What Does “Bad Faith” Mean in Bankruptcy?

As it sounds, this is not a term you care to associate yourself with if you can help it.  Bad faith refers to certain actions and circumstances that cover fraudulent bankruptcy filings.  In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was legislated to define and outline situations associated with bad faith bankruptcy filing.

One of the roles of the bankruptcy court and bankruptcy Trustee is to protect creditors from debtors who are maliciously trying to defraud the system.  Most debtors are really struggling under the weight of their debt without much hope of ever breaking even, but unfortunately, there are people who are just trying to stall or manipulate creditors.  There are 5 situations in which a debtor is considered to act in bad faith.

First, if there is evidence that a debtor is trying to unfairly thwart a creditor’s efforts to collect on a debt, this is considered a bad faith filing.  For example, a client files bankruptcy in order to stall a foreclosure with no intention of ever completing the bankruptcy.  Bad faith is relevant when a client files bankruptcy to save a home, then does not make any of the required plan payments and is dismissed.  This of course can be a very fine line and cannot always be proved; especially if a client has a very tight budget and unforeseen circumstances arise.  Most Chapter 13 bankruptcy clients are in this position and have every intention of completing their bankruptcy.  This is why bankruptcy is a very involved process and should be taken seriously by all potential debtors.

Another bad faith filing revolves around a debtor filing a bankruptcy while already in an active one.  How does this happen?  Most commonly, a debtor is dismissed from a bankruptcy and files before they have received a Final Decree that officially releases them from the first bankruptcy.  Or, a Chapter 13 client cares to convert to a Chapter 7 bankruptcy and files a Chapter 7 while still in the Chapter 13 without permission from the court.  Or a debtor tries to file bankruptcy within the time limitations, such as with 8 years of previously filing a Chapter 7 bankruptcy or 4 years for a Chapter 13 bankruptcy.

The third example would be prevalent among the debtors who care to file pro se or without an attorney.  There are certain documents and motions that must be filed with the court.  Two very important documents are the financial management certification and the motion for discharge.  Don’t know what these are?  That is why an attorney comes in handy!  A bankruptcy case may be dismissed under bad faith if required documents are not filed or presented to the bankruptcy court or bankruptcy Trustee.

Fourth, if a debtor is continually filing and being dismissed from a Chapter 13 due to non-payment, the bankruptcy Trustee may reject the case due to bad faith.  If you are dismissed from a Chapter 13 you may turn around after the final decree and file again as long as the court has not placed some limitation on your ability to file again like dismissing your case with prejudice. The big question to determine bad faith is “why do you keep being dismissed?  And what is different about your situation from your previous filings?”  Usually, this is just a due diligence question, but it is very important.

Lastly, if you fail to make adequate protection payments, your bankruptcy is automatically noted as being filed in bad faith.  Adequate protection is rather loosely defined as the initial payments in a Chapter 13 bankruptcy.  On the other hand, in a Chapter 7 bankruptcy, unprotected equity must be compensated to the Trustee in order for the debtor to keep the non-exempted asset.  If this adequate protection payment is not made to the Trustee in the mandated time frame, your case can be dismissed.

Be sure to avoid a situation in which your case may be dismissed for “bad faith.” Contact an experienced bankruptcy lawyer who can help you navigate the, often times, tricky path through bankruptcy.