Chapter 13 and Good Faith

Posted by Kevin on March 14, 2012 under Bankruptcy Blog | Be the First to Comment

Bankruptcy gives the honest debtor a fresh start.  We hear that often.  Bankruptcy courts are courts of equity.  Hear that too.  We also hear words like “good faith”, “fairness”, and “substance over form”.  These are not just empty platitudes but heart felt beliefs held by the court, trustees and a vast majority of practitioners.

The Code allows debtors to discharge most of their debts.  That means that they go away.  Chapter 13, which requires monthly payments over a period of 36 to 60 months, provides not only a discharge if all payments are made under a plan that was approved by the court, but also allows the debtor to adjust the obligations to certain secured creditors.  A secured creditor is a creditor that has collateral.  Like GMAC lends you money to buy a car and takes the car as collateral.

Now, in Chapter 13, you can adjust the interest rate on your car loan.  So, if your loan is for 14%, you may, subject to court approval, reduce it to, say, 4%.  The creditor can object to that treatment.  Then, the court decides what is fair, what is good faith.

In a recent case in South Florida, a Chapter 13 debtor went too far.  He bought a 2007 Suzuki and financed it at 19.95% interest. Less than 90 days later, he filed Chapter 13.  In his plan, the debtor proposed to pay 5.25% interest.   The debtor testified at the confirmation hearing and was cross-examined by the finance company’s lawyer.  Debtor admitted that he conferred with and retained  bankruptcy counsel just before he bought the car.  Of course, he did not tell the car dealer that he was going to file.  The court found that the debtor “pulled a fast one”, and bought the car knowing that he would knock down the interest rate in his plan.   The court stated that good faith focuses on whether the filing is fundamentally fair to the creditors.  Debtor was not fair.    The Court found that the debtor must pay the contract rate of 19.95%.  if he wanted the plan confirmed.

So play it straight.