Tuesday, September 6, 2011

Motions to Dismiss Chapter 13 Bankruptcies

When you get the bankruptcy notice in the mail, the case might not be over.  It may just be getting started.  If the bankruptcy is a Chapter 13, it is subject to dismissal for bad faith.  A finding of bad faith does not require fraudulent intent by the debtor. The bankruptcy judge is not required to have evidence of debtor ill-will directed at creditors, or that the debtor was affirmatively attempting to violate the law.  Inconsistencies and misrepresentations are usually enough to get the case dismissed, even if they are not intentional, if the sloppiness rises to the level of bad faith.  

You will want to analyze the petition for errors, omissions, or inconsistencies based on what you already know about the debtor and what appears on the face of the petition.  For instance, I recently had a case where the debtor only disclosed one checking account, but he had bounced a check to my client from a different account just several days before filing bankruptcy.  That was a major omission, but the smaller things can add up too.  Debtors frequently fail to disclose life insurance polices, but you'll see them deducting the premiums from their gross wages.  Or they will try to affirm debts that have monthly payments higher than their stated income.  

A motion to dismiss a Chapter 13 bankruptcy is filed under Section 1307(c) of the Code.  That section allows the trustee or any creditor to move for dismissal for 11 separate reasons, including failure to make any payment required by the plan, failure to make any domestic support obligation, etc.  Also, pursuant to the case law, bad faith is also a cause for dismissal under Section 1307(c). The bankruptcy court will apply the “totality of the circumstances” test when ruling on a motion to dismiss for bad faith. The test involves the following factors:

  • Whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his Chapter 13 petition or plan in an inequitable manner;
  • The debtor’s history of filings and dismissals;
  • Whether the debtor only intended to defeat state court litigation; and
  • Whether egregious behavior is present.

If fraudulent intent can be inferred from the totality of the circumstances, the debtor’s petition can be dismissed with prejudice pursuant to Section 349(a) of the Code.  Even if the case is not dismissed with prejudice, it is still possible to obtain an order that the case can not be refiled for six months.  That means the automatic stay is not in effect and you can proceed to state court.  You will want to move quickly to accomplish your specific purpose, and the state court may help you do so once it learns the circumstances of the Ch. 13 dismissal.  

Call me with any questions.

1 comment:

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