ABI Means Test

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Recent changes to the bankruptcy law. Includes all changes.
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   223 MEANS TESTING: THE FAILED BANKRUPTCY REVOLUTION OF 2005 D AVID G RAY C ARLSON *  I NTRODUCTION ......................................................................................................224I.   D ISCLOSURES .....................................................................................................228II.   M EANS T ESTING P RIOR TO 2005.......................................................................234  A. Primarily Consumer Debts ........................................................................ 234   B. Standing........................................................................................................ 238  C. Substantial Abuse ...................................................................................... 239   D. Pro-Debtor Presumption.............................................................................. 248   E. Charitable Contributions.............................................................................. 249   III.   M EANS T ESTING AND BAPCPA......................................................................250  A. Standing........................................................................................................ 251   1. United States Trustees..............................................................................2512. Partial Immunity.......................................................................................2533. Total Immunity.........................................................................................2534. The Qualifications for Partial and Total Immunity...................................2565. Crime Victim Standing.............................................................................2586. Current Monthly Income..........................................................................258 a. Non-Debtor Spousal Income ................................................................260 b. Child Support  .......................................................................................262 c. Exclusions .............................................................................................262 d. Irregular Income ..................................................................................2637. Median Family Income.............................................................................264  B. The Means Test............................................................................................. 266   1. The Sixty-Month Test for Gross Income..................................................2662. Expenses...................................................................................................268 a. IRS Standards .......................................................................................268i. National Standards............................................................................269ii. Dependents.......................................................................................270iii. Local Standards..............................................................................272 (a) Housing ......................................................................................273 (b) Transportation ...........................................................................274iv. Other Necessary Expenses..............................................................278v. Health and Disability Insurance.......................................................280vi. Family Violence..............................................................................280vii. The Chronically Ill.........................................................................281viii. Chapter 13 Expenses.....................................................................282ix. Tuition.............................................................................................283x. Secured Debts..................................................................................283 * Professor of Law, Benjamin N. Cardozo School of Law.  224  ABI LAW REVIEW  [Vol. 15:223xi. Priority Claims................................................................................2883. Charitable Contributions...........................................................................2904. Rebuttals...................................................................................................2915. Veterans....................................................................................................2926. Sanctions...................................................................................................294 C. Means Testing In Excess of Section 707(b)(2)............................................. 295   IV.   D ISPOSABLE I NCOME IN C HAPTER 13..............................................................298  A. Gross Income................................................................................................ 301   B. Below-Median Debtors................................................................................. 306  C. Above-Median Debtors................................................................................. 307   1. The Unfairness of It All............................................................................3072. Who Receives Disposable Income?..........................................................3103. Charitable Contributions...........................................................................313V.   C ONVERSION B ACK TO C HAPTER 7..................................................................314C ONCLUSION .........................................................................................................318I NTRODUCTION  As with most human practices, American bankruptcy law is rife with myth andmisconception. One of them is the idea that honest debtors are entitled to a bankruptcydischarge and a fresh start. 1 This myth was promulgated by  Local Loan Co. v. Hunt  , 2  where, Hesiod-like, Justice Sutherland wrote the following oft-quoted words:[The] purpose of the [Bankruptcy] act has been again and againemphasized by the courts as being of public as well as private interest,in that it gives to the honest but unfortunate debtor who surrenders fordistribution the property which he owns at the time of bankruptcy, anew opportunity in life and a clear field for future effort, unhamperedby the pressure and discouragement of preexisting debt. 3  Although  Local Loan does not actually use the phrase fresh start, 4 the case isusually cited in connection with the concept. 5 Technically,  Local Loan involvedavoidance of a pre-petition wage assignment as security for a loan. This assignment 1    E.g. , Marrama v. Citizens Bank of Mass., 127 S. Ct. 1105, 1107 (2007) ( The principal purpose of theBankruptcy Code is to grant a 'fresh start' to the 'honest but unfortunate debtor.' ). 2 292 U.S. 234 (1934). 3    Id  . at 244. 4 It does, however, refer to debtors starting afresh.  Id  . at 244 ( One of the primary purposes of theBankruptcy Act is to 'relieve the honest debtor from the weight of oppressive indebtedness, and permit him tostart afresh free from the obligations and responsibilities consequent upon business misfortunes.' (quotingWilliams v. U.S. Fidelity & Guar. Co., 236 U.S. 549, 554–55 (1915))). 5    E.g. , Cent. Va. Cmty. College v. Katz, 126 S. Ct. 990, 996 (2006) (citing  Local Loan and noting BankruptcyCode gives debtor an ultimate discharge and a new start); Grogran v. Garner, 498 U.S. 279, 286–87 (1991)(citing  Local Loan and stating central purpose of Bankruptcy Code is for debtors to make peace with creditors toenjoy new opportunity in life).  2007] THE FAILED BANKRUPTCY REVOLUTION OF 2005 225was valid under Illinois law, yet Justice Sutherland ruled as a matter of non-statutorybankruptcy policy, that the lien was automatically dissolved by the very fact of abankruptcy discharge. 6 Discharge of a debt has no such effect on other types of securityinterests. 7 So  Local Loan strongly stands for the proposition that the debtor has aninalienable ownership of his post-petition wages following a bankruptcy discharge.The principle of   Local Loan was ratified by Congress forty-three years later in theBankruptcy Reform Act of 1978. 8  The spirit of the fresh start is embodied withinsection 541(a), which defines the bankruptcy estate. Preliminarily, section 541(a)(1)establishes that the bankruptcy estate consists of all legal or equitable interests of thedebtor in property as of the commencement of the case. 9 Without more, it wouldappear that a worker's job is part of the bankruptcy estate, since a job is an executorycontract and these routinely go into the bankruptcy estate, where section 365 of theBankruptcy Code governs them at great length. But section 541(a)(6) goes on tospecify that the bankruptcy estate includes [p]roceeds, product, offspring, rents, orprofits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case . 10 Here iswhere the concept of   Local Loan manifests itself. Post-petition wages belong to thedebtor, not to the bankruptcy estate. 11  So, gazing at section 541(a)(6), one might get the impression that individuals, if they file for bankruptcy, can disencumber their wages from any pre-petition debts.True, they may have to give up their non-exempt assets (if any), but, so long as theyqualify for a discharge, they have a right  to a fresh start, do they not? The fresh start is all about disencumbering the post-petition wage income stream from any pre-petitionclaim. To use a notorious example, in 1987 Dr. Denton Cooley, the innovative heartsurgeon, reported income of $9,747,599. 12 Nevertheless he filed for bankruptcyliquidation in 1988 and from his prodigious wages enjoyed a very fresh start indeed.In spite of this example, the fresh start has not been possible for ordinary mortalssince 1984. 13 In that year, at the behest of the consumer finance industry, Congress 6    Local Loan , 292 U.S. at 242–43. See generally Matthew Frankle, Wage Garnishments in Bankruptcy: Riddervold Revisited  , 21 C ARDOZO L.   R EV . 927 (1999) (arguing while Illinois allowed assignment of wagesearned after bankruptcy, United States Supreme Court rejected concept noting its inconsistency with purpose of Bankruptcy Act). 7   See Chandler Bank of Lyons v. Ray, 804 F.2d 577, 579 (10th Cir. 1986) (holding discharge will not precludeenforcement of valid lien). 8   Pub. L. No. 95-598, § 541, 92 Stat. 2549, 2558–59 (codified in 11 U.S.C. § 541(a)(6)). 9 11 U.S.C. § 541(a)(1) (2006).   10    Id. § 541(a)(6) (emphasis added). 11 Oddly, the job belongs to the trustee, even if the proceeds of the job do not. Presumably, a malicious trusteecould resign the debtor from a too-lucrative job. On this peculiarity, see Louis M. Phillips & Tanya MartinezShively,  Ruminations on Property of the Estate—Does Anyone Know Why a Debtor's Postpetition Earnings,Generated by Her Own Earning Capacity, Are Not Property of the Bankruptcy Estate? , 58 L A .   L.   R EV . 623,630–39 (1998) (suggesting debtor can receive post-petition wages even if trustee could assert debtor had vestedcontractual right to employment that would allow trustee to exercise debtor's rights and perform debtor'sobligations). 12    In re Cooley, 87 B.R. 432, 436 (Bankr. S.D. Tex. 1988). 13   See Green v. Staples (  In re Green), 934 F.2d 568, 570 (4th Cir. 1991) ( Prior to 1984, debtors enjoyed a  226  ABI LAW REVIEW  [Vol. 15:223enacted a new provision, section 707(b), which authorized dismissal of consumerbankruptcy cases for substantial abuse. 14 After 1984, courts have defined substantialabuse as the condition of having surplus income that could be used to pay creditors. 15  In other words, the fresh start was denied to any consumer debtor who had evenmodest surplus income after expenses. At this point, or perhaps in 1986, when theUnited States trustee was given standing to make motions to dismiss, the untrammeledright to a fresh start essentially ended. 16  What section 707(b) became was a procedure whereby the intimate details of adebtor's life were subject to scrutiny by a bankruptcy judge. If the judge did not likewhat he or she saw, the judge could deny the debtor a fresh start. Most dramatically,section 707(b) has become a means for extorting future wages and other forms of exempt property in exchange for access to a bankruptcy discharge. The past deeds of adebtor might also be used to dismiss a case, even though the bad conduct is not listedas grounds to deny a discharge under section 523(a) or 727(a) of the Bankruptcy Code.Even admittedly honest debtors could be barred from a fresh start, if they had netsurplus wages or if a court has disapproved of their life style. 17  In 2005, Congress finally passed the ironically named Bankruptcy AbusePrevention and Consumer Protection Act ( BAPCPA ). 18 Most famously, thislegislation, a side car to the existing bankruptcy vehicle, 19 vastly expands section707(b) to provide a mechanical means test. 20 Consumer advocates in particular havebeen overwrought about the massive elongation of section 707(b) to include meanstesting of consumer debtors. 21 These advocates somehow imagine that fewer virtually unfettered right to a 'fresh start' under Chapter 7, in exchange for liquidating their nonexempt assets forthe benefit of their creditors. ).   14   See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, § 312(2), 98 Stat.333, 355 (codified in 11 U.S.C. § 707 (b) (2000)). The idea can be traced back to President Herbert Hoover,sponsor of the Great Depression. See Ann Morales Olazabal & Andrew J. Foti, Consumer Bankruptcy Reformand 11 U.S.C. § 707(b): A Case-Based Analysis , 12 B.U.   P UB .   I NT .   L.J. 317, 325–26 (2003). 15 Doctor Cooley escaped this regulation since his debts were business-related, not consumer debts. See infra  text accompanying notes 86–87. 16   See infra text accompanying notes 102–05. 17   See Price v. U.S. Trustee (  In re Price), 280 B.R. 499, 505 (B.A.P. 9th Cir. 2002) (holding debtor honest butnot unfortunate);  In re West, 324 B.R. 45, 49–50 (Bankr. S.D. Ohio 2005) (dismissing chapter 7 relief as substantial abuse where debtors were honest but unable to point to inability to support themselves);  In re Hill,328 B.R. 490, 496–97 (Bankr. S.D. Tex. 2005) (finding debtors honest but nevertheless dismissed in light of surplus income);  In re Zuehlke, 298 B.R. 610, 615–16 (Bankr. N.D. Iowa 2003) (concluding stroke victim andschizophrenic spouse living on social security and disability insurance with no extravagant expenses werebankruptcy abusers). 18 Pub. L. No. 109-8, 119 Stat. 23 (2005) [hereinafter BAPCPA] (codified as amended in scattered sections of 11 U.S.C.). The tortured legislative history of BAPCPA is set forth in Susan Jensen,  A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 , 79 A M .   B ANKR .   L.J. 485 (2005) ( Theenactment of the BAPCPA in 2005 brought to a close a tumultuous legislative initiative . . . . ). 19    In re Murray, 350 B.R. 408, 411 (Bankr. S.D. Ohio 2006). 20 Judge Jeff Bohm protests that means test  is a misnomer in the sense that the 'test' being conducted is notwhether the debtor has means to pay, but rather whether the debtor has no means to pay.  In re Singletary, 354B.R. 455, 459 (Bankr. S.D. Tex. 2006). 21   See, e.g. , Robert J. Landry, III & Nancy Hisey Mardis, Consumer Bankruptcy Reform: Debtors' PrisonWithout Bars or Just Desserts for Deadbeats? , 36 G OLDEN G ATE U.L.   R EV . 91, 92 (2006) (stating means test
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