I. Introduction

The vast majority of bankruptcy cases that are filed are consumer bankruptcy cases. ( Bankruptcy Strategist, 1997) Indeed, the filing of consumer bankruptcy cases is at an all-time high. In the last two decades, personal bankruptcy cases have increased by more than 700 percent.

One would think that honest people of color, honest working class, and honest poor people would have unrestricted access to Chapter 7. Bankruptcy Code (the "Code") Section 707(b), however, has significantly altered the operation of the consumer bankruptcy system. Prior to the enactment of Code Section 707(b), an honest debtor who had filed his or her Chapter 7 petition in good faith could only be deprived of his or her discharge through the operation of Code Section 727(a). ( 11 U.S.C. Section 727(a), (1998) Now it is possible for an honest debtor to be denied a Chapter 7 discharge,(Flint, 1991) even if he or she has acted in good faith and has not committed fraud. Code Section 707(b) has fundamentally transformed the concept of the "fresh start,"( Jackson , 1985) and the availability of the Chapter 7 discharge for individual debtors. Consequently, there is a fundamental issue as to whether Code Section 707(b) prevents honest consumer debtors, particularly people of color, working class, and poor people, from obtaining justice.

This article discusses the enactment of Code Section 707(b), and the difficulties that the lower federal courts have had in interpreting this provision. In particular, Code Section 707(b) is a poorly drained statute, which has failed to provide any meaningful guidance to bankruptcy courts or to the Office of the United States Trustee who is responsible for implementing this statute. Part III examines the explosion of consumer debt; the imprudent practices of the consumer credit industry; and the concomitant surge in consumer bankruptcies. This article posits that the consumer bankruptcy crisis is a result of the humongous growth in consumer debt that is the product of the avaricious practices of the consumer credit industry, and that the consumer credit industry must reform its lending practices. The consumer credit industry's practices require that there be liberal access for consumer debtors. Part IV discusses different levels of debt. Part V is conclusion.

II. Code Section 707(b)

The consumer credit industry sought the enactment of Code Section 707(b) as an attempt to curb the alleged abuse of the bankruptcy system by consumer debtors.(Wildermuth, 1995) The consumer credit industry lobbied Congress for a provision to halt these alleged abusive practices by consumer debtors.(Balser, 1986) The proposed legislation was debated; however, the consumer credit industry, consumer activists, and the Congress failed to reach an agreement as to what constituted a substantial abuse.(Morris, 1985) Code Section 707(b) was enacted as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984.

As enacted, Code Section 707(b) failed to define what constituted a substantial abuse. (United States Trustee…1996) To exacerbate matters, there are neither Senate reports, nor House reports providing guidance as to what Congress thought would constitute a substantial abuse. (Bruckman, 1994) Code Section 707(b) is only applicable to Chapter 7 cases in which the majority of the debt is consumer debt. Only bankruptcy judges and the Office of the United States Trustee have standing to bring Code Section 707(b) motions.(Vandiver, 1992) Having a bankruptcy judge make the initial challenge under Code Section 707(b) is problematic, and it is somewhat peculiar that the individual who will be the ultimate finder of fact is the individual who makes the initial challenge to the validity of the Case.(McKim, 1986) Usually, it is incumbent upon the Office of the United States Trustee to make the determination as to which cases should be dismissed because of a substantial abuse. The Office of the United States Trustee, however, has no uniform national guidelines as what constitutes a substantial abuse. (Wells et al, 1991) Consequently, it is left to the discretion of the individual United States Trustees and, in particular, the Assistant United States Trustees to make a determination as to which cases should be dismissed. With so many different people scrutinizing Chapter 7 petitions to determine what constitutes a substantial abuse, implementation of the standard of what constitutes a substantial abuse will vary from district to district. Consequently, there will be inconsistent determinations as to what constitutes a substantial abuse.

B. The Courts of Appeal Are In Disagreement as To What Constitutes a Substantial Abuse

The Eighth and Ninth Circuits have held that a Chapter 7 debtor's ability to fund a Chapter 13 plan is per se proof of substantial abuse.(United States Trustee…1992) Under the ability to pay test, a debtor's ability to repay his or her debts, without any other factor, will justify a dismissal under Code Section 707(b). The Fourth Circuit has adopted the "totality of the circumstances test" to determine whether the prosecution of a Chapter 7 case would constitute a substantial abuse.( Green v. Staples, 1991) In In re Krohn, the Sixth Circuit Court of Appeals adopted a modified version of the totality of the circumstances test.(Cuevas, 1993)

C. Code Section 707(B) Has Been Implemented In a Random Manner

Code Section 707(b) is ambiguous and federal appellate courts have been unable to develop a coherent and readily applicable standard; consequently, the enforcement of Code Section 707(b) has occurred in a haphazard manner. There are various cases involving Code Section 707(b) in which a debtor sought to exploit the bankruptcy system to the detriment of his or her creditors. (In re Duncan, 1996) For example, the debtor in In re Dominguez was a recent graduate of the Harvard Medical School and a resident at the Duke Medical Center . The debtor was an anesthesiologist resident with an annual salary of $33,000. After the debtor completed his internship, his salary was expected to increase substantially. The debtor had $29,723.31 of debts. The court held that granting relief would be a substantial abuse. As a graduate of the Harvard Medical School with good grades, the debtor had an excellent prospect of earning a substantial income. Although the debtor would only make $33,000 as a resident, that was sufficient to provide the debtor with an adequate lifestyle and to make a partial payment on his debts. The filing was not the result of a sudden illness or calamity. The debtor's attempt to use the bankruptcy process under these circumstances constituted a lack of good faith. (In re Waldron, 1986)

III. Code Section 707(B) Has Not Alleviated the Consumer Debt Crisis in the United States

A. Since the Enactment of Code Section 707(B) Consumer Debt Has Swelled Profusely

Since the enactment of Code Section 707(b), consumer debt has continued to escalate at an alarming rate. Indeed, during the period since the passage of Code Section 707(b), consumer credit debt has more than doubled. Moreover, in the last seven years, credit card debt has increased by more than 100 percent. In 1996, consumer debt continued to expand, and in November 1996 consumer borrowing reached $1,191,000,000. ( Consumer Debt Rises, 1997) An example of the expansion of consumer debt in 1996 is the fact that in 1996 consumers charged more than $1,000,000,000 on their credit cards. In recent years, credit card issuers have sent 2,000,000,000 credit card solicitations to consumers. (Tharpe, 1997) Moreover, people of color carry more credit card debt than Caucasians, (Charge It…1997) and during the last three years amount of credit card debt held by Blacks and Hispanics has escalated rapidly.

The 1980s was a period in which the consumer finance sector underwent a transformation.(Getter, 1996) The increase in the expansion of consumer credit occurred during the latter half of 1982 and early 1983 because of deregulation of the consumer credit industry. One consequence of deregulation was that lenders modified their standards and extended credit to riskier customers because of the potential profits. Since credit cards were introduced they were profitable, and credit cards have produced lucrative profits for the consumer credit industry. Credit cards are profitable because usury laws are inapplicable to the interest rates charged by credit card issuers from a different jurisdiction.

The availability of consumer credit has supported the mass production of consumer goods. (Sherwin, 1997) Credit cards have also been important to retailers. For example, Sears has utilized its credit card to foster demand for its products. In addition, Sears borrows money inexpensively in the public debt markets, and then charges its cardholders 21% interest. (Snyder, 1997) It has been estimated that Sears' income from its credit card operations exceeds the income that its receives from selling merchandise. Sears aggressively solicited credit card accounts, and its imprudent lending practices have resulted in a high number of credit card delinquencies.

B. The Profitability of Credit Cards Has Led To an Explosion in Credit Card Debt

The profitability of credit cards has resulted in consumers being inundated with credit card applications.(Credit Card Earnings, 1997) Some consumers unworthy of receiving further credit have received dozens of unsolicited credit card applications.( Singletary & Crenshaw, 1996) At times it seemed that the credit card issuers were distributing credit cards without carefully screening applicants.(Morrow, 1996) In their quest for profits, the credit card issuers have also made credit cards available to college students. The combination of student loans and credit card bills has left many college graduates mired in significant debt. Consumer advocates are concerned about the explosion of credit card debt and the inability of some consumers to shoulder this immense burden.

C. The Surge in Credit Card Debt Has Had Adverse Consequences

The practice of the consumer credit industry of readily issuing credit cards has had significant adverse consequences. (Silverman, 1997) Many consumers have been compelled to file for bankruptcy because of their inability to pay their credit card debt. In addition, the rate of credit card delinquencies is at record levels. Another measure of credit card delinquencies is the percentage of overdue dollars outstanding, and this is also at an all-time high. After many years of profitable expansion, some credit card issuers have experienced lower profits. (Jerry, 1997)

D. The Enormous Increase in Credit Card Debt Has Led To a Record Number of Personal Bankruptcy Cases Being Filed

The most significant consequence of the credit card debt explosion has been the record number of personal bankruptcies.(Hanseli, 1996) Another consequence of the proliferation of credit card debt has been the record rate of credit card delinquencies. One economist has noted that consumer card delinquencies and consumer bankruptcies have risen in tandem. (Ausunbel, 1997)

Since the enactment of Code Section 707(b), the number of personal bankruptcies has skyrocketed, and has now reached record levels. Bankruptcy filings have increased in every state since 1984 and in eighteen states and in Puerto Rico filings have at least quadrupled during the last twelve years. Consumer bankruptcies continue at a record pace in 1997. (Consumer Bankruptcies….1997)

Mr. Samuel Gerdano, Executive Director of the American Bankruptcy Institute, credits the surge in consumer bankruptcies with out-of-control spending and borrowing. (Sanchez, 1995) Some consumer advocates have contended that easy credit has forced many consumers into bankruptcy. Further, some consumer advocates argue that creditors have brought on these problems and that a revision of the bankruptcy laws is not the solution. The significant increase in personal bankruptcies has occurred in a period when the economy been relatively stable.

E. Code Section 707(B) Is Ill-Equipped To Respond To the Explosion of Personal Bankruptcies Caused By the Imprudent Practices of the Consumer Credit Industry

The concept of substantial abuse was intended to prevent the non-needy debtor from exploiting the consumer credit system and employing bankruptcy as a means of purging himself or herself of consumer debt. Nonetheless, Code Section 707(b) has been employed against all types of individuals who are consumer debtors regardless of their age, occupation, or class status. Since the enactment of Code Section 707(b), the major development in the consumer economy has been the proliferation of consumer debt, and with this proliferation of consumer debt has come a record number of personal bankruptcies. ( Lykins & Plankenhorn, 1994) During this period consumer credit companies have imprudently extended credit to consumers who were poor credit risks because the profits were lucrative. College students and working class people were seduced and victimized by credit card issuers, and, under these circumstances, the utilization of Code Section 707(b) against these types of consumer debtors is unconscionable. The consumer credit companies have taken advantage of people that lack the financial sophistication to appreciate the consequences of misusing credit cards until it is too late. Although some consumers might think that bankruptcy is a viable solution to their financial problems, Code Section 707(b) has weakened, if not destroyed, the Chapter 7 discharge for some consumer debtors. Some consumer debtors will not be eligible for Chapter 7 relief because some courts will hold that granting these debtors relief will constitute a substantial abuse.

F. Congress and the Consumer Credit Industry Must Adopt More Stringent Lending Policies

The credit card issuers must adopt new measures that will make lending practices more prudent. Although some members of the consumer credit industry have advocated the adoption of more stringent consumer bankruptcy laws, the consumer credit industry must reform its lending practices. (Freedman, 1997) If there were an interest rate ceiling on credit cards, then lending practices would change. The high interest rates that credit card issuers are permitted to charge encourages credit card issuers to engage in imprudent practices. An interest rate ceiling would make issuing credit cards to riskier applicants less attractive because the credit card issuer would be unable to recoup its losses from other cardholders. Thus, credit card issuers will become more circumspect when they issue cards, and they will be reluctant to extend credit to individuals who lack the ability to repay their debts.

Another recommendation is to limit the amount of credit that a consumer can receive. There has been a recommendation that a consumer's total credit line should be limited to twenty percent of a consumer's annual income.(Geewax, 1997) The twenty percent limitation would be a safeguard to prevent a consumer from obtaining credit that he or she lacks the means to repay.

There are other measures that credit card issuers can implement to address the problem of credit card debt delinquencies and consumer bankruptcies. Credit card issuers could limit credit lines to consumers. (Hansell, 1997) Credit card issuers should develop credit models that will detect when a consumer is in trouble so that the consumer's credit line will not be increased.

G. The Consumer Finance Industry's Irresponsible Conduct since the Enactment of Code Section 707(B) Warrants a Narrow Construction of That Statute

The credit card industry has acted irresponsibly, and its conduct is the most forceful argument for a restrictive interpretation of Code Section 707(b). The unprecedented growth in consumer debt since the enactment of Code Section 707(b) has produced a record number of consumer bankruptcies. Until there is major reform in the credit card industry, numerous consumers will need bankruptcy relief. The credit card debt problem is not an isolated problem, but rather, as the bankruptcy statistics reflect, is a crisis. The employment of Code Section 707(b) to deny Chapter 7 relief to consumer debtors is inequitable because the credit card industry has failed to police its practices. The massive wanton solicitation of credit cards has been disastrous. To a large degree, the credit card issuers have created the consumer bankruptcy crisis. Therefore, it is unconscionable to utilize Code Section 707(b) to deny consumer debtors relief and a Chapter 7 discharge. Given the practices of the consumer credit industry, it is difficult to comprehend how most consumer debtors would be exploiting the bankruptcy system, and, therefore, would not be entitled to relief under Code Section 707(b).

Another equally important point is that the premise underlying Code Section 707(b) is fallacious. It has been estimated that more than 96 percent of the credit cardholders pay their debts. (Jones, 1997) In addition, only one percent of cardholders file for bankruptcy. Credit card debt only represents sixteen percent of all debt on the average consumer bankruptcy petition. Consequently, the consumer credit industry's contention that there is mass exploitation of the consumer bankruptcy system is misleading and self-serving propaganda.

IV. Debt Levels of American Consumers

Descriptive statistics of debt levels and credit usage of two age groups: under age 65 and 65 and older. A smaller percentage of older household had debt of any type. Balance of outstanding debt was also lower for this age group, but their average nonzero debt balances were unexpectedly large. Compared to the younger group, the older age group, on average, could access a higher amount of credit.

In 1990, 12.5% of the United States population was aged 65 and older compared to 8.1% in 1950 and 4.1% in 1900. Projections are that by 2030, 1 in 5 individuals in the U.S. will be aged 65 or older ( Hobbs , 1996). This significant demographic change has spurred research on such economic issues as income, housing cost, and retirement funding among the aged (Duncan & Smith, 1989; Hurd, 1990; Mankiw & Weil, 1989; Ryscavage, 1992; U.S. Congressional Budget Office, 1993). Still, little is known about debt levels and credit usage among this age group.

Debt and credit are usually considered financial tools of the young. However, several factors are currently influencing change in debt levels and credit usage among those aged 65 and older: (1) aggressive solicitation of the elderly by a mature credit card market (Ramresearch, 1997), (2) reduced stigma associated with credit use, (3) greater confidence in ability to repay due to increased longevity, health care advances and inflation adjusted post-retirement income, (4) common use of credit cards in markets used by older individuals (e.g. mail order), and (5) convenience of credit card use versus use of cash or check.

Credit card usage has been the focus of the limited research on credit usage of those aged 65 and older. McGurr (1995) found this group was less likely than those under age 65 to hold credit cards. However, being married, having good health, having higher levels of income and education, being a home owner and having positive attitudes toward credit were positively associated with having credit cards.

Elderly persons were interviewed about their credit use. It was concluded that, for some, credit card usage was simply an extension of pre-retirement money management practices. For others, credit cards were a financial safety net of last resort, extending low income. This latter group was at greatest risk of credit overextension.

Compared to the younger age group, a smaller percent of the older group held any type of debt. Interestingly, over 70% of the older group had a credit card, nearly the same percentage as the younger group. Only 27%, however, carried a balance, compared to 48% of the younger group.

The younger group owed more in each debt category and had a much larger proportion in mortgage debt. More than half of the debt held by the older group is in other debt (51% versus 21%) perhaps because a few in the older group have relatively high levels of business debt.

Qualified credit for the younger group is higher than that for the older group, whereas potential credit (qualified credit + nonqualified credit) is higher for the older group, due to their higher levels of home equity and pension assets.