A Cautionary Tale on Good Faith

Posted by NCBRC - October 4, 2012

The Northern District of California upheld a finding of bad faith for debtor’s chapter 13 fee-only plan. In re Ingram, No. 11-408 (N.D. Cal. Sept. 28, 2012). The plan proposed to maintain payments on first mortgage, strip off the second wholly unsecured mortgage, and pay only attorney and administrative fees. The debtor later filed an amended plan proposing to make lower payments for a longer duration while still paying nothing to unsecured creditors. The Bankruptcy Court raised the issue of good faith sua sponte.

The district court found that the bankruptcy court applied the appropriate “totality of the circumstances” standard as set forth in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999) and Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982). It noted, however, that a “veiled chapter 7” plan is rarely proposed in good faith. Though the court teetered on the edge of a per se rule against such plans, it did not step over that edge.

The debtor’s downfall here appears to have been the fact that when he amended his plan to lower payments but extend the duration, he refused to explain to the bankruptcy court why he could not maintain the higher payments and pay something to unsecured creditors. The court found that the original proposed plan indicated that the debtor could afford to pay more into the plan without regard to duration and the debtor failed to counter that inference.

Lesson: where fee-only plans are generally disfavored, it is perhaps wise not to antagonize the court when trying to confirm one.

Ingram opinion


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