§ 107.1 — Greed, Not Need
Revised: June 7, 2004
Courts look at the nature of the debtor’s financial problems in the context of the proposed plan for evidence of the debtor’s motive in filing and intent with respect to creditors. When scheduled debts are one-dimensional and the plan is technically permissible but benefits the debtor without maximizing benefits to creditors, some courts draw adverse good-faith inferences.
For example, in In re Pope,1 the bankruptcy court denied confirmation for lack of good faith of a plan that bifurcated a mobile home-secured claim, paid the secured portion in full in five years and paid a 10 percent dividend to unsecured creditors. In the context of other debt problems, this proposal probably would have raised no good-faith problems. However, these debtors had no other real debt problems, and it appeared to the court that the “factor motivating debtors to file for Chapter 13 relief is to reduce the purchase price of their mobile home.”2 The court found that the plan would reduce the $30,000 balance on the mobile home debt to the $21,000 value of the collateral, consistent with the Bankruptcy Code, but not because the debtors were in any substantial financial distress. According to the court, the debtors could alleviate their financial problems “by paying the debt as originally contracted.”3 The lack of good faith in Pope was the one-dimensional motivation of the debtors to benefit themselves and the absence of a chorus of barking creditors.
Although it can almost always be said that the debtor created the financial problems that led to bankruptcy, some reported decisions find evidence of bad faith when the debtor’s prepetition choices appear driven by greed or meanness rather than “ordinary” financial need. For example, in Banks v. Vandiver (In re Banks),4 the debtor slugged it out with a former spouse in state court for more than eight years before the Chapter 13 case. When the good-faith objection to confirmation reached the Bankruptcy Appellate Panel for the Eighth Circuit, the BAP found that the debtor had chosen to spend the contested portion of pension monies, thereby manufacturing the debt to his ex-spouse that became the centerpiece of the Chapter 13 case. The BAP found the debtor was gainfully employed at all times and did not need to invade the contested portion of the pension to provide for himself or his dependents. The BAP held, “[T]he debtor is not of the ‘honest but unfortunate’ variety that the Bankruptcy Code was intended to protect.”5
Attorneys in general and other debtors with special experience or understanding of bankruptcy law can expect increased good-faith attention to the need for Chapter 13 relief. In In re James,6 the debtor, an attorney, scheduled a friend, his brother and his accountant as secured creditors. This scheduling did not reduce the amount the debtor would have to pay to confirm a plan, but it directed distributions under the plan toward friends and relatives. The bankruptcy court found “mischief afoot”7 for good-faith purposes. In In re Quiles,8 a paralegal with 11 years’ experience preparing bankruptcy cases failed good-faith analysis in a Chapter 13 case filed a few months after discharge in a Chapter 7 case when the proposed plan stripped off a wholly unsecured second mortgage9 without payment to any creditor: Greed, not need.
A variation on this theme are the cases in which bad motive or lack of sincerity is revealed by a plan that makes the debtor look greedy. For example, in In re Tucker,10 the debtor’s plan paid 30 percent to unsecured claim holders but paid in full two claims secured by certificates of deposit that would be paid to the debtor in cash ($12,600) upon completion of the plan. In In re Stanley,11 the equity in real property owned by the debtor and a nonfiling spouse as tenants by the entirety could not be reached by the debtor’s individual creditors, but paying nothing to unsecureds when the equity was sufficient to pay 80 percent of all claims tubed the plan for lack of good faith. The cases dealing with retirement loans are usually resolved under the disposable income test,12 but some courts have held that good faith prohibits confirmation of a plan that repays retirement loans to the debtor’s benefit when unsecured creditors are not paid in full.13 Plans that accelerate the payment of secured debt fall in this category. When the effect of accelerated payment is to generate equity for the debtor and unsecured creditors are not paid in full, the debtor looks bad even if all other tests for confirmation are technically satisfied.14
The logic of these cases is a bit slippery because bad motive or insincerity is inferred from things that are perfectly legal under the Code. In combination with less than terrible financial problems, use of available powers can make the debtor look bad. In In re Ruggles,15 the debtor barely escaped the good-faith hatchet by claiming an exemption in both sides of a duplex. The court found that “the sole purpose for debtor’s plan is to retain the large amount of equity in the duplex while making minimum payments to unsecured creditors.”16 This motive was indicative of bad faith until the bankruptcy court examined Vermont law and determined that the exemption claim was not forbidden fruit.17 Intense good-faith scrutiny was triggered in Ruggles because permissible provisions in the plan made the debtor look greedy rather than needy. Of course, debtors can’t take full advantage of their rights under the Bankruptcy Code without running this risk. Counsel’s task is to balance the management of debt problems and the realization of benefits for the debtor through the plan. In some circumstances, the use of nonbankruptcy alternatives to deal with less than life-threatening financial problems is the better course.18
1 215 B.R. 92 (Bankr. S.D. Ga. 1997).
2 215 B.R. at 93. Accord In re Quiles, 262 B.R. 191 (Bankr. D.R.I. 2001) (Lack of good faith when purpose of Chapter 13 case is to strip off an unsecured second mortgage without payment to creditors.); In re Cushman, 217 B.R. 470 (Bankr. E.D. Va. 1998) (There is lack of good faith in Chapter 13 plan that strips down a car loan when the debtors have sufficient income after discharge in a prior Chapter 7 case to maintain regular payments on the surviving car lien.).
3 215 B.R. at 93.
4 248 B.R. 799 (B.A.P. 8th Cir. 2000), aff’d, 267 F.3d 875 (8th Cir. 2001).
5 248 B.R. at 805 n.2.
6 260 B.R. 498 (Bankr. D. Idaho 2001).
7 260 B.R. at 509.
8 262 B.R. 191 (Bankr. D.R.I. 2001).
9 See § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13 Modification of Unsecured Home Mortgage: Before and After BAPCPA.
10 220 B.R. 359 (Bankr. W.D. Tenn. 1998).
11 296 B.R. 402 (Bankr. E.D. Va. 2002).
12 See §§ 164.1 [ Projected (Disposable) Income ] § 91.2 Projected (Disposable) Income and 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3 Reasonably Necessary for Maintenance or Support.
13 See In re Bayless, 264 B.R. 719, 722–23 (Bankr. W.D. Okla. 1999) (“Debtors propose to discharge over half of their unsecured debt while continuing to make contributions to a retirement plan and fund ongoing elective fertility treatments. Debtors’ plan reveals that the motivation of Debtors is to continue to live in the same manner as they did pre-petition, yet avoid paying their creditors in full. Further, if Debtors devoted their disposable income to paying their creditors as opposed to funding their retirement account and continuing fertility treatments, they likely have no need for bankruptcy protection at all.”); In re Fulton, 211 B.R. 247, 255 (Bankr. S.D. Ohio 1997) (Because disposable-income test cannot be raised sua sponte, court denies confirmation on good-faith ground of plans that propose to pay retirement loans in full and less than 100% of other unsecured debts. “It is . . . clear and also appropriate for the Court to consider the principles of § 1325(b) in determining whether a debtor’s proposed plan conforms to the good faith requirements of § 1325(a)(3). . . . Even when there are no pending objections to confirmation, a bankruptcy court, ‘nevertheless, has an independent duty to ensure that the Plan meets the requirements for confirmation as set forth in 11 U.S.C. § 1325(a), including the good faith standard of § 1325(a)(3).’ . . . An analysis of a debtor’s budgeted monthly expenses is an appropriate element of a bankruptcy court’s good faith calculus.”).
14 See, e.g., In re Liles, 292 B.R. 138, 140–41 (Bankr. E.D. Tex. 2002) (Plan lacks good faith that pays mobile-home-secured creditor in full by increasing the contract payment from $408 to $979.18 per month at the expense of distributions to unsecured claim holders. “[A] plan which proposes to take money from unsecured creditors in order to fund accelerated payments to a secured creditor is not proposed in ‘good faith.’ . . . [T]he Debtors are not prepaying their account with Greenpoint, rather their unsecured creditors are funding the accelerated pay off of this asset for these debtors. This the Court will not condone.”); In re Crussen, 264 B.R. 723, 726 (Bankr. W.D. Okla. 2001) (Accelerated payment of second mortgage when unsecureds will received only 44% is not good faith. Plan proposed to pay $1,125 per month to second mortgage rather than contractual payment of $475. Unsecured creditors, including more than $100,000 in credit card debt would receive 44% in three years. “Debtor is not sincerely making his best effort to pay his debts, but rather wants to benefit himself through the plan. . . . [T]he Debtor, who enjoys a substantial income, has proposed a plan for the statutory prescribed minimum duration of 36 months which permits him to walk away from over half of the obligations owed fourteen credit card issuers while enjoying the benefits inuring from wholly prepaying his second mortgage in only three years. . . . [T]his Debtor’s plan . . . appears to be an example of an attempt to manipulate and abuse the bankruptcy system in a manner that this Court will not permit.”). Compare In re Elrod, 270 B.R. 258, 262 (Bankr. E.D. Tenn. 2001) (Payment to mortgage holder of $25 more than contract monthly payment does not violate good faith. “The proposed payments to Citifinancial will cause a slight reduction in the percentage that the debtors might pay to unsecured creditors based on a 60-month plan. This slight reduction is not sufficient evidence by itself to show lack of good faith by the debtors.”).
15 210 B.R. 57 (Bankr. D. Vt. 1997).
16 210 B.R. at 60–61.
17 210 B.R. at 60–61 (“[B]ecause under Vermont law the property is indivisible, any finding that the homestead does not extend to the rented portion of the duplex would force a sale of the entire complex and effectively eliminate Debtor’s homestead right. . . . In light of the foregoing, we conclude that Debtor has a good faith motivation for claiming an exemption in the equity of her entire duplex.”).