Cite as: Keith M. Lundin, Lundin On Chapter 13, § 108.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Prior to the 1984 amendments, the courts seemed almost obsessed with the measure of financial effort required of a Chapter 13 debtor to prove good faith.1 Looking to the standards for discharge in a Chapter 7 case,2 some courts demanded a debtor’s “best efforts” to satisfy good faith.3 The endless lists of good-faith factors generated by so many courts inevitably contained five or six overlapping statements of the economics of the debtor’s effort.4
For nearly 20 years, Congress has tinkered with the economic tests for confirmation of Chapter 13 plans. The best-efforts notion was embraced and embedded in § 1325(b) of the Code in 1984.5 Yet not once has Congress suggested by amendment or legislative comment that the good-faith test in § 1325(a)(3) is an economic test of the debtor’s effort. Quite apart from § 1325(a)(3), there are now four specific economic tests for confirmation in Chapter 13 of the Code:
The best-interests-of-creditors test in 11 U.S.C. § 1325(a)(4) requires, at a minimum, that unsecured claim holders receive through the plan at least what they would be paid in a liquidation under Chapter 7.6
The feasibility test in 11 U.S.C. § 1325(a)(6) defines the upper limit of the effort that can be required of a Chapter 13 debtor.7
The disposable income test in 11 U.S.C. § 1325(b) requires the debtor to commit to the plan all projected disposable income for at least three years.8
The duration limitation in 11 U.S.C. § 1322(d) permits a Chapter 13 plan to exceed three years for cause but prohibits any plan from exceeding five years.9
Enlightened decisions have concluded that these four provisions fully circumscribe the economic effort that a debtor can or must make in a Chapter 13 case, and there is thus little if any economic content to the good-faith test.10 As explained by the U.S. Court of Appeals for the Seventh Circuit, Congress has defined the range of payments that will satisfy the conditions for confirmation without resort to judicial extrapolations of good faith:
Congress has not adopted a minimum payment for confirmation of a Chapter 13 plan, and we cannot read one into the Code through its good faith requirement. . . . [I]t is difficult to see how the low percentage of the payout adds anything to the other good faith factors and the other statutory requirements. The percentage repayment is a function of the size of the debt relative to the debtor’s anticipated earnings; this factor is not relevant to determining whether the debtor has acted in good faith. The Code requires a debtor to commit all of his disposable income to repayment of his creditors over the term of his Chapter 13 plan. If this process, honestly and fairly undertaken, produces a payment that is a small percentage of the debt, the Code permits such a payment so long as it is “not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7.” . . . The Sixth Circuit requires bankruptcy courts to give additional scrutiny to Chapter 13 plans that propose repayment of only a small percentage of a debt that could not be discharged in Chapter 7. . . . We have no quarrel with the proposition that a low payout is a red flag, which ought to prompt the bankruptcy court to engage in a particularly careful examination of a debtor’s finances or of a creditor’s challenge to the accuracy or completeness of the debtor’s disclosures.11
Other courts persist in the view that good faith includes consideration of the economic effort by the debtor.12
In most jurisdictions, debtor’s counsel cannot risk ignoring economic issues in response to a good-faith objection. The debtor should be prepared to prove that the budget is reasonable; that the duration of the plan is the maximum reasonable under the circumstances; that the percentage of repayment of unsecured claims is the most that this debtor can pay; that the debtor is not living a luxurious lifestyle; and, in some jurisdictions, that the debtor is willing to share improvements in financial condition with creditors through the plan.
1 See App. F.
2 See 11 U.S.C. § 727(a)(9)(B)(ii).
3 See, e.g., In re Raburn, 4 B.R. 624 (Bankr. M.D. Ga. 1980); In re Burrell, 2 B.R. 650 (Bankr. N.D. Cal. 1980). But see In re Raines, 33 B.R. 379, 381 (M.D. Tenn. 1983) (“[I]f ‘good faith’ was synonymous with ‘best efforts’ then Congress would have had no need to include both of these terms in § 727(a)(9).”).
4 See, e.g., Kitchens v. Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983) (Among the factors that bankruptcy courts were instructed to consider in good-faith analysis were the amount of the debtor’s income, the living expenses of the debtor and his dependents, the probable or expected duration of the plan, the debtor’s degree of effort, the debtor’s ability to earn and the likelihood of fluctuation in the debtor’s earnings.).
5 11 U.S.C. § 1325(b), discussed beginning at § 91.1 In General.
6 See discussion beginning at § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
7 See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan.
8 See discussion beginning at § 91.1 In General.
9 See discussion of length of plan beginning at § 112.1 General Rule: Three Years, More or Less.
10 Noreen v. Slattengren, 974 F.2d 75 (8th Cir. 1992) (Although most of the factors listed in United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982), were “subsumed” by 11 U.S.C. § 1325(b), “the totality of the circumstances analysis adopted by Estus . . . remains in place.”); Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346 (8th Cir. 1990) (en banc) (Section 1325(b) supersedes most of the “ability to pay” factors previously identified in Estus.); Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987) (The enactment of § 1325(b) eliminates “ability to pay” criteria from the good-faith calculus. “The bankruptcy court must look at factors such as whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code.”); Downey Sav. & Loan Ass’n v. Metz (In re Metz), 820 F.2d 1495 (9th Cir. 1987) (“Totality of the circumstances” is the appropriate test. That the plan provides no payment to unsecured creditors is not sufficient to establish bad faith: §§ 1325(a)(4) and 1325(b)(1) preclude minimum-payment requirement as a component of good faith.); Keach v. Boyajian (In re Keach), 243 B.R. 851, 870 (B.A.P. 1st Cir. 2000) (“It was also error for the bankruptcy judge here to see bad faith in the Debtor’s Chapter 13 plan because it promised creditors less than what the bankruptcy judge thought they deserved on account of the Debtor’s prefiling conduct. In Section 1325, Congress set the minimum dividend by employing the disposable income and the best interests tests. Congress having spoken, no judge may raise the bar.”); New Jersey Lawyers’ Fund for Client Protection v. Goddard (In re Goddard), 212 B.R. 233, 240–42 (D.N.J. 1997) (“After passage of BAFJA, however, many of the [United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982),] factors were subsumed by Section 1325(b)’s ‘ability to pay’ criteria. . . . As a result, the inquiry into whether a Chapter 13 plan was proposed in good faith has taken on a more narrow focus . . . and now principally concentrates on the following factors: (1) whether the debtor has stated his debts and expenses accurately; (2) whether he has made any fraudulent misrepresentations to mislead the bankruptcy court; or (3) whether he has unfairly manipulated the Bankruptcy Code. . . . [E]ven after BAFJA, a bankruptcy court must look at Estus factors not addressed by the amendments—including the debt sought to be discharged, and the debtor’s motivation and sincerity in seeking Chapter 13 relief.”); Colorado Student Obligation Bond Auth. v. Thompson (In re Thompson), 116 B.R. 794 (D. Colo. 1990) (“[T]he ability to pay test of § 1325(b) eliminates the need to reconsider such factors as . . . employment history, the term of the plan, or any special circumstances affecting . . . financial condition.”); Smith v. ITT Fin. Serv. (In re Smith), 100 B.R. 436 (S.D. Ind. 1989) (After the Seventh Circuit’s opinion in Smith, bankruptcy courts should no longer look at the amount unsecured creditors will receive as an element of good faith.); In re Wilcox, 251 B.R. 59, 64–65 (Bankr. E.D. Ark. 2000) (Citing Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987), “[m]any of the financially-based factors were subsumed by the 1984 enactment of Section 1325(b), such that the good faith inquiry is now a narrower and more subjective issue. . . . Among the factors now emphasized by the Eighth Circuit to determine good faith as a subjective inquiry are the following: Whether the debtor has accurately stated his debts and expenses on his bankruptcy statements and schedules. . . . Whether the debtor has made any fraudulent misrepresentation in connection with the case . . . . Whether the debtor has unfairly manipulated the Bankruptcy Code in any aspect of his plan. . . . Whether a specific debt treated in the plan would be nondischargeable in a chapter 7 case. . . . The type of debts which the debtor seeks to discharge in the chapter 13 case. . . . The debtor’s motivations and sincerity in seeking chapter 13 relief.”); In re Nipper, 224 B.R. 756, 758 (Bankr. E.D. Mo. 1998) (In Eighth Circuit, the “ability to pay” criteria in § 1325(b) “subsumed most of the [United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982),] factors and thus narrowed the focus of the good faith inquiry.”); In re Kelly, 217 B.R. 273, 274 (Bankr. D. Neb. 1997) (“Section 1325(b) of the Bankruptcy Code was added in 1984, which subsumes most of the [United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982),] factors, however in determining whether a Chapter 13 plan is filed in good faith, the eighth circuit has stated that the totality of the circumstances analysis adopted in Estus remains in place.”); In re Burris, 208 B.R. 171, 174–75 (Bankr. W.D. Mo. 1997) (“[S]ection 1325(b)’s ‘ability to pay,’ or disposable income, criteria subsume most of the factors identified in [United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982)]. . . . [A]ccording to the [Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987),] Court, [a plan] is proposed in good faith if the debtor commits all of her projected disposable income over a three year period to make payments under the plan, and the Court finds that the debtor has accurately stated her debts and expenses; that she has made no fraudulent misrepresentations to the Court; and that she has not unfairly manipulated the Code. . . . In [Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346 (8th Cir. 1990),] . . . the Court stressed the relevance of pre-petition conduct in any determination of good faith.”); In re Norwood, 178 B.R. 683, 688 (Bankr. E.D. Pa. 1995) (“Many of the factors previously considered to be relevant to the good faith determination were eliminated by the passage of BAFJA. . . . As a result . . . good faith has taken on a more narrow focus . . . a) whether the debtor has stated his debts and expenses accurately; b) whether he has made any fraudulent misrepresentations to mislead the bankruptcy court; c) or whether he has unfairly manipulated the Bankruptcy Code.”); In re Coburn, 175 B.R. 400, 403 (Bankr. D. Or. 1994) (“[S]ince the amendments to the Code in 1984 which added the disposable income test of § 1325(b), the dividend to unsecured creditors is no longer an issue under the good faith requirement.”); In re Oglesby, 161 B.R. 917, 923 (Bankr. E.D. Pa. 1993) (“With respect to the requirement that a plan be proposed in good faith set forth in § 1325(a)(3) . . . ‘the scope of good faith inquiry must be limited to those factors which address (1) whether the debtor has deliberately misinformed the court of facts material to confirmation of the plan; (2) whether the debtor intends to effectuate the plan as proposed and (3) whether the proposed plan is for a purpose not permitted under the Bankruptcy Code.’”); In re Carsrud, 161 B.R. 246, 250–51 (Bankr. D.S.D. 1993) (Most of the factors identified by the Eighth Circuit in United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982), “were subsumed by the 1984 enactment of 11 U.S.C. § 1325(b), which narrowed the good faith inquiry to whether debts and expenses are stated accurately; whether there is [sic] any fraudulent misrepresentations to mislead the bankruptcy court; or whether there is an unfair manipulation of the Bankruptcy Code; however, the traditional totality of circumstances approach with respect to Estus factors not addressed by the legislative amendments were [sic] preserved.”); In re Murrell, 160 B.R. 128, 131 (Bankr. W.D. Mo. 1993) (“This Court agrees that the [enactment of the disposable income test in § 1325(b)(1) in 1984] potentially modifies two of the eleven factors set out by [the Eighth Circuit in United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982)], and clearly directs that zero per cent plans should be confirmed if all the debtor’s disposable income for three years will be applied to fund the plan. However, this Court does not agree that a debtor may file a plan in bad faith and assure confirmation just by pledging all of his disposable income for three years.”); In re Selden, 116 B.R. 232 (Bankr. D. Or.), aff’d, 121 B.R. 59 (D. Or. 1990) (1984 amendments eliminate the amount of repayment and length of the plan as factors in determining good faith under Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982).); In re Carver, 110 B.R. 305 (Bankr. S.D. Ohio 1990) (After enactment of § 1325(b), neither the duration of the plan nor the percentage of repayment is an appropriate good-faith consideration.); In re Belt, 106 B.R. 553 (Bankr. N.D. Ind. 1989) (Amount of plan payments is no longer part of good-faith analysis.); In re March, 83 B.R. 270 (Bankr. E.D. Pa. 1988) (After enactment of § 1325(b), the good-faith inquiry must be limited to whether the debtor has deliberately misinformed the court, whether the debtor intends to effectuate the plan, and whether the proposed plan is for a purpose not permitted by the Bankruptcy Code. Court confirms 13%, one-creditor plan.); In re Pierce, 82 B.R. 874 (Bankr. S.D. Ohio 1987) (Percentage of repayment is not appropriately considered as an element of good faith if the plan satisfies § 1325(b). The good-faith inquiry “should be restricted to the traditional concept of ‘serious debtor misconduct or abuse’ . . . and whether the debtor has acted equitably in proposing his Chapter 13 plan.”); Cornett v. Galt (In re Galt), 70 B.R. 57 (Bankr. S.D. Ohio 1987) (Deep composition satisfies good faith after enactment of § 1325(b) where proposed monthly payment is all that debtors can reasonably be expected to pay.); In re Hazel, 68 B.R. 287 (Bankr. E.D. Mich. 1986), aff’d, 95 B.R. 481 (E.D. Mich. 1988) (The amount of a debtor’s payment “is no longer a significant consideration of good faith” after the 1984 amendments to the Bankruptcy Code.); In re Gathright, 67 B.R. 384 (Bankr. E.D. Pa. 1986), aff’d, 71 B.R. 343 (E.D. Pa. 1987) (The 1984 amendments restrict the notion of good faith to “the traditional concept of ‘serious debtor misconduct or abuse.’”); In re Baker, 66 B.R. 253 (Bankr. N.D. Miss. 1986) (Debtors with no disposable income under § 1325(b) can satisfy good-faith standard notwithstanding minimal or no payment to unsecured claim holders.); In re Greer, 60 B.R. 547 (Bankr. C.D. Cal. 1986) (In light of enactment of disposable income test in § 1325(b), nominal or zero payment to unsecured creditors is only some evidence bearing on debtor’s good faith, and other evidence of bad faith is necessary to justify denial of confirmation.); In re Red, 60 B.R. 113 (Bankr. E.D. Tenn. 1986) (With the 1984 enactment of § 1325(b), the degree of substantiality of repayment of unsecured debt is no longer a factor in assessing good faith under § 1325(a)(3).).
11 In re Smith, 286 F.3d 461, 468 (7th Cir. 2002).
12 See, e.g., In re McGovern, 297 B.R. 650, 658–60 (S.D. Fla. 2003) (“[T]his court agrees with the current majority view that ‘good faith’ analysis in Chapter 13 context requires consideration of both pre-petition and post-petition behavior, and specifically rejects the . . . premise that the 1984 amendments to the Code eliminate consideration of the nondischargeability of a particular debt under Chapter 7, or other pre-petition behavior of the debtor bearing on his intent in proceeding under Chapter 13. . . . [T]he debtor’s degree of honest sorrow over his past behavior is largely beside the point. The pertinent question is not whether he is now sorry for what he did . . . but whether he is intent on repaying . . . as much as possible in a genuine effort at rehabilitation, or as little as possible in an effort to thwart and avoid a legitimate debt.”); First United Sav. Bank v. Edwards, 184 B.R. 46, 51 (S.D. Ind. 1995) (Finding of good faith was reversed because bankruptcy court incorrectly considered only whether the debtor intended to pay the debt when it was incurred and whether the debtor intended to mislead the court with respect to the Chapter 13 case. Debtor converted collateral. In 1989, the debtor agreed to a “nondischargeable judgment” in state court. She filed a Chapter 7 petition in 1991, and in 1992, the issue of nondischargeability was decided against her. The debtor filed Chapter 13 in 1993 and proposed to pay two-fifths of the (nondischargeable) judgment. “[T]he Bankruptcy Court offered the incorrect test. The issue is not whether the debtor intended to pay the debt when she incurred it, or whether she intended to mislead the Court. Rather, the issue is whether she was trying to pay her creditors to the reasonable limit of her ability or whether she was trying to thwart them. As the Seventh Circuit found in [In re Schaitz, 913 F.2d 452 (7th Cir. 1990),] . . . [t]he notion that good faith means only full disclosure and an intent to make the payments has been rejected.”); In re Walsh, 224 B.R. 231, 235 (Bankr. M.D. Ga. 1998) (“While it is true that the Kitchens v. Georgia Railroad Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983) decision predates the 1984 changes to the Bankruptcy Code, this Court concludes that the substantiality of repayment to unsecured creditors factor is still a proper consideration in good faith determinations.”); In re Jobe, 197 B.R. 823, 826 (Bankr. W.D. Tex. 1996) (Although the enactment of § 1325(b) in 1984 “‘subsumed most of the financially based objections to confirmation under § 1325(a)(3) that had been recognized under [United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982),]’ . . . some courts have continued to apply all the Estus factors in determining ‘good faith’ under Section 1325(a)(3). . . . This Court considers ability to pay equally relevant under both.”); In re Strauss, 184 B.R. 349, 351–52 (Bankr. D. Neb. 1995) (Applying In re Baker, 736 F.2d 481 (8th Cir. 1984), confirmation of a 0% plan is denied on good-faith grounds because the proposed plan is a “disguised Chapter 7 liquidation.” The debtors were discharged in a Chapter 7 case in 1990 and filed Chapter 13 in 1994. Sixty-month plan would pay priority claims in full (including $21,000 of priority taxes), secured claim holders would receive approximately $7,000, and attorneys’ fees, trustee’s compensation, and other priority claims would consume the rest. “I have considered the factors enumerated by the Eighth Circuit Court of Appeals in [United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982)]. . . . If the debtor had not received a Chapter 7 discharge within the past six years, I would conclude that the proposed plan was filed in good faith and the plan would be confirmed. The amount of payments under the plan are substantial . . . for a full 60 months. . . . I have no reason to believe that the bankruptcy schedules and statements of affairs of the debtors are inaccurate. However, based on the Eighth Circuit Court of Appeals decision in In re Baker, I conclude that a Chapter 13 plan should not be confirmed if all following conditions are met: (1) The debtor received a Chapter 7 discharge within six years prior to filing the Chapter 13 case; (2) Section 727 would bar the debtor from obtaining a Chapter 7 case filed on the date the Chapter 13 case was commenced; and (3) The proposed Chapter 13 plan amounts to no more than a Chapter 7 liquidation. . . . I conclude that a Chapter 13 plan amounts to no more than a Chapter 7 liquidation if the plan does not provide to pay unsecured creditors significantly more than they would receive in a Chapter 7 case. . . . [A] zero payment plan should not be permitted to circumvent § 727(8). . . . In a Chapter 7 case secured creditors are paid the value of their collateral. Therefore, the Chapter 13 plan provision for payments to secured creditors is not a valid basis for distinguishing this Chapter 13 plan from a Chapter 7 liquidation. The payment of attorney fees in the plan will benefit only the debtors personally. . . . Finally, although the proposed Chapter 13 plan provides to make payments on priority tax claims for debtors’ future income, this fact does not adequately distinguish the present case from a Chapter 7 liquidation.”); In re Whipple, 138 B.R. 137 (Bankr. S.D. Ga. 1991) (Good-faith analysis includes the 11 factors in Kitchens v. Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983), and in addition “this court adopted substantiality of repayment and potential nondischargeability of a debt in a Chapter 7 case as factors to be considered in finding good faith.”); In re Hale, 65 B.R. 893 (Bankr. S.D. Ga. 1986) (1984 amendment adding the disposable income test of § 1325(b)(1) does not alter good-faith criteria established by the Eleventh Circuit in 1983 in Kitchens v. Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983). The good-faith requirement of § 1325(a)(3) continues to include “substantiality of repayment” as a relevant factor.).