Abuse under Section 707(b) of the Bankruptcy Code - An Explanation

Much has been written about the 'abuse' section of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. That section, 707(b), is the one that might well be referred to as the 'teeth' in that new bankruptcy law. Practitioners and debtors who have run afoul of the revised section 707(b) will likely conclude that the BAPCPA is a lot more 'abuse prevention' than 'consumer protection'.

To get a handle on the revised section 707(b), it is helpful to look at the different subsections individually, and to compare them with what section 707(b) used to look like, that is, before the sweeping changes that went into effect in 2005.

Prior to the revision, section 707(b)(1) was fairly innocuous; that is, its proscription was pretty narrow, and thus easy to avoid running afoul of: "The court, on its own motion or on a motion by the United States trustee, may dismiss a case filed by an individual if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter".

This was interpreted to mean that the debtor had to have income well in excess of his expenses - generally a couple hundred dollars or so - before he was considered to be in "substantial abuse". That all changed, unfortunately, with the BAPCPA, which took out the key word "substantial". The result was that trustees faced much less of a burden in order to sustain a motion or complaint against a debtor; that is, they now needed merely to demonstrate any abuse under section 707(b)(1).

A further problem arose for the debtor in the calculation of 'disposable income'. Under the old law, the debtor was allowed to list his actual expenses, even if they were much higher than average. Consequently, a debtor could have a sizable income - even over six figures in many cases - and still qualify for a Chapter 7 discharge if he had expenses large enough to offset that income.

The BAPCPA, unfortunately, included a new section, 707(b)(2), that drastically changed the way disposable income would henceforth be calculated. This section set forth the so called "means test," under which the debtor's allowable deductions are based on regularly inflation-adjusted IRS standards, for certain expense categories without regard to the debtor's actual expenses.

Last but not least was the addition of another new section, 707(b)(3), which gave the trustee still more ammunition for a motion or complaint against the debtor. This section allows the court to consider, even if the debtor has rebutted (overcome) a presumption of abuse arising from either of the two other subsections, whether the "totality of the circumstances of the debtor's financial situation demonstrates abuse."

These two new sections of the bankruptcy code, together with the revision to the pre-existing section, create veritable land mines for the unwary debtor. In most districts, the trustee ultimately prevails in a very high percentage of cases in which litigation results from a trustee's 707(b) action. It is therefore critical that a debtor's attorney thoroughly appraise the debtor's situation with respect to section 707(b) before filing, so that potential abuse allegations under section 707(b) may be avoided in advance.

David Romito is an Attorney based in Pittsburgh, PA. He handles Chapter 7 Bankruptcy matters in the Western District of Pennsylvania. For more answers to your Chapter 7 Bankruptcy questions, please visit his website at Pittsburgh Bankruptcy Lawyer .