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Bankruptcy Court Decisions

Disguised Chapter 7 Bankruptcy Not Allowed in Ninth Circuit Without Evidence of Good Faith

In Lavilla: In re, 20 CBN 641 (Bankr. E.D. Cal. 2010) the debtors proposed to pay 4.8% to unsecured creditors. At the time of the filing the debtors were not eligible to file and receive a discharge in a Chapter 7 bankruptcy because of a previous discharge they had received within the past 8 years. In the case the debtors proposed to pay very minimal to unsecured creditors and to pay in full the secured debt for a vehicle. The trustee objected to the plan and argued that a plan that proposed to pay minimal amounts to unsecured creditors was a disguised Chapter 7 bankruptcy and that debtors should not be entitled to receive another Chapter 7 "disguised" discharge. The court found that the plan did not meet the good faith requirements because the debtors failed to show any evidence of undue hardship, medical emergency or other that would show good faith.

Comment: Under 1325 (a) (3) a plan must be proposed "in good faith and not by any means forbidden by law". The decisions indicates that debtors in the 9th circuit may have difficult time filing a Chapter 13 bankruptcy where they propose a minimal payment to unsecured creditors and are currently ineligible to file Chapter 7 bankruptcy because of a previous 8 year filing. It suggest that courts may be willing to confirm a plan where there is evidence that some unexpected event or hardship occurred that suggest no bad faith. Someone who has experienced a medical emergency or disability, or loss of a job may be able to argue good faith on the basis of changed circumstances that would allow them to file a Chapter 13 bankruptcy and pay unsecured creditors a minimal amount during the life of the Chapter 13 plan.

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