In re Edwards, 85 B 10104 (PBA).

• Decision Date: 05 July 1985
• Docket Number: No. 85 B 10104 (PBA).,85 B 10104 (PBA).
• Citation: 50 BR 933
• Parties: In re Clarence C. and Michelle A. EDWARDS, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

50 B.R. 933 (1985)

In re Clarence C. and Michelle A. EDWARDS, Debtors.

No. 85 B 10104 (PBA).

United States Bankruptcy Court, S.D. New York.

July 5, 1985.

COPYRIGHT MATERIAL OMITTED

Clarence C. and Michelle A. Edwards, pro se.

Budget and Credit Counseling Services, Inc., New York City (James Bickford, New York City, of counsel), for debtors.

Ira S. Greene, New York City, Trustee.

MEMORANDUM DECISION AND ORDER

PRUDENCE B. ABRAM, Bankruptcy Judge:

Clarence C. and Michelle A. Edwards (the "Debtors") filed a joint petition for relief under Chapter 7 of the Bankruptcy Code ("Code") on January 25, 1985. The matter for determination is the court's sua sponte motion under Code § 707(b). The motion was made in the form of an order to show cause dated February 15, 1985, which directed the Debtors to appear and show cause why their Chapter 7 petition should not be dismissed. The order to show cause stated, inter alia,

"* * * It appearing that Code § 707(b), as amended, authorizes the bankruptcy court, `on its own motion and not at the request or suggestion of a party in interest\' to dismiss, after notice and a hearing a case filed by an individual whose debts are primarily consumer debts if the court finds that the granting of relief would be a `substantial abuse\' of Chapter 7, and

"It appearing that Code § 101(7) defines `consumer debt\' as a debt incurred by an individual primarily for personal, family, or household purpose, and * * *

"It further appearing that the Debtors have scheduled as their only debts obligations of approximately $10,500 for consumer purchases and obligations of approximately $3,000 on student loans, and

"It further appearing in their schedule of current income and expenditures that the Debtors have an annual gross income of $60,000 and a combined monthly take-home pay of $2,550 and have no dependents, and

"It further appearing that the Debtors\' estimated monthly expenditures total $2,366, including $250 for recreation, and

"It further appearing that a budget surplus of $184 per month exists and that the Debtors have otherwise made no showing of why they are unable to make periodic future payments on their debts, it is therefore

"ORDERED that the Debtors * * * show cause before the undersigned * * * why an order should not be entered dismissing their Chapter 7 petition on the grounds that the granting of relief would be a substantial abuse of the provisions of Chapter 7 * * *" Order to Show Cause dated February 14, 1985.

Pursuant to the order to show cause a hearing was held on March 20, 1985. The Debtors appeared at the hearing and submitted two affidavits. No testimony was taken at the hearing. At the hearing's conclusion, the court took the matter under advisement. Based upon the supplemental information provided by the two affidavits and for the reasons which follow, the court has determined that the Debtors' petition is not a substantial abuse of Chapter 7 within the meaning of Code § 707(b) and that the petition should not be dismissed.

Code § 707(b) was added by the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("BAFJA").¹ It provides as follows:

"(b) After notice and a hearing, the court, on its own motion and not at the request or suggestion 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."

This section inferentially imposes a duty on the bankruptcy court to review petitions filed under Chapter 7 to determine whether the granting of a discharge would be a "substantial abuse of the provisions of this chapter".²

The phrase substantial abuse is not defined in the Bankruptcy Code. Resort to dictionary definitions is therefore appropriate and helpful. The term "abuse" has been defined as:

"To make excessive or improper use of a thing, or to employ it in a manner contrary to the natural or legal rules for its use; to make an extravagant or excessive use, as to abuse one\'s authority." Black\'s Law Dictionary (1968).

The term "substantial" includes among its meanings real, not seeming or imaginary, that of moment or important. See Webster's New International Dictionary (2d Edition).

In this court's view, Congress intended the courts to apply Code § 707(b) as a type of motion to dismiss for failure to state a claim for relief. It is to be used to deny Chapter 7 relief to those persons whose pleadings in the form of the petition, schedules, statement of affairs and statement of income and expenses fail to reflect a need for the relief being sought because they do not reflect that the debtor is now suffering or will suffer in the near future from any meaningful economic hardship. The "substantial abuse" provision of Code § 707(b) is in the nature of a threshold predicate to entitlement to Chapter 7 relief.

To date there is apparently only one reported case considering Code § 707(b), In re Bryant, 47 B.R. 21 (Bankr.W.D.N.C. 1984). Cf. In re Wright, 48 B.R. 172 (Bankr.E.D.N.C.1985) (Attorney denied compensation for failure to appear and assist debtor at substantial abuse hearing). In Bryant, the bankruptcy judge dismissed Bryant's Chapter 7 petition upon finding that Bryant had failed to list a number of credit card debts, misstated or misrepresented his expenses and could, with "only a modicum of restraint," 47 B.R. 23, have made payments of at least $800.00 per month under a Chapter 13 plan (totalling $28,000.00 over 3 years or 67% of his unsecured obligations).

"This case was brought, not because of the Debtor\'s unemployment or an inability to pay on his part, but because he simply desired to shuck a couple of his debts. His testimony was that he had previously guaranteed a number of business debts and he filed this bankruptcy in order to `get rid\' of the same. * * * "* * * While Congress intended to give Debtors relief in such cases, it was not the design of the Bankruptcy laws to allow the Debtor to lead the life of Riley while his creditors suffer on his behalf. "Therefore, in light of the Debtor\'s purpose in filing this petition; his fraudulent and misleading omissions in his petition; his attempts to pad his expenses statement in order to misrepresent his financial position; and the relatively exorbitant lifestyle which he seeks to maintain while taking shelter from his creditors under the Bankruptcy provisions, the court concludes that to allow this petition would be a substantial abuse of the provisions of Chapter 7." 47 B.R. at 24, 26.

In adopting a bankruptcy law pursuant to the authority granted to it by the United States Constitution, Congress has concluded that no abuse exists when an honest debtor seeks to avail himself of a fresh start without the encumbrance of life-long debt through obtaining a bankruptcy discharge. The matter was well put by the United States Supreme Court in Local Loan Co. v. Hunt, 292 U.S. 234, 245, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934): "The power of the individual to earn a living for himself and those dependent upon him is in the nature of a personal liberty quite as much as, if not more than, it is a property right. * * * The new opportunity in life and the clear field for future effort, which it is the purpose of the Bankruptcy Act to afford the emancipated debtor, would be of little value to the wage earner if he were obliged to face the necessity of devoting the whole or a considerable portion of his earnings for an indefinite time in the future to the payment of indebtedness incurred prior to his bankruptcy."

This court has determined that it is reasonable to conclude that a debtor whose income and reasonable expenses indicate that he could pay over three years an amount equal to 100% of the principal owed to his creditors is not suffering from sufficient economic hardship to warrant use of Chapter 7.³ That debtor ought to use either Chapter 13 or forego bankruptcy relief and rely on the protections afforded under the state and federal wage garnishment and other laws.⁴

The court has concluded that it should set this rather high screening standard for a debtor's entitlement to Chapter 7 relief for several reasons. Firstly, even a debtor who can pay 100% of the principal of his debts over three years is not making a 100% payment to his creditors since their claims no doubt include interest at rate that may be as high as 20%. Any payments made under a Chapter 13 plan would be further diminished by the amount of the trustee's fees. Secondly, at the time of initiating any inquiry, the court can only make preliminary estimates that reflect the possibility of such a payment. Further information received will refine the picture, generally by increasing expenses and reducing income. Thus, if a lower threshold inquiry level is set, the court is likely to find itself dismissing most of its inquiries as the debtor's future ability to pay becomes entirely problematic. Futile inquiries are a burden on the court, an imposition on the debtor and his counsel, and unlikely to encourage greater respect for the bankruptcy system by creditors, or debtors. Thirdly, the presumption in favor of granting the relief sought by the debtor which Congress incorporated into Code § 707(b) means that, although the court should examine all the facts, including the reasons why the debtor has chosen to file, the court should accord great weight to the debtor's own assessment of his financial condition. Fourthly, and perhaps as significantly, the so-called Purdue Study used by the consumer credit industry in lobbying Congress for bankruptcy reform concluded that 30% of all Chapter 7 debtors could have repaid their debts in full over 3 years.⁵ This standard should thus cause inquiry to be made into a substantial number of Chapter 7 filings. The 100% of principal standard would...