The Emerging Good Faith Standard Under Bankruptcy Code Chapter 13
| Jurisdiction | United States,Federal |
| Citation | Vol. 12 No. 9 Pg. 1434 |
| Pages | 1434 |
| Publication year | 1983 |
1983, September, Pg. 1434. The Emerging Good Faith Standard Under Bankruptcy Code Chapter 13
When Congress enacted the Bankruptcy Code of 1978 ("Code"),(fn1) it radically rewrote the provisions of Chapter 13. Not only was the scope broadened from a wage earner's plan to plans for persons with regular income,(fn2) but the role of creditor approval was substantially restricted. Although creditors still get to vote on a plan in theory, the real determination of plan confirmation is the standard of minimum repayment, which allows a plan to be approved even over unanimous creditor objection if it is proposed in good faith.
In bare outline, as long as a Chapter 13 plan under the new Code repaid secured creditors the present value of their collateral and unsecured creditors what they would have received in a Chapter 7 liquidation, a plan could be confirmed.(fn3) In addition, Congress also liberalized the discharge provisions so that most of the obligations which could not be discharged in a Chapter 7 liquidation would be discharged after completion of a Chapter 13 plan.(fn4)
The apparent intent of Congress was to make it more attractive for debtors to propose repayment plans for their creditors, rather than opt for straight liquidation in which creditors rarely received any return. However, in easing the restrictions of Chapter 13 and liberalizing the discharge provisions, Congress may have over-estimated the desire of debtors to make a meaningful attempt to repay unsecured obligations. Since creditors receive no dividend in the majority of Chapter 7 liquidations, a substantial majority of Chapter 13 plans in some districts, such as Colorado, promised to repay unsecured creditors no more than one dollar or one percent of the debts. The infamous "one percent" plans became the anathema of the finance industry. Moreover, debts which debtors could not escape in Chapter 7 because they involved malicious or willful injury to property nonetheless were discharged in Chapter 13, even though the creditor received no additional return.
Finding little help elsewhere in the provisions of Chapter 13, creditors began arguing that the requirement of good faith in 11 U.S.C. § 1325 meant some effort by the debtor to repay unsecured creditors. Although the phrase was carried over from Chapter XIII of the Bankruptcy Act, there was little case law interpreting the phrase. Moreover, the legislative history of the Code does not appear to discuss the concept of good faith in connection with any minimum repayment requirements.(fn5) Understandably, the resulting court decisions varied widely in their interpretations.
Some courts, perhaps disturbed by the fact that Chapter 13 had become an analogue for Chapter 7, construed the good faith requirement to mean that some meaningful repayment to creditors was required for confirmation of a Chapter 13 plan. Some of the courts left the repayment requirement ambiguous and dependent upon the facts of the particular case.(fn6)
At the other end of the spectrum were those courts which felt that a minimum repayment standard could not be read into the words "good faith" because 11 U.S.C. § 1325 already clearly sets forth the minimum repayment requirements for confirmation of a Chapter 13 plan. These decisions construed good faith to mean "honesty in fact."(fn7) Under this standard, plans that would not meet the test were plans that were part of an overall scheme to defraud creditors purposely by running up debts with a view toward taking bankruptcy, or Chapter 13 cases in which the debtor attempted to mislead the court or creditors. However, factors such as the amount to be repaid to creditors and the ability of the debtor to pay would not be considered. Therefore, "one percent plans" would be approved even if the debtor's future income indicated the ability to make meaningful repayment to unsecured creditors.
A growing number of cases took a compromise position. These cases interpret the concept of good faith to require evaluation of the amount to be repaid to unsecured creditors in relation to the debtor's expected future income, but do not impose any strict standard for repayment or make repayment the sole determining factor of good faith.(fn8) These courts attempt to reach more of a balance between imposing an inflexible standard for repayment and giving recognition to the idea that Chapter 13...
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