What is Bad Faith Under Section 348(f)(2)?

By Vijay Malik, 2012 J.D. Candidate

Section 348(f)(2) states that in a conversion from Chapter 13, the property of the estate is the property at the time of conversion unless there is “bad faith.”  What is “bad faith” in this context? Let’s take a look at what four courts have held.

The Court in In re Carter, 260 BR 130 (B.W.D. Tenn. 2001) held that life insurance proceeds received by the Debtor shortly after conversion to Chapter 7 but more than 180 days after filing of the Chapter 13 petition were not property of the Chapter 7 estate.  The Court said that conversions should not be deemed to be made in “bad faith” solely because the Debtor could not make payments under the Chapter 13 plan.

The Court in In re Mullican, 417 BR 389 (B.E.D.Tex. 2008) held that conversion to Chapter 7 was done in bad faith when the Debtor received an inheritance more than 180 days after filing. The Court considered it bad faith that the Debtor’s attempt to convert the case rather than devote the inheritance to payment of its Chapter 13 creditors.

The Court in In re Bejarno, 302 BR 559 (B.N.D. Ohio 2003), held that bad faith under § 348(f) required “nefarious planning,” and that the tax refunds and proceeds from an injury claim received by the Debtors prior to conversion but after the filing of the petition did not become property of the Chapter 7 estate.  Because only a small portion of the tax refund and injury claim was likely to be non-exempt, the Court doubted the Debtors had participated in “nefarious planning.”

The Court in In re Brinkley, 323 BR 685 (B.W.D.Ark. 2005) held that although life insurance proceeds received during a Chapter 13 would be property of the estate regardless of whether they were received within 180 days of the petition date, by virtue of §348(f) these funds were not property of the estate once the case was converted to Chapter 7.

In In re Carter, a debtor-wife became entitled to life insurance proceeds following the death of her debtor-husband.  The case was filed more than 180 days prior to the death of the debtor-husband and consequently the debtor-wife obtained her interest in the proceeds outside of bankruptcy’s 180 day window.  The court reasoned that “courts should not find that a bad-faith conversion exists if debtor is unable to complete a Chapter 13 plan due to a change in circumstances or financial hardship.”

The Court in In re Brinkley held similarly:  “Life insurance proceeds that were received by debtor-wife under deceased debtor-husband’s life insurance policy after 180-day period in which Bankruptcy Code treated life insurance benefits as estate property, but before debtors’ case was converted to case under Chapter 7, became property of Chapter 13 estate only as a result of statute that included in Chapter 13 estate any property acquired by debtors during pendency of Chapter 13 case, and therefore policy proceeds were not property of the estate upon case conversion, given absence of allegation or evidence that case was converted in bad faith.”

However, the court in In re Mullican, held “debtors’ bad faith in converting their Chapter 13 case to case under Chapter 7 after debtor-husband lost his job, despite fact that debtor-husband had also inherited a sum sufficient from his late mother that they could easily have satisfied their plan obligations in full, in deliberate attempt to avoid paying unsecured creditors even the minimal 1.04% dividend that they had agreed to pay in their confirmed plan, was sufficient to trigger statutory “bad faith” exception to general rule that property acquired postpetition is not included in property of the estate upon conversion.”  The Court looked past a superficial “change in circumstances” (job loss) to the debtor’s financial position due to the windfall.  Accordingly, because the debtor could have satisfied plan obligations in full, and because the debtor attempted to avoid paying unsecured creditors only approximately 1% of their claims, the Court found bad faith under a totality of the circumstances analysis.  This case is closer to the “nefarious planning” as discussed in In re Carter.

Vijary Malik Mr. Malik is a law student at Creighton University in Omaha, Nebraska. Prior to law school, Mr. Malik worked in real estate private equity and investing banking for various firms in New York and Washington, D.C.
No Author Biography has been linked to this Article.

Related Articles

“We have observed consumers who seem to be focused principally on their credit scores, . . . rather than focusing on . . . a more critical immediate focus on their balance sheets . . .”
December 19, 2021
Introduction Following Part 1's review of the December 1, 2021 changes in the Federal Rules of Bankruptcy Procedure, Part 2 and
November 8, 2020
By James J. Robinson, Chief United States Bankruptcy Judge, Northern District of Alabama When do the trustee’s duties end, and who gets the money? Harris v. Viegelahn, 135 S. Ct. 1829 (2015). This opinion of the unanimous Court requires the trustee to return to the debtor undistributed plan payments—originating from wages earned postpetition—on hand at a good-faith, post-confirmation conversion rather...
December 6, 2020
13 documents by Independence Software – Identity theft is a real and constant threat when transmitting information through the Internet. For Trusteeships, using e-mail to receive documents from the debtor bar is insecure, placing sensitive debtor information at risk. Founded in 2011, 13 Documents is unlike other filing systems — it is a complete document management solution for your Trusteeship...
November 3, 2019
By Henry E. Hildebrand, III, Standing Chapter 13 Trustee for the Middle District of TN (Nashville) A creditor may request an extension of time to file a claim under Rule 3002, F.R.B.P. only where the conditions of that rule have been fully satisfied; the filing of a defective list of creditors does not permit an extension of the time for...
September 27, 2020
By Professor Nancy Rapoport Dear Readers: The Academy staff has raised an important issue: Given the mental health issues associated with the pandemic, what should someone do when he or she sees a colleague lawyer in distress? Before we get to the ethics implications, let’s talk about the mental health issue itself. When people are under great stress, they try...
Copy of Hildebrand-2016
September 18, 2022
Insurance proceeds generated due to a totaled car treated under the “hanging paragraph” of 1325(a) covers the entire claim; interest, however, is not recalculated even though it was a higher rate than the interest paid under the plan. (Hanan) In re Pagan, 638 B.R. 887 (Bankr. E.D. Wis. Jan. 24, 2022) Case Summary Bankruptcy judges have been overheard saying that...
July 19, 2020
By Cathy Moran, Esq. (Redwood City, CA) Like so much in life, it’s all about timing. I revisited an older post here about delaying the filing of a bankruptcy til the New Year when the debtor expects to owe taxes in April. A Chapter 13 filed in January can include and pay the taxes associated with the tax year ending...
July 14, 2019
By Beverly M. Burden, Standing Chapter 13 Trustee (Lexington, KY) An unscheduled creditor without notice of the bankruptcy case was denied an extension of time to file a proof of claim pursuant to Bankruptcy Rule 3002(c)(6)(A) in a recent opinion from the Eastern District of Kentucky. In the case of In re Fryman,1 the debtor did not include creditor Kentucky...
April 24, 2022
Recent headlines noted that March 2022 saw a 33.5% increase in bankruptcy filings over February. This could suggest the coming swell in bankruptcy cases anticipated since the start of the COVID pandemic. However, bankruptcy professionals recognize that consumer filings always spike in March (see chart). This phenomenon is usually attributed to the tendency to avoid filing in January and February...