Bankruptcy Article #13
Eligibility, Feasibility and Good Faith
Three key components to a Chapter 13 plan are eligibility (whether a debtor is entitled to file a Chapter 13 under the limitations set forth in Section 109(e), feasibility (whether a debtor can fund a payment plan which complies with Section 1322 and 1325), and good faith (as set forth in Section 1325(a)(3)). Eligibility is established at the outset of the case under Section 109(e). Section 109(e) reads as follows:
(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $336,900 and noncontingent, liquidated, secured debts of less than $1,010,650, or an individual with a regular income and such individual's spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $336,900 and noncontingent, liquidated, secured debts of less than $1,010,650 may be a debtor under Chapter 13 of this title.
This definition of eligible individuals who may file under Chapter 13 has two requirements: regular income and the $336,900 debt level for unsecured debt and $1,010,650 for secured debt. These limits will adjust up in April 2010. Regular income has been determined to be any form of income - even unemployment benefits, worker's compensation benefits, or ADC benefits. It is not necessary to have wage employment or be self employed to take advantage of Chapter 13.
The debt level requirement mandates that the debts be determined as of the date of filing. Contingent debts, on which the contingency has not yet occurred, do not count toward the debt limitation for Chapter 13. Similarly, debts which have not yet been liquidated also do not count toward the debt limitation.
The Maine Bankruptcy Courts have concluded that contractual obligations in litigation which are mathematically capable of being determined are considered liquidated for the purposes of Section 109(e). A judgment on the debt is not essential for liquidation. In the same way, a dispute over the amount of the debt does not render it unliquidated. See In re Jordan, 166 B.R. 201 (Bankr. D. Me. 1994). Tort debt are the most frequently found to be unliquidated, but the Chapter 13 case must be filed before any mathematical certainty surrounds the debt, or the debt might be determined liquidated. Clearly, the lesson from In re Papatones, 143 F.3d 6234 (1st Cir. 1998) is that the issuance of a judgment or declaration of an intended judgment in tort litigation will result in the claim being determined liquidated.
Feasibility is a test of whether the debtor's resources can pay sufficient money into the plan to pay unsecured creditors under the plan not less than the amount that would be paid on the claim if the estate of the debtor were liquidated under Chapter 7 of the Code. Section 1325(a)(4). A debtor's resources are measured by the debtor's anticipated income over a three to five year time period as well as assets that a debtor may sell or liquidate under Section 363 during the life of a plan with proceeds contributed to the plan.
For example, if a debtor proposes a plan which results in curing mortgage arrearage, paying for a secured debt on a vehicle, paying off tax debt and some past due child support, as well as paying his or her unsecured creditors 10% of the value of their claims, and if the total amount to be paid through the plan is $20,000, the debtor must demonstrate to the Court and trustee that he or she has the income and assets to pay that amount of money over a three to five year time period. If the debtor can pay the trustee $400 per month for 50 months, the goal can be reached. If, however, the most a debtor can contribute from his or her income to the plan is $300 per month, and the debtor wants to keep the plan length at 50 months, the debtor must find another $5,000 from some other source (such as the sale of an asset, or the contribution of a tort claim recovery that the debtor has against a third party) to complete the plan. At the time of the plan confirmation, the Court and trustee will closely examine the debtor's ability to follow through with his or her plan payments before approving the contents of the plan.
Good faith is a test set forth in Section 1325(a) (3) which permits a Court to confirm a plan if "the plan has been proposed in good faith and not by any means forbidden by law". The code does not define good faith. Courts across the country have established various tests to determine whether a debtor is proposing a plan in "good faith". The First Circuit has avoided setting a series of benchmarks by which good faith can be found, and instead decided that "honesty of intention", complete and accurate disclosure of information, and best efforts of the debtor should be the guiding principles in good faith evaluations. See In re Farmer, 186 B.R. 781 (Bankr. D.R.I. 1995). Courts seem to be willing to give the debtor the benefit of the doubt despite any bad behavior repetition, as long as the debtor is open, honest, and plays fair with all creditors after filing. Unfortunately for some debtors who have trouble with that personality metamorphosis, "good faith" objections to plans can still haunt the debtors many months into their Chapter 13 case.
The First Circuit Bankruptcy Appellate Panel recently considered the issue of good faith in Chapter 13 in the case of In re Keach, 243 B.R. 851 (1st Cir BAP R.I. 2000). The debtor filed a Chapter 13 immediately after filing a Chapter 7 case, proposed a Chapter 13 plan that paid a 5% dividend to unsecured creditors, and attempted to discharge a fraud claim (which was non dischargeable in the previous Chapter 7 case). The Bankruptcy Appellate Panel concluded that none of the above reflected "bad faith" and remanded the case back to the Rhode Island Bankruptcy Court for consideration of confirmation of the debtor's plan.