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Bad Faith and Totality of the Circumstances

Debtors do not have the absolute right to declare bankruptcy at will and discharge their debts.  The ‘totality of circumstances’ test for bankruptcy proceedings is to determine if a debtor has engaged in abuse of the process by filing for Chapter 7 bankruptcy, when in fact there is sufficient income to repay debts.  The ‘totality of circumstances’ test is employed to determine whether any mitigating factors affect the debtor’s ability to pay or whether any aggravating factors show debtor’s bad faith.

Before dismissing a case based on a bad faith filing, a court must evaluate whether the debtor’s intention in filing the petition is inconsistent with the Chapter 7 goals of providing a fresh start to debtors and maximizing return to creditors.  In order to reach this determination, the Court must consider the following:

  1. debtor’s ability to repay his/her debts,
  2. whether bankruptcy petition was filed because of sudden illness, calamity, disability, or unemployment,
  3. whether debtor incurred cash advances and made consumer purchases far in excess of his ability to repay,
  4. whether debtor’s proposed family budget is excessive or unreasonable,
  5. whether debtor’s schedules and statement of current income and expenses reasonably and accurately reflect true financial condition,
  6. whether debtor has likelihood of sufficient future income to fund Chapter 11, 12, or 13 plan which would pay substantial portion of unsecured claims,
  7. whether debtor has history of bankruptcy petition filings and case dismissals,
  8. whether debtor has engaged in eve-of-bankruptcy purchases,
  9. whether petition was filed in good faith,
  10. whether debtor enjoyed stable income, and
  11. whether expenses could be reduced without depriving debtor and his/her family of necessities of life like food and shelter.

Procedural or substantive bad faith can lead to sanctions under Rule 9011 of Federal Rules of Bankruptcy Procedure and imposition of sanctions is mandated where the rule has been violated.

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