How Courts Interpret Bad Faith in Chapter 13 Cases

If you’re considering Chapter 13 bankruptcy in New York, you may have heard the term “bad faith” used in connection with plan confirmation or case dismissal. But what exactly does that mean? And how do courts determine if a debtor has filed in bad faith?

The answer isn’t always simple. In fact, courts in the Second Circuit (which includes New York) use a totality of the circumstances test to decide whether a Chapter 13 petition or repayment plan was filed in good faith, as required by 11 U.S.C. § 1325(a)(3) and (a)(7).

📜 What Is “Bad Faith” in Chapter 13?

In bankruptcy, bad faith generally refers to situations where a debtor is abusing the process—such as filing to delay creditors, misrepresenting assets, or proposing a plan that doesn’t meet the spirit of the Bankruptcy Code. However, there’s no single definition. Instead, courts examine a range of factors, including:

  • Accuracy of the debtor’s schedules and disclosures

  • The timing of the bankruptcy filing

  • The debtor’s financial history and conduct

  • Whether the plan is feasible and pays creditors fairly

  • Prior bankruptcy filings (especially multiple or repeat filings)

📚 In In re Sorbello (2023), the court found that a debtor who filed to manage a family law debt still acted in good faith because they credibly explained their actions and proposed a feasible plan. The fact that the debt was linked to an unresolved divorce judgment did not, by itself, prove bad faith.

🏛 How New York Courts Apply the Totality of Circumstances Test

Federal courts in New York—and throughout the Second Circuit—routinely emphasize that bad faith cannot be decided based on one fact alone. Instead, judges look at the debtor’s intent, honesty, and overall conduct.

For example, in In re Edwards (2003), the court rejected a creditor’s bad faith claim even though the debtor filed Chapter 13 shortly after a prior Chapter 7 discharge. The court ruled that using the Chapter 13 “super-discharge” was legal and not inherently abusive, especially since the debtor made a good-faith effort to repay.

🚩 Red Flags That May Indicate Bad Faith

Courts may find bad faith where:

  • The debtor has filed multiple bankruptcies in quick succession to block foreclosure (In re Wenegieme, 2018).

  • The debtor fails to make meaningful payments or inflates expenses to avoid paying creditors.

  • There is evidence of manipulation or concealment—like omitting assets or transferring property.

  • There’s no realistic ability or intention to complete the plan.

In Wenegieme, the debtor had filed for Chapter 13 ten times in five years, admitted to doing so solely to stop foreclosure, and had not made mortgage payments in six years. The court not only dismissed the case, but also imposed a one-year bar on refiling.

⚖️ The Second Circuit’s Balanced Approach

Compared to some other jurisdictions, courts in the Second Circuit tend to give debtors a fair chance—even if they’ve made mistakes. Courts recognize that people turn to bankruptcy during times of stress or financial crisis, and not every late filing or budget mistake is “bad faith.”

Still, debtors must act honestly, disclose all relevant information, and propose a plan that treats creditors fairly and complies with the Bankruptcy Code.

✅ How to Avoid a Bad Faith Finding

To stay on the right side of the court, here are some tips:

  • Be honest and complete in your bankruptcy schedules.

  • Don’t file just to delay or frustrate creditors.

  • Disclose all assets, income, and debts—even if you think they’re exempt or irrelevant.

  • File only when you have a real plan to reorganize and repay.

📞 Need Advice About Filing Chapter 13?

At the Law Office of William Waldner, we help New Yorkers navigate the complexities of Chapter 13 bankruptcy—including emergency filings, mortgage arrears, and trustee negotiations. If you’re worried about how your case might be viewed by the court, we can guide you every step of the way.

🗽 Schedule a confidential consultation today at www.midtownbankruptcy.com
Let’s build a plan that works—and that the court will approve.

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