Chapter 13 case converted to Chapter 7 because of debtor’s bad faith

There are multiple types of bankruptcy, and it is important to choose the one that fits your specific needs, debt, and personal circumstances. Sometimes, however, a court may determine that your choice, or the choice you made with the assistance of counsel, was not appropriate.

In the case of In re Killian, on appeal from the United States Bankruptcy Court for the Central District of Illinois, one debtor found out the hard way that concealing information from the bankruptcy trustee can lead a court to convert your bankruptcy from one type to another.

The debtor originally filed for Chapter 13 bankruptcy, and explained to the court that at the time he originally filed, he believed he was considered an "over-median" income debtor, therefore ineligible for Chapter 7 relief.

The Court affirmed the decision of the lower court, confirming that a bankruptcy court can either dismiss or convert a Chapter 13 case, if it is determined to be in the best interest of the creditors, for cause, after appropriate notice and an appropriate hearing. The Court, relying on the standard set forth in In re Love, further explained that "good faith" is a difficult term to precisely define, and "the good faith inquiry is a fact intensive determination better left to the discretion of the bankruptcy court." This means that Illinois bankruptcy courts have been directed to consider the "totality of circumstances and, thereby, make good faith determinations on a case-by-case basis."

Determining the totality of the circumstances

Courts seek to promote resolutions to bankruptcy cases that are based on "fundamental fairness." Where it is faced with determining whether a Chapter 13 petition was filed in good faith, the Seventh Circuit, in seeking to best lay out how to make such a decision, explained a number of factors to consider in looking at the totality of the circumstances. These factors include, but are limited to: the nature of the debt, including the question of whether the debt would be non-dischargeable in a Chapter 7 proceeding; the timing of the petition; how the debt arose; the debtor's motive in filing the petition; how the debtor's actions affected creditors; the debtor's treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors.

In In re Killian, the bankruptcy court found that the debtor, with the help of his attorney, had covered up certain transfers and assets which constituted bad faith. In making this determination, the court reviewed documents, pleadings and statements at prior hearings.

The court expressed that both the debtor and his attorney knew about a transfer of $11,000, which took place just two days before he filed, that was undisclosed to the bankruptcy trustee. The debtor claimed the money was used by his wife to pay off various bills, and sought to have that amount exempted from the bankruptcy. The court ultimately found that the actions of the debtor warranted conversion or dismissal. Therefore, the court determined that converting the Chapter 13 bankruptcy to a Chapter 7 bankruptcy was the best option, and denied the desired exemption because of the debtor's bad faith.

Bankruptcy schedules are signed under penalty of perjury. Concealing certain assets or monetary transfers can lead to devastating results in your bankruptcy case. If you file for bankruptcy, there are many laws and rules that will apply to your case. Consulting with a trustworthy attorney will help ensure the best outcome possible.