Opinion ID: 410407
Heading Depth: 1
Heading Rank: 4

Heading: the good faith requirement

Text: 25 We cannot tell exactly what the Bankruptcy Court did on the issue of whether the plan has been proposed in good faith under section 1325(a)(3) of Chapter 13. Despite the fact that this subsection says only that the wage earner plan must be proposed in good faith, not that the debt in question be incurred in good faith, it is clear from the record that the Bankruptcy Court assessed the automobile payment plan in light of the debtor's pre-plan conduct in creating the debt. The Bankruptcy Court found that the debtor puffed her income somewhat on her loan application but not so egregiously as to constitute fraud or dishonesty. Because, however, the integrity of the debtor's conduct in securing the loan was questionable, the Bankruptcy Court stated at the confirmation hearing that it would refuse to confirm a plan that reduced her car payments below the contract price. Yet in its written opinion, the Bankruptcy Court in effect reduces the interest rate on the loan from the contract rate of 21% to a rate of 10%. In light of its comments at the confirmation hearing and in other parts of its written opinion, it is unclear why the Bankruptcy Court changed its mind. We, therefore, remand the case to the Bankruptcy Court for clarification on this subject as well. 26 On the good faith issue the creditor and the debtor appear to have diametrically opposed positions. The creditor says that the debt in question was fraudulently obtained and that a plan composing such a debt is necessarily in bad faith. The debtor claims that under the good faith provision the Court can only look to see whether the proposed plan or arrangement is made in good faith, i.e., whether it is in line with the debtor's inability to pay, and not whether the debt was incurred in good faith. 27 The good faith requirement is neither defined in the Bankruptcy Code nor discussed in the legislative history. The phrase should, therefore, be interpreted in light of the structure and general purpose of Chapter 13. Obviously the liberal provisions of the new Chapter 13 are subject to abuse, and courts must look closely at the debtor's conduct before confirming a plan. We should not allow a debtor to obtain money, services or products from a seller by larceny, fraud or other forms of dishonesty and then keep his gain by filing a Chapter 13 petition within a few days of the wrong. To allow the debtor to profit from his own wrong in this way through the Chapter 13 process runs the risk of turning otherwise honest consumers and shopkeepers into knaves. The view that the Bankruptcy Court should not consider the debtor's pre-plan conduct in incurring the debt appears to give too narrow an interpretation to the good faith requirement. See, e.g., Matter of Kull, 12 B.R. 654, 659 (S.D.Ga.1981) (among the facts a court should consider to determine whether a debtor has acted in good faith are the circumstances under which the debtor contracted his debts and his demonstrated bona fides, or lack of same in dealing with his creditors.) 28 One way to refuse to sanction the use of the bankruptcy court to carry out a basically dishonest scheme under Chapter 13 is to deny confirmation to the proposed plan. When the debtor's conduct is dishonest, the plan simply should not be confirmed. Unless courts enforce this requirement, the debtor will be able to thwart the statutory policy denying discharge in Chapter 7 cases for dishonesty. 29 Another way to deal with the problem when the conduct is questionable but is not shown to be dishonest, as the Bankruptcy Court found it to be in the instant case, is to require full payment in accordance with the contract. This is the position the Bankruptcy Court apparently intended to take until it wrote the last paragraph of its opinion. On remand the Bankruptcy Court should make clear whether it is, in fact, taking this position and state on the record its reasons for its decision on the good faith issue. 30 Accordingly, the judgment of the District Court is reversed and the case remanded for further proceedings consistent with this opinion.