A recent decision by the Sixth Circuit U.S. Court of Appeals has confirmed that a debtor in Chapter 13 bankruptcy in Michigan has the absolute right to voluntarily dismiss a Chapter 13 bankruptcy case. Please note that if you are presently in a Chapter 13 case, there are certain consequences of dismissing your Chapter 13 bankruptcy that you should be aware of before voluntarily doing so.
In Re. Ronald J. Smith: The Facts of the Case
The case of In re Ronald J. Smith arose in Ohio where the debtor, Mr. Smith, sought to dismiss his third Chapter 13 bankruptcy case. Smith had filed two prior Chapter 13 case and has voluntarily dismissed each of them after the scheduled sheriff’s sale auction of his foreclosed home was stopped by the bankruptcy automatic stay.
He sought to dismiss the third case in the same manner.
In other words, Smith had filed not one, not two, but three “bad faith” bankruptcies.
While “bad faith” is a term often utilized in the U.S. Bankruptcy Code, it does not actually define it. Thus, Bankruptcy Judges have shouldered the task of doing so in case-law. Depending upon in which jurisdiction your case is filed, therefore, bad faith may mean one thing or another.
In the Sixth Circuit, which includes Michigan, the Court has developed a list of indications of bad faith in the filing of a bankruptcy case.
The case-law elaborating these bad faith criteria make it fairly clear that a Chapter 13 bankruptcy case filed solely for the purpose of evading the lawful collection attempts of a creditor and without the intent to actually complete the Chapter 13 is a bad faith bankruptcy filing.
A case filed in “serial” manner—one after the other—is also likely a case filed in bad faith.
Thus, Mr. Smith’s third Chapter 13 bankruptcy was indisputably filed in bad faith (and without the use of a bankruptcy attorney, who might be sanctioned for filing such a case).
As such, it was vulnerable to being dismissed by a creditor or US Trustee or Chapter 13 Trustee via a motion to dismiss.
However, in this instance, the opposite happened.
When Mr. Smith’s third foreclosure sheriff’s sale was unscheduled upon filing of the bankruptcy, he again sought to voluntarily dismiss the case himself.
This time, however, his mortgage creditor opposed the dismissal. Locking Mr. Smith into his Chapter 13 for the (presumably) 5-year duration of the Plan would ensure that it would be repaid Smith’s (presumed) mortgage arrearage.
The Bankruptcy Court in Ohio reinstated the third dismissed case utilizing its “equitable” powers. These so-called powers derive from a section of the Bankruptcy Code allowing a Bankruptcy Court to issue any order or judgment necessary or appropriate to carry out the Code’s provisions.
The Sixth Circuit reversed that reinstatement upon appeal by Mr. Smith, ruling that a court may use its “equitable powers” only to further the Code’s provisions and not to circumvent them.
The Court noted that the provision of the Bankruptcy Code, Section 1307(b), allowing for a debtor in a Chapter 13 bankruptcy to dismiss a case voluntarily simply reads:
On request of the debtor at any time, if the case has not been converted [from a Chapter 7, etc.], the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.
The Court ruled that, by its plain language, 1307(b) is mandatory and that the mortgage creditor in this case had identified no portion of the statute rendering this Section discretionary by the Bankruptcy Court in cases of bad faith.
Mr. Smith’s dismissal was allowed.
This reasoning and this “published” decision of the Sixth Circuit is binding upon all Bankruptcy Courts in Michigan.
Why Dismiss a Chapter 13 Bankruptcy Case?
The Sixth Circuit’s decision is a good one for two reasons.
One, it curtails the use of the Code’s equitable powers provision from this particular use by creditors. The Bankruptcy Court in Detroit already routinely refrains from utilizing its equitable powers for the benefit of debtors, so it’s nice to see the shoe on the other foot here.
Two, it reinforces the absolute nature of a debtor’s right to voluntarily dismiss his or her Chapter 13 bankruptcy case.
Why would anyone want to voluntarily dismiss a Chapter 13 bankruptcy case after going through so much trouble to file it?
Simply put, it is because, over the 3-5-year duration of a Chapter 13 bankruptcy proceeding, things change.
A Chapter 13 bankruptcy is, quickly described, a reorganization bankruptcy in which you pay off some debt in priority order over other types of debt through a court-monitored and -enforced payment plan.
Every month for at least 36 months and up to 60 months, or 5 years, you make a payment equivalent to the “net monthly income” you had on the day that you filed the bankruptcy case.
This “net monthly income” amount is what is left over in your household budget when your necessary household expenses are deducted from your take-home pay.
Whatever that amount of money is, you make a payment in that amount to the Chapter 13 Trustee assigned to your case by the Bankruptcy Court.
The Trustee takes that payment and pays his or her own fee, your attorney’s fees (generally), and, then, whatever is left over is paid to your secured (mortgage, car loan) creditors and other creditors in descending order of importance.
Credit card debt, medical debt, and other “low priority” debt is paid last, after everyone else, and those types of unsecured creditors receive only what is left over, the balance you may owe them after that payment is then totally discharged at the end of the case as in a Chapter 7 bankruptcy.
Thus, in a Chapter 13, you can catch mortgage arrearages up without worrying about paying credit cards, etc., while you do so.
It’s a very good way to save a home from foreclosure.
However, the key language in this description of the process is “on the day that you filed the bankruptcy case.”
What if your income changes? Or you incur a permanent household expense (such as medical or nursing home care) that eats up the net monthly income you had on the day you originally filed the bankruptcy case?
On the flip side of the coin (this is the question that every bankruptcy lawyer hears at least twice per week), what if you win the lottery? Are you stuck in the Chapter 13?
You have the (now absolute) right to dismiss your Chapter 13 bankruptcy case if it is no longer affordable for you—or if a better option for dealing with your debt comes along.
A voluntary dismissal also sometimes results from the divorce of a married couple who filed a Chapter 13 case jointly. The case is usually, in that instance, bifurcated (split into 2 separate cases), with one spouse remaining in the Chapter 13 and the other either converting to Chapter 7 or dismissing his or her bifurcated case entirely.
Perhaps the mortgage arrearage is paid up after, say, 19 months, and there isn’t actually that much credit card debt to worry about … You may, after consulting with your attorney about the pros and cons of dismissal, decide that the general annoyance of being in a Chapter 13 outweighs the advantages of staying in it at that point.
There are as many reasons for a debtor to decide to voluntarily dismiss a Chapter 13 as there are for a debtor to decide to file one.
Voluntary Dismissal of Chapter 13 Bankruptcies: The Bottom Line
The bottom line here is that a Chapter 13 bankruptcy is not an iron-barred cage from which you will be unable to escape for 5 years.
It is a process that the U.S. Congress, in drafting the Bankruptcy Code, intended to be beneficial to you and not a trap to be sprung by your creditors.
Your Chapter 13 is yours to maintain—or to dismiss. Regardless of why you filed the Chapter 13 bankruptcy in the first place.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has exclusively represented debtors in Michigan bankruptcy matters for over 28 years.
If you are considering filing for Chapter 7 or Chapter 13 bankruptcy, contact us to schedule your free initial consultation.