§ 151.3     Strategic Considerations: Consequences of Voluntary Dismissal
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 151.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Voluntary dismissal of a Chapter 13 case is not without consequences. A principal consideration is the 180-day bar to refiling in 11 U.S.C. § 109(g)(2):1 if the Chapter 13 debtor voluntarily dismisses under § 1307(b), “following the filing of a request for relief from the automatic stay provided by section 362,” the debtor is ineligible to commence another bankruptcy case within 180 days.2

[2]

Before filing a motion for voluntary dismissal under § 1307(b), debtor’s counsel must take a close look at the file to determine whether voluntary dismissal will invoke the 180-day bar of § 109(g)(2). The outcome of the stay relief request is irrelevant to the § 109(g)(2) effect—even if relief from the stay was denied or resolved by agreement, when the debtor voluntarily dismisses, the literal language of § 109(g)(2) will bar a refiling within 180 days.3

[3]

Voluntary dismissal can be strategically useful to a Chapter 13 debtor who has experienced a financial disaster after filing a Chapter 13 case. For example, a catastrophic illness during a Chapter 13 case may produce postpetition claims that cannot be managed through the existing Chapter 13 plan. Modification of the plan may not be helpful, especially if the postpetition claim holders fail or refuse to file proofs of claim.4 The debtor’s only route to organized payment of the postpetition claims may be to voluntarily dismiss and file a new Chapter 13 case.

[4]

Chapter 13 debtors can sometimes voluntarily dismiss after a creditor has moved for relief from the stay, wait the 180 days in § 109(g) and then file another Chapter 13 case. In a jurisdiction where state law requires more than 180 days to complete a foreclosure, § 109(g) will not give creditors enough time, and the new stay will interrupt any foreclosure begun during the hiatus. The creditor may need to be ready with another request for relief from the stay. Voluntary dismissal and refiling in violation of § 109(g) is a tactic that has been swiftly dealt with as an abuse of the bankruptcy process.5

[5]

Voluntary dismissal is sometimes used when the debtor’s financial condition improves and the debtor no longer needs the Chapter 13 case to pay creditors. For example, in jurisdictions where real estate prices are rapidly appreciating, after some period of time in Chapter 13, debtors sometimes have enough equity in a home to refinance and pay creditors. Voluntary dismissal frees the debtor to carry out the financing and to pay creditors outside bankruptcy. The same result can often be accomplished through modification of the plan under § 1329.6

[6]

Debtors have been tempted to voluntarily dismiss a bankruptcy case to seek advantage of favorable changes in the Code. For example, the 1994 amendments to the Bankruptcy Code increased the exemptions available to some debtors,7 changed the rules for curing defaults at confirmation8 and improved the outcome for debtors in the event of conversion.9 Debtors in Chapter 13 cases filed before October 22, 1994, were tempted to dismiss and refile under the more favorable provisions of the new law.

[7]

The strategic or “engineered” dismissal of a bankruptcy case in order to refile after the 1994 amendments has been rejected by most courts.10 There is contrary authority—one court held that it was not cause for dismissal that an ineligible Chapter 13 debtor voluntarily dismissed a case filed before October 22, 1994, and refiled under the higher eligibility limits after the 1994 amendments.11

[8]

If the debtor needs to dismiss the Chapter 13 case, but a request for relief from the stay has been filed, the strategies become complicated: the debtor must accomplish dismissal involuntarily, on the request of some other party, to avoid the 180-day bar of § 109(g)(2). The specter is thus raised of collusive or provoked dismissal at the request of a party in interest but with the blessings of the debtor. One bankruptcy court cited the debtors’ intentional delay in filing a Chapter 13 plan—described as “bait” to provoke the Chapter 13 trustee to move for dismissal—as cause for conversion to Chapter 7 notwithstanding the debtors’ motion to dismiss.12 Some debtors are tempted to encourage the filing of a motion to dismiss by the trustee by defaulting in payments under the plan. This is a dangerous area of Chapter 13 practice. Intentional default under the plan may constitute a willful failure to abide by a court order, which would trigger the 180-day bar to refiling in § 109(g)(1).13 The Chapter 13 trustee is not likely to knowingly cooperate in an effort to frustrate § 109(g)(2).

[9]

A creditor that has filed a request for relief from the stay must be alert for a motion to dismiss from a source other than the debtor. If the Chapter 13 trustee moves to dismiss after the filing of a request for relief from the stay, the creditor may have to oppose the trustee’s motion to protect the grant of relief from the stay and to be sure that the debtor will be prohibited by § 109(g)(2) from immediately refiling.


 

1  See discussion beginning at § 25.1  180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In General. See, e.g., In re Sator, 51 B.R. 30 (Bankr. D.D.C. 1985) (Despite absolute right to dismiss, pro se debtor granted 20 days after request for voluntary dismissal in which to consider the effect of § 109(g).).

 

2  See, e.g., In re Stuart, 297 B.R. 665 (Bankr. S.D. Ga. 2003) (Voluntary dismissal of Chapter 13 case after filing of a motion for relief from the stay bars filing of a Chapter 7 case within 180 days under § 109(g)(2).).

 

3  See § 23.1 [ 11 U.S.C. § 109(g)(2)—Voluntary Dismissal after Request for Relief from Stay ] § 25.3  11 U.S.C. § 109(g)(2)—Voluntary Dismissal after Request for Relief from Stay.

 

4  See § 127.4  To Provide for Postpetition Claims, § 137.1  Postpetition Claims before BAPCPA and § 137.2  Postpetition Claims after BAPCPA.

 

5  See discussion beginning at § 25.1  180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In Generalsee also § 24.1  Court-Imposed Restrictions on Eligibility to Refile§ 139.2  BAPCPA: More Grounds; Changed Consequences§ 152.3  Cause for Dismissal Added or Changed by BAPCPA, § 152.4  Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings and § 153.3  Court-Imposed Conditions and Restrictions on Dismissal.

 

6  See §§ 262.1 [ To Incur New Debt ] § 127.5  To Incur New Debt, 267.1 [ To Account for Payments Other Than under the Plan ] § 127.10  To Account for Payments Other Than under the Plan and 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11  To Extend or Reduce the Time for Payments.

 

7  See §§ 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1  Available and Important in Chapter 13 Cases and 317.1 [ Exemptions at Conversion ] § 144.1  Exemptions at Conversion.

 

8  See § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994.

 

9  See § 143.2  In Cases Filed after October 22, 1994§ 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA, § 143.4  Priorities after Conversion: Two Trustees and a DSO, § 145.2  In Cases Filed after October 22, 1994 and § 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.

 

10  See Clifton Sav. Bank v. Jackson (In re Jackson), 184 B.R. 16, 20–21 (D.N.J. 1995) (Court rejects engineered dismissal of a Chapter 11 case filed before October 22, 1994, in which a motion for relief from stay had been filed and debtors desire to refile a Chapter 13 case under the 1994 Act. Because of the Third Circuit’s [First National Fidelity Corp. v. Perry, 945 F.2d 61 (3d Cir. 1991),] opinion, debtors’ efforts to reorganize a mortgage that had been reduced to a foreclosure judgment ended up in a Chapter 11 case. Five days after the 1994 Act became effective, the mortgage holder moved for relief from the stay and for conversion to Chapter 7. The debtors responded with an “Application for Appropriate Action” that asked the bankruptcy court to dismiss the Chapter 11 case in a manner that would not trigger § 109(g) so that the debtors could file a Chapter 13 case utilizing new § 1322(c). The bankruptcy court obligingly dismissed the Chapter 11 case in an order that required the debtors to file a new Chapter 13 case within 15 days. Citing Alice in Wonderland, the district court held, “A request for conversion does not cease to be a request for conversion simply by designating it an ‘Application for Appropriate Action.’ We see no reason to characterize the bankruptcy court’s dismissal order, which includes a condition that the debtors refile immediately, as anything but the granting of a faintly concealed conversion motion. . . . [B]ecause we find that the Chapter 11 case was actually converted to a Chapter 13 proceeding, we must dismiss [the debtors’ new Chapter 13 filing]. ‘If a bankruptcy action is pending, a bankruptcy action which purports to affect the same debt cannot be maintained.’”); In re Fitzpatrick, 175 B.R. 436, 437–38 (Bankr. D.N.H. 1994) (Debtor in a Chapter 11 case filed before October 22, 1994, cannot convert to Chapter 13 to take advantage of the higher debt limits in the Bankruptcy Reform Act of 1994; neither can debtor dismiss the Chapter 11 case as part of a scheme to refile a Chapter 13 case under the new debt limits. “[S]ection 702(b) of the Reform Act specially provides that, except for certain enumerated exceptions, ‘the amendments made by this Act shall not apply with respect to cases commenced under title 11 of the United States Code before the date of enactment of this Act.’ . . . [T]he debtors cannot now convert their case to Chapter 13 as they do not qualify for such relief under the pre–Reform Act debt limits and nothing before the Court indicates that the plain language of section 702(b) does not control. . . . [T]o allow a dismissal and a refiling would just abrogate or end-run the prohibition that Congress intended that pending cases would not benefit by other than a few provisions of the Bankruptcy Reform Act of 1994.”).

 

11  In re Elrod, 178 B.R. 5 (Bankr. N.D. Okla. 1995) (That debtors dismissed Chapter 13 case and refiled nine days later is not cause for dismissal where first petition was filed when the debtors were not eligible under former § 109(e) and refiling on November 10, 1994, permitted debtors to use the higher eligibility limits in the Bankruptcy Reform Act of 1994.).

 

12  In re Barnes, 275 B.R. 889, 894 (Bankr. E.D. Cal. 2002) (“A debtor, however, can sometimes ‘bait’ the chapter 13 trustee into moving for dismissal by not attending the meeting of creditors, failing to file a chapter 13 plan, or failing to otherwise prosecute the chapter 13 case. . . . The debtors did not file their plan until . . . the chapter 13 trustee and the former chapter 7 trustee had jointly requested the reconversion of the case. In other words, the trustees believe that the debtors filed their plan only after learning that their ploy to have their case dismissed had failed.”).

 

13  See § 22.1 [ 11 U.S.C. § 109(g)(1)—Willful Failure to Abide by Court Order or to Appear in Proper Prosecution ] § 25.2  11 U.S.C. § 109(g)(1)—Willful Failure to Abide by Court Order or to Appear in Proper Prosecution.