Cite as: Keith M. Lundin, Lundin On Chapter 13, § 152.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
As with voluntary dismissal by the debtor,1 the effect of § 109(g) is an important strategic consideration for any party that desires dismissal of a Chapter 13 case. Absent a contrary court order,2 dismissal at the request of a party in interest will not bar the debtor from immediately refiling unless the dismissal triggers the 180-day bar in § 109(g)(1) for “willful failure of the debtor to abide by orders of the court or to appear before the court in proper prosecution of the case.”3 Dismissal at the request of a party in interest will not invoke the 180-day bar to refiling in § 109(g)(2) because § 109(g)(2) applies only upon a voluntary dismissal by the debtor after the filing of a request for relief from the stay.4
Creditors often have no choice—if they want dismissal, they have to move for it or no one will. Occasionally, it is possible to convince the Chapter 13 trustee to make the motion to dismiss, especially when the cause for dismissal is default by the debtor in payments under a confirmed plan. Although having the Chapter 13 trustee out front saves creditors the expense of prosecuting the motion and there is often some advantage in the presentation of evidence when the trustee is a party, dismissal on the trustee’s motion will not bar refiling by the debtor unless there is a factual finding of willful failure by the debtor under § 109(g)(1).
In many jurisdictions, the Chapter 13 trustee periodically reviews all pending Chapter 13 cases and moves to dismiss those that are nonperforming. The good news for creditors is that the trustee thus performs much of the policing function after confirmation.5 The bad news is that the Chapter 13 trustee may be willing to compromise a motion to dismiss on less stringent terms than would creditors, and the Chapter 13 trustee has less incentive to seek conditions on dismissal6 or to assert and litigate a ground for dismissal that would invoke the § 109(g) bar to refiling. There is also the possibility that unwittingly the trustee will aid the debtor’s effort to accomplish dismissal of the Chapter 13 case in a manner that will not invoke the bar to refiling in § 109(g)(2).7 Creditors may have to respond in writing to a trustee’s motion to dismiss to ensure their views are heard. A creditor that has been granted relief from the stay but has not completed its state court foreclosure may need to oppose the motion of another party to dismiss to avoid a dismissal that will leave the debtor free to immediately refile.
One bankruptcy court found a clever if not somewhat extreme solution when it appeared that a trustee’s motion to dismiss was not in the best interests of some creditors. In In re McDaniels,8 the Chapter 13 trustee moved to dismiss because the debtor stopped making payments into the plan. A bank opposed the trustee’s motion, asking the bankruptcy court to leave the case pending for a time sufficient to permit the bank to complete foreclosure. The debtor responded that the failure to dismiss the case on the trustee’s motion was “unfair,” characterizing the bank’s opposition as “an illegitimate conspiracy between the creditor and the court to assist the creditor in the exercise of its state law remedies.”9 The bankruptcy court observed that the Chapter 13 trustee should not postpone filing a motion to dismiss under these circumstances because the debtors clearly had no intention of making further payments into the plan. But the court concluded that the appropriate remedy was to grant relief from the stay to all creditors while continuing the pendency of the case to permit the bank to complete its foreclosure. The court found that the debtors had no ground to complain about this outcome:
Debtors are provided with a complete remedy in section 1307(b) wherein Debtor has the absolute right to cause the dismissal of this case. The fact that section 109(g)(2) may attach consequences to the exercise of that remedy which could limit the refiling of a new case does not present to the Court any imperative to construct some other course for Debtors to be dismissed from this case without such consequences. Debtors have no right to require that this case be dismissed except pursuant to section 1307(b). If it appears to the Court that the dismissal of this case is unjust as to one or more creditors, and if a remedy can be fashioned to avoid that injustice without depriving the debtor of his right to dismiss the case pursuant to section 1307(b), then this Court is obligated to provide such a remedy.10
It may be in the best interests of unsecured claim holders to appear in opposition to a motion to dismiss. For example, when the debtor has defaulted in payments after confirmation, but the default has affected only secured claim holders, continuation of the Chapter 13 case may be the best hope for recovery for the general creditors.
One reported decision suggests that unsecured creditors recently discharged in a Chapter 7 case may have an interest in disposition of a subsequently filed Chapter 13 case. As described by the bankruptcy court in In re Taylor:11
Seven days after Mrs. Taylor was granted her second chapter 7 discharge and while her chapter 7 case was pending, she filed her third petition, a chapter 13 case . . . . On that same day, . . . Mr. Taylor filed a voluntary chapter 7 petition . . . a routine no-asset case. . . . Mr. Taylor was granted a discharge.12
Mrs. Taylor’s Chapter 13 schedules revealed only two secured debts that survived discharge in her prior Chapter 7 case. Mrs. Taylor’s Chapter 13 plan was dependent upon Mr. Taylor’s income. The bankruptcy court concluded that the Taylors were using serial petitions to shield equity in their home and discharge unsecured debt without payment. When the Chapter 13 trustee moved to dismiss Mrs. Taylor’s case, the bankruptcy court fashioned an unorthodox remedy that resurrected the rights of creditors discharged in the prior Chapter 7 cases:
The appropriate remedy is to re-open both prior . . . chapter 7 cases. One was filed simultaneously with Mrs. Taylor’s chapter 13 case, the other three months earlier. Both chapter 7 cases were recently closed. By re-opening the prior chapter 7 cases and consolidating them into this case, the creditors scheduled in the chapter 7 cases will be creditors of this estate and will be entitled to a distribution from the proceeds of the sale of the real property.13
1 See § 331.1 [ Strategic Considerations: Consequences of Voluntary Dismissal ] § 151.3 Strategic Considerations: Consequences of Voluntary Dismissal.
3 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.
4 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.
5 See §§ 239.1 [ What to Do If Creditor Is Not Receiving Payments ] § 123.1 What to Do If Creditor Is Not Receiving Payments and 239.2 [ What to Do If Debtor Defaults ] § 123.2 What to Do If Debtor Defaults.
7 See §§ 21.1 [ 180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In General ] § 25.1 180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In General and 331.1 [ Strategic Considerations: Consequences of Voluntary Dismissal ] § 151.3 Strategic Considerations: Consequences of Voluntary Dismissal.
8 213 B.R. 197 (Bankr. M.D. Ga. 1997).
9 213 B.R. at 199.
10 213 B.R. at 201.
11 261 B.R. 877 (Bankr. E.D. Va. 2001).
12 261 B.R. at 880.
13 261 B.R. at 889.