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

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.

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