Bad faith can result in loss of pre-conversion chapter 13 property

Posted on Feb 03, 2014

If a person files chapter 13 bankruptcy and the case is converted or changed from chapter 13 to chapter 7, the property that is acquired after filing the chapter 13 but before the conversion, is not considered property of the chapter 7 bankruptcy estate (and subject to seizure) unless the debt acts in bad faith. See 11 U.S.C. Sec. 348(f)(2).

In a recent case from the Houston Division of the U.S. Bankruptcy Court for the Southern District of Texas, Judge Jeffrey Bohm ruled that the debtors had acted in bad faith during their chapter 13, and that all property acquired during the chapter 13 would therefore be property of the chapter 7 bankruptcy estate, and subject to administration by the chapter 7 trustee. In re Reeves, Bankr. Court, SD Texas 2014.

The debtor had started a business, incurred over $500,000 in new debt, and failed to amend the bankruptcy schedules to disclose the business, or inform the chapter 13 trustee. It also appears that the debtor did not maintain books and records for the business, and could not explain how over $800,000 in business receipts was spent.

It likely didn't help that there were inaccuracies in amended schedules that were filed, both debtors did not appear for the Sec. 341(a) meeting of creditors, and the attorney for the debtors made some flippant comments in the legal pleadings filed in the case.

So if you are in chapter 13 and want to convert the case to one under chapter 7 and you are concerned about keeping any new property that you acquired since the filing of the chapter 13, be honest with the court, and disclose everything, and do so accurately and completely.

 

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