Good Faith Factors in Chapter 13

Good Faith Factors in Chapter 13

lady justice with flag background

Overview: The Bankruptcy Code requires Chapter 13 plans to be “proposed in good faith”. The code does not have a set standard of what meets this “good faith” test, but courts tend to have a list of factors they consider along with a totality of the circumstances test to determine good faith. Today’s post details what that means for debtors filing plans in Kansas and if the factors set out in Flygare are still relevant for a good faith analysis.

Discussion: Historically there was disagreement between courts about the meaning of the good faith standard. Some courts held that good faith required a particular level of payment to unsecured creditors, while others looked at all the circumstances of the case. In Flygare v Boulden (In re Flygare) 709 F.2d 1344, the court outlined 11 non-exclusive factors factors relevant to a good faith determination:

(1) the amount of the proposed payments and the amount of the debtor’s surplus;
(2) the debtor’s employment history, ability to earn and likelihood of future increases in income;
(3) the probable or expected duration of the plan;
(4) the accuracy of the plan’s statement of the debts, expenses and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;
(5) the extent of preferential treatment between classes of creditors;
(6) the extent to which secured claims are modified;
(7) the type of debt sought to be discharged and whether any such debt is non-dischargeable in Chapter 7;
(8) the existence of special circumstances such as inordinate medical expenses;
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;
(10) the motivation and sincerity of the debtor in seeking Chapter 13 relief; and
(11) the burden which the plan’s administration would place upon the trustee

Since Flygare, Congress has made changes to 11 USC 1325. The 10th Circuit has stated that some of the Flygare factors are no longer relevant under these changes and are subsumed into the code. Rather, a bankruptcy court must consider factors such as whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code. See Cranmer 697 F.3d 1314 (10th Cir. 2012).

In Kansas, the court has stated it will analyze these factors while keeping an eye for Flygare factors that are relevant in each case. Even when a debtor accurately states his debts and expenses, he is still bound to four separate economic tests for plan confirmation. These tests are:

(1) the best-interest-of-creditors test in § 1325(a)(4), which requires that unsecured claim holders receive through the plan at least what they would be paid in a liquidation under Chapter 7;
(2) the feasibility test in § 1325(a)(6), which provides the upper limit of the effort that can be required of a debtor in Chapter 13;
(3) the disposable income test in § 1325(b); and
(4) the duration limitation in 11 U.S.C.S. § 1322(d), which defines the length of Chapter 13 plans.

Some Chapter 13 plans, sometimes called “fee-only” plans, propose to pay the Trustee and attorney’s fees but little or nothing to unsecured creditors. These types of plans have been targeted as failing to meet good faith standards because there is not a fair distribution of the debtor’s income to repay creditors. Although the code does not require any repayment to unsecured creditors in a Chapter 13, courts seem to acknowledge these types of plans are very similar to a Chapter 7 proceedings but allow the debtor to pay their attorneys in installments rather than the up-front fee in a Chapter 7. The up-front payment requirement for a Chapter 7 proceeding often puts low-income debtors at a disadvantage. This is even more true when debtors are being garnished and it is nearly impossible for them to save any money to pay counsel. While there is an argument that debtors can represent themselves in a proceeding, it not without administrative burden on the Trustees office and they are rarely successful.

In re Wark, 542 B.R. 522 (Bankr. D. Kan. 2015) discussed these types of cases and stated that the Code gives debtors a choice, they can file under a Chapter 13 or a Chapter 7. No special circumstances are required when a debtor chooses to file a Chapter 13 over a Chapter 7 as long as other requirements are met, including good faith. Kansas courts have stated the good faith analysis is a question of fact and only a case-by-case analysis of a debtor’s plan can determine good faith. In re Roberts, 493 B.R. 584, 586 (Bankr. D. Kan. 2013).

Conclusion: The Flygare factors are still relevant in determining “good faith” of a proposed plan. While these factors are non-exclusive, we must be aware of them and how they fit into proposed plan. We must also understand that passing the “good faith” test does not necessarily mean the plan will be confirmed.

If you are considering a bankruptcy please feel free to reach out to us for a free consultation. Coons and Crump has offices in Wichita, Topeka, Lawrence, and Overland Park. One of our bankruptcy attorneys will go over your circumstances with you in detail and work out a plan with you to deal with your creditors.