In re: Rankin, No. 10-62340-13 (Bankr. D. Mont., January 21, 2011).
In a recent 9th Circuit decision, a Montana bankruptcy court weighed in on whether a Chapter 13 plan was proposed in good faith and in the best interest of creditors.
In Chapter 13, a plan must be in the best interest of creditors under section 1325(a)(4). Under this test, a plan cannot be confirmed if it pays unsecured creditors less than they would receive in a Chapter 7 liquidation. It is not uncommon for people to propose a Chapter 13 plan that mainly pays their secured creditors. This way, at the end of the plan, when most of their unsecured debt is not paid, they can discharge it, having paid much of the secured debt they would be required to pay in any case. This test is to avoid such a scenario.
The debtors in the case, the court held, proposed a plan that passed this best interest test. After deducting exemptions, the debtor had $17,597 in assets. That number exceeded the $14,000 proposed for distribution in the liquidation analysis of their plan. A creditor challenged this as violating the best interest of the creditors test, but the court held that, once an $8,000 secured tax claim was deducted, the amount was brought below this liquidation number, and therefore passed the test.
There is also a good faith requirement in every bankruptcy filing. The court must review the totality of the circumstances in determining whether the debtors filing was a bad faith abuse of the bankruptcy system. In the 9th Circuit, a court will consider (1) whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the code, or otherwise filed his petition or plan in an inequitable manner, (2) the debtor's history of filings and dismissals, (3) whether the debtor intended to defeat state court litigation, and (4) whether egregious behavior is present.
In this case, the court failed to find that the debtors filed in bad faith. The trustee did not object, and the court gave the trustee's opinion much weight. Further, all of the above factors weighed in favor of a good faith filing.
