RobertandRobynKline filed a petition for liquidation under Chapter 7. They submitted a schedule that listed their debts at $9,735.00, their assets (other than real estate) at $7,295.00, their net monthly income at $2,249.00, and their monthly expenses at $1,973.00. The U.S. Trustee, concluding that the debtors could pay a significant portion of their unsecured debt under a three-year Chapter 13 plan, moved to dismiss the petition on the ground that to grant the Harrises relief would constitute a substantial abuse of Chapter 7 under Section 707(b) of the Bankruptcy Code. The bankruptcy court denied the U.S. Trustee's motion, holding that two conditions must be met before a case can be dismissed for substantial abuse and that the trustee had failed to establish the existence of these conditions. The two conditions were (1) that the debtors exhibited "egregious behavior" (such as repeated bankruptcy filings evidencing bad faith, fraud, or misconduct) and (2) that a significant portion of the unsecured debt could be paid under a three-year Chapter 13 plan.

The appellate court rejected the holding that dismissal for substantial abuse requires the moving party to show "egregious behavior" by the debtor. The court explained, "[T]he debtor's ability to pay his debts when due as determined by his ability to fund a chapter 13 plan is the primary factor to be considered in determining whether granting relief would be substantial abuse. * * * [A] finding that a debtor is able to pay his debts, standing alone, supports a conclusion of substantial abuse." The court concluded that imposing an additional "egregious behavior" requirement would conflict with this determination. The court noted that the lower court, "after readjusting theKlines' income and expenses figures to reflect the record, concluded that the Klines' income in excess of expenses would enable them to pay 156 percent of their unsecured debt within three years."

What do you think of the court's decision in this case?This question, as the other one in this forum, is intended to encourage a discussion on bankruptcy policy in general. With the amount of unemployment and underemployment this is an extremely timely topic. In addition, take a look at the article I posted under Course Materials about student loans. I mention student loans in this context because bankruptcy reform legislation made students loans a non-dischargeable debt (subject to several narrow exceptions). The article is a few years old now, but student loan debt remains a significant issue in this country and is constantly debated in the context of the best choice of colleges and which ones (and which majors) have the most economic value.