good faith Archives - National Consumer Bankruptcy Rights Center

by NCBRC Editor on February 24, 2025

Can Debtors Prioritize Retirement Over Creditors? Trustee Seeks Supreme Court Review in In re Saldana

In a move that could have sweeping implications for Chapter 13 bankruptcy cases nationwide, Martha G. Bronitsky, the Chapter 13 Trustee, has filed a petition for certiorari with the Supreme Court in In re Saldana. The case centers on whether voluntary contributions to retirement accounts should be excluded from a debtor’s disposable income calculation. The Ninth Circuit’s decision in In re Saldana sided with the debtor, holding that voluntary retirement contributions are shielded from creditors, a ruling that some argue disrupts the balance between debtor protections and creditor rights under the Bankruptcy Code. Now, the Supreme Court is being asked to step in, potentially impacting thousands of Chapter 13 cases filed each year.

The National Consumer Bankruptcy Rights Center (NCBRC) and the National Association of Consumer Bankruptcy Attorneys (NACBA) have been strong advocates for preserving the rights of consumer debtors and ensuring the integrity of the bankruptcy system. We remain committed to supporting Jorden Marie Saldana as this case progresses, including filing amicus briefs to amplify the voices of debtors nationwide. At stake is not only Saldana’s ability to prioritize her financial future but also the broader rights of Chapter 13 debtors to save for retirement while navigating bankruptcy. Stay tuned as this pivotal case unfolds, with the potential to shape bankruptcy law for years to come.

Petition for Certiorari

9th Circuit Opinion – In re Saldana

NCBRC/NACBA Amici Brief – In re Saldana

by NCBRC Editor on January 14, 2025

The Sixth Circuit Reverses Bankruptcy Court’s Denial of Discharge Based on Intent to Hinder Trustee

Facts

Jason and Leah Wylie filed for Chapter 7 bankruptcy in 2020 following financial hardships caused by Mr. Wylie’s health issues. Before filing, they delayed filing tax returns for 2018 and 2019. When the returns were filed, the Wylies elected to apply their substantial overpayments from those years to future tax liabilities instead of requesting refunds.

The bankruptcy trustee filed an adversary proceeding under 11 U.S.C. § 727 to deny discharge, alleging the Wylies transferred anticipated tax refunds from the bankruptcy estate with the intent to hinder, delay, or defraud creditors. The bankruptcy court agreed with the trustee on one count—related to post-petition transfers—and denied discharge. On appeal, the district court reversed, and the trustee appealed to the Sixth Circuit.

Analysis

The Sixth Circuit focused on whether the bankruptcy court’s finding of specific intent to hinder the trustee was clearly erroneous. Section 727(a)(2) requires evidence of actual intent to hinder, delay, or defraud a creditor or the trustee.

The court found no evidence that the Wylies acted with such intent. The bankruptcy court had itself noted that the Wylies’ primary motive was to ensure their taxes were paid, not to hinder the trustee. The Sixth Circuit emphasized that a mere preference to pay certain creditors, such as taxing authorities, over others does not meet the statute’s specific intent requirement. It also pointed out that the Wylies were not intimately familiar with the Bankruptcy Code’s priority scheme, undermining the trustee’s claim of intentional hindrance.

The court found the bankruptcy court’s reasoning inconsistent, as it had dismissed a similar claim related to pre-petition transfers due to a lack of specific intent. The Sixth Circuit ultimately affirmed the district court’s decision and remanded the case for entry of discharge.

Conclusion

The Sixth Circuit’s decision highlights the high burden of proof required under § 727(a)(2). Without clear evidence of specific intent to hinder creditors or the trustee, courts are reluctant to deny debtors a discharge, given the extreme consequences of such a penalty.

NCBRC and NACBA filed an amici brief in support of the debtor.

In re Wylie – 6th Circuit

Amici Brief filed by NCBRC – NACBA

by NCBRC Editor on January 14, 2025

Ninth Circuit Clarifies Disposable Income Exclusions for Chapter 13 Debtors Concerning Voluntary Contributions to Retirement Plans

Facts

Jorden Marie Saldana, a surgical technician earning approximately $101,776 annually, filed for Chapter 13 bankruptcy to reorganize her finances and address over $64,000 in unpaid taxes and unsecured debts. In calculating her disposable income, Saldana excluded $747 per month in voluntary contributions to her employer-managed retirement plan.

The Chapter 13 trustee objected, arguing that voluntary retirement contributions constitute disposable income under the Bankruptcy Code and must be applied to repay creditors. The bankruptcy court agreed, sustaining the trustee’s objection and requiring Saldana to adjust her Chapter 13 plan. Saldana appealed to the district court, which affirmed the bankruptcy court’s decision. Saldana then appealed to the Ninth Circuit.

Analysis

The Ninth Circuit reversed the lower courts, holding that voluntary contributions to employer-managed retirement plans are excluded from disposable income under Chapter 13. The court relied on the “hanging paragraph” in 11 U.S.C. § 541(b)(7), which explicitly states that such contributions “shall not constitute disposable income as defined in section 1325(b)(2).”

The Ninth Circuit emphasized that the statutory language is unambiguous, allowing Chapter 13 debtors to exclude any amount of voluntary contributions to qualified retirement plans from their disposable income calculations. This interpretation aligns with Congress’s intent in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which sought to protect retirement savings while encouraging Chapter 13 reorganizations.

The court rejected alternative interpretations that would limit the exclusion to pre-petition contributions or cap it based on historical contribution levels. It also dismissed concerns about debtor abuse, noting that Chapter 13’s good faith requirements and other safeguards adequately address potential misuse of the exclusion.

Conclusion

The Ninth Circuit’s decision in In re Saldana reinforces the broad protections for retirement contributions in Chapter 13 bankruptcy cases. By excluding voluntary contributions from disposable income, the ruling encourages debtors to maintain long-term financial stability while reorganizing their debts.

NCBRC and NACBA filed an amici brief in support of the debtor

In re Saldana – 9th Circuit

Amici Curiae Brief of NCBRC-NACBA

by NCBRC Editor on April 17, 2023

Debtor Misled Lender as to Discharge of Debt

The debtor’s conduct gave the lender reason to believe that the debt owed to him was not discharged, so the bankruptcy court did not err in finding that the lender’s continued collection efforts lacked the requisite scienter to support a contempt sanction for violation of the discharge injunction. Bernhard v. Kull (In re Bernhard), No. 22-854 (E.D. Pa. Feb. 3, 2023).

When his business began to suffer financially, the debtor borrowed $60,000 from a childhood friend. He made sporadic efforts to pay the debt, but at one point he told the lender he might have to file for bankruptcy. He assured the lender that if he did file, he would not include the debt in his bankruptcy. When the debtor finally did file for Chapter 7 bankruptcy, he did not list the debt in his schedules, inform the trustee or the court of the debt, or inform the lender of the bankruptcy. The lender therefore didn’t learn of the bankruptcy until the debtor received his discharge. Over a year after discharge, the debtor executed a new promissory note to the lender and made more payments on the debt.

At some point, however, the lender grew impatient with the slow progress on repayment and filed suit in state court. The debtor returned to the bankruptcy court and filed an adversary proceeding against the lender and his attorneys seeking a finding of contempt for violation of the discharge injunction. The bankruptcy court found that the debt had been discharged and that the defendants violated the discharge injunction. But the court declined to hold the defendants in contempt finding that they lacked the requisite scienter.

The only issues raised in the debtor’s appeal to the district court related to the bankruptcy court’s findings that 1) the lenders had no notice of the bankruptcy case until it was too late to seek a finding that the debt was nondischargeable, 2) that the defendants lacked the requisite scienter to justify a contempt order, and 3) that the debtor was not entitled to any relief other than a declaration that the debt was discharged.

The court set out the requirements for establishing contempt for a discharge violation: “(1) a discharge order has been entered (discharging the applicable debt); (2) the creditor had notice of the discharge order; (3) collection efforts continued regardless; and (4) there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”

Here the court took into consideration the long-term friendship between the parties, the debtor’s efforts to repay the loan including executing a post-discharge promissory note and making payments, and the debtor’s failure to tell the lender that he had filed for bankruptcy. The court found no error in the bankruptcy court’s finding that the defendants were unaware of the debtor’s bankruptcy filing until it was too late to file objections. In addition, the court found that the debtor indicated through word and action that he intended to repay the debt even after he received his discharge. All of these things gave the lender a reasonable basis to believe that the debt was not discharged and that he was within his rights to pursue repayment.

The court thus concluded that the bankruptcy court did not commit clear error in finding no basis for a contempt order against the defendants, nor did it err in finding that the only relief to which the debtor was entitled was an order declaring the $60,000 debt discharged.

The debtor has filed an appeal to the Third Circuit, case no. 23-1358.

Bernhard ED Pa Feb 2023

by NCBRC Editor on January 31, 2023

Right to Dismiss Despite Bad Faith or 109(e) Ineligibility

A chapter 13 debtor’s statutory right to dismiss his bankruptcy is not precluded by bad faith or ineligibility under section 109(e). Powell v. TICO Construction Co. Inc., No. 22-1014 (B.A.P. 9th Cir. Oct. 21, 2022).

TICO Construction, a judgment creditor in the debtor’s chapter 13 case, opposed the debtor’s motion to voluntarily dismiss his bankruptcy under section 1307(b). TICO alleged both that the debtor’s unsecured debts exceeded the debt limit set forth in section 109(e), and that the debtor abused by the bankruptcy process by transferring non-exempt assets to his ex-wife in “sham” divorce proceedings. TICO requested that, instead of granting the debtor’s motion to dismiss, the court should convert the case to chapter 7 or 11.

The bankruptcy court found that with one statutory exception that was inapplicable, the debtor had an absolute right to dismiss his case and granted the debtor’s motion. TICO appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.

The panel began with section 1307(b), which provides: “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”

The question before the panel was whether the debtor’s right to dismiss his chapter 13 bankruptcy was circumscribed either by bad faith or by his ineligibility to be in chapter 13. In Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir. 2010), the court held that a debtor’s bad faith precludes voluntary dismissal of his chapter 13 case. While the Ninth Circuit at one time agreed with that conclusion, it changed its view in Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), where it found the debtor’s right to dismiss was subject only to the exception included in the statute itself. The panel noted that Nichols was based on the decision in Law v. Siegel, 571 U.S. 415 (2014), where the Court held that the bankruptcy court could not override explicit mandates of the Code.

Because bad faith was not included in the statutory exceptions to the debtor’s right to dismiss, the panel found the bankruptcy court did not err in that finding.

TICO next argued that the debtor exceeded the debt limit for chapter 13 and therefore his case should have been treated as if it were chapter 7 with the court considering his motion to dismiss in terms of the best interests of creditors. The panel disagreed, finding that if it did as TICO requested it would create a new exception to the debtor’s right to dismiss under section 1307(b) and that would go directly against the holding in Law.

The panel noted that in FDIC v. Wenberg (In re Wenberg), 94 B.R. 631 (9th Cir. BAP 1988), aff’d, 902 F.2d 768 (9th Cir. 1990), it held that the debt limit in section 109(e) is not jurisdictional, and a bankruptcy court is not required to dismiss a chapter 13 case when the debtor is found ineligible under section 109(e), but may allow the debtor to convert to chapter 7. The court reasoned that if an ineligible chapter 13 debtor retains his right to convert, his right to dismiss also remains intact.

In response to TICO’s argument that the debtor should not be allowed to get away with his bad faith conduct, the panel pointed to other methods for addressing bad faith including denying the debtor’s right to refile, or to apply other sanctions under section 105(b).

The case is currently on appeal to the Ninth Circuit, Case No. 22-60052.

Powell BAP 9th Oct 2022

by NCBRC Editor on November 14, 2022

Pawn Contract Disavowing Bankruptcy Intent Is Enforceable

A pawn agreement requiring the borrower to affirm that she was not in bankruptcy and did not intend to file for bankruptcy was not unenforceable as against public policy because the agreement did not commit the borrower to an agreement not to file for bankruptcy at a later date. TitleMax v. Roby, No. 21-630 (M.D. Ala. Sept. 19, 2022). [Read more…] about Pawn Contract Disavowing Bankruptcy Intent Is Enforceable

by NCBRC Editor on December 16, 2020

Debtor’s Post-Discharge Pre-Closure Motion to Convert Denied

The debtor was not permitted to convert from chapter 7 to chapter 13 post-discharge but prior to administrative closure of his case where the court found the attempted conversion to be an abuse of process and his conduct in his chapter 7 case to indicate bad faith. In re Chamoun, No. 20-5069 (C.D. Cal. Dec. 2, 2020). [Read more…] about Debtor’s Post-Discharge Pre-Closure Motion to Convert Denied

by ncbrc on April 16, 2020

No Bad Faith in Filing Second Chapter 13 Petition while First Still Pending

The bankruptcy court declined to attribute bad faith to the debtors when they voluntarily dismissed one chapter 13 case after a motion for relief from stay had been filed by the mortgage creditor, and filed a second chapter 13 petition while the first was still pending. 21st Mortgage Corp. v. Wilkinson, No. 19-3021 (Bankr. M.D. Pa. Nov. 26, 2019).

The debtors’ first chapter 13 was filed by counsel, and when the debtors failed to respond to the mortgage creditor’s motion for relief from stay, the court granted default judgment in the creditor’s favor. Five months later, through new counsel, the debtors filed another chapter 13 petition. The following day, they voluntarily dismissed their prior case. Relying on section 109(g)(2), the mortgage creditor filed a motion to dismiss the second petition as being filed in bad faith to avoid the consequences of its motion for relief from stay. [Read more…] about No Bad Faith in Filing Second Chapter 13 Petition while First Still Pending

by NCBRC Editor on December 6, 2019

Court May Not Deny Amendment to Exemptions Based on Bad Faith

Based on Law v. Siegel the bankruptcy court properly overruled the trustee’s objection to the debtor’s amendment to his exemptions without regard to whether the debtor concealed assets in bad faith. Rucker v. Belew (In re Belew), No. 18-3045 (8th Cir. Nov. 26, 2019).

In his bankruptcy schedules, the debtor initially failed to disclose that he had $30,000 in cash in a home safe. When the trustee learned of the cash, the debtor sought to amend his exemptions to exempt the money. The trustee objected because the debtor had intentionally concealed the asset and was therefore precluded from amending based on bad faith. The bankruptcy court overruled the objection and the BAP affirmed. [Read more…] about Court May Not Deny Amendment to Exemptions Based on Bad Faith