Bankruptcy A-Z: G is for “Good Faith”
December 26th, 2011 | 
Author: Bankruptcy A-Z: G is for “Good Faith”.
The bankruptcy laws help the honest debtor. Filing a case or a plan in good faith is a requirement of getting that protection.
It also forces all creditors to deal with the debtor through the bankruptcy court, so that no one creditor prevails at the expense of other creditors in a similar position. It prevents a free-for-all on the debtor’s assets and allows the debtor and family to retain a certain amount of property to avoid being wards of the state. This give and take is based on good faith.
G is for Good Faith.
The good faith requirement limits serial filings.
If you file a second bankruptcy case within a year of a prior case being dismissed, the automatic stay is limited to 30 days unless you can prove that the second case was filed in good faith as to your creditors. The Bankruptcy Code presumes that the second filing was not in good faith, unless you can prove otherwise by clear and convincing evidence.
Perhaps you inadvertently forgot to file the right documents or didn’t know which ones to file. If you just refused to disclose information and file the right documents or amendments without a substantial excuse, you lose. Perhaps you could not comply with the plan as confirmed. You can overcome the obstacle here if you faced a substantial change in your financial or personal situation, like a divorce, job loss or medical disability.
You also need to show that the current case can lead to either to a discharge (if the new case is filed under Chapter 7) or a confirmed plan that will be fully performed (if the new case is filed under Chapter 11 or 13).
If this is the third case pending within the year, then there is no stay in effect. You can petition the court to instate the stay by overcoming the presumption of bad faith. However, in this case, the stay starts on the day the court orders it. Until then, it is a free-for-all for your creditors to take whatever collection action the law allows.
If a specific creditor filed an action against you during that case, you may face further limits as to that creditor.
The good faith requirement applies to Chapter 13 plans as well.
Section 1325(a)(3) of the bankruptcy code requires that a Chapter 13 plan be “proposed in good faith and not by any means forbidden by law.” Basically, the question is whether under the circumstances of the case there has been an abuse of the provisions, purpose, or spirit of Chapter 13 or the Bankruptcy Code in proposing the plan.
The Fourth Circuit adopted a “totality of the circumstances” approach when evaluating debtor’s good faith under 11 U.S.C. § 1325. This approach requires the examination of the following non-exhaustive list of factors:
(1) the percentage of the proposed repayment; (2) debtor’s financial situation; (3) the period of time over which payment will be made; (4) debtor’s employment history and prospects; (5) the nature and amount of unsecured claims; (6) debtor’s past bankruptcy filings; (7) debtor’s honesty in representing facts; and (8) any unusual or exceptional problems facing the particular debtor.
Failure to follow the good faith requirement has consequences. A lack of good faith in a bankruptcy case can result in dismissal, denial of a discharge, denial of confirmation (if 13), conversion to another chapter.
Pursuant to Section 1307(c) of the Bankruptcy Code, the court may convert a case from Chapter 13 to Chapter 7, or may dismiss a Chapter 13 case, whichever is in the best interests of creditors and the estate, for cause. The statute contains a non-exhaustive list of factors deemed to constitute “cause” for conversion or dismissal.
Those factors include:
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees and charges required under chapter 123 of title 28;
(3) failure to file a plan timely under section 1321 of this title;
(4) failure to commence making timely payments under section 1326 of this title;
(5) denial of confirmation of a plan under section 1325 of this title and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) material default by the debtor with respect to a term of a confirmed plan;
(7) revocation of the order of confirmation under section 1330 of this title, and denial of confirmation of a modified plan under section 1329 of this title;
(8) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan other than completion of payments under the plan;
(9) only on request of the United States trustee, failure of the debtor to file, within fifteen days, or such additional time as the court may allow, after the filing of the petition commencing such case, the information required by paragraph (1) of section 521 (a);
(10) only on request of the United States trustee, failure to timely file the information required by paragraph (2) of section 521 (a); or
(11) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.
Dismissal for substantial abuse or cause
One of the most commonly utilized civil enforcement sections of the Bankruptcy Code is 11 U.S.C. § 707(b). Section 707(b) provides that the court “may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter. . . .” What constitutes “substantial abuse” is not defined by the Bankruptcy Code but, rather, has been left to the courts to sort out. The controlling case in the Fourth Circuit (which includes Virginia) is Green v. Staples (In re Green), 934 F.2d 568 (4th Cir. 1991). In Green, the Fourth Circuit rejected the argument that a debtor’s ability to repay debts, by itself, constituted grounds for dismissing a case as substantial abuse of Chapter 7.
Instead, the Fourth Circuit found that in order to determine whether a case should be dismissed for substantial abuse a court must apply a “totality of the circumstances test” which involves a consideration of the debtor’s ability to repay debts and factors such as the following: “(1) Whether the bankruptcy petition was filed because of sudden illness, calamity, disability, or unemployment; (2) Whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay; (3) Whether the debtor’s proposed family budget is excessive or unreasonable; (4) Whether the debtor’s schedules and statement of current income and expenses reasonably and accurately reflect the [debtor's] true financial condition; and (5) Whether the petition was filed in good faith.”
Lying, concealing property, failing to disclose required information, committing fraud or a number of other factors can be grounds for denying a discharge. Now, you have a bankruptcy on your credit, but no benefit from the discharge. Even worse, if you have unexempt assets, the trustee can administer those assets and the court can still deny the discharge.
Good faith is important in so many contexts. This is especially true in bankruptcy.
If you need help getting your creditors to deal in good faith with you and you are in the metro Richmond area, or anywhere in central Virginia, contact bankruptcy and consumer lawyer Mitchell Goldstein at (804) 592-1674 or by email at mitch at mitchellpgoldstein dot com.
Other G posts:
G is for General Unsecured Creditor.
G is for Garnishment or Garnishmentor Garnishment.
G is for Guaranty.
G is for Goals.
G is for Gifts.
G is for Good Manners.
G is for Guilt.
G is for Good to me.
G is for Good Faith.
G is for Gumshoe.
PHOTO CREDIT: takomabibelot
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