Legal Definitions - 707(b) action

A 707(b) action refers to a specific legal motion filed under Section 707(b) of the United States Bankruptcy Code. This action is initiated to dismiss a debtor's Chapter 7 bankruptcy case if it is determined that allowing the bankruptcy to proceed would constitute an "abuse" of the bankruptcy system. Chapter 7 bankruptcy is designed for individuals who genuinely cannot afford to repay their debts and need a fresh start.

An abuse typically occurs when a debtor has the financial ability to repay their creditors, at least in part, but is attempting to use Chapter 7 to avoid these obligations. This motion can be brought by the bankruptcy court itself, the United States Trustee (a government official overseeing bankruptcy cases), the trustee assigned to the debtor's case, or any other party with a legitimate interest in the case, such as a creditor. The purpose is to ensure that Chapter 7 relief is reserved for those truly in need, preventing its misuse by individuals who could instead repay their debts through a Chapter 13 repayment plan or other means.

Here are some examples illustrating when a 707(b) action might be filed:

• Example 1: High Income and Disposable Funds
  • Scenario: Mark, a successful marketing executive, files for Chapter 7 bankruptcy after accumulating significant credit card debt. Although he recently received a substantial bonus and his monthly income far exceeds his essential living expenses, he claims he cannot afford to pay his creditors.
  • Explanation: In this situation, the United States Trustee or a creditor might file a 707(b) action. Mark's high income and significant disposable funds suggest he has the financial capacity to repay a portion of his debts through a Chapter 13 repayment plan over time. Allowing him to discharge all his debts through Chapter 7 would be considered an abuse of the system, as Chapter 7 is intended for those without the means to repay.
• Example 2: Recent Luxury Spending and Lack of Good Faith
  • Scenario: Sarah, facing financial difficulties, uses her credit cards to purchase a new luxury car and takes an expensive international vacation just two months before filing for Chapter 7 bankruptcy. She then lists these debts as part of her bankruptcy petition.
  • Explanation: A creditor or the bankruptcy trustee could initiate a 707(b) action here. Sarah's recent, significant luxury spending immediately prior to filing for bankruptcy suggests a lack of good faith. Such behavior might indicate an intent to incur debts with no genuine intention of repaying them, only to quickly discharge them through Chapter 7. This could be deemed an abuse of the bankruptcy provisions, as it manipulates the system rather than genuinely seeking relief from unavoidable financial hardship.
• Example 3: Undisclosed Assets or Misleading Information
  • Scenario: David files for Chapter 7 bankruptcy, declaring minimal assets and income. However, during the bankruptcy process, the trustee discovers that David recently transferred ownership of a valuable rental property to his cousin for a nominal fee and failed to disclose a substantial inheritance he received six months prior.
  • Explanation: The bankruptcy trustee would likely file a 707(b) action. David's actions of attempting to hide assets and providing misleading information constitute an abuse of the bankruptcy process. Chapter 7 requires full transparency and honesty from debtors regarding their financial situation. Attempting to conceal assets to prevent them from being used to repay creditors, while simultaneously seeking a discharge of debts, is a clear misuse of the system's protections.