## Facts

- A married couple (the Shaws) with two adult children filed a voluntary Chapter 7 petition with primarily consumer debts, including about $130,000 in unsecured credit-card debt.
- For roughly five years before filing, the Shaws were consistently employed and reported high income on their tax returns (about $138,000 in 2001 and $157,000 in 2002).
- Over a period of years, the Shaws accumulated substantial consumer debt while living beyond their means, including purchasing expensive vehicles and consumer goods.
- The Shaws lived in a large home and sought to retain the home and three vehicles while obtaining a Chapter 7 discharge.
- The Shaws supported one adult child living at home and paid college tuition and related expenses for their other adult child, treating those payments as part of their regular monthly budget.
- After the bankruptcy filing, Mrs. Shaw’s employment ended, but she received full-salary severance pay for a period of time and intended to seek new employment.
- Based on the Shaws’ income, expenses, and proposed budget (which largely preserved their existing standard of living), the bankruptcy court issued an order to show cause why the case should not be dismissed as a substantial abuse under 11 U.S.C. § 707(b).

## Issues

1. Whether granting Chapter 7 relief to the Shaws, whose debts were primarily consumer debts, would constitute a “substantial abuse” under 11 U.S.C. § 707(b).
2. Whether, considering the Shaws’ income, expenses, and spending choices (including voluntary support of adult children), the Shaws had the ability to fund a meaningful Chapter 13 plan such that Chapter 7 relief was improper.

## Decision

- The court dismissed the Chapter 7 case under § 707(b), finding that allowing the Shaws to proceed in Chapter 7 would be a substantial abuse of Chapter 7.
- The court emphasized that the Shaws’ financial problems resulted from extended overspending and the use of significant consumer credit, not a sudden, unavoidable hardship.
- The court determined that the Shaws’ budget included expenses that were discretionary or excessive for § 707(b) purposes, including maintaining a large home, keeping three vehicles, and continuing voluntary financial support for adult children (including college costs).
- The court found that, with reasonable reductions to discretionary expenses, the Shaws could pay a meaningful portion of their unsecured debts through a Chapter 13 plan.
- The court delayed the effectiveness of dismissal briefly to allow the Shaws an opportunity to convert the case to Chapter 13.

## Legal Principles

- Under pre-BAPCPA 11 U.S.C. § 707(b), a bankruptcy court may dismiss a Chapter 7 case filed by an individual debtor with primarily consumer debts if granting relief would be a “substantial abuse,” even though the statute contains a presumption in favor of Chapter 7 relief.
- A bankruptcy court may raise § 707(b) substantial-abuse concerns on its own motion and require the debtor to show cause why the case should not be dismissed.
- In assessing substantial abuse, courts apply a totality-of-the-circumstances inquiry in which the debtor’s ability to repay unsecured debts through a Chapter 13 plan is a primary factor.
- Expenses that are voluntary, discretionary, or excessive may be reduced in evaluating disposable income; payments for adult children’s living costs or college expenses may be treated as nonessential when determining ability to repay creditors.
- When debtors have stable or continuing income and can make meaningful payments to unsecured creditors by adjusting lifestyle choices, Chapter 7 relief may be denied through dismissal under § 707(b), leaving Chapter 13 repayment as the appropriate route.

## Conclusion

In re Shaw held that Chapter 7 relief was a substantial abuse where high-income debtors sought to discharge large consumer credit-card debt while keeping an expensive household budget—including a large home, multiple vehicles, and voluntary support for adult children—and could repay a meaningful portion of unsecured debt in Chapter 13 after reducing nonessential expenses.


In re Shaw, 311 B.R. 180 (2003)