DISHONEST CHAPTER 13 DEBTOR RIGHT TO DISMISS CASE NOT ABSOLUTE

Normally, Chapter 13 debtors can get out of or dismiss their Chapter 13 cases almost as a matter of right. On the other hand, Chapter 7 debtors cannot ordinarily have their Chapter 7 cases dismissed. Once you have filed a Chapter 7 case and have gone through the initial 341a meeting of creditors, you cannot just change your mind and get out of the Chapter 7 case. For example, debtor files a Chapter 7 case without disclosing that he has $50,000 in a CD account. The trustee discovers later that debtor has a $50,000 CD. Debtor is not able to exempt the $50,000. The trustee tells the debtor to turnover the $50,000 to him so he can pay some creditors. Debtor changes his mind about filing for bankruptcy because he does not want to lose the $50,000. Can he dismiss his Chapter 7 case? NO. The trustee will file a motion asking the court for an order to have the bank turnover the CD to him and the debtor will not be able to oppose the motion successfully. Debtor will end up losing his CD. But in a Chapter 13 case, debtor can most probably have his case dismissed and save his CD if there was no bad faith by debtor.

What is meant by debtor “bad faith” which will prevent debtor from being able to dismiss his Chapter 13 case?

In Re Kotche, the debtor moved to dismiss her Chapter 13 case at the confirmation hearing. The U.S. Trustee objected to confirmation and objected to dismissal of the case and asked that the court convert the case to Chapter 7. In other words, debtor wanted to get out of bankruptcy by dismissing her Chapter 13 case but the US Trustee wants the court to keep debtor in bankruptcy by converting her Chapter 13 case to a Chapter 7 case against her will! It’s like dragging her by the hair and forcing her to stay in bankruptcy even if she does not want to. The court denied confirmation of debtor’s plan, and scheduled a hearing to consider the competing motions.

According to schedule B, debtor owned jewelry $50, however her ex-husband testified that she owned a diamond wedding ring set with a separately purchased center-diamond stone of 3.64 karats, a tennis bracelet, two diamond bracelets, a diamond necklace, a watch, and a cocktail ring. Further, the couple purchased a baby grand piano, which the debtor did not disclose in her schedules. The debtor testified that she was living with her mother, did not have the jewelry, and did not know what happened to it. This is known as the “selective amnesia” excuse. The piano, she said was given to movers. The court found that the debtor had clearly not been complete or forthright in her disclosures on schedule B and her Statement of Financial Affairs. “Although Debtor promised at her Section 341a meeting to amend these documents, no amendments have been filed,” the court said, adding that the debtor’s recounting of what she owned changes from one sworn statement to the next. “The debtor’s vague assertions of losing track of various pieces of diamond jewelry cannot be found sufficient to rebut the evidence that she had such items and either retains them today, or disposed of them within the period required to be disclosed under her Statement of Financial Affairs,” the court said, and found that the motion to dismiss was brought in bad faith. The court noted that the debtor could not be kept in Chapter 13 against her will, but also found that she did not have an absolute right to have her case dismissed.

“There is no indication in Section 1307(b) is intended to provide the dishonest debtor a right to misuse the protections of a bankruptcy case and then escape with impunity. Such result would permit abusive practices and render null and void any judicial power to prevent or protect against such fraudulent practices…” Case converted to Chapter 7!