By: Mohammed Badwan, Esq.
Successfully passing the means test in a Chapter 7 bankruptcy is not the only obstacle on the road to financial freedom. Although passing the means test rebuts the presumption of abuse in a Chapter 7 filing, the U.S. Trustee can still file a motion to dismiss if it believes the totality of circumstances of the debtor's financial situation demonstrates abuse.  If the Trustee succeeds, then the debtor must either convert to a Chapter 13 bankruptcy or their bankruptcy will be dismissed without the relief sought. The totality of circumstances provision was added to the Bankruptcy Code through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).  Prior to BAPCPA, the U.S. Trustee could only file a motion to dismiss a Chapter 7 if the case was a substantial abuse of the bankruptcy code. The implementation of the totality of circumstances provision in the Code specifically allows the U.S. Trustee to file a motion to dismiss even if the debtor has passed the means test and rebutted the presumption of abuse. The new provision has resulted in confusion among bankruptcy practitioners and judges.
The new provision fails to expressly define the phrase, "totality of the circumstances," forcing the courts to interpret its meaning with little guidance. Although the phrase is new to the Code, it has pre-BAPCPA roots.  The court in In Re Zaporski ruled that the totality of circumstances concept is a judicially created construct for determining substantial abuse under pre-BAPCPA; the case law applying that concept lays out the general scope of the abuse to be determined."  Therefore, in analyzing whether dismissal is appropriate under the totality of the circumstances provision, courts focus on the following factors: 1) whether the debtor has the ability to repay a substantial portion of his debts ; 2) whether the petition was filed because of sudden illness, calamity, disability or unemployment; 3) whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay; 4) whether the debtor's proposed family budget is excessive or unreasonable; and 5) whether the debtor's schedules and statements of current income and expenses reasonably and accurately reflect the true financial condition of the debtor. 
Many bankruptcy practitioners have been highly critical of the totality of the circumstances test. They believe it renders the means test a "mere surplusage".  They argue that "to perform the means test and then perform another means test that is more to the U.S. Trustee's liking ignores the plain language of the statute and would be a waste of judicial resources".  The Nockerts court found the argument persuasive and ruled that a dismissal based on the totality of the circumstances, "requires proof of something more than the ability to fund a Chapter 13 plan in order to avoid rendering the means test a 'mere surplusage'." 
Practically speaking, the totality of circumstances test becomes applicable when a debtor passes the means test but has disposable income on Schedule J. Schedule J is a list of the debtor's actual expenses as opposed to the allowable expenses in the means test. If a debtor has disposable income, after all his reasonable and necessary expenses are deducted from his income, then that allows for a meaningful repayment to his creditors in a Chapter 13 plan. The U.S. Trustee, at its discretion, may then file a motion to dismiss the Chapter 7 petition based on totality of the circumstances. The U.S. Trustee would assert that the means test does not reflect the debtor's actual financial circumstances and move the Court to dismiss the Chapter 7 since the totality of circumstances of the debtor's financial circumstances (disposable income) demonstrates abuse of the bankruptcy code.
Case law on the totality of circumstances provision is still in its infancy. When determining whether a case is abusive by applying the totality of circumstances test, the court is ultimately being asked to determine whether the debtor's expenses are reasonably necessary. "There is no bright-line rule for determining what is reasonably necessary."  Judges are quick to point out that the "totality of circumstances" test is fact-sensitive and must be decided on a case-by-case basis.  Courts have refused to superimpose their values and substitute their judgment for the debtor when determining whether an expense is reasonably necessary.  However, courts will substitute their judgment when any one of the following additional factors are present: 1) the debtor proposes to use income for luxury goods or services; 2) the debtor proposes to commit a clearly excessive amount to non-luxury goods or services; 3) the debtor proposes to retain a clearly excessive amount of income for discretionary purposes; 4) the debtor proposes expenditures that would not be made but for a desire to avoid payments to unsecured creditors; and 5) the debtor's proposed expenditures as a whole appear to be deliberately inflated and unreasonable. 
It is evident that the application of the totality of the circumstances provision has resulted in a rather large gray area due to its subjective nature. One judge may find an expense to be reasonably necessary while another may find the expense to be unreasonable. The BAPCPA and its ambiguities have resulted in many issues that bankruptcy practitioners and judges alike are having difficulty tackling. When considering bankruptcy, it is imperative that a debtor seek competent bankruptcy counsel, to address the rather ambiguous totality of the circumstances provisions to increase the likelihood of a successful chapter 7 filing.