Anyone who declares bankruptcy is presumed to be acting in good faith. Ideally, this is to be using the procedure as intended (a means of assisting debtors in controlling their debt and finances again). A bad faith filing, on the other hand, arises when someone attempts to game or exploit the system for purposes other than kickstarting their finances.
A fraudulent bankruptcy petition might have major ramifications. When you do not intend to pursue your process in good faith or be truthful in your papers, you should not claim bankruptcy protection. Continue reading to find out about the good and bad faith filings of bankruptcy.
The Good Faith Principle In Filing for Bankruptcy
The primary goal of filing bankruptcy is to provide debtors with a new start from onerous debt, whether by selling the debtor\’s properties or enabling them to pay a minimum portion of their debt over the term. Bankruptcy also requires every creditor to engage with their debtor in the court of bankruptcy proceedings. This ensures that no creditor benefits at the cost of the remaining creditors and that the majority of unsecured creditors receive an equal share of their indebtedness if there even is one.
The bankruptcy proceedings, on the other hand, could only succeed once the debtor is truthful. This is because the process is dependent on the debtor\’s information disclosure of financial facts (asset, income, and expenses).
Additionally, bankruptcy should also not be allowed to be exploited as a way for a debtor to obtain money without meaning to return it, as this would severely limit the access to credit. Plus, it would be seen as a legitimate kind of stealing.
As a result, bankruptcy is highly reliant on the good faith principle. Good faith in bankruptcy refers to the debtor\’s sincere expressed intent to use all the bankruptcy processes to get a new chance from overbearing debts owed either due to situations beyond control.
Examples would be medical bills, losing a job, declining business or the debtor being unable to control his or her financial affairs. To put it another way, the debtor had not lent any funds that he or she didn\’t actually mean to pay back.
Forasmuch as good faith is necessary for bankruptcy to proceed effectively, courts condemn the inadequacy of good faith. Judges will drop the bankruptcy proceedings without granting the debtor any clearance and suspending the automatic stay, which prevents creditors from seizing property or earnings to settle off their obligations.
Recognizing a Bad Faith Bankruptcy Filing
A variety of indications might show that someone is attempting to obtain an edge not authorized in bankruptcy, and the judge will investigate these all. The judges refer to this requirement as the facts and circumstances. This notion empowers judges to use rational thinking of the bigger picture that will halt the injustice.
Here are a few elements that courts evaluate when deciding whether or not to dismiss a bad faith claim:
- the quantity and frequency of previous bankruptcy cases and dismissals
- the viability of a repayment strategy
- omissions or misrepresentations in the petition
- increasing spending in order to be considered for Chapter 7 rather than Chapter 13 (for example, by acquiring an expensive automobile),
- any failure to follow procedures once the lawsuit has been filed or
- any other heinous behavior
The Takeaway
Filing bankruptcy in poor faith may get you in hot water. The repercussions of a bad faith disclosure might vary based on how extreme your behavior was. Nevertheless, the bankruptcy court might include the rejection of your bankruptcy, the permanent loss of the power to reduce debts that existed at the moment of your petition, and the seizure of all nonexempt properties.