Lack Of Good Faith Sinks Alabama Homeowners' 'Chapter 20' Bankruptcy Gambit

A U.S. Bankruptcy Court in Anniston, Alabama recently kiboshed a homeowner/couple's attempt at pulling off a so-called 'Chapter 20' bankruptcy (ie. the filing of a Chapter 7 filing to obtain a discharge of unsecured debts, followed by a Chapter 13 filing to work out a 5-year payment plan on the arrearages on secured debts), finding the filing was made with a lack of good faith.(1)

The indicia of a lack of good faith found by the judge:

• failure to file a Chapter 13 petition soon after obtaining the Chapter 7 discharge ("They waited over 3 years, during which time they incurred 37 new obligations and increased their debts by $37,620");



• the lack of a need for a Chapter 13 filing immediately after the Chapter 7 discharge to work out any mortgage arrearages existing immediately thereafter ("And most significantly, their mortgage arrears — 3 monthly installments — was not a leftover from their 2007 Cases.");



• The Debtors' probable intent to simply buy some time until they again became eligible to file another Chapter 7 petition, at which point they would be strategically positioned to once again stiff all their unsecured creditors (this time, on all new obligations incurred subsequent to the filing of the earlier Chapter 7 petition).

With regard to the last point, the court made this comment:

• "The Debtors' probable motive for filing this case was to bide their time under the protection of the automatic stay (§ 362), and later a confirmation order (§ 1327), until they become eligible for another chapter 7 discharge. While the Court cannot be absolutely certain of the Debtors' motives, it can look at the totality of the circumstances to determine whether their case was filed in good faith, especially at a time they were not eligible for a discharge."

For the ruling, see In re Gaddis, Case No. 11-40050-JJR-13 (Bankr. N.D. Ala. Eastern Div. June 20, 2011).

(1) The judge's general position on so-called Chapter 20 filings was expressed in this excerpt:

• This bankruptcy judge believes that with the enactment of BAPCPA, and specifically §1328(f)(1), most chapter 13 debtors are now prohibited from seeking relief under chapter 13 until the 4-year bar from discharge required by § 1328(f)(1) is satisfied; especially debtors who have incurred substantial post-chapter 7 debts and whose principal purpose for seeking chapter 13 relief is not to cure mortgage arrears that were left over after a recently granted chapter 7 discharge.
  
  In any event, § 1328(f)(1) cannot be ignored, and the ineligibility of a debtor to receive a discharge in a chapter 13 case must be considered as a critical factor in a court's determination of whether a chapter 13 case was filed in good faith as required by Section 1325(a)(7), a section also enacted with BAPCPA. In re Gonzalez, No. 08-15277-B-13, 2008 WL 5068837 (Bankr. E.D. Cal. Nov. 25, 2008).