In this article, we explain how to avoid filing for bankruptcy in bad faith and answer the questions:
- What constitutes filing for bankruptcy in bad faith?
- What are some common bad faith filing mistakes to watch out for?
- What factors do the courts consider when evaluating bankruptcy filings for bad faith?
What Constitutes Filing For Bankruptcy In Bad Faith?
Bankruptcy is meant as an option for those in debt to get back on their feet and start over with a clean, or at least much more organized, financial slate. However, there are many people in the world that will try to exploit a system for their own personal gain, and bankruptcy is not immune to exploitation. Thankfully, many checks and balances exist to discover those filing for bankruptcy in bad faith, and trying to game the bankruptcy system comes with severe consequences.
Filing for bankruptcy in bad faith can be an honest mistake, but in most cases, it’s because an individual or company is trying to avoid a portion of the bankruptcy process, prolong the time they have to pay a debt or to avoid the consequences of getting into debt in the first place. There are many different avenues to filing for bankruptcy in bad faith, but working with an experienced bankruptcy attorney can help you avoid any potential issues and keep your bankruptcy case from being unexpectedly denied by the court.
What are Some Common Bad Faith Filing Mistakes To Watch Out For?
Whether it was done deliberately or by mistake the majority of bad faith filings are the result of the petitioner filing for bankruptcy to delay creditors with no intention of following through on the bankruptcy. Some common examples of filing for bankruptcy in bad faith include:
- Filing for Chapter 13 bankruptcy the day before the foreclosure auction to initiate the automatic stay but then later dismissing the Chapter 13 bankruptcy with no intention of completing the process;
- Trying to hide property that would normally be sold under Chapter 7 bankruptcy;
- Reporting a lower income in order to qualify for Chapter 7 instead of Chapter 13 bankruptcy;
- Filing for chapter 7 bankruptcy in order to initiate the automatic stay to get debt collectors to leave you alone, but then converting to a Chapter 13 bankruptcy to enable the debtor to dismiss the case without prior court approval;
- Certain instances when attempting to file Chapter 20 bankruptcy;
- Filing Chapter 7 to stop a lawsuit or to block debt collectors but failing to file the correct forms or completing the debtor education certificate so the court can dismiss the case (essentially trying to prolong the case indefinitely);
- Deliberately not listing nonexempt assets in an attempt to not include those assets under Chapter 13 bankruptcy and thus avoiding paying those creditors.
The examples of bad faith bankruptcy filings are numerous as any mistake in paperwork, failure to report an asset or debt, or any other omission may be viewed as deliberate and considered bad faith.
What Factors Do the Courts Consider When Evaluating Bankruptcy Filings For Bad Faith?
Bankruptcy filings have a lot of moving parts and the court will look at all of them when determining the validity and lawfulness of each filing. A number of factors can indicate to a judge that the bankruptcy filer is attempting to manipulate the system and gain an advantage not intended under the bankruptcy process. The ability of the court to comb through every piece of information, account, etc, often at the discomfort of the bankruptcy filer, is referred to as the “totality of circumstances.” Some common factors the court will consider when attempting to rule out a bad faith filer include:
- If the bankruptcy filer has had multiple previous bankruptcies and at what frequency;
- Incorrect paperwork, misrepresentations, poor reporting, or omissions;
- Whether the proposed repayment plan is feasible or unrealistic;
- Failures to comply with expected procedures post case;
- Last-minute attempts to increase expenses to qualify for Chapter 7 versus Chapter 13;
- Any other abnormal behavior, paperwork, etc. (The judge doesn’t really need a reason to challenge the filer, but the filer does need a legitimate response to any challenge).
The easiest way to avoid being charged with filing a bankruptcy in bad faith and having your bankruptcy discharge unexpectedly denied, or worse, being charged with bankruptcy fraud, is to hire an experienced bankruptcy attorney. If you have questions about bankruptcy give us a call at 630-324-6666.
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