By Ryan C. Wood
When an individual files a chapter 13 bankruptcy case to reorganize their debts involuntary dismissal of the case was most likely not the outcome desired. The entire reason for filing bankruptcy is to obtain relief from creditors. The case being involuntarily dismissed does not help. Involuntary dismissal does happen though. There are actually many ways a Chapter 13 Reorganization can be dismissed involuntarily or without the consent of the person filing the case. This article will focus on the most common reasons a Chapter 13 bankruptcy reorganization is dismissed by the filing of a motion to dismiss by the standing Chapter 13 Trustee assigned to administer the bankruptcy estate. Each jurisdiction has a standing Chapter 13 trustee assigned to administer all of the chapter 13 cases filed in that region. In the Bankruptcy Court for the Northern District of California we have three different standing Chapter 13 Trustees.
1. Failure to Pay or Failure to Timely Pay the Monthly Chapter 13 Plan Payment
This is the single most common reason a Chapter 13 case is dismissed. The reason is not because creditors will stop getting paid through the Chapter 13 plan when the debtor stops making the plan payments. Some bankruptcy attorneys will say the reason a motion to dismiss the case is filed is because the confirmed chapter 13 plan is violated when a debtor stops making the plan payments. While this is true, the real world reason is the Chapter 13 trustee gets a percentage of the monthly Chapter 13 plan payment to administer the Chapter 13 bankruptcy estate. Chapter 13 trustees cannot continue to administer cases they are not getting paid for. A Chapter 13 trustee could in theory go bankrupt themselves if they operate like that. Really there are many issues surrounding failure to make the monthly Chapter 13 plan payment any of the foregoing reasons are valid. At any point in the three to five year Chapter 13 plans if the monthly chapter 13 plan payments are not paid to the Chapter 13 trustee can file a motion to seek dismissal of the case. Some trustees are more aggressive than others and different offices handle nonpayment quite differently. Some Chapter 13 trustees will send a letter informing the chapter 13 debtor the amount not paid and when it must be paid by or a motion to dismiss the case will be filed. Others go straight to filing a motion to dismiss the case and set it for hearing. There is no mercy at all. Either pay or the case will be dismissed.
2. Failure to Confirm a Chapter 13 Plan of Reorganization
The requirements to confirm or approve a Chapter 13 Plan of reorganization are set forth in 11 U.S.C. Section 1325(a) and there are many requirements. Almost all jurisdictions use some version of a model chapter 13 plan that helps meet the requirements for confirmation or approval of the plan of reorganization by the court. Unfortunately model plans also hurt debtors in limiting their options to reorganize their debts. It cuts both ways. The goal is to try and make the reorganization more streamlined and less work for the court. Objections to confirmation of the chapter 13 plan are routinely filed by the chapter 13 trustee or secured creditors. Rarely do creditors holding general unsecured claims do anything in chapter 13 cases. Why? It is not worth their time or money to do anything but file a proof of claim and be done with it. For secured creditors or creditors with priority unsecured debts the law is different. Depending upon the circumstances secured creditors and creditors with priority unsecured debts will mostly be paid through the Chapter 13 plan of reorganization and the debt owed to them could be reorganized or changed for the benefit of the bankruptcy filer. Chapter 13 trustees also have to file objections to confirmation given they are the gatekeeper making sure the requirements for confirmation, as they determine, are met. In almost all circumstances if the Chapter 13 trustee recommends a Chapter 13 plan be confirmed the court will confirm the plan. It is when the objections to confirmation are not resolved or withdrawn a debtor and their bankruptcy attorney can run into problems and the case could be dismissed for undue delay in confirming or resolving the objections to confirmation. At some point a hearing will have to be held regarding confirmation of the Chapter 13 plan and the judged assigned to the case can weigh in on what should happen. If there is an issue that requires additional evidence to make a determination an evidentiary hearing or mini-trial will have to be conducted. If the court denies confirmation the debtor will usually be given additional time to amend the plan or the case will be converted to Chapter 7 or involuntarily dismissed.
3. Bad Faith of the Bankruptcy Filer is Case for Involuntary Dismissal
11 U.S.C. Section 1307(c) allows for the dismissal of a Chapter 13 case for cause on a finding of bad faith based upon the totality of the circumstances. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1222-23 (9th Cir. 1999). There are four factors to take into consideration: (1) whether the debtor misrepresented facts in his; petition or plan, unfairly manipulated the Code, or otherwise filed his petition or plan in an inequitable manner; (2) the debtor’s history of filings and dismissals; (3) whether the debtor intended to defeat state court litigation; and (4) whether egregious behavior is present. There is a lot of gray in these factors when determining whether a Chapter 13 case was filed in bad faith.
4. Sua Sponte Dismissal of a Chapter 13 Case
This is extremely rare but possible. Sua Sponte means the court on its own accord chooses to dismiss the Chapter 13 case given the court made the determination the case is not proper. Section 105(a) explicitly provides the bankruptcy court with this authority. In relevant part, § 105(a) states: “No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.” See also Tennant v. Rojas (In re Tennant), 318 B.R. 860, 869 (9th Cir. BAP 2004) (holding that bankruptcy court may sua sponte dismiss a chapter 13 case under §§ 1307 and 105(a)).