Avoiding “Good Faith” Objections to Chapter 13 Plans

10 Jul Avoiding “Good Faith” Objections to Chapter 13 Plans

Sometimes a chapter 13 case is filed, instead of chapter 7, due to concerns over possible non-dischargeability complaints. Perhaps the debtor has incurred large credit charges or balance transfers recently, or maybe he or she owes a large debt to a creditor who might claim fraud, or a wilful or malicious injury. If there are creditors who are upset with the debtor over misconduct, chapter 7 may be an invitation to expensive bankruptcy court litigation over dischargeability issues; hence the decision to file chapter 13 instead. But what about the possibility of an objection to the chapter 13 plan, or an objection to dischargeability of the debt in chapter 13? It’s a good idea to minimize the chances of such objections or complaints, if possible, through careful drafting of the initial chapter 13 plan.

This can be accomplished by proposing, along with the initial filing, a generous chapter 13 plan providing for full payment of all creditors, or something close to full payment. This may induce an otherwise unhappy creditor into believing that time and money should not be wasted objecting to a chapter 13 plan which, after all, provides for a large payment to the creditor. This tactic may also induce the creditor to forego filing a non-dischargeability complaint within the mandatory 60 day deadline, which runs from the date of the creditors meeting, due to the creditor’s expectation of a large payment under the plan.

Once the initial chapter 13 plan is confirmed, most courts will consider the issue of the debtor’s good faith in filing the case to have been finally determined. Similarly, the running of the 60 day non-dischargeability complaint deadline will prevent a creditor from ever raising this issue later. If creditors can be “lulled” into sleeping on their rights by filing an initial chapter 13 plan which proposes large payments, the debtor gains the advantage of getting a plan confirmed, the certainty of being able to remain in chapter 13, and possibly the certainty of being able to discharge all of his or her debts.

The next step is to modify the chapter 13 plan to consist of a much lower monthly payment, which now will represent what the debtor can actually afford. Once a decent interval has elapsed from the filing of the case and confirmation of the initial chapter 13 plan, the debtor can file a motion to modify the monthly plan payment to an amount consisting of what his or her monthly household budget shows is affordable. This modified plan might provide that creditors will receive only pennies on the dollar toward their claims. However, because a plan has been previously confirmed, any creditor objecting to the modified plan will be prevented from arguing good faith issues. Instead, the creditor will be limited to asking the court to examine whether the debtor is proposing, in the new plan, to pay all he or she can reasonably afford into the plan. This means the legal issues have changed from good faith, or non-dischargeability of the debts, into a simple issue which favors the debtor: whether the new payment amount is consistent with the debtor’s budget. If the motion to modify the plan is carefully drafted, this is an issue upon which the debtor can usually hope to prevail.

The debtor should be prepared to explain that the intial plan was proposed in the sincere belief that he or she could afford the high plan payments, through “belt tightening” or other sacrifices, and that after attempting to perform under the plan, it became apparent that the high payments were not affordable after all, despite the debtor’s good intentions. This should help the debtor avoid the appearance of having unfairly manipulated the legal process just to obtain confirmation of the intial, high-payment chapter 13 plan.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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