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The Totality of the Circumstances of the
D eb tor’s F inancial S ituation in a P ost-M eans
Test W orld : Trying to B rid g e the
W ed off/ Culhane & W hite D iv id e
*
John A. E. Pottow
TABLE OF CON
I. IN T R
II. TH E
III. PR O
A. T
B .C
IV. PR O
V. TR Y
VI. CO N
T EN T S
O D U C T I O N ................................................................................ 1
DE B A T E ................................................................................... 1
B L E M S W I T H JU D G E WE D O F F ’S PO S I T I O N .................................. 1
h e M ean s T es t , D es p i t e I t s L abel , I s N o t A P r es u mp t i o n . .......... 1
o n g r es s L eg i s l at ed “ S h o u l d P ay , ” N o t “ C an P ay ” .................. 1
B L E M S W I T H CU L H A N E & WH I T E .............................................. 1
I N G T O FI N D A MI D D L E GR O U N D ............................................... 1
C L U S I O N .................................................................................. 1
I. IN
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T ROD U CT ION
B ank ruptcy Judg e E ug ene Wedoff and Creig hton L aw School professors
Marianne Culhane and Michaela White eng ag e in a spirited debate over a
series of law review articles about the proper scope of motions to dismiss a
debtor’s petition under section 7 0 7 (b) of the freshly revised B ank ruptcy
Code.1 It is an interesting and provocative dialog ue, with both sides advancing their respective positions persuasively. A s a result, I find myself in the
unfortunate position of wanting to ag ree with both. Since that is impossible,
however, this brief article is my attempt to find a middle g round between
their two positions. It does so in five parts: Part II explains the debate; Part III
tak es issue with Judg e Wedoff; Part IV tak es issue with professors Culhane
* Assistant P rof essor of Law, U niversity of Mich ig an Law Sch ool. T h anks to
Rita Ab ro f or research assistance and to all participants, especially Mech ele
D ickerson, at th e U niversity of Missouri-Columb ia Sch ool of Law “ Interdisciplinary
P erspectives on Bankruptcy Ref orm” Conf erence.
1. Marianne B. Culh ane & Mich aela M. W h ite, Catching Can-P ay D e b to r s: I s
the M e ans T e st the O nl y W ay ? , 13 AM. BA N K R . IN S T. L. RE V . 665 (20 0 5); Eug ene
W edof f , M e ans T e sting in the N e w § 7 0 7 ( B ), 79 AM. BA N K R . L.J . 231, 234 (20 0 5)
[ h ereinaf ter W edof f , M e ans T e sting] ; Eug ene R. W edof f , J ud icial D iscr e tio n to F ind
A b use U nd e r S e ctio n 7 0 7 ( b )( 3 ), 71 MO. L. RE V . 10 35 (20 0 6) [ h ereinaf ter W edof f ,
J ud icial D iscr e tio n] .
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and White; Part V offers an attempt to strik e a middle g round; and Part VI
concludes.
II. TH
E DEBAT E
This analysis will not repeat the complete timeline of the section 7 0 7 (b)
amendments, nor will it try to parse their leg islative history. Instead, it will
look at section 7 0 7 (b) as it formerly was and as it now is under the recently
enacted B ank ruptcy A buse Prevention and Consumer Protection A ct of 2 0 0 5
(“B A PCPA ”) .2
The former section 7 0 7 (b) was itself an amendment to the overhauled
B ank ruptcy Code of 1 9 7 8 .3 When Cong ress passed the then-new Code in
1 9 7 8 , it allowed consumer debtors, not without some dissent,4 to choose between Chapter 7 liq uidation plans and Chapter 1 3 wag e-earner plans.5 Perhaps unhappy with the early work ing s of this new Code, or perhaps captured
by a credit lobby that preferred Chapter 1 3 , Cong ress was persuaded in 1 9 8 4
to chip away at this debtor choice by adding section 7 0 7 (b) . While some advocated amending the Code to force certain debtors to file under Chapter 1 3 ,
Cong ress took the time-honored approach of the compromise with the
amendment. It declined r eq u i r i n g debtors to file Chapter 1 3 but allowed
bank ruptcy j udg es the d i s c r et i o n to mak e them do so.6 It accomplished this
procedurally by endowing j udg es with the power to dismiss a debtor’s Chapter 7 petition — which would req uire the debtor to refile under Chapter 1 3 to
seek bank ruptcy protection — if the j udg e felt that the debtor’s relief throug h
Chapter 7 constituted “a s u bs t an t i al abu s e.”7
2. Bankruptcy Ab use P revention and Consumer P rotection Act of 20 0 5, P ub
P ub . L. N o. 10 9-8, 119 Stat. 23 (codif ied as amended in scattered sections of 11
U .S.C.) [ h ereinaf ter BAP CP A] .
3. T h e Bankruptcy Amendments and Federal J udg esh ip Act of 1984 added
section 70 7(b ) to th e Bankruptcy Code, wh ich allowed b ankruptcy courts to dismiss a
deb tor’ s Ch apter 7 petition f or relief if it f ound th at g ranting th e relief would b e a
“ sub stantial ab use” of Ch apter 7. S e e V andiver, inf r a note 4, at 550 .
4. S e e Rob ert B. V andiver, J r., B ank r up tcy – A R e v ie w o f R e ce nt Co ur t D e cisio ns A p p l y ing S e ctio n 7 0 7 ( b ) o f the B ank r up tcy Co d e to Chap te r 7 P r o ce e d ings, 22
ME M. ST. U . L. RE V . 549, 549-50 (1992) (discussing Cong ress’ s decision to allow
deb tors to ch oose b etween f iling f or b ankruptcy protection under eith er Ch apter 7 or
Ch apter 13 of th e Code wh en it enacted th e Bankruptcy Ref orm Act in 1978 even
th oug h th e consumer credit industry complained th at too many individuals wh o could
af f ord to repay th eir consumer deb ts would ch oose to disch arg e all th eir deb ts under
Ch apter 7).
5. Bankruptcy Ref orm Act of 1978, P ub . L. 95-598, 92 Stat. 2549 (1978) (codif ied as amended in scattered sections of 11 U .S.C.).
6. S e e V andiver, sup r a note 4, at 549-50 ; se e al so 11 U .S.C. § 70 7(b ) (1984)
(current version at 11 U .S.C. § 70 7(b ) (Supp. V 20 0 5)).
7. P rior to th e 20 0 5 amendments, section 70 7(b ) read:
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Cong ress left the amorphous standard of “substantial abuse” undefined,
and so it was the courts who were g iven the task of filling it out. They did so
by propounding an array of j udicial tests, each with seeming ly more prong s
than the last.8 A n important difference among these j udicial tests interpreting
section 7 0 7 (b) was the treatment of debtor income, or more precisely, the
treatment of debtor net income after the deduction of court-approved expenses. Some courts (the “ability to pay” g roup) held that if the debtor had
surplus net income after deducting his reasonable and necessary living expenses, and hence could pay some money into a wag e-earner Chapter 1 3 plan,
it was dispositively “substantial abuse” to liq uidate under Chapter 7 instead
of filing under 1 3 .9 O thers held that the debtor’s choice to pick liq uidation
over a wag e-earner plan, even in the face of surplus disposable income, could
not be undone without amending the Code. They reserved section 7 0 7 (b)
dismissal for instances of bad faith or misconduct (the “misconduct” g roup) ,
and held that ability to pay alone could not j ustify dismissal.10 A third camp
came out in the middle, saying that the debtor’s ability to pay his debts,
measured by the presence of surplus disposable income after deducting reasonable and necessary living expenses, was one of the many factors that
could be considered, but would not be dispositive when g aug ing “substantial
abuse” under section 7 0 7 (b) (the “totality of the circumstances” g roup) .11
Af ter notice and a h earing , th e court, on its own motion or on a motion b y
th e U nited States trustee, b ut not at th e req uest or sug g estion of any party
in interest, may dismiss a case f iled b y an individual deb tor under th is
ch apter wh ose deb ts are primarily consumer deb ts if it f inds th at th e g ranting of relief would b e a sub stantial ab use of th e provisions of th is ch apter.
11 U .S.C. § 70 7(b ) (20 0 0 ), am e nd e d b y 11 U .S.C. § 70 7(b ) (Supp. V 20 0 5).
8. S e e Susan J ensen, A L e gisl ativ e H isto r y o f the B ank r up tcy A b use P r e v e ntio n
and Co nsum e r P r o te ctio n A ct o f 2 0 0 5 , 79 AM. BA N K R . L.J . 485, 493 (20 0 5).
9. S e e , e .g., Z olg v. K elly (I n r e K elly), 841 F.2d 90 8 (9th Cir. 1988) (leading
case setting out th e ab ility to pay test and estab lish ing per se rule th at th e deb tor’ s
ab ility to pay deb ts under a h ypoth etical Ch apter 13 repayment plan, standing alone,
warrants dismissal under section 70 7(b )); I n r e Attanasio, 218 B.R. 180 , 239 (Bankr.
N .D . Ala. 1998) (“ If a deb tor can meet deb ts with out dif f iculty as th e deb ts come due,
th en use of Ch apter 7 represents a sub stantial ab use . . . . If , on th e oth er h and, a
deb tor canno t meet deb ts as th e deb ts b ecome due . . . dismissal of th e case pursuant
to 70 7(b ) is unwarranted.” ).
10 . S e e , e .g., G reen v. Staples (I n r e G reen), 934 F.2d 568, 572 (4th Cir. 1991)
(“ [ T ] h e real concern b eh ind Section 70 7(b ) [ is] ab use of th e b ankruptcy process b y a
deb tor seeking to take unf air advantag e of h is creditors. . . . [ S] olvency alone is not a
suf f icient b asis f or a f inding th at th e deb tor h as in f act sub stantially ab used th e provisions of Ch apter 7.” ).
11. S e e , e .g., I n r e W h ite, 49 B.R. 869, 873 (Bankr. W .D .N .C. 1985) (h olding
th at to determine wh eth er sub stantial ab use exists, a court must look at “ th e totality of
th e circumstances presented, including th e ef f ects upon th e petitioner and h is creditors sh ould relief under Ch apter 7 b e g ranted, or alternatively, denied” ); se e al so I n r e
May, 261 B.R. 770 , 773 (Bankr. M.D . Fla. 20 0 1) (stating th at “ h aving income in
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In enacting the B A PCPA last year, Cong ress apparently decided that the
“substantial abuse” test was not work ing .12 Perhaps it was dissatisfied with
how that j udicially administered test had been teased out in the courts, or
perhaps it ig nored the recommendations of a bipartisan commission and favored a bill drafted by credit industry lobbyists. That is a discussion for another day. Whatever its motivations, Cong ress replaced the j udicially administered “substantial abuse” test with a painstak ing ly detailed statutory “means
test,” ballooning section 7 0 7 (b) into five sing le-spaced pag es of Code.13 In so
doing , it seemed to alig n with the “ability to pay” case line under former section 7 0 7 (b) or, more accurately, seemed to rej ect the “misconduct” case line
that req uired some form of wrong doing for dismissal.
The revised section 7 0 7 (b) (2 ) (A ) contains this means test. It establishes
a reg imented list of includable sources of income and deductible expenses
that must be used to calculate a debtor’s surplus monthly income.14 If that
surplus is g reater than a statutory amount (g enerally $ 1 6 6 ) , the debtor flunk s
the means test and is dismissed from Chapter 7 : Cong ress says he is an abuser
as a matter of law.15 If the debtor’s surplus income is less than the threshold,
he remains otherwise elig ible for Chapter 7 .16
So what is the debate between Judg e Wedoff and Professors Culhane
and White? It comes from Cong ress’s statutory caveat that the means test —
formally, the “presumption of abuse” that is g enerated by flunk ing the surplus
income test under section 7 0 7 (b) (2 ) (A ) — is not the exclusive g round for
dismissing a debtor from Chapter 7 .17 Consider in this reg ard the ordering of
the subsections of new section 7 0 7 (b) .
Section 7 0 7 (b) (1 ) provides that “the court . . . may dismiss a case . . . if
it finds that the g ranting of relief would be an abuse of the provisions of this
chapter.”18
excess of necessary expenses is not, b y itself , suf f icient to support a f inding of sub stantial ab use of Ch apter 7, and th e b ankruptcy court sh ould eng ag e in a ‘ totality of
th e circumstances’ analysis in determining wh eth er a disch arg e would b e a sub stantial
ab use of Ch apter 7” ). N ote th at J udg e W edof f , with more detailed analysis, accurately
b reaks th e cases out into f our g roups. W edof f , M e ans T e sting, sup r a note 1, at 235. I
am simplif ying th e taxonomy f or convenience.
12. T h is decision took th e b etter part of eig h t years. S e e Consumer Bankruptcy
Ref orm Act of 1997, S. 130 1, 10 5th Cong . (1998).
13. S e e 11 U .S.C. § 70 7(b ) (Supp. V 20 0 5); se e al so Culh ane & W h ite, sup r a
note 1, at 668.
14. 11 U .S.C. § 70 7(b )(2)(A). “ Current Month ly Income” is def ined in 11
U .S.C. § 10 1(10 A).
15. I d . § 70 7(b )(2)(A).
16. N ote th at most deb tors, specif ically th ose with b elow-median income, b ypass
th e means test, “ passing ” as a matter of law. I d . § 70 7(b )(7).
17. I d . § 70 7(b )(2)(A).
18. I d . § 70 7(b )(1).
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Section 7 0 7 (b) (2 ) in turn instructs that “[i]n considering under parag raph (1 ) whether the g ranting of relief would be an abuse of the provisions
of this chapter, the court shall presume abuse exists if [the means test is
failed].”19
Section 7 0 7 (b) (3 ) then eliminates doubt reg arding the means test’s nonexclusivity as g rounds for dismissing debtors from Chapter 7 . It endows the
j udg e with the additional discretion to dismiss a case under Section 7 0 7 (b) (1 )
“in which the presumption [of abuse] in []parag raph [(2 ) ](A ) (i) . . . does not
arise or is rebutted.”20 To do so, the j udg e must consider:
(A ) whether the debtor filed the petition in bad faith; or
(B ) t h e t o t al i t y o f t h e c i r c u ms t an c es (including whether the debtor
seek s to rej ect a personal services contract and the financial need
for such rej ection as soug ht by the debtor) o f t h e d ebt o r ’s f i n an c i al
s i t u at i o n demonstrates abuse.21
Clause (A ) of (b) (3 ) doesn’t cause much fuss. Who denies the j udg e of
an eq uitable proceeding the power to dismiss a petitioner who comes in bad
faith? Clause (B ) , however, does. Judg e Wedoff reads “‘ the totality of the
circumstances . . . of the debtor’s financial situation’” as conferring authority
on bank ruptcy j udg es to boot debtors out of Chapter 7 who pass the means
test if those debtors nonetheless have, in those j udg es’ second-look views, an
“ability to pay” their debts.22 Professors Culhane and White disag ree and
think that this exception narrowly applies only to serious forms of misconduct
that are “manifestly unreasonable,” such as, for example, “cheating ” on the
means test by manipulating a revenue stream.23 A bsent wrong doing , the professors contend, dismissal under section 7 0 7 (b) (3 ) (B ) would be improper.
N ote how both find cog nates in the pre-B A PCPA case law: the “ability to
pay” g roup and the “misconduct” g roup of cases. B oth of these positions, at
least as j ust characteriz ed, have merit but are not without difficulty.
III. PROBLEMS W
IT H
JU
D G E WED OFF’S POSIT ION
A. T h e M ea n s T es t , D es p i t e I t s L a b el , I s N o t A P r es u m p t i o n
Judg e Wedoff’s position suffers from two impediments, one operational
and the other theoretical. The operational problem is that he mistak enly inter19.
20 .
21.
22.
23.
I d . § 70 7(b )(2)(A)(i).
I d . § 70 7(b )(3).
I d . § 70 7(b )(3)(A)-(B) (emph asis added).
W edof f , J ud icial D iscr e tio n, sup r a note 1, at 10 40 (omission in orig inal).
Culh ane & W h ite, sup r a note 1, at 666, 668, 687-88.
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prets the means test of section 7 0 7 (b) (2 ) (A ) as an evidentiary presumption.24
This is not surprising , as Cong ress has explicitly called it that (“[T]he court
shall p r es u me abuse exists.”) .25 It similarly styles section 7 0 7 (b) (2 ) (B ) as the
means of rebutting that “presumption” (“[T]he presumption of abuse may
only be rebutted by”) .26 Following this ling uistic miscue of Cong ress, Wedoff
reasons that if the means test is merely a presumption, and that presumption
can be rebutted, then it must serve as “merely one” of several possible routes
to show income-related abuse of Chapter 7 .27 H e lik ens the means test to the
paternity presumption that arises with reg ard to the husband of an infant’s
mother.28 The g entleman is presumed to be the baby’s father, but g enetic or
other evidence can also show his paternity directly if he is unmarried to the
mother and hence the presumption does not apply.29
The means test is not, however, an evidentiary presumption in the sense
of a foundational fact (marriag e) that assists in proving a presumed fact (paternity) . While unq uestionably styled as a “presumption,” the means test is
more accurately viewed as a j urisdiction-stripping statute. L eaving aside the
difference between a fact (paternity) and a leg al determination (abuse of
Chapter 7 of the B ank ruptcy Code) , the function of the means test is to req uire dismissal, and hence forbid j urisdiction, for Chapter 7 debtors whose
monthly surplus income is g reater than $ 1 6 6 . This reading of the means test
as a j urisdiction-stripper rather than an evidentiary presumption is enforced
by the fact that Section 7 0 7 (b) (2 ) (B ) is the ex c l u s i v e method by which the
debtor can “rebut” the so-called presumption.30 Contrary to what one would
expect from a real evidentiary presumption, section 7 0 7 (b) (2 ) (B ) only allows
a debtor to challeng e the method by which the court has calculated the surplus income under section 7 0 7 (b) (2 ) (A ) . She may not, as Judg e Wedoff himself concedes, introduce evidence that notwithstanding her surplus monthly
24. W edof f , J ud icial D iscr e tio n, sup r a note 1, at 10 37 (“ T h e key to understanding th e proper role of th e means test in Ch apter 7 is to recog niz e th at it is simply a
mech anism f or g enerating a presumption; it does not result in any f inal determination.” ).
25. 11 U .S.C. § 70 7(b )(2)(A)(i) (Supp. V 20 0 5) (emph asis added).
26. I d . § 70 7(b )(2)(B).
27. W edof f , J ud icial D iscr e tio n, sup r a note 1, at 10 40 (“ T h e f unction of th e
means test as a presumption h as one f inal critical f eature. A presumption is merely
one meth od of estab lish ing a f act. W h ere a presumption does not arise, a party may
prove th e necessary f act directly, using th e same kind of evidence th at could b e used
to reb ut th e presumption.” ).
28. I d . at 5 (citing 750 IL L . COMP . STA T. 45/ 5(b ) (20 0 5) (providing f or reb uttal of
th e marital paternity presumption b y clear and convincing evidence)).
29. J ust as, presumab ly, a h usb and seeking to disclaim paternity could reb ut th e
presumption th roug h D N A or oth er evidence.
30 . 11 U .S.C. § 70 7(b )(2)(B)(i) (Supp. V 20 0 5) (“ In any proceeding b roug h t
under th is sub section, th e presumption of ab use may only b e reb utted b y demonstrating special circumstances, such as a serious medical condition or a call or order to
active duty in th e Armed Forces . . . .” ).
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income of $ 1 6 7 , she is not abusing the provisions of Chapter 7 .31 A s such, the
means test is not a rebuttable evidentiary presumption in the traditional sense.
It is an irrebuttable j urisdictional rule that permits exception only for miscalculation.
L et us examine with more scrutiny the only permissible way the debtor
may “rebut” the means test “presumption” reg arding his surplus monthly
income. Section 7 0 7 (b) (2 ) (B ) provides that “the presumption of abuse may
o n l y be r ebu t t ed by demonstrating special circumstances, such as a serious
medical condition or a call or order to active duty in the A rmed Forces, t o t h e
ex t en t s u c h s p ec i al c i r c u ms t an c es j u s t i f y ad d i t i o n al ex p en s es o r ad j u s t men t s
o f c u r r en t mo n t h l y i n c o me f o r w h i c h t h er e i s n o r eas o n abl e al t er n at i v e.”32 O n
the income side, a reservist whose $ 1 6 7 surplus income was unfairly hig h
under the means test’s trailing six-month formula could seek an adj ustment to
his calculation by showing that his substantial overtime pay will evaporate as
he g ets called up for active service next month. Similarly, on the expense
side, a disease sufferer could show that his recurrent illness, presently in remission, req uires him to build up a reserve account to deal with future onsets
such that an additional “sick ness reserve” expense (which is not allowed under the means test) is necessary. B ut there would be no room to “rebut” the
“presumption” of abuse by a debtor with surplus income of $ 1 6 7 , who, for
example, wants to submit evidence that he has work ed hard, had his debts
incurred in g ood faith, and would only be able to pay a 1 % dividend to creditors if subj ected to a five-year wag e-earner plan: in short, that it would be a
waste of time for such a debtor to file in Chapter 1 3 . H e is abusive as a matter
of law and is barred from Chapter 7 . There is not j urisdiction, however sensible it mig ht be, to let such a debtor in.
This operation of the means test enables debtors to challeng e the metric,
but not the merits, of their surplus income. Professors at law schools, such as
my own, that strip faculty of j urisdiction to chang e g rades after submission to
the reg istrar but provide for an exception for mistabulated g rades should find
this framework familiar.33 It is a brig ht-line rule. To say that it creates a “rebuttable presumption” that the submitted g rade is the final g rade when the
only way of rebutting the presumption is to show that the g rade was added up
incorrectly is doublespeak of the hig hest order. It is not a p r es u mp t i o n , let
31. W edof f , J ud icial D iscr e tio n, sup r a note 1, at 10 47 (“ D isposab le income of
more th an $ 166.66 per month . . . is always an ab use req uiring denial of Ch apter 7
relief .” ). W edof f summariz es th at a deb tor seeking Ch apter 7 relief may “ reb ut th e
means test’ s calculation of disposab le income in an amount ab ove th e ab use th resh old; [ b ut § 70 7(b )(2)(B)] does not allow any arg ument th at th e th resh old itself is too
low.” I d . at 10 46-47.
32. 11 U .S.C. § 70 7(b )(2)(B)(i).
33. T h e rationale b eh ind th is rule is a commendab le anti-wh ining principle.
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alone a rebuttable one, that submitted g rades are final. It is a r u l e that submitted g rades are final, absent calculation error. There is no appeal.34
B. C o n g r es s L eg i s l a t ed “S h o u l d P a y , ” N o t “C a n P a y ”
The parts of Judg e Wedoff’s analysis that g o astray cannot all be blamed
on Cong ress’s poor diction. A nother problem arises from the more theoretical
conflation of the means-test-calculated surplus income with the concept of the
“ability to pay” that finds its roots in Chapter 1 3 .35 This is ag ain not the fault
of Wedoff; Culhane and White also use the label “can pays” to describe those
who flunk the means test.36 This is another unfortunate word choice, because
a more accurate label would have been “should pays.”
Consider, by way of contrast (and contrasts are important in statutory interpretation) ,37 Chapter 1 3 , in which a debtor deducts his “reasonable and
necessary expenses” in arriving at what Chapter 1 3 explicitly calls his “disposable income.”38 B A PCPA modifies this rule for certain above-median
income debtors, but the old law still holds for the vast maj ority of Chapter 1 3
filers.39 If the debtor only deducts his reasonable and necessary living expenses, that which remains is all that he “can” pay to his creditors (assuming
we want the debtor to continue living ) . B y contrast, under the Chapter 7
means test, the debtor deducts a particulariz ed list of allowed expenses; the
term “disposable income,” familiar from Chapter 1 3 ’s text, is assiduously
avoided by Cong ress in Section 7 0 7 . Some of these allowed expenses are
34. I am led to b elieve (se ul e m e nt p ar l e s autr e s) th at many states adopt similar
“ presumptions” reg arding radar-recorded evidence of motorists’ speed; th ey permit
“ reb uttal” only b y sh owing mech anical def ault. My colleag ue, P rof essor J ames J .
W h ite, may h ave f urth er insig h t f rom experience.
35. S e e , e .g., W edof f , J ud icial D iscr e tio n, sup r a note 1, at 10 40 (“ G iven th at th e
means test is directed at measuring deb t-paying ab ility as a presumption, th is direction
conf irms th at wh ere th e presumption does not arise, th e deb tor’ s actual deb t-paying
ab ility must b e assessed in ruling on a motion under § 70 7(b )(1).” ).
36. Culh ane & W h ite, sup r a note 1, at 70 0 n.1 (“ W e use ‘ can-pay’ to describ e
deb tors wh o f ail th e means test, and ‘ can’ t-pay’ f or th ose wh o pass it.” ).
37. S e e , e .g., G uarantee T itle & T rust Co. v. T itle G uar. & Sur. Co., 224 U .S.
152 (1912) (h olding th at wh en dif f erent lang uag e is used in dif f erent parts of a statute,
it is presumed th at th e lang uag e is used with a dif f erent intent).
38. 11 U .S.C. § 1325(b )(1)(B) (Supp. V 20 0 5) (“ If th e trustee . . . ob j ects to th e
conf irmation of th e plan, th en th e court may not approve th e plan unless . . . th e plan
provides th at all of th e deb tor’ s proj ected d isp o sab l e inco m e to b e received in th e
applicab le commitment period . . . will b e applied to make payments to unsecured
creditors under th e plan.” ) (emph asis added); id . § 1325(b )(2) (“ [ T ] h e term ‘ disposab le income’ means current month ly income received b y th e deb tor . . . less amounts
reasonab ly necessary to b e expended.” ).
39. I d . § 1325(b )(3).
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fixed by IR S schedules for food, housing , and such.40 O thers are limited by
what the debtor actually spends.41 Thus we cannot envision surplus income
calculated under the means test as what the debtor c an pay. R ather, we must
say it is what Cong ress, as a policy determination, has decided that the debtor
s h o u l d pay (whether under his current circumstances he can afford to or
not) .42 A ny doubt about the difference between what a debtor c an and s h o u l d
pay under Section 7 0 7 (b) should be removed by Section 7 0 7 (b) (2 ) (D) in
which Cong ress expressly exempts certain disabled veterans from the j urisdictional bar of the means test.43 We are unable to pretend these vets c an ’t
pay; a simple calculation of surplus income over $ 1 6 6 would refute that contention. Instead we must say that Cong ress made a normative, value-laden
j udg ment that althoug h other similarly situated debtors s h o u l d pay, these veterans, perhaps as thank s for their service, s h o u l d n o t (and do not) have to pay.
Such is Cong ress’s prerog ative.
The confusion of Chapter 1 3 ’s can-pay test with Chapter 7 ’s should-pay
test leads Wedoff to conclude that the means test’s routiniz ed calculations are
simply a roug h and ready proxy for the more particulariz ed, case-specific
investig ation of “can-pay” that occurs under Chapter 1 3 .44 This in turn explains Wedoff’s reading of Section 7 0 7 (b) (3 ) . If the means test, with its al l o w ed living expenses, is simply a roug h first cut at finding debtors who can
pay, a j udg e or U .S. Trustee can use Section 7 0 7 (b) (3 ) to do the individual,
case-specific follow-up analysis of the debtor’s ac t u al reasonable and necessary expenses that is traditionally performed under Chapter 1 3 . If the j udg e
conducting this second inq uiry finds the debtor can pay (based on the $ 1 6 6
threshold) , he may dismiss the debtor under this j udicially administered A lternative Minimum Means Test.
Judg e Wedoff’s interpretation thus rests on eq uating Chapter 1 3 ’s canpay analysis with Section 7 0 7 (b) ’s should-pay alg orithms. It is not clear,
however, that Cong ress intended to use these textually different provisions
interchang eably. Indeed, surely Cong ress did not care, other than in rare cases
such as a medical illness sufferer or a member of the military, whether the
debtor had expenses that were h i g h er than those allowed under the IR S40 . S e e , e .g., id . § 70 7(b )(2)(A)(ii)(I) (“ [ T ] h e deb tor’ s month ly expenses may
include an . . . allowance f or f ood and cloth ing categ ories as specif ied b y th e N ational
Standards issued b y th e Internal Revenue Service.” ).
41. S e e , e .g., id . § 70 7(b )(2)(A)(ii)(II) (“ [ T ] h e deb tor’ s month ly expenses may
include . . . th e continuation of actual expenses paid b y th e deb tor th at are reasonab le
and necessary f or care and support of an elderly, ch ronically ill, or disab led h ouseh old
memb er . . . wh o is unab le to pay f or such reasonab le and necessary expenses.” ).
42. Cf . id . § 10 1(10 A) (excluding b y statute certain sources of arg uab ly availab le
income f rom creditor recovery).
43. I d . § 70 7(b )(2)(D ) (“ [ T ] h e court may not dismiss or convert a case b ased on
any f orm of means testing , if th e deb tor is a disab led veteran.” ).
44. W edof f , J ud icial D iscr e tio n, sup r a note 1, at 10 41.
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controlled means test.45 The q uestion, therefore, is whether Cong ress cared if
a debtor had actual expenses that were l o w er .
There is reason to doubt that Cong ress did. The basis for this hesitance
is the possibility that it wanted the rehabilitated debtor to reap the “frug ality
dividend” of having his actual expenses be lower than the means-test allowed
ones. Wedoff seems to accept too q uick ly that such a dividend should inure to
the benefit of the debtor’s creditors. H e would allow a dismissal motion under
Section 7 0 7 (b) (3 ) to punish such a tig ht-belted debtor and enable her creditors to reap that surplus. While it may be impossible to prove that the structure of the statute or the leg islative history inexorably req uire that this excess
should g o to the debtor,46 neither can Wedoff prove, without at least some
critical analysis, that it should g o to the creditors. Indeed, g iven the absence
of express statutory command, if we want to theoriz e from first principles, we
can readily envision some ex an t e policy reasons why Cong ress would be
disinclined to penaliz e frug al, means-test-passing debtors. A llowing a j udg e
the power to bar them from Chapter 7 would surely create perverse incentives
of moral haz ard.
IV. PROBLEMS W
IT H
CU
LH AN E AN D
WH
IT E
Why not simply ag ree with Culhane and White? The problem with their
analysis is that it swing s too far the other way and would hobble the wide
swath of discretion deliberately conferred on j udg es under Section
7 0 7 (b) (3 ) (B ) . Their g loss of “serious misconduct” or “manifestly unreasonable” — basically “bad faith lite” — is too narrow. It is also unsupported by
the lang uag e of the new Code.
Consider in this reg ard at least three possible ways a court could interpret “the totality of the circumstances . . . of the debtor’s financial situation.”
First, a court could say the “totality of the circumstances” means anything ,
anywhere, remotely related to the debtor’s finances. Second, a court could say
that the “totality of the circumstances” must be read in the context of a
means-test-dominated B A PCPA statute. A s such, it is merely a safety valve
for a defective application of the means test and should only be applied to
remedy “cheating ” or other misconduct problems that evince a debtor’s compliance with the letter but not spirit of the Code (similar to the way some
courts interpreted the “substantial abuse” standard pre-B A PCPA ) .47 Third, a
45. One way of th inking ab out th is is th at Cong ress determined th at unenumerated expenses were unreasonab le as a matter of law.
46. Consider, h owever, th e deb tor’ s ab ility to deduct IRS expenses, even if
g reater th an actual expenses. See sup r a note 40 .
47. S e e , e .g., Stewart v. U nited States T rustee (I n r e Stewart), 215 B.R. 456, 467,
468 n.8 (B.A.P . 10 th Cir. 1997) (“ Bad f aith , inaccurate representations to th e Bankruptcy Court, and elig ib ility f or Ch apter 13 are all f actors to b e considered under th e
totality of th e circumstances test . . . .” ); se e al so I n r e K roh n, 886 F.2d 123, 126 (6th
Cir. 1989) (noting th at, b ased on leg islative h istory, Cong ress meant to deny Ch apter
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court could say something in between, such as “totality of the circumstances”
means all relevant factors of a debtor’s financial situation ex c ep t t h o s e r ev i s i t i n g t h e mean s t es t .
The reason to shy away from the first test is because it parses the phrase
“totality of the circumstances . . . of the debtor’s financial situation” in isolation from the rest of the section and the statute as a whole. U nder g eneral
principles of statutory construction, when a statute “occupies a field” and
establishes a comprehensive scheme for determining one type of abuse
(“should pay”) , the inclusion of a caveat for finding other types of abuse
should not be allowed to bootstrap a revisitation of the same g round.48 Consider ag ain law school faculty policy. Suppose we say at the U niversity of
Michig an L aw School that any student with an averag e lower than C will be
expelled, and then we develop a complex formula for which courses to include in that averag e and how to weig ht them (perhaps, pick ing up on the
B A PCPA methodolog y, we say the six most recent courses) . We then allow a
student to “rebut” that calculation by showing that the six most recent courses
were aberrational (e.g ., she was away at another school with different g rading
norms for her last six courses) . E ver the risk -averse lawyers, we say that
nothing in our “C rule” precludes us from expelling a student for bad faith, or
for any other reason considering the totality of the circumstances of the student’s academic situation.
Could we k ick out a student for embez z lement? O f course we could; that
would be bad faith. Could we k ick out a student for plag iariz ing ? Y es, that
would be bad faith, too. It mig ht also overlap with the totality of the circumstances of her academic situation (she think s copying is an acceptable form of
learning ) . B ut two overlapping g rounds of discretion should cause ang st only
to the overly fastidious.49 The point is we could do it under the policy. Could
7 relief to “ th e dish onest or non-needy deb tor” and pointing out th at th e court sh ould
determine if th e deb tor is h onest b y looking at wh eth er deb tor h as acted with “ g ood
f aith and candor in f iling sch edules and oth er documents” ).
48. T h is principle f inds f req uent outlet in th e f ederal law “ preemption” cases.
S e e , e .g., Fidelity Fed. Saving s & Loan Ass’ n. v. D e la Cuesta, 458 U .S. 141, 153
(1982) (reasoning th at even in th e ab sence of an express cong ressional command,
state law is neverth eless preempted if f ederal law so th oroug h ly occupies a leg islative
f ield “ as to make reasonab le th e inf erence th at Cong ress lef t no room f or th e States to
supplement it” ).
49. S e e Culh ane & W h ite, sup r a note 1, at 684 (explaining th at th e overlapping
g rounds of Sections 70 7(b )(3)(A) and 70 7(b )(3)(B) stem f rom Cong ress’ s decision to
adopt two dif f erent tests f rom f ormer 70 7(b ) case law). P re-BAP CP A, “ f iled in b ad f aith ”
and “ totality of th e circumstances” were:
f req uently and sometimes interch ang eab ly used in cases under f ormer section
70 7, b ef ore ab ility to pay was measured b y th e means test. Bad f aith was used
b oth under section 70 7(a) as ‘ cause’ f or dismissal, as well as under f ormer sub section 70 7(b ) in sub stantial ab use cases, wh ere it sometimes stood alone b ut
of ten was considered in addition to j udicial tests of ab ility to pay.
Id .
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we expel a student for having bad study habits or for mak ing persistently
inane comments in the classroom that evince a total misunderstanding of the
law? Probably so; both seem relevant to the totality of the circumstances of
her academic situation. B ut could we k ick out a student for having a C+ averag e, on the theory that C+ is a pretty crummy g rade point averag e in its own
rig ht? H ere is where we move to thin ice. To allow that would do violence to
the whole point of setting the mechaniz ed formula in the first place for how to
count the C averag e and implement the C rule. Trying to boot a C+ student
who passes the C rule j ust sounds lik e a faculty member unhappy with where
that bar was set.50
B ut other than an anti-bootstrapping limitation to deal with the professor
who wants to expel the C+ student, any and all other circumstances of the
student’s “academic situation” should be fair g ame for consideration. This is
the problem with the Culhane and White stance. Further q ualifications, such
as “serious misconduct,” appear to be cut out of whole cloth: possibly sensible refinements, to be sure, but not compelled by the faculty’s deliberations.
B ring ing the discussion back to bank ruptcy law, this creates misg iving s with
Culhane and White’s proposed interpretation of Section 7 0 7 (b) (3 ) (B ) . For
example, Culhane and White do not believe a debtor’s portfolio of exempt
assets is a permissible g round to consider within the totality of the debtor’s
financial situation, absent some misconduct lik e eve-of-bank ruptcy transfers.51 Why not? While some may say it is foolish policy to consider them,
and that it may even undermine the very purpose of having exemptions in the
first place (which is in part to protect a debtor’s fresh start by ensuring a postbank ruptcy baseline of available assets) , others may disag ree.52 In any event,
unwise policy on its own does not accord a sufficient basis to bar a bank ruptcy j udg e from noticing a debtor’s enormous retirement plan account in
deciding whether it offends the spirit of the Code to let that debtor use Chapter 7 .53
50 . T h e b etter and toug h er q uestion is would I allow kicking someone out wh o
makes semi-inane comments in class and h as “ only” a C+ averag e? W ould considering th e C+ averag e th ere, as part of th e totality of th e circumstances, b e prob lematic?
T h at is a much closer call. I mig h t f oreclose th is f or prudential reasons alone f or f ear
of th e dang erous pretextualism it could eng ender (or ab et).
51. Culh ane & W h ite, sup r a note 1, at 690 -691.
52. S e e , e .g., Stuart v. K och (I n r e K och ), 10 9 F.3d 1285, 1290 (8th Cir. 1997).
53. For a f ormer § 70 7(b ) case h olding th at exempt assets are appropriately considered under th e “ totality of th e circumstances,” see K ornf ield v. Sch wartz (I n r e
K ornf ield), 164 F.3d 778, 781 (2d Cir. 1999) (“ A totality of circumstances inq uiry is
eq uitab le in nature and th e existence of an asset, even if exempt f rom creditors, is
relevant . . . .” ).
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IN G T O FIN D A MID D LE GROU N D
Trying to find a middle g round between the powerful arg uments of
Judg e Wedoff and Professors Culhane and White is not easy. A mong other
challeng es, it involves g iving content to the amorphous “totality of the circumstances” standard in a principled, usable manner. This cannot be done by
simply relying on pre-B A PCPA case law interpreting former Section 7 0 7 (b) .
R ecall that some courts then adopted a “totality of the circumstances” approach that considered multiple factors, including the debtor’s income.54 B ut
those tests soug ht to define the open-ended standard of “substantial abuse,”
with many including factors such as bad faith and misconduct.55 B y contrast,
new Section 7 0 7 (b) (3 ) (B ) covers financial factors independent from bad faith,
which is already covered by Section 7 0 7 (b) (3 ) (A ) , rendering much of former
Section 7 0 7 (b) (3 ) precedent inapposite.
N or is the task helped much by Cong ress’s sing le cryptic clue in the text
of Section 7 0 7 (b) (3 ) (B ) . Specifically, Cong ress says that a court must consider whether “the totality of the circumstances ( i n c l u d i n g w h et h er t h e d ebt o r
s eek s t o r ej ec t a p er s o n al s er v i c es c o n t r ac t an d t h e f i n an c i al n eed f o r s u c h
r ej ec t i o n as s o u g h t by t h e d ebt o r ) of the debtor’s financial situation demonstrates abuse.”56 Culhane and White explain how this was a compromise for
the recording industry that lobbied unsuccessfully to insert a blank et prohibition on rej ecting certain personal service contracts by debtors in bank ruptcy.57
B ut how does one g eneraliz e from this parenthetical clause in the statute? Is it
an example? Is it a factor? O n the one hand, there is the canon of ej u s d em
g en er i s ,58 which states that illustrations should be seen of the same g enus of
the g eneral. O n the other hand, it could be arg ued that Cong ress was not providing an example, but rather was simply ensuring that one specific circumstance would not be forg otten by the j udg e. We also have history, where
some courts held that rej ecting personal services contracts under former Sec-
54. S e e Stewart v. U nited States T rustee (I n r e Stewart), 215 B.R. 456 (B.A.P .
10 th Cir. 1997).
55. S e e id . (stating th at b ad f aith is one of many f actors to b e considered under
th e totality of th e circumstances test).
56. 11 U .S.C. § 70 7(b )(3)(B) (Supp. V 20 0 5) (emph asis added).
57. Culh ane & W h ite, sup r a note 1, at 692 n.123 (citing I n r e Carrere, 64 B.R.
156, 157 (Bankr. C.D . Cal. 1986) (dismissing case of actress wh o admitted sh e
wanted to rej ect contract with one T V network in order to sig n one with anoth er th at
would pay h er sub stantially more money).
58. N orf olk & W . Ry. Co. v. Am. T rain D ispatch ers’ Ass’ n, 499 U .S. 117, 129
(1991) (“ U nder th e principle of e j usd e m ge ne r is, wh en a g eneral term f ollows a specif ic one, th e g eneral term sh ould b e understood as a ref erence to sub j ects akin to th e
one with specif ic enumeration.” ).
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tion 7 0 7 constituted bad faith.59 Perhaps Cong ress was simply endorsing this
case law and clarifying that a court may permissibly dismiss a debtor for rej ecting a personal services contract.
Section 7 0 7 (b) (3 ) (B ) is thus a morass, and the strug g le to tame it cannot
escape a fundamental difficulty. If the text had simply said “the totality of the
circumstances,” it mig ht have made sense to follow the Culhane and White
approach. The problem is that the text continues to say that the totality of the
circumstances must affect the debtor’s “f i n an c i al situation,”60 which must in
turn be an instruction to weig h primarily financial matters, not primarily ethical or conduct-based matters. Thus, Culhane and White are lik ely moving in
the wrong direction by look ing at conduct. Y et one eq ually encounters the
countervailing consideration, raised above, that Cong ress’s comprehensive
treatment of permissible income under the means test renders unlik ely the
probability that it wanted revisitation of the debtor’s “g rade” by an unhappy
j udg e under subsection (b) (3 ) (B ) . A ccording ly, if we want to construct a
reading of (b) (3 ) (B ) that does not render it superfluous, we need to come up
with financial factors of a debtor u n r el at ed to his monthly income that mig ht
warrant dismissal from Chapter 7 .
This may seem to be a fine needle to thread, but perhaps it can be done
by focusing on as s et s rather than i n c o me. The means test addresses the
debtor’s income in painful detail but is silent on her assets.61 To be sure, assets, especially business assets, g enerally exist to g enerate income, but Section 7 0 7 (b) deals with consumer debtors with primarily consumer debts. A nd
surely a debtor’s asset base, even her exempt assets, pertains to her “financial
situation.” Thus I submit, althoug h Culhane and White think it contrary to the
spirit of Cong ress, that not only is consideration of exempt assets permissible
under Section 7 0 7 (b) (3 ) (B ) , but it is one of the few considerations that must
be permitted to mak e sense of this maddening provision. Indeed, using Section 7 0 7 (b) (3 ) (B ) to examine the assets, exempt or otherwise, could also address the concern some commentators have about the build-up of secured
debt to tak e advantag e of the means-test deduction.62 Plausibly a j udg e could
inq uire whether a debtor with such a handsome portfolio of secured assets
req uires relief under the B ank ruptcy Code, when selling such assets mig ht
alleviate financial distress.63
59. I n r e Sammons, 210 B.R. 197 (Bankr. N .D . Fla. 1997) (h olding th at case
f iled b y deb tor, at time wh en h e was not in f inancial distress, solely f or purpose of
rej ecting ag reement was f iled in b ad f aith and could according ly b e dismissed).
60 . 11 U .S.C. § 70 7(b )(3)(B) (emph asis added).
61. Culh ane & W h ite see th is silence as insulating a deb tor’ s assets f rom scrutiny. Culh ane & W h ite, sup r a note 1, at 690 .
62. I d . at 688.
63. It certainly would improve cash f low. Of course, such an interpretation mig h t
undermine th e unlimited secured deb t deduction under th e means test. 11 U .S.C. §
70 7(b )(2)(A) (Supp. V 20 0 5) (“ N otwith standing any oth er provision of th is clause,
th e month ly expenses of th e deb tor sh all not include any payments f or deb ts.” ).
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CLU SION
B oth Culhane and White and Wedoff ag ree that Section 7 0 7 (b) (3 ) (B )
means Cong ress wanted j udg es to have some discretion to dismiss debtors for
reasons other than flunk ing the means test of (b) (2 ) and straig ht-out bad faith
under (b) (3 ) (A ) . Culhane and White contend that Cong ress did not intend this
caveat to be an end-run around the means test by a j udg e who would have
preferred the $ 1 6 6 allowable income threshold to have been set at a lower
level. Surely that is rig ht. Similarly, it seems difficult to believe that Cong ress
would have wanted to divest the debtor of any frug ality dividend resulting
from his ac t u al net income being hig her than his al l o w abl e net income under
the means test. The detail and structure of the means test sug g est that Cong ress intended it to be the exclusive manner of scrutiniz ing the debtor’s permissible monthly income — what he “should pay” — under the Code.64 B ut
other than that income-based carveout, all other financial considerations
should be fair g round for an eq uitable decision to dismiss for the totality of
the circumstances under section 7 0 7 (b) (3 ) (B ) . Judg e Wedoff is thus correct to
part ways with Professors Culhane and White on that score.
My proposal to bridg e the divide between these two positions is to focus
on a debtor’s financial as s et s when considering a 7 0 7 (b) (3 ) (B ) motion. This
approach would g ive meaning to this provision of the Code in a way that
g rants j udg es the discretion they need but does not tread on Cong ress’s clear
occupation of the income scrutiny field. This reading mig ht j ust mak e sense
of the “totality of the circumstances . . . of the debtor’s financial condition” in
a post-means-test world.
64. Oth er th an, f or instance, income manipulation suf f icient to rise to th e level of
b ad f aith , such as (perh aps) suspending work irreg ularly to distort six-month trailing
income. Indeed, conceivab ly b ad f aith could deal with J udg e W edof f ’ s h ypoth etical
CEO wh o is willing to sacrif ice h er prof essional reputation b y f iling personal b ankruptcy under Ch apter 7. W edof f , J ud icial D iscr e tio n, sup r a note 1, at 10 35-36.