fits all test. Debtors with good lawyers can use the means test to their strategic advantage to achieve the desired outcome. The means test results in some cases that should not be presumed abuse to be presumed abuse and some cases that should carry the presumption do not. This is because of the detailed mechanics of the test that do not accurately capture the nuances of individual fact-sensitive bankruptcy cases.