Did You File Your Case in Bad Faith?

“Bad faith” might sound a lot like the name of a cheesy 1980’s hair band. But understanding the concept of bad faith is important if you are considering bankruptcy. So what is bad faith?

Filing in Bad Faith

So when will a court decide that my case was filed in bad faith? It must find that your actions clearly show that you have abused the bankruptcy process.

It would be difficult to compile a complete list of all the actions that would be considered bad faith when filing for bankruptcy. In an 11th Circuit Court decision on the matter (In Re Piazza), the judges used a 15 part test to determine if there was bad faith present in a case. A test that complex certainly leaves a lot of ambiguity as to whether a case was filed in bad faith.

Maybe a concrete example will at least shed some light on what is probably bad faith in a case.

A fairly obvious example would be racking up a lot of debt close in time to filing for bankruptcy. If the court sees that you took out a large loan for cash or made a lot of charges on your credit card right before filing for bankruptcy, it will likely view this as an act of bad faith.

After all, it’s hard for you to argue that you didn’t know you were going to file for bankruptcy in the near future. And since you knew you were filing for bankruptcy, you also should have known that the large debt you just created would get eliminated when you filed.

Here are some examples of factors the court looked at for bad faith in the case In Re Piazza. The debtor in that case did not take steps to repay his debts. His case was filed in response to a collection effort by his creditor. Also, the court felt that the debtor was trying to avoid a large, individual debt, rather than a combination of small ones. It also looked at whether or not he had enough money to pay off his debts when he filed, and the court felt he did not fully disclosed his debts at the time of filing.

What Happens if the Court Finds Bad Faith

If a court determines there is bad faith in your case, several different outcomes are possible. The court might still allow your bankruptcy case to go through, but you will have to repay any creditors you attempted to eliminate in bad faith. The court might choose to dismiss your bankruptcy altogether. The court can also fine you, and in extreme cases, you could face jail time. It all depends on the court, and the severity of your transgression.

The good news is, any competent bankruptcy attorney will review all the elements of your case thoroughly before he or she files. As long as you disclose every detail of your financial situation to your attorney, he or she will be able to address any issues of possible bad faith before your case is filed.  This will ensure that you will not encounter the problems that Mr. Piazza did in his case, and it will all but guarantee  your case will go smoothly from start to finish.