Is a chapter 13 bankruptcy case filed one month after a divorce a bad faith filing in Virginia?

Is a chapter 13 bankruptcy case filed one month after a divorce a bad faith filing in Virginia?

Not in the case of In re: James Christopher Haney, Case no: 10-10258-SSM (EDVA, Aug. 2010), where the bankruptcy judge for the Eastern District of Virginia ruled that the chapter 13 case had not been filed in bad faith.

In the Final Decree of Divorce, the Virginia Circuit Court divorce judge ordered the husband to pay a portion of the mortgage on the marital residence until it was sold, several credit card debts, and $20,000 toward wife’s attorney’s fees.  The husband filed a chapter 13 bankruptcy case in the United States Bankruptcy Court for the Eastern District of Virginia about a month after the entry of the divorce decree.  The debtor husband’s first proposed chapter 13 plan included a provision that the wife would pay the mortgage on the former marital residence until it sold, then all debts would be paid from the proceeds.  The plan drew an objection from the creditor wife for failing to pay priority debts in full, as required by 11 U.S.C. §1322(a)(2), and on the grounds that the plan was not feasible, as required by 11 U.S.C. §1325(a)(6), and was not proposed in good faith, as required by 11 U.S.C. §1325(a)(3) and (7).

The bankruptcy court judge sustained the wife’s objection to confirmation of the first chapter 13 plan because it failed to include the treatment of the mortgage payment contributions by the wife or the credit card payment obligations of the husband arising under the divorce decree.  However, the judge did find that the case and the first plan were not filed or proposed in bad faith, simply because it compromised the claim for wife’s attorney’s fees, which were not a Domestic Support Obligation as defined in 11 U.S.C. §101(14A), and were not entitled to priority treatment in the plan.

As allowed under 11 U.S.C. §1323 and Local Bankruptcy Rule 3015-2, the husband filed a modified chapter 13 plan, within the required 21 day period after denial of confirmation, in which he proposed to reimburse wife for her share of the full mortgage payments and to pay debts required to be paid in the divorce decree, all from the net proceeds of sale of the real estate.  The wife objected to the modified plan on four grounds: (1) her priority claim was not being paid in full; (2) the husband could not defer his requirement to contribute to the monthly mortgage payment as required by the divorce decree; (3) the case and the plan were not filed or proposed in good faith; and (4) the plan was not feasible.

The bankruptcy court judge sustained the wife’s first objection by finding that the divorce decree had created an equitable lien in the husband’s share of the net proceeds for the payment of the monetary award to wife or “equalizing payment” as described by the judge, and the payment of the Best Buy credit card.  The court recognized that property settlement and equitable distribution debts were not priority debts and did not have to be paid in full, citing the case of In re Uzaldin, 418 B.R. 172 (Bkr. E.D.Va. 2009), also decided in the bankruptcy court for the Eastern District of Virginia (and also the subject of another blawg post herein).  Nevertheless, as these debts were secured by an equitable lien, they would have to be paid in full.   As the modified plan still did not specify that these non-priority amounts would be paid exclusively from husband’s share of the net proceeds, it could not be confirmed.  The proposed modified plan was “unquestionably ambiguous” as to when the monetary award and the payment of the credit card debt assigned to husband in the divorce decree would be paid.

The bankruptcy court judge also sustained the wife’s second objection to the husband’s deferred mortgage contributions.  The court recognized that such contributions were domestic support obligations and noted that 11 U.S.C. §1325(a)(8) requires full payment of all post-petition domestic support obligations prior to confirmation, without any allowance for delayed payments provided they were not prejudicial to the recipient spouse, as argued by the husband in this case.  Further, the husband’s modified chapter 13 plan was too tenuous because there was no guarantee the mortgage lender would accept partial payments from the wife alone and no specifics as to when and how the house would be sold.  In fact, after performing the estimated calculations, it appeared the net proceeds from the proposed home sale would not even be sufficient to pay husband’s past-due domestic support obligations.

In support of the wife’s good faith objection, the court noted that the case was filed only one month after entry of the final decree of divorce and that the debtor’s correspondence with his ex-wife’s divorce counsel mischaracterized the bankruptcy court’s prior order allowing relief from the automatic stay, which mischaracterization evidenced the husband’s intention to use the bankruptcy to thwart enforcement of the divorce decree.  On the other hand, the debtor had substantial debts, including attorney’s fees owed to his own divorce counsel, and was proposing to pay a substantial majority of the amount of his debt in the chapter 13 plan.  Ultimately, the court overruled the good faith objection because the bankruptcy court judge could not find that the debtor had filed the bankruptcy case solely to avoid his obligations to his ex-wife as opposed to attempting to adjust all his debts.

While the bankruptcy court judge expressed doubts about whether the debtor could propose any feasible plan, considering the need to make up for the debtor’s share of the mortgage payments he had already missed and to satisfy the equalizing payment and credit card debt, the judge was willing to allow the debtor one more chance to file a modified plan.  The court reminded that debtor that although Local Bankruptcy Rule 3015-2(H) normally allowed the debtor 21 days after denial of confirmation to file another modified plan, a chapter 13 case could be dismissed under 11 U.S.C. §1307(c)(5) by both a denial of confirmation and a denial of additional time to file another plan or under 11 U.S.C. §1307(c)(11) for failure to pay post-petition domestic support obligations.

The author finds that the most interesting aspects of the Haney case are not only the bad faith analysis in light of a prior divorce, but also the implication that a bankruptcy case filed solely to avoid obligations to a spouse from a divorce case would constitute a bad faith bankruptcy filing.

You should consult with your Virginia bankruptcy and divorce lawyer or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether a particular bankruptcy filing following the entry of a divorce decree might be considered a bad faith filing.

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