In In re Witcher, No. 11-15883 (11th Cir. December 13, 2012) (click here for opinion), the issue before the Court was…
whether a court may take into account a debtor’s ability to pay his or her debts in determining whether "the totality of the circumstances . . . of the debtor’s financial situation demonstrates abuse" of chapter 7 of the Bankruptcy Code under 11 U.S.C. § 707(b)(3)(B).
The Bankruptcy Administrator moved to dismiss or convert the joint Debtors’ Chapter 7 case on the grounds that the filing constituted an abuse of the Chapter 7 process, even though the Debtors "passed" the Means Test of 11 U.S.C. §707(b)(2). The primary grounds for the Administrator’s Motion was the following:
The primary factor that the court relied upon to support its conclusion was its finding that the [Debtors] had kept certain luxury items—including a camper, a boat, a trailer, and a tractor—and had continued making payments on these items to their secured creditors. It determined that “the Debtors’ 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.” Because “a meaningful distribution to unsecured creditors could be made by simply surrendering those items that are being kept for merely recreational purposes,” reasoned the court, the [Debtors’] decision to keep paying for these “unnecessary, luxury items” showed that they were not prepared to earnestly engage in the “give and take process” of bankruptcy.
The Bankruptcy Court dismissed the case and the Debtors appealed, arguing that ability to pay should not be a consideration under 11 U.S.C. § 707(b)(3)(B). The District Court affirmed, and Debtors appealed to the Eleventh Circuit Court of Appeals. The Eleventh Circuit affirmed.
The present case concerns §§ 707(b)(2) and 707(b)(3). Under § 707(b)(2), “the court shall presume abuse” of chapter 7 if the debtor runs afoul of the so-called “means test.” The means test takes into account a great many factors, including the debtor’s payment of secured debts as calculated by a statutory formula. See 11 U.S.C. § 707(b)(2)(A)(iii). If a presumption of abuse arises under the means test and is not rebutted, the court may dismiss or convert the chapter 7 case. See 11 U.S.C. §§ 707(b)(1), 707(b)(2).
Subsection 707(b)(3) comes into play when the presumption of abuse under 707(b)(2) does not arise or is rebutted. Under § 707(b)(3), the court shall consider “whether the debtor filed the petition in bad faith,” § 707(b)(3)(A), or whether “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,” § 707(b)(3)(B).
The Court specifically found that "totality of circumstances" of §707(b)(3)(B) was "surely intended" to ability to pay.
… although the [Debtors] are correct that allowing each bankruptcy court to devise its own subjective means test under § 707(b)(3) would defeat the purpose of the congressionally enacted means test in § 707(b)(2), the same logic does not dictate that any factors that are considered under § 707(b)(2) are by implication precluded from consideration under § 707(b)(3). If Congress had intended such preclusion, it could have easily said so. 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.
The Court also found support for its position in the pre-BAPCPA version of the relevant statutes and case law.
The phrase “totality of the circumstances” was not in the pre-BAPCPA statute, but it was the pre-BAPCPA standard used by many courts across the country in determining whether there had been a substantial abuse of chapter 7. These courts uniformly took the ability to pay into account in examining the totality of the circumstances… Congress was doubtless aware when it codified the totality-of-the-circumstances standard that the relevant pre-BAPCPA jurisprudence took into consideration a debtor’s ability to pay his or her debts…The absence of an explicit preclusion regarding the ability to pay under § 707(b)(3)(B) in the face of Congress’s awareness of judicial inclusion of the same factor under prior law indicates that Congress did not intend to preclude such consideration.
Having concluded that ability to pay could be considered under the "totality of circumstances" test, the Court emphasized what it was not holding.
Before concluding, we wish to emphasize the limited nature of our holding. We do not decide whether a debtor’s ability to pay his or her debts can alone be dispositive under the totality-of-the-circumstances test. Nor do we decide how much weight a bankruptcy court may properly give to the debtor’s ability to pay as compared with other factors making up the totality of the circumstances. The questions of whether the ability to pay may be dispositive and, if not, what weight it should be given as compared to other factors, were debated in the pre-BAPCPA caselaw … and they continue to be debated post-BAPCPA…
Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation. For more information, click here.