Cite as: Keith M. Lundin, Lundin On Chapter 13, § 104.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
One of the surest ways for a Chapter 13 debtor to get into good-faith trouble is to misrepresent income, expenses, assets or other matters in the petition, schedules or statement. Another way is to tell a lie under oath at the meeting of creditors, at a 2004 examination or in the course of discovery before confirmation. Many courts have discussed the accuracy or inaccuracy of the debtor’s documents or testimony as important evidence bearing on good faith under § 1325(a)(3).1
As the economic tests for confirmation become more well developed under other sections of the Code,2 the honesty and accuracy components of good faith receive more and more emphasis from the courts. The importance of accuracy in documents filed with the bankruptcy court is implicit in the sworn and unsworn declarations required by the official forms.3 There is no substitute for careful preparation in the first instance. If the debtor is caught in an inaccuracy, the best the debtor can do is to immediately file a correcting amendment.4 When the statement and schedules were inaccurate in a prior bankruptcy case, sometimes the best the debtor can do is to “get religion” and truthfully correct all of the errors in a subsequent filing.5 On the other hand, too much religion—too many correcting amendments to the statement and schedules—can become evidence of a lack of good faith.6
Testing the accuracy of the debtor’s documents is accomplished by examining the debtor under oath and comparing the schedules and statement with representations that the debtor has made to lenders, merchants or employers. Loan applications and financial statements that the debtor gave to creditors are relatively easy to gather and should be compared to the assets and liabilities filed with the court. A debtor’s statement of income should be compared to an employer’s record of wages paid. Compare the debtor’s income tax return to Schedules I and J of Official Bankruptcy Form 6. If the debtor filed a prior bankruptcy case, comparing the prior statement and schedules to the most recent editions is a good test of the debtor’s honesty.
Debtors sometimes make misstatements under the stress of questioning at the meeting of creditors. It may be useful to order a copy of the tape of the § 341 meeting and have it transcribed as evidence at the hearing on confirmation.
1 See, e.g., In re Day, No. 98-3182, 1999 WL 96117, at *4 (7th Cir. Feb. 17, 1999) (Table decision at 172 F.3d 52) (No evidence that debtor omitted or misstated any debts or expenses is a factor in support of finding that plan was in good faith notwithstanding that it compromised large judgment for aggravated battery.); Gier v. Farmers State Bank (In re Gier), 986 F.2d 1326 (10th Cir. 1993) (There were inconsistencies between the debtor’s trial testimony and other evidence.); In re Love, 957 F.2d 1350 (7th Cir. 1992) (Debtor understated the amount of debt in the petition, debtor was not forthcoming with information about dealings with the IRS, debtor failed to list three insurance policies, and debtor understated income.); Bayer v. Hill (In re Bayer), 210 B.R. 794, 795–96 (B.A.P. 8th Cir. 1997) (Bankruptcy court inappropriately decided good faith against the debtor based on allegations of assault and sexual battery. “This good faith inquiry turns on ‘whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentations to the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code.’ . . . [T]here is no evidence in the record that Debtor misstated his expenses or debts nor is there any evidence . . . of misrepresentations to the bankruptcy court.”); New Jersey Lawyers’ Fund for Client Protection v. Goddard (In re Goddard), 212 B.R. 233, 240–42 (D.N.J. 1997) (“We also conclude that the Bankruptcy Court was clearly erroneous by finding that the Debtor accurately stated his debts and expenses. . . . [T]he Debtor . . . artificially raised his debts and expenses by claiming responsibility for a substantially higher portion of his family’s living expenses than is warranted, thereby lowering his Modified Plan payments and enabling his wife’s income to be used for the family’s discretionary consumer spending. . . . On remand, the Bankruptcy Court should consider whether this inaccuracy was made for the purposes of misleading the Bankruptcy Court and/or manipulating the Bankruptcy Code.”); Beard v. United States Trustee (In re Beard), 188 B.R. 220 (W.D. La. 1995) (Bankruptcy court appropriately determined good-faith issue against the debtor on its own initiative based on “contradictions” in debtor’s testimony.); Suggitt v. French (In re French), Nos. 01-10603, 01-1058, 2003 WL 21288644, at *2 (Bankr. D. Vt. May 30, 2003) (unpublished) (Four amendments to schedules changing the debtor’s income, adding creditors and changing living expenses give rise to questions concerning the debtor’s good faith.); In re Soost, 290 B.R. 116 (Bankr. D. Minn. 2003) (Inconsistent statements with respect to income, expenses, the amount owed to a relative and the value of assets demonstrate lack of good faith.); In re York, 282 B.R. 519, 525–26 (Bankr. M.D. Ga. 2002) (Lack of candor and misrepresentations to creditors before the petition and continuing through testimony in court evidenced a lack of good faith. “Debtor acted fraudulently in contracting his debt to AB & T and lied under oath to the Court during his confirmation hearing. . . . Debtor testified untruthfully with respect to the acknowledgment of the City on the assignment. . . . By denying any knowledge of how the City’s acknowledgment was placed on the agreement, Debtor has sustained a deception into the confirmation process that he began prepetition. . . . A debtor who lies to a creditor to obtain financing and maintains that deceit through the confirmation process cannot be said to have proposed his plan in good faith . . . . Debtor’s lack of candor before the Court . . . demonstrates his intent to abuse both the judicial process and the bankruptcy system.”); In re Terry, 279 B.R. 240 (Bankr. W.D. Ark. 2002) (Lack of good faith that debtor concealed his one-fifth interest in 80 acres of land before conversion from Chapter 7, failed to list the transfer of a boat, motor and trailer to his brother-in-law and intentionally misstated his average monthly income and expenses.); In re James, 260 B.R. 498, 505, 506 (Bankr. D. Idaho 2001) (Debtor is “justifiably criticized for failing to fully and accurately account for his assets.” Debtor demonstrated a “lack of candor” with respect to ownership of a car titled to the debtor’s brother. A second car, a 1973 Fiat, was alleged to be “rusted out.” “However, a debtor is duty-bound under the Code to submit an accurate schedule of assets . . . . Even items perceived to have no substantial value should be disclosed.”); In re McNichols, 254 B.R. 422 (Bankr. N.D. Ill. 2000) (Plan fails good-faith test because debtor did not account for $850 per month being deducted for a 401(k) plan contribution, the debtor did not state expenses accurately, the debtor’s testimony did not support the accuracy of the schedules and the debtor repeatedly failed to clear up the inaccuracies and inconsistencies.), motion to alter or amend denied, 255 B.R. 857 (Bankr. N.D. Ill. 2000); In re Wilcox, 251 B.R. 59, 66 (Bankr. E.D. Ark. 2000) (Confirms 18%, 60-month plan that compromises a claim that would probably be nondischargeable in a Chapter 7 case notwithstanding that one of the debtors was not candid with respect to breach of trust in the debtor’s business. “Although the Debtors’ petition and schedules were basically accurate . . . the Debtors were less than candid with the Court during the February 14 hearing with regard to the debt owed to UP. Roy Wilcox refused to admit, under oath, that he intentionally sold vehicles out of trust . . . . Although Juanita Wilcox was more forthcoming, her testimony failed to neutralize the evasive and misleading tenor of Roy Wilcox’s testimony.” Other good-faith factors weighed in favor of confirmation.); In re Johnson, 241 B.R. 394, 402–03 (Bankr. E.D. Tex. 1999) (“In failing to reference in any manner within their schedules the substantial monthly sum being deducted from Mr. Johnson’s income for repayment of the 401-k loan, estimated by Mr. Johnson to be $500 to $550, the Debtors have cast considerable doubt over the legitimacy of their intentions in seeking Chapter 13 relief.”); In re Dixon, 241 B.R. 234 (Bankr. M.D. Fla. 1999) (Failure to schedule personal injury action in Chapter 7 case prior to conversion to Chapter 13 is not outcome determinative of good faith because omission was unintentional and five-year plan otherwise is indicative of good faith.); In re Keach, 234 B.R. 236, 238 (Bankr. D.R.I. 1999) (The debtor “continues to be dishonest, evasive, and unable to support his position when confronted with inconsistencies (of which there are many in this case). He continues to be a cross-examiner’s dream. When questioned about specific numbers in his budget, such as a vehicle expense of $7,018 per month, or changes in the amounts claimed for food and recreation, he defers to his accountant and his wife, and we do not have an adequate picture of what is fact and what is fiction when it comes to the Debtor’s budget.”), rev’d, 243 B.R. 851 (B.A.P. 1st Cir. 2000) (The debtor’s candor with creditors and the court is relevant only as evidence bearing on the debtor’s honesty; bankruptcy court did not find that the debtor had misrepresented facts concerning his budget, only that the debtor could not provide facts. Applying “honesty” test, remand is necessary because bankruptcy court overweighted the debtor’s prepetition misconduct and the successive filing of the Chapter 13 petition.); In re Letsche, 234 B.R. 208, 213 (Bankr. D. Mass. 1999) (On debtor’s mother’s good-faith objection, “[t]he Debtors’ failure to accurately and honestly list all their debts and to disclose all their expenses, including the repayment of undisclosed credit card obligations and loans from family members, fatally undermines the integrity and reliability of their Schedules and compels the conclusion that the Debtors intended to mislead this Court, the Chapter 13 Trustee and their creditors when they proposed their Chapter 13 plans.”); In re Nottingham, 228 B.R. 316 (Bankr. M.D. Fla. 1998) (That documents “seem accurate” is one factor supporting confirmation of a 14% plan that compromises a large claim that might be nondischargeable in a Chapter 7 case.); In re Petersen, 228 B.R. 19, 26 (Bankr. M.D. Fla. 1998) (Two percent 36-month plan that would discharge $550,000 judgment for prepetition misconduct lacks good faith. “Additionally, the Court deeply questions the credibility of Debtor’s testimony. Debtor testified to the disposition of many luxuries prior to his filing. He testified to his mudslide-damaged home, firebombed Lamborghini, traded Rolls Royce, payment of attorney’s fees, gifts to the church and on and on. However, no proof supporting Debtor’s testimony was presented to the Court.”); In re Lewis, 227 B.R. 886 (Bankr. W.D. Ark. 1998) (Debtor was “incredible”—asserted in schedules that debts to former spouse were not support, but under penalty of perjury characterized same debts as alimony in tax returns.); In re Famisaran, 224 B.R. 886, 891–92 (Bankr. N.D. Ill. 1998) (Plan fails good faith test because “Debtors’ credibility was successfully impeached . . . . Debtors’ income was greater than that scheduled and . . . actual expenditures were markedly different from those detailed on Schedule J. . . . [T]here were no canceled checks for rental payments or utilities . . . . [There were] numerous checks that were made payable to the Debtors’ daughters . . . numerous undisclosed checks to Hollywood Casino . . . numerous automatic teller machine withdrawals at the machine located on the gambling boat . . . . Debtors’ failure to list or credibly explain these expenditures . . . constitutes grounds for denial of confirmation.”); In re Nipper, 224 B.R. 756, 759 (Bankr. E.D. Mo. 1998) (Distinguishing Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346 (8th Cir. 1990), and Noreen v. Slattengren, 974 F.2d 75 (8th Cir. 1992), court overrules bad-faith objection to plan that would compromise embezzlement judgment with 10% payment. “Unlike LeMaire, who failed to schedule a contingent liability, Nipper has not been alleged to have failed to schedule a significant liability. Additionally, Nipper has not included any debts on his schedules, like LeMaire’s debt to his parents, that cause the Court to question the accuracy of his schedules.”); In re Huntebrinker, 224 B.R. 405, 406–07 (Bankr. E.D. Mo. 1997) (Debtor “has stated his debts and expenses accurately, has not made fraudulent misrepresentations, has not misled the bankruptcy court and has not unfairly manipulated the Bankruptcy Code. . . . Debtor’s plan has been proposed in good faith.”); In re Smith, 222 B.R. 846, 857 (Bankr. N.D. Ind. 1998) (That debtors “inadvertently failed to disclose the value of their life insurance policies” was not indicative of bad faith because the cash surrender value of the life insurance policy was only $1,000 and debtors testified that they were unaware of the $1,000 cash surrender value.); In re Turpen, 218 B.R. 908 (Bankr. N.D. Iowa 1998) (Plan fails good-faith test in part based on schedules that were inaccurate with respect to retirement fund and pension fund.); In re Georgeff, 218 B.R. 403, 408 (Bankr. S.D. Ohio 1998) (Bad faith based in substantial part on “a pattern of deceit, evasive responses to questions, nondisclosure or disclaimer of ownership as to certain assets.”); In re Cushman, 217 B.R. 470, 478 (Bankr. E.D. Va. 1998) (“[T]he debtor’s honesty in representing facts is questionable since she omitted from her schedules the small amount that her parents gave to her to supplement her income and substantially understated the balance in her checking account.”); In re Kelly, 217 B.R. 273, 275 (Bankr. D. Neb. 1997) (Plan fails good faith test based in part on finding that the debtor “failed to list over $38,500 in student loans on his bankruptcy schedules until the Chapter 13 Trustee objected to confirmation.”); In re Britt, 211 B.R. 74, 78 (Bankr. M.D. Fla. 1997) (“A lack of good faith in proposing a plan involves serious debtor misconduct or abuse such as fraudulent misrepresentation or serious nondisclosure of material facts in filing the plan. . . . There has been no showing of fraudulent misrepresentation.”); In re Jobe, 197 B.R. 823, 828 (Bankr. W.D. Tex. 1996) (17% percent plan is denied confirmation on good-faith ground because of multiple inaccuracies in the statements and schedules and lack of evidence of effort by the debtor. Debtors scheduled no livestock or crops but showed unsecured debts to veterinarians, for feed and to chemical suppliers. “They failed to report income from previous years, failed to report accounts receivable, failed to report the existence of insurance policies, and failed to report a retirement pension plan. . . . Minimal effort combined with multiple misrepresentations . . . are unmistakable manifestations of bad faith.”); In re Rosencranz, 193 B.R. 629, 636 (Bankr. D. Mass. 1996) (Bad faith that debtor omitted assets in schedules, understated the value of other assets and lied in testimony to state court immediately before filing. Debtor, an attorney, omitted or mischaracterized his interest in a trust that owned his house, failed to acknowledge an interest in a life insurance policy until forced by a creditor, failed to list an interest in a car and did not list two mortgages. “The Debtor filed a petition whose Schedules either omitted assets or grossly understated their actual value. . . . Although the Debtor amended his petition twice, he failed to correct these defects. . . . Debtor’s plan was proposed in anything but good faith.”); In re Weisser, 190 B.R. 453, 455 (Bankr. M.D. Fla. 1995) (“[A]ny inaccuracies in debtor’s petition are slight and the result of debtor’s unfamiliarity with the law rather than a desire to defraud creditors.”); In re Martin, 189 B.R. 619 (Bankr. E.D. Va. 1995) (Debtor’s slight misstatement of income was not sufficient to show bad faith but should be corrected by the debtor.); In re Tobiason, 185 B.R. 59, 65 (Bankr. D. Neb. 1995) (“Notwithstanding my conclusions as to the majority of the arguments of the objecting creditors on the issue of good faith, I conclude that the debtor’s failure to disclose his interest in the stock option within his bankruptcy schedules justifies a finding of bad faith. The failure to disclose assets is an extremely serious violation of the Bankruptcy Code.”); In re Strauss, 184 B.R. 349, 351 (Bankr. D. Neb. 1995) (“I have no reason to believe that the bankruptcy schedules and statements of affairs of the debtors are inaccurate.”); In re Lindsey, 183 B.R. 624, 629 (Bankr. D. Idaho 1995) (“The debtor’s schedules are obviously inaccurate. . . . [I]ncome is understated or the debtor’s business expenses are overstated or both.”); In re Harlan, 179 B.R. 133, 138–40 (Bankr. W.D. Ark. 1995) (“Harlan has accurately stated her debts and expenses. . . . Harlan has not made any fraudulent misrepresentations to mislead the Bankruptcy Court.”); In re Norwood, 178 B.R. 683, 691 (Bankr. E.D. Pa. 1995) (“Debtor omitted both his personal residence and personal property from the assets column in the Summary of Schedules.”); In re Wilson, 168 B.R. 260 (Bankr. N.D. Fla. 1994) (Debtor showed a lack of candor in his testimony, and schedules of income and expenses were not accurate.); In re Sutherland, 161 B.R. 657 (Bankr. E.D. Ark. 1993) (Schedules were incomplete.); In re Carsrud, 161 B.R. 246 (Bankr. D.S.D. 1993) (Debtor miscalculated the amount of a large judgment that was the “target” of the Chapter 13 filing.); In re Murrell, 160 B.R. 128 (Bankr. W.D. Mo. 1993) (Debtor’s schedules were inaccurate, and the debtor lied in open court.); In re Neill, 158 B.R. 93 (Bankr. N.D. Ohio 1993) (Debtor grossly misstated the amount of arrearages due on a mortgage.); In re Kuriakuz, 155 B.R. 454 (Bankr. E.D. Mich. 1993) (Debtor made misrepresentations to a creditor with respect to income, information concerning the ownership of businesses was inaccurate, and the extent of the debtor’s employment and income were inaccurate.); In re Saglio, 153 B.R. 4 (Bankr. D.R.I. 1993) (Debtor neglected without reasonable explanation to list a potential asset in the plan, and the liquidation of that asset would support some ability to pay unsecured creditors.); In re Jahnke, 146 B.R. 830 (Bankr. E.D. Cal. 1992) (Statement of affairs failed to reveal an adversary proceeding declaring the debtor’s primary debt nondischargeable.); In re Rogers, 140 B.R. 254 (Bankr. W.D. Mo. 1992) (Budget is either false or the debtor cannot make the payments proposed by the plan.); In re Edwards, 132 B.R. 400, 403 (Bankr. E.D. Ark. 1991) (Debtor understated income, overstated expenses and “did not present a demeanor consistent with truthfulness.”); In re Henricksen, 131 B.R. 467 (Bankr. N.D. Okla. 1991) (Debtors overstated monthly expenses and included deductions for support of an adult child away at college.); In re Bush, 120 B.R. 403 (Bankr. E.D. Tex. 1990) (Debtor understated income and overstated expenses, thus miscalculating disposable income.); In re Carpico, 117 B.R. 335 (Bankr. S.D. Ohio 1990) (Court was not satisfied with the debtor’s statement of expenses.); In re Little, 116 B.R. 615 (Bankr. S.D. Ohio 1990) (Debtor failed to list outstanding debts on prepetition credit applications.); In re Cisneros, 110 B.R. 531 (Bankr. D. Colo. 1990) (Bank was not properly scheduled.); In re Easley, 72 B.R. 948, 951 (Bankr. M.D. Tenn. 1987); In re Kelley, 58 B.R. 927 (Bankr. D. Del. 1986) (Debtors misrepresented value of assets and understated income.); In re DeReus, 53 B.R. 362 (Bankr. S.D. Cal. 1985) (evasive, conflicting and inaccurate information); In re Cash, 51 B.R. 927 (Bankr. N.D. Ala. 1985) (omission of debts); In re Sullivan, 40 B.R. 914 (Bankr. E.D.N.Y. 1984) (Debtor refused to supply financial information about overseas investment business.); In re Delany, 28 B.R. 956 (Bankr. D. Conn. 1983) (Debtor inadequately disclosed financial contributions to family members and misstated the existence of dependents.).
2 See § 193.1 [ Economic Components of Good Faith—In General ] § 108.1 Economic Components of Good Faith—In General.
4 See § 41.3 [ Preconfirmation Amendment of Petition, Statements, Schedules and Lists ] § 41.2 Preconfirmation Amendment of Petition, Statements, Schedules and Lists.
5 See, e.g., In re White, 273 B.R. 279, 283 (Bankr. M.D. Fla. 2001) (That schedules filed in prior Chapter 13 case were “replete with inaccuracies and omissions” is not outcome determinative of good-faith challenge to second Chapter 13 plan. “[W]hile the omissions and improper answers would have been a basis to dismiss the previous Chapter 13 case, there is nothing to prevent a debtor who finds ‘religion’ and now truthfully discloses all the previously omitted assets and furnishes correct answers, as this Debtor has done.”).
6 See, e.g., Suggitt v. French (In re French), Nos. 01-10603, 01-1058, 2003 WL 21288644, at *2 (Bankr. D. Vt. May 30, 2003) (unpublished) (Four amendments to schedules before conversion to Chapter 13 “give rise to questions of bad faith.” The amendments changed the debtor’s income, added creditors and significantly changed living expenses.).