good faith and disposable income: should the good faith...

Good Faith and Disposable Income:Should the Good Faith Inquiry Evaluate the

Proposed Amount of Repayment?

Brandon L. Johnson*

TABLE OF CONTENTS

I. INTRODUCTION ..................................... 375II. THE BASICS OF CHAPTER 13 ........................... 376

III. SUMMARY OF GOOD FArrH ANALYSIS .................... 378IV. THE 1984 AMENDMENTS .............................. 380V. GOOD FAITH ANALYSIS REQUIRES CONSIDERATION OF THE

AMOUNT THE DEBTOR PROPOSES TO REPAY CREDITORS ....... 381A. The Totality of the Circumstances Test

Requires Consideration of Repayment ................ 381B. The Legislative History of Chapter 13 Requires

Consideration of Repayment ........................ 386VI. CONCLUSION ...................................... 388

APPENDIX A: ..................................... 390APPENDIX B: ..................................... 393

I. INTRODUCTION

More and more debtors facing bankruptcy are choosing to file for Chapter13 relief rather than Chapter 7 relief.' The enactment of the new BankruptcyCode in 1978 loosened the requirements to be eligible for Chapter 13 and as aresult, issues relating to Chapter 13 cases are being litigated at an increasingrate. One of the most litigated issues in Chapter 13 cases is whether the debtor'splan has been proposed in good faith. Good faith litigation has generated amyriad of published decisions, many of which are utterly irreconcilable with

* B.S. 1997, Washington State University; J.D., 2000, summa cum laude, GonzagaUniversity School of Law. The author is currently clerking for the Honorable Dennis J.Sweeney, Washington State Court of Appeals, Division IIl. The author would like to thankProfessor Stephen Sepinuck for reviewing early drafts of this Article.

1. In 1978, Chapter XII filings comprised approximately 15% of total bankruptcyfilings. By 1998, Chapter 13 filings had nearly doubled, comprising approximately 28% oftotal bankruptcy filings. Statistics available at http://moneycentral.msn.com/articles/smartbuy/debt/4955.asp (last visited Feb. 22, 2001); http://www.abiworld.org/stats/currentstats.html (last visited Mar. 1, 2001).

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one another. Much of the litigation has concerned how the standard of goodfaith should be defined and applied to individual cases.

Prior to 1984, most courts considered the amount or percentage ofunsecured claims the debtor proposed to pay. The courts' interpretation ofChapter 13's legislative history led them to conclude repayment of debts wasa primary objective of Chapter 13 debtors. As such, courts looked closely athow much debtors proposed to pay their unsecured creditors.

In 1984, Congress amended the Bankruptcy Code and added§ 1325(b)(1)(b), known as the disposable income test. This provision requiresa debtor who is not satisfying all debts in full to devote all disposable incomeinto the plan for a period of three years upon the objection of any creditor or thetrustee. Many courts and commentators alike saw this provision as implicitlyremoving any consideration of the amount to be paid to unsecured creditorsfrom the good faith analysis under § 1325(b)(3).

However, some courts continue to view the amount of repayment as onefactor of the good faith analysis. Currently, both bankruptcy courts and circuitcourts are split on the issue of whether the amount of repayment continues tobe a relevant factor when determining if a debtor's plan has been proposed ingood faith.

This paper will demonstrate how, in light of the legislative history behindChapter 13, the amount a debtor proposes to pay unsecured creditors is not onlya relevant factor for determining the good faith of the plan, but indeed it is anecessary factor. Section two provides a brief overview of Chapter 13 relief.Section three examines the current state of good faith analysis under§ 1325(a)(3). Section four describes the 1984 amendments to the BankruptcyCode. Finally, section five explains why the amount of repayment to unsecuredcreditors is a critical factor for determining whether a debtor's plan has beenproposed in good faith.

II. THE BASICS OF CHAPTER 13

Individual debtors who desire bankruptcy protection may rehabilitatethemselves under Chapter 13 of the Bankruptcy Code.2 Chapter 13 is availableto any individual with regular income who owes fixed unsecured debts of lessthan $269,250 and fixed secured debts of less than $807,750 at the time thepetition is filed.3 A Chapter 13 case is commenced when the debtor files apetition with the bankruptcy court.4 Unlike Chapter 7, only the debtor may

2. 11 U.S.C. §§ 1301-1307, 1321-1330 (1994).3. 11 U.S.C. § 109(e) (1994).4. 11 U.S.C. §§ 301, 303 (1994).

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2000/01] GOOD FAITH AND DISPOSABLE INCOME 377

institute a Chapter 13 case, and the debtor may convert to Chapter 7 or dismissat any time.5

The Chapter 13 debtor is generally allowed to retain possession of allproperty,' and in exchange the debtor pays future income to a trustee whooversees the case and distributes the payments to creditors.7 The debtor mustfile a plan for repayment of creditors.' The plan must provide for submissionof the debtor's income to the trustee to carry out the plan, provide for fullpayment of priority claims under § 507,9 and treat claims within a particularclass the same. 0 Plans are generally proposed to last three years, although thecourt may extend the plan up to five years "for cause.''11

Once the debtor has proposed the plan, the bankruptcy court will hold ahearing on its confirmation.' 2 For a plan to be confirmable, the court must findit meets the required elements found in § 1325(a):

the plan complies with the provisions of this chapter and with the otherapplicable provisions of this title;any fee, charge, or amount required under chapter 123 of title 28, or by theplan, to be paid before confirmation, has been paid;the plan has been proposed in good faith and not by any means forbidden bylaw;the value, as of the effective date of the plan, of property to be distributedunder the plan on account of each allowed unsecured claim is not less thanthe amount that would be paid on such claim if the estate of the debtor wereliquidated under Chapter 7 of this title on such date;with respect to each allowed secured claim provided for by the plan -

the holder of such claim has accepted the plan;(i) the plan provided that the holder of such claim retain the liensecuring such claim;(ii) the value as of the effective date of the plan, of property to bedistributed under the plan on account of such claim is not less thanthe allowed amount of such claim; or

5. 11 U.S.C. §§ 1307(a), 301, 303 (1994).6. 11 U.S.C. § 1306(b) (1994).7. 11 U.S.C. §§ 1302, 1306(a) (1994).8. 11 U.S.C. § 1321 (1994).9. 11 U.S.C. § 507 (1994).10. 11 U.S.C. § 1322(a) (1994).11. 11 U.S.C. § 1322(c) (1994). See In re Arnold, 869 F2d 240, 244 (4th Cir. 1989)

("Cause" is determined on a case by case basis.); In re Andrews, 155 B.R. 769, 773 (9th Cir.B.A.P. 1993) (Whether "cause" exists is left to the bankruptcy judge's discretion.); In reCoburn, 175 B.R. 400, 402 (Bankr. D. Or. 1994) ("The 'cause' to exceed over 3 years mustbe something for the debtor's benefit.").

12. 11 U.S.C. § 1324 (1994).

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the debtor will be able to make all payments under the plan and tocomply with the plan. 13

A confirmed plan becomes binding on both the debtor and the creditors, andtitle to all the estate's property is vested back in the debtor.'4

After the plan is filed, the debtor must begin making payments to the trusteewithin thirty days. 5 A debtor able to make all payments under the plan willreceive a discharge under § 1328(a) of all debts included in the plan with someexceptions, including debts for alimony and child support and certain long-termdebts included in the plan that require payments beyond the length of the plan. 16

The current Chapter 13 essentially encourages debtors to exercise thisoption of relief by making three major changes from the old Chapter XIII. First,Congress expanded the class of debtors who are eligible to utilize Chapter 13by making it available to anyone with a regular income, rather than only wageearners. 17 Second, Congress eliminated the requirement the plan be approvedof by a majority of the creditors, instead using the elements in section § 1325(a)as a basis for the confirmation of proposed plans. 18 Finally, Congress addedfurther benefits to utilizing Chapter 13 by making many debts dischargeableunder section § 1328(a) that are non-dischargeable in a straight Chapter 7bankruptcy case under section § 523.19 This is referred to as the Chapter 13"super discharge., 20

III. SUMMARY OFGOOD FAITH ANALYSIS

"Every bankruptcy statute since 1898 has incorporated literally, or byjudicial interpretation, a standard of good faith for the commencement,

13. 11 U.S.C. § 1325(a) (1994).14. 11 U.S.C. § 1327 (1994).15. 11 U.S.C. § 1326(a)(1) (1994).16. 11 U.S.C. § 1322(b)(5) allows a debtor to cure defaults on payments within a

reasonable time for debts that become due after the final payment of the plan. The mostcommon example is the debtor who is allowed to cure arrearages on a home mortgage. SeeIn re Winthurst, 97 B.R. 457, 460 (Bankr. C.D. Ill. 1989).

17. 11 U.S.C. § 1095(e) (1994). See also In re Stella, 663 F.2d 326, 328 (1st Cir.1981); In re Pearson, 773 F.2d 751, 753 (6th Cir. 1985).

18. See Barnes v. Whelan, 689 F.2d 193, 197 (D.C. Cir. 1982).19. These include, most importantly, debts procured through fraud, embezzlement,

misrepresentation, larceny, and debts resulting from willful and malicious conduct that injuresa person or property. 11 U.S.C. § 523(a)(1)-(10) (1994).

20. See In reSolomon, 67 F.3d 1128, 1131 (4th Cir. 1995); In re Games, 213 B.R.773, 779 (Bankr. E.D. Wash. 1997); In re Edwards, 207 B.R. 728, 730 (Bankr. N.D. Fla.1997); First United Sav. Bank v. Edwards, 184 B.R. 46, 48 (S.D. Ind. 1995).

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prosecution, and confirmation of a bankruptcy proceeding.",2' The good faithrequirement is said to "prevent[ ] abuse of the bankruptcy process by debtorswhose overriding motive is to delay creditors without benefitting them in anyway or to achieve reprehensible purposes. 22

The Bankruptcy Code does not define the concept of good faith.23 "Goodfaith is an amorphous notion, largely defined by factual inquiry."24 Some courtshave found the good faith inquiry to be one of the central factors, if not the mostimportant, when determining whether a Chapter 13 plan is confirmable.25

The general approach of courts examining the issue of good faith withregard to whether a Chapter 13 plan is confirmable has been a "totality of thecircumstances" test, usually using a laundry list of relevant factors. This is thetest used by the Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, andEleventh Circuits.26 Other circuits have chosen not to use a laundry list offactors and instead look at whether the plan was proposed with "honesty ofintention," "honesty of purpose," or some other similar phrase.27 In the circuitsthat have adopted a totality of the circumstances test with a laundry list offactors, one case, In re Estus,28 has provided the list of factors most commonlycited to by other courts.29

21. Little Creek Dev. Co. v. Commonw. Mortgage Corp., 779 F.2d 1068, 1071 (5thCir. 1986).

22. Id. at 1072.23. In re Waldron, 785 F.2d 936, 939 (11 th Cir. 1986); In re Okoreeh-Baah, 836 F.2d

1030, 1033 (6th Cir. 1988).24. Okoreeh-Baah, 836 F.2d at 1033.25. In re Smith, 848 F.2d 813, 817 (7th Cir. 1988) (quoting In re Rimgale, 669 F.2d

426, 431 n.14 (7th Cir. 1982)); In re Warren, 89 B.R. 87, 90 (9th Cir. B.A.P 1988).26. In re Lilley, 91 F.3d 491, 496 (3rd Cir. 1996); Deans v. O'Donnell, 692 F2d 968,

972 (4th Cir. 1982); Pub. Finance Corp. v. Freeman, 712 F.2d 219, 221 (5th Cir. 1983); Inre Barett, 964 F.2d 588, 591 (6th Cir. 1992); In re Love, 957 F.2d 1350, 1355 (7th Cir.1992); In re Estus, 695 F.2d 311, 316-17 (8th Cir. 1982); In re Goeb, 675 F.2d 1386, 1390(9th Cir. 1982); Flygare v. Boulden, 709 F.2d 1344, 1347 (10th Cir. 1983); In re Kitchens,702 F.2d 885, 888 (11th Cir. 1983).

27. See Barnes, 689 F.2d at 200; In re Johnson, 708 F.2d 865, 868 (2d Cir. 1983).28. 695 F.2d 311 (8th Cir. 1982).29. The list of factors are as follows:the amount of proposed payments and the amount of the debtor's surplus;the debtor's employment history, ability to earn and likelihood of further increases inincome;the probable or expected duration of the plan;the accuracy of the plan's statements of debts, expenses and percentage repayment ofunsecured debt and whether any inaccuracies are an attempt to mislead the court;the extent of preferential treatment between the classes of creditors;the extent to which secured claims are modified;the type of debt sought to be discharged and whether any such debt is non-dischargeablein Chapter 7;

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Regardless of whether a court labels its test totality of the circumstances orhonesty of intention, the ultimate decision will rest on whether the court believesthe plan is an abuse of the purpose and spirit of Chapter 13.

IV. THE 1984 AMENDMENTS

In 1984, Congress enacted the Bankruptcy Amendments and FederalJudgeship Act ("BAFJA").3" The BAFJA added the disposable incomerequirement as a condition for confirmation of a debtor's proposed Chapter 13plan. The disposable income requirement forces a debtor to commit alldisposable income to the plan for a three-year period.32 Thus, when the debtorproposes not to pay unsecured claims in full, the creditor or the trustee caneffectively require the debtor to contribute all disposable income into the planfor at least three years.

Disposable income is derived by subtracting the debtor's projectedexpenses from projected income.33 The expenses a debtor may list include home

the existence of special circumstances such as inordinate medical expenses;the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;the motivation and sincerity of the debtor in seeking Chapter 13 relief; andthe burden which the plan's administration would place on the trustee.

Id. at 317. See Kitchens, 702 F.2d at 888-89; In re Caldwell, 851 F.2d 852, 859 (6th Cir.1988); In re Coomes, 79 B.R. 274, 275-76 (W.D. Ky. 1987); In re Chase, 43 B.R. 739, 743(D. Md. 1984).

30. Deans, 692 E2d at 972; Pub. Finance Corp., 712 F2d at 221; Estus, 695 F.2d at317; Flygare, 709 F.2d at 1347; Kitchens, 702 F.2d at 888.

31. Pub. L. No. 98-353, 98 Stat. 333 (1984).32. The disposable income requirement is codified in § 1325(b) and provides:If the trustee or the holder of an allowed unsecured claim objects to the confirmation ofthe plan, then the court may not approve the plan unless, as of the effective date of theplan-(A) the value of the property to be distributed under the plan on account of suchclaim is not less than the amount of such claim; or(B) the plan provides that all of the debtor's projected disposable income to bereceived in the three-year period beginning on the date that the first payment is dueunder the plan will be applied to make payments under the plan.

11 U.S.C. § 1325(b)(1) (1994).33. Disposable income is defined in the new section of the code as:[I]ncome which is received by the debtor and which is not reasonably necessary to beexpended-(A) for the maintenance or support of the debtor or a dependent of the debtor,including charitable contributions (that meet the definition of "charitablecontribution" under section 548(d)(3)) to a qualified religious or charitable entityor organization (as that term is defined in section 548(d)(4)) in an amount not toexceed 15 percent of the gross income of the debtor for the year in whichcontributions were made; and(B) if the debtor is engaged in business, for the continuation, preservation, and

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expenses (utilities, taxes, and repairs); taxes; alimony and child support;insurance; loan payments; transportation; education; food; clothing; medicaland dental expenses; laundry; newspapers, periodicals, and books; recreationand entertainment; charitable contributions; and other expenses.34

Unfortunately, the legislative history of the BAFJA has provided courts andcommentators with little or no guidance into its language.35 Therefore, courtshave essentially interpreted its impact on their own.

V. GOOD FAITH ANALYSIS REQUIRES CONSIDERATIONOF THE AMOUNT THE DEBTOR PROPOSES TO

REPAY CREDITORS

The good-faith inquiry is clearly important to the Chapter 13 process.Indeed, it has been labeled the policing mechanism of the Bankruptcy Code.36

Therefore, it is imperative courts be allowed to make a complete review of allthe facts of each case when determining whether a debtor has proposed the planin good faith. In fact, both the essence of the totality of circumstances test andthe legislative history of Chapter 13 require courts to examine the amount adebtor proposes to repay creditors.

A. The Totality of the Circumstances Test RequiresConsideration of Repayment

Prior to the enactment of the BAFJA and the addition of the disposableincome requirement, courts were divided: some concluded that good faithrequired a minimum amount of repayment, others ruled it did not. Therefore,some courts held minimum and zero-payment plans to be per se filed in badfaith, while other courts allowed minimum and zero-payment plans to pass overthe hurdle of § 1325(a).37

operation of such business.11 U.S.C. § 1325(b)(2) (1994).

34. 11 U.S.C. Official Bankruptcy Form 6 (Schedule J) (1994 & Supp. V 2000).35. See In re Hale, 65 B.R. 893, 895 (Bankr. S.D. Ga. 1986) ("There is no significant

legislative history to guide litigants and courts in interpreting section 1325(b)(1)."); In reDavis, 68 B.R. 205, 211 (Bankr. S.D. Ohio 1986) (The court found the legislative history tobe vague and unenlightening, concluding the duty to arrive at an appropriate standard was leftto the courts.); In re Jones, 55 B.R. 462, 465 (Bankr. D. Minn. 1985) (calling the legislativehistory "vague and unenlightening").

36. Chase, 43 B.R. at 745.37. Courts finding a substantial amount of repayment necessary generally based it on

Chapter 13's legislative history. See In re lacovoni, 2 B.R. 256 (Bankr. D. Utah 1980); In reHurd, 4 B.R. 551 (Bankr. W.D. Mich. 1980). Courts finding no minimum amount ofrepayment to be required generally based their analysis on Congress' intent to make Chapter

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However, over an approximate eighteen-month period prior to the passageof the BAFJA, a new approach to addressing the amount of repayment issuearose and began to gain support. This "middle of the road"38 approach treatedthe amount of repayment as merely one factor in the courts' test to determinethe debtor's good faith. In all, ten circuit courts examined the issue and, whiletheir tests for good faith are not entirely uniform, each court concluded thatsubstantial repayment was not necessary for a plan to have been filed in goodfaith.39

Courts addressing the good-faith inquiry after the enactment of the BAFJAhave found Congress did not intend to displace the totality of the circumstancestest.40 However, many courts have concluded the BAFJA's passage removed asubstantial number of the factors previously examined under the totality of thecircumstances test.4 ' Courts applying this more narrow totality of thecircumstances test examine "whether the debtor has stated his debts andexpenses accurately, whether he has made any fraudulent misrepresentation tomislead the bankruptcy court, or whether he has unfairly manipulated theBankruptcy Code. '42 These courts have reasoned that, in order to stop thecourts from denying plans based entirely on the proposed percentage ofrepayment, Congress intended the disposable income test to expressly replaceany examination of the amount of repayment when determining good faith.

This reasoning is flawed for several reasons. First, the totality of thecircumstances test is expressly designed to be done on a case by case basis.43

13 available to more people, thus allowing more debtors an opportunity for a fresh start. SeeIn re Scher, 12 B.R. 258 (Bankr. S.D. N.Y. 1981); In re Thebeau, 3 B.R. 537 (Bankr. E.D.Ark. 1980).

38. See Hale, 65 B.R. at 894; In re San Miguel, 40 B.R. 481, 484 (Bankr. D. Colo.1984).

39. See In re Hines, 723 F.2d 333, 334 (3rd Cir. 1983); Deans, 692 F.2d at 972; Pub.Finance Corp., 712 F.2d at 221; Okoreeh-Baah, 836 F.2d at 1033 (clarifying Memphis Bankand Trust Co. v. Whitman, 692 F.2d 427, 432 (6th Cir. 1982)); In re Rimgale, 669 F.2d 426,431 (7th Cir. 1982); Estus, 695 F.2d at 316; Goeb, 675 F.2d at 1390; Flygare, 709 F.2d at1347; Kitchens, 702 E2d at 889; Barnes, 689 E2d at 200.

40. See In re LeMaire, 898 F2d 1346, 1349 (8th Cir. 1990); Okoreeh-Baah, 836 F.2dat 1032-1033; In re Thompson, 116 B.R. 794, 797 (D. Colo. 1990).

41. "[Section 1325(b)'s] 'ability to pay' criteria subsumes most of the Estus factorsand allows the court to confirm a plan in which the debtor uses all of his disposable incomefor three years to make payments to his creditors. Thus, our inquiry into whether the plan'constitutes an abuse of the provisions, purpose or spirit of Chapter 13' has a more narrowfocus." Educ. Assistance Corp. v. Zellner, 827 F2d 1222, 1227 (8th Cir. 1987) (citationsomitted); see also Smith, 848 F.2d at 820; In re Carsrud, 161 B.R. 246, 250-51 (Bankr. D.S.D. 1993).

42. Educ. Assistance Corp., 827 F.2d at 1227. See also Carsrud, 161 B.R. at 250; Inre March, 83 B.R. 270, 275 (Bankr. E.D. Penn. 1988).

43. See Goeb, 675 F.2d at 1390-91; Deans, 692 F.2d at 972; In re Rasmussen, 888

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For courts to truly examine the totality of the circumstances, they must do justthat; examine the totality of the circumstances. The whole point is to allowcourts to examine the entire record and make a subjective determination as towhether the debtor has proposed the plan in good faith. Thus, the test mustremain flexible and capable of fairly dealing with diverse factual scenarios. Assuch, no purpose is served by limiting the number of factors a judge mayconsider when making the good faith inquiry. As one court stated prior to theenactment of the BAFJA:

The correct approach ... is to treat the issues of substantiality and best effortas elements of good faith. Unless the courts have discretion to consider suchfactors, the danger exists that Chapter 13 plans could become shams thatwould emasculate the safeguards that Congress has included in Chapter 7to prevent debtor abuse of the bankruptcy laws.44

The logical approach is to allow courts to examine the entire record,determine what is relevant in a particular situation, and determine whether thedebtor has acted in good faith.45

Second, the majority of circuits have already come to the conclusion thatgood faith required no minimum amount of repayment. Instead, almost allcircuits concluded that the amount of repayment was only one factor fordetermining good faith, and not dispositive either way.46 As such, courtsreasoning that Congress enacted the disposable income test to stop the courtsfrom applying a minimum percent of repayment are simply ignoring the factthat the majority of circuit courts were not insisting on a minimum percent ofrepayment. In essence, these courts are asserting the disposable income test wasdesigned to solve a problem that did not exist.

Prior to the passage of the BAFJA and the addition of the disposableincome test, a typical court determining whether a debtor's plan was filed ingood faith would apply a list of factors similar to, or the same as, the Estus

F.2d 703, 704 (10th Cir. 1989); Love, 957 F.2d at 1355; Lilley, 91 F.3d at 496; In re Chaffin,836 F.2d 215, 217 (5th Cir. 1988); In re Warner, 115 B.R. 233, 238 (Bankr. C.D. Cal. 1989).

44. In re Burrell, 6 B.R. 360, 366 (N.D. Cal. 1980).45. A good example of this analysis is found in In re Baker, 129 B.R. 127 (Bankr.

W.D. Tex. 1991), where the court found that for an objection to a plan to be sustained, morethan just low payment to creditors is usually needed. The court, although considering theamount of repayment as part of the good faith analysis, went on to confirm the debtor's lowpercentage plan where there was no other evidence of bad faith. Id. at 131-33.

46. See Chase, 43 B.R. at 743; Baker, 129 B.R. at 129-30 (The court summarized thestatement from Flygare, 709 F.2d at 1347, joining the Fourth, Fifth, Seventh, Eighth, Ninth,Eleventh, and D.C. circuits in the conclusion that the amount of repayment is not a dispositivefactor on the issue of good faith.).

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factors.47 The examination would include an evaluation of both the amount thedebtor was proposing to pay as well as other factors relating to the debtor'sability to pay, such as past and future employment and potential increases inincome after the completion of the plan.48 However, after the passage of theBAFJA, many courts substantially restricted the number of factors theyexamined under their totality of the circumstances test.49 The potential faultwith applying this narrow totality of the circumstances test is best demonstratedwith a hypothetical Chapter 13 debtor.

Our debtor can be either a law or medical student. The student performswell in school, but in the process accumulates substantial credit card debt byliving lavishly, buying expensive clothes, and eating out often. Additionally, ourstudent has taken out significant student loans to pay for tuition and books.Upon graduation, the student accepts low-paying employment as a law clerk,or practices medicine in a rural area. The young professional then files forChapter 13 relief under the Bankruptcy Code.

Our young professional's plan proposes to make minimal payments to allcreditors, including the student loan and unsecured creditors.50 The plan willthen be evaluated using § 1325(a) and (b). The young professional, as well asthe vast majority of Chapter 13 debtors, can easily satisfy § 1325(a)(1) as wellas pay the fees required by § 1325(a)(2). Because our young professional hasvirtually no nonexempt assets, any repayment to unsecured creditors is likelyto be more than they would receive in a Chapter 7 liquidation. Thus,§ 1325(a)(4) is also easy to satisfy. Compliance with § 1325(a)(5) may actuallyfurther reduce the amount of disposable income available to unsecuredcreditors. Our young professional does not own a home, so by applying theunused homestead exemption to a car, our debtor may even be allowed to payoff a secured car loan in full over the course of the plan. Our youngprofessional's minimal repayment plan can also pass the feasibility of paymentsinquiry of § 1325(a)(6).

So long as the young professional's plan proposes to commit all disposableincome to the plan, regardless of whether any disposable income is actuallyavailable for unsecured creditors, the plan will satisfy § 1325(b). Therefore, theonly hurdle left for our hypothetical debtor to clear is the good faith inquiry of§ 1325(a)(3). This is where the difference between a true totality of thecircumstances test and a narrow totality of the circumstances test becomescrucial to the confirmation of the plan.

47. See supra note 29 and accompanying text.48. See supra note 29 and accompanying text.49. See supra note 41 and accompanying text.50. Making uniform payments will remove any possibility that our debtor is unfairly

discriminating between creditors. See 11 U.S.C. § 1322(b)(1) (1994).

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By applying a true totality of the circumstances test, the court overseeingour hypothetical debtor would examine not only the amount of repaymentproposed under the plan, but also the debtor's future potential for increasedincome. 5' The court could then deny the plan for failing to be proposed in goodfaith based on the debtor's potential future income after moving to the privatesector or a bigger city.52

Conversely, a court applying a narrow totality of the circumstances testwould be precluded from evaluating any factors relating to the amount ofrepayment,53 as well as any increases in the debtor's future income occurringbeyond the three year period contemplated by § 1325(b). 54 It seems that unlessour hypothetical debtor has lied to the court directly or inaccurately listedexpenses or income, the good faith inquiry under the narrow totality of thecircumstances test could not prevent the plan from being confirmed. While thenarrow test includes possible manipulation of the Bankruptcy Code as a factorto be considered,55 it is difficult to imagine how a court could find this factorpresent without either extreme debtor misconduct or an examination into theproposed amount of repayment. Because the narrow test does not examine

51. These are both factors included in the most common list of factors used by courtsemploying the totality of the circumstances test. See supra note 29 and accompanying text.

52. The likelihood of a successful law student accepting a low paying position as a lawclerk is not as remote as one might think. In many cases a student can actually increase theireventual starting salary in the private sector by gaining experience as a law clerk. Similarly,a medical student may have incentives to start out in a low paying position in a rural area.Indeed, the student may actually be required to practice medicine in a remote area as part ofa partial loan repayment program, i.e. "Northern Exposure".

53. Courts applying the narrow totality of the circumstances test have determined thatgood faith analysis includes no economic test outside the requirements of § 1325(b). See Inre Carver, 110 B.R. 305, 312-13 (Bankr. S.D. Ohio 1990); Pierce, 82 B.R. at 879; Easley, 72B.R. at 955. The courts applying the narrow inquiry look almost exclusively at whether thedebtor has been involved in serious misconduct or has lied to the court. See Smith, 848 F.2dat 820-21; In re Cottle, 189 B.R. 591, 594-95 (Bankr. E.D. Penn. 1995).

54. In Chaffin, 836 F.2d at 216, the court instructed the trial court to examine thedebtor's ability to pay through both his present and future income. However, the courtspecifically stated the debtor's potential income beyond the three years of the plan was notto be considered. The court reasoned that because the scope of § 1325(b)(1)(B) is limited tothree years, it could not examine the debtor's financial situation beyond three years. Id.

Similarly, the court in In re Karayan, 82 B.R. 541 (Bankr. C.D. Cal. 1988), concludedthe expectations for debtors in Chapter 13 is limited to the three year period mandated in§ 1325(b)(1)(B). Id. at 544. See also Easley, 72 B.R. at 954-55; In re Red, 60 B.R. 113, 116(Bankr. E.D. Tenn. 1986).

Another court has found the debtor's employment history to be irrelevant to the goodfaith inquiry. See Coburn, 175 B.R. at 402. The court fails to grasp that a debtor with ahistory of significant income potential is far more likely to earn significant income in thefuture than a debtor who has no history of earning potential. Indeed, past employment isnearly as relevant to the good faith analysis as the potential for increased future income.

55. See Educ. Assistance Corp., 827 F.2d at 1227.

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amount or any other economic factors, our hypothetical debtor's plan wouldlikely be confirmed. As the preceding example demonstrates, the debtor'scompliance with § 1325(b) should not remove consideration of the amount ofrepayment or other economic factors from the good faith inquiry.

B. The Legislative History of Chapter 13 RequiresConsideration of Repayment

The Bankruptcy Reform Act of 1978 addressed many of the shortcomingsfound in the old Chapter XIII. The Senate Report of the Bankruptcy ReformAct stated:

In theory, the basic purpose of Chapter XIII has been to permit an individualto pay his debts and avoid bankruptcy by making periodic payments to atrustee under bankruptcycourt protection, with the trustee fairly distributingthe funds deposited to creditors until all debts have been paid. The hearingsrecord and the bankruptcy literature show uniform support for thisprinciple.

56

The report goes on to state:

As in current law, 100 percent payment plans will be encouraged bylimitation on availability of a subsequent discharge in section 727(a)(8).This kind of plan has provided great self-satisfaction and pride to thosedebtors who complete them, and at the same time effect a maximum returnto creditors... It is also necessary to prevent chapter 13 plans from turninginto mere offers of composition plans under which payments would equalon the non-exempt assets of the debtor.57

The House committee made similar findings concerning the inadequaciesof the old Chapter XIII. The House Subcommittee stated:

[M]ost consumer debtors would rather work out a repayment plan than filestraight bankruptcy. They opt for straight bankruptcy only because thepresent chapter XIII simply cannot meet their needs. Only in certain areasof the country where the bankruptcy judges have taken an active interest,

56. S. REP. No. 95-989, at 12 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5798(emphasis added).

57. S. REP. No. 95-989, at 13 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5799(emphasis added).

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have put in the extra effort required to make chapter XIII work, and haveencouraged the bar to recommend its use, has chapter XIII provided anysubstantial or realistic alternative to straight bankruptcy liquidation.58

The report goes on to explain the new Chapter 13, stating:

The purpose of chapter 13 is to enable an individual, under courtsupervision and protection, to develop and perform under a plan for therepayment of his debts over an extended period. In some cases, the plan willcall for full repayment. In others, it may offer creditors a percentage of theirclaims in full settlement ... [c]hapter 13 also protects a debtor's creditstanding far better than a straight bankruptcy, because he is viewed by thecredit industry as a better risk. In addition, it satisfied many debtors' desireto avoid the stigma attached to straight bankruptcy and to retain the prideattendant on being able to meet one's obligations. The benefit to creditorsis self-evident: their losses will be significantly less than if debtors opt forstraight bankruptcy. 59

Courts have consistently interpreted the legislative history of Chapter 13as suggesting Congress intended the benefits of Chapter 13 for debtors whocould, over time, repay their creditors in full or in substantial measure.6°

Regardless of how a particular court has applied the addition of § 1325(b)'sdisposable income requirement, no court has concluded the intent of the BAFJAor the disposable income test was to dramatically change the underlyingpurpose of Chapter 13.

Courts have almost uniformly held the good faith inquiry of § 1325(a)(3)is designed to test whether the debtor is attempting to abuse the purpose,provisions, or spirit of Chapter 13.61 The purpose and spirit of Chapter 13 arebest derived from its legislative history,62 yet courts choose to ignore the clearintent of Congress by refusing to examine factors indicating whether debtors are

58. H.R. REP. No. 95-595, at 117 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6077-78 (citations omitted).

59. H.R. REP. No. 95-595, at 118 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6079(emphasis added).

60. Rimgale, 669 F.2d at 431. See also Baker 129 B.R. at 131 ("There can be littledoubt of Congress' belief that the primary benefit of Chapter 13 relative to Chapter 7 is theexpected improved return for unsecured creditors.").

61. See supra note 30 and accompanying text.62. See County of Wash. v. Gunther, 452 U.S. 161, 182 (1981) (Rehnquist, J.,

dissenting) ("[It is] well settled that the legislative history of a statute is a useful guide to theintent of Congress."); Green v. Bock Laundry Machine Co., 490 U.S. 504, 508-09 (1989)(The Court, in interpreting the Federal Rules of Evidence, found that when the text of astatute is ambiguous, courts should seek guidance from the legislative history.); but see Wis.Pub. Intervenor v. Mortier, 501 U.S. 597, 617 (1991) (Scalia, J., concurring).

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legitimately attempting to rehabilitate themselves or merely masking their trueintent of simple liquidation.

Courts applying the narrow totality of the circumstances test havevoluntarily stopped examining factors that may indicate whether a debtor isattempting to abuse the purpose and spirit of Chapter 13. Certainly all debtorswho propose a low percentage of repayment to their creditors do not do so inbad faith.63 However, courts should have the ability to evaluate all potentiallyrelevant factors when determining good faith, and as the hypothetical debtorexample illustrates, compliance with the disposable income requirement shouldnot prevent courts from evaluating economic factors under their good faithanalysis.

While the legislative history does not impose a minimum percentage ofrepayment, it strongly indicates that debtors are expected to be takingsubstantial steps toward repaying their creditors in exchange for the benefits ofChapter 13 relief. As one court explained, the "process progresses towardanswering the question 'how much can I pay?' rather than starting out tryingto determine 'how little can I get by with paying?" 64 Debtors who are unable tolive up to their end of the Chapter 13 bargain should not expect the benefits ofChapter 13 given to those debtors who can.

VI. CONCLUSION

As Chapter 7 continues to be attacked for being too easy on debtors and asCongress prepares to means-test debtors prior to allowing them to file forstraight bankruptcy, 65 Chapter 13 litigation will continue to increase. Asubstantial part of Chapter 13 litigation will continue to involve issues of goodfaith as well as the role of the disposable income test. As such, the relationshipbetween a debtor's good faith and the satisfaction of the disposable incomerequirement must be resolved.

A textual reading of § 1325(b) simply does not support the conclusion thatthe amount of repayment was intended to be removed from the good faithanalysis. As one court stated, "[I]t is an overstatement to declare that 1325(b)resolved the judicially perceived tension between the issue of good faith and theconfirmation of nominal or zero percentage plans., 66 A better reasonedconclusion is that § 1325(b) answers the question of whether a minimum

63. See supra note 45.64. In re Cook, 3 B.R. 480, 485-86 (Bankr. S.D. W. Va. 1980).65. See Jack F. Williams, Distrust: The Rhetoric and Reality of Means-Testing, 7 AM.

BANKR. INST. L. REV. 105 (1999).66. Davis, 68 B.R. at 211.

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amount of repayment is required for confirmation while at the same time settinga minimum amount of effort under which no debtor may fall below. 67

Both the clear intent of Congress and the retention of the totality of thecircumstances test demonstrate the need for courts to consider the amount ofrepayment proposed by the debtor when undertaking the good faith inquiry.Chapter 13, like the old Chapter XIII, was intended for debtors with a sinceredesire to repay as much of their debts as possible. While this does not mandatea set minimum percentage of repayment, the amount of debts debtors proposeto pay is a clear indicator of their true intentions, and the courts must be giventhe flexibility to determine if debtors are truly seeking a form of rehabilitation,or merely a "super discharge" from their liability.

67. The court in Hale, summarized the proper impact of § 1325(b) on the good faithanalysis as follows:

[A] plan which meets the tests for mandatory confirmation [§ 1325(a)(1)-(6)],including 'good faith' still cannot be confirmed, if after objection, the disposableearnings test is not met. Thus, Section 1325(b)(1) can be viewed only as a floorbelow which no plan can go and still be confirmed, even if the general good faithtest is fully met to the satisfaction of the Bankruptcy Judge. It is a 'fail-safe'mechanism to insure some uniformity in the minimum effort that will be requiredof debtors, even when their good faith is not questioned." Id. at 895-96 (emphasisomitted).65 B.R. 893. An excellent example of the Hale court's analysis in practice is found in

In re Krull, 54 B.R. 375 (Bankr. D. Colo. 1985). Although the court was satisfied that thedebtor had proposed their plan in good faith, the court nonetheless denied confirmation of theplan on the basis that it failed to comply with § 1325(b). Id. at 378.

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APPENDIX A:

POST BAFJA CASES THAT DO NOT EXAMINE THE AMOUNT OF ADEBTOR'S PAYMENTS WHEN DETERMINING IF THE DEBTOR HASFILED THE PLAN IN GOOD FAITH.

In re Pierce, 82 B.R. 874, 878 (Bankr. S.D. Ohio 1987); the court found thatwith the addition of the disposable income test, amount of payment is no longera factor when determining good faith. The court stated the good faith inquiryis limited to acts of serious debtor misconduct or abuse.

In re Castello, 98 B.R. 523, 526 (Bankr. D. Or. 1989) (overruled on othergrounds); the court determined the amount of payment "should be givenvirtually no weight in determining good faith."

In re Belt, 106 B.R. 553, 570 (Bankr. N.D. Ind. 1989); the court found once adebtor satisfies the disposable income test, amount of payment is not consideredwhen evaluating good faith.

In re Jones, 119 B.R. 996, 1002 (Bankr. N.D. Ind. 1990); the court removedthe amount of payment and applied a totality of the circumstances test to thegood faith inquiry. The court also stated good faith is determined according tothe purpose, provisions, and spirit of Chapter 13.

In re Smith, 848 F.2d 813, 817-20 (7th Cir. 1988); the court determined theproper test for evaluating good faith is still the totality of the circumstances test.However, the court found the addition of the disposable income test removed theneed to examine the amount of payment under the good faith test. Thus, thecourt applied the totality of circumstances factors from Rimgale, minus theamount of payment.

In re Norwood, 178 B.R. 683, 688 (Bankr. E.D. Pa. 1995); the court applieda totality of the circumstances test to determine good faith minus the factor ofamount of payment. Additionally, the court stated the main issue, with respectto good faith, is still whether the debtor has abused the purpose and spirit ofChapter 13.

In re Selden, 121 B.R. 59, 60 (D. Or. 1990); the court concluded that once adebtor has satisfied the disposable income test, amount of payment is not anissue under the good faith test.

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In re Metz, 820 F.2d 1495, 1498 (9th Cir. 1987); the court kept the totality ofthe circumstances test as the test for determining good faith. Further, the courtconcluded a zero amount plan can be proposed in good faith if the debtorsatisfies the disposable income test.

In re Cottle, 189 B.R. 591, 594 (Bankr. E.D. Pa. 1995); the court found thedisposable income test requires no minimum amount and limited the good faithinquiry to whether the debtor has been honest in fact or has engaged inmisconduct.

In re March, 83 B.R. 270, 274-76 (Bankr. E.D. Pa. 1988); the court concludedthe addition of the disposable income test directly precludes the considerationof the amount of payment from the totality of the circumstances test for goodfaith.

In re Harmon, 72 B.R. 458, 462 (Bankr. E.D. Pa. 1987); the creditor objectedto the debtor's plan under good faith rather than the disposable income test.The court concluded zero amount plans may be proposed in good faith.

In re Baker, 66 B.R. 253, 260-61 (Bankr. N.D. Miss. 1986); the court founda plan proposing to pay nothing to an unsecured creditor is nevertheless filedin good faith so long as the debtor satisfies the disposable income test.

In re Carver, 110 B.R. 305, 308, 312 (Bankr. S.D. Ohio 1990); the courtdetermined the proper test for good faith is whether the debtor is abusing thepurpose and spirit of Chapter 13. The court further concluded that once adebtor satisfies the disposable income test, the amount of payment is no longeran appropriate factor for determining good faith.

In re Galt, 70 B.R. 57, 58-60 (Bankr. S.D. Ohio 1987); the court found if adebtor satisfies the disposable income test, amount will not be considered whendetermining good faith.

In re Smith, 100 B.R. 436, 440-41 (S.D. Ind. 1989); the court determined theproper test for good faith, after the addition of the disposable income test, is atotality of the circumstances test minus the amount of payment factor.

In re Greer, 60 B.R. 547, 551, 554 (Bankr. C.D. Cal. 1986); the court founda debtor who satisfied the disposable income test acted in good faith when filinga zero payment plan.

In re Coburn, 175 B.R. 400, 402 (Bankr. D. Or. 1994); the court concluded the

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amount of payment is not a relevant factor under good faith analysis where thedebtor has satisfied the disposable income test.

In re Chaffin, 836 F.2d 215 (5th Cir. 1988); the court found the amount ofpayment is governed only by the disposable income test and should not beconsidered under the good faith analysis.


APPENDIX B:

POST BAFJA CASES THAT INCLUDE THE AMOUNT OF PAYMENTTO UNSECURED CREDITORS IN THE GOOD FAITH ANALYSIS.

In re Lattimore, 69 B.R. 622, 624-26 (Bankr. D. Tenn. 1987); the courtdetermined all proposed zero percentage plans are filed in bad faith. The courtreasoned the way Chapter 13 defines an "individual with regular income" insection 101 (27) contemplates payments will be made under the plan. Therefore,a plan proposing no payments "is an abuse of the purpose and spirit of Chapter13."

In re Walsh, 224 B.R. 231, 235 (Bankr. M.D. Ga. 1998); the court, citing toHale, found the amount of repayment remains a factor for consideration underthe good faith test.

In re Massey, 1995 WL 529825, at *2-3 (5th Cir. Sept. 7, 1995); the courtapplied the totality of circumstances test from Public Finance, whichconcentrates on the reasonableness of proposed payments and the purpose andspirit of Chapter 13. The court cited to Chaffin's list of factors, concludingamount is a relevant factor when determining whether a plan has been filed ingood faith.

In re Pickering, 195 B.R. 759, 763-64 (Bankr. D. Mont. 1996); the court citesto Street, Warren, and Goeb, concluding the good faith inquiry is broad, anddoes not end with a showing of compliance under the disposable income test.

In re Baker, 129 B.R. 127, 129, 131 (Bankr. W.D. Tex. 1991); the courtapplies the Estus factors, finding while amount of payment is not dispositive,it is "certainly significant" to the good faith inquiry.

In re Warren, 89 B.R. 87, 90 B.A.P. (9th Cir. 1988); the court concluded thegood faith inquiry must be decided on a case by case basis and include anelement of judicial discretion. Additionally, the court found the good faithinquiry is a different examination into the facts of the case than the best effortstest.

In re Farmer, 186 B.R. 781, 783 (Bankr. D. R.I. 1995); the court found thatalthough a zero percent plan may be proposed in good faith, it will be subjectedto heavy scrutiny. The court also concluded, citing to Jewell, the amount ofpayment is a factor under good faith analysis.

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In re Jewell, 75 B.R. 318, 319-20 (Bankr. S.D. Ohio 1987); the court found apayment plan providing creditors what they would have received under Chapter7 is not per se proposed in good faith. Likewise, a plan proposing low paymentis not per se filed in bad faith. However, low payment plans are subject toheavy judicial scrutiny.

In re Terrill, 68 B.R. 441, 441 (Bankr. C.D. Ill. 1987); the court found thegood faith inquiry is focused on whether the plan conforms to the purpose andspirit of Chapter 13 and is fair to creditors. The court concluded a Chapter 13plan proposing zero payment to unsecured creditors, filed four years after thedebtor received a Chapter 7 discharge, was done in bad faith because it violatedthe spirit of Chapter 13.

In re Hale, 65 B.R. 893, 894-95 (Bankr. S.D. Ga. 1986); the court found thecreation of the disposable income test did not displace the use of the totality ofthe circumstances test for evaluating good faith. Further, the court concludeda plan satisfying the disposable income test must still be found to have beenproposed in good faith, as they are separate tests.

In re Davis, 68 B.R. 205, 211 (Bankr. S.D. Ohio 1986); the court found thatChapter 13 requires the debtor to make a substantial effort to repay his debtsand that the amount of payment, while not dispositive, remains a factor whendetermining if a debtor has acted in good faith.

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good faith and disposable income: should the good faith...

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