When you file for Chapter 13 bankruptcy, you must propose a Chapter 13 plan in "good faith," where you repay as much of your unsecured debt as you can over the length of your bankruptcy (somewhere between three and five years). Read on to learn what good faith means in Chapter 13 bankruptcy.
(Learn the basics of Chapter 13 bankruptcy, including how it works, what happens to your debts and property, and more.)
The Chapter 13 Repayment Plan
When you file your Chapter 13 bankruptcy petition, at the same time you must file a proposed Chapter 13 repayment plan in which you tell the bankruptcy trustee and the bankruptcy court how much you will pay each month towards your secured debts, priority debts (such as taxes and child support), and unsecured debts. In order for your case to proceed, the bankruptcy court must approve your Chapter 13 plan. (For details on what you must pay through the plan and other plan requirements, see The Chapter 13 Repayment Plan.)
In your plan, you are required to devote all of your “disposable income” to repaying unsecured creditors. Disposable income is that portion of your current monthly income that is not reasonably necessary for the support of you or your dependents. (Figuring out disposable income requires a series of calculations. To learn more, see The Best Effort Requirement in Chapter 13.)
The "Good Faith" Requirement for Chapter 13 Plans
The bankruptcy court will only confirm your plan if it believes you proposed it in good faith. What "good faith" means varies among the courts. But if your Chapter 13 trustee doesn’t think you acted in good faith in proposing plan payments, the trustee can object to your plan.
The Traditional vs. Expansive Definition of "Good Faith"
For years courts have been split on what "good faith" means. Some courts stick to the traditional definition of good faith – that the debtor must be honest regarding the facts of the case, and not have engaged in fraud or concealed assets. Other courts view “good faith” as a check on the disposable income test. That is, are you truly paying all of your disposable income into your plan?
Here are some reasons the trustee might object to your plan as not in good faith.
You have more income than is reflected in your “current monthly income” calculation. Your current monthly income (CMI) is actually your average income received over the six months prior to your bankruptcy filing. (CMI in Chapter 13 is similar to that in Chapter 7. To learn more, see Current Monthly Income for the Means Test.) But you also must tell the court about any current or anticipated changes to your income. For example, if you got a new job or a pay raise right before filing for Chapter 13 bankruptcy, you must tell the court. Although this income is not included in your disposable income calculation, if you don’t include the income in determining your plan payments, the trustee might object to your plan, arguing that your new income allows you to pay more to your unsecured creditors.
Your deductions are not accurate or reasonably necessary for your support. The Chapter 13 bankruptcy trustee might also object to your plan as not in good faith if you overstated the amount of your deductions or deducted expenses that are not reasonably necessary for the support of you or your family. For example, if you are single or married and childless and have high living expenses or recently bought an expensive house, the trustee could argue that these expenses are unreasonable and thus your plan is not proposed in good faith.
What to Do If the Trustee Objects to Your Plan?
If the Chapter 13 trustee objects to your plan as not in good faith, you have the opportunity to respond and explain to the court why your income or deductions are proper. Usually, if you talk to the trustee before the court hearing and address the trustee’s concerns, the trustee will either withdraw the objection or compromise with you.