Nothing stops creditors’ counsel colder in their tracks than an
official notice of bankruptcy filing. That unmistakable document
from the U.S. Bankruptcy Court will bring litigation to
a screeching halt whether pre-judgment or post-judgment.
Fortunately, a bankruptcy filing is not always the end
of the story. Creditors faced with a bankruptcy filing
have several options, including adversary proceedings for
objections to discharge and challenges to the dischargeability
of certain debts. However, before acknowledging the
validity of the bankruptcy by filing an adversary
complaint, creditors’ counsel should examine whether a
motion to dismiss the bankruptcy is the appropriate first step. If
the totality of the circumstances indicates that the bankruptcy
was filed in bad faith, the court may dismiss the bankruptcy
Chapter 7 Bankruptcies.
Any party in interest, including a creditor, may move to dismiss
a Chapter 7 bankruptcy for cause.1 Section 707(a) of the
Bankruptcy Code lists three examples of “cause,” including
unreasonable delay by the debtor that is prejudicial to
creditors, but does not specifically mention bad faith.2
However, the three examples of “cause” set forth in §707(a) are
illustrative rather than exhaustive.3 While the Seventh Circuit
has not yet addressed the issue of dismissal “for cause” under§707(a), the majority of district and bankruptcy courts in this
Circuit have concluded that bad faith – or lack of good faith –
supports a “for cause” dismissal.4
Generally, the bad faith inquiry looks at the totality of the
circumstances.5 The court must look at the totality of
the circumstances surrounding both objective and subjective
considerations in each case in order to determine whether
the Bankruptcy Code is being used properly and fairly and,
consequently, whether “cause” exists to dismiss the case.6
The court can focus on the debtor’s pre-petition and postpetition
conduct.7 To make the requisite showing, the movant
need not show, though it would be relevant, that the debtor had
any sort of fraudulent or malicious intent or scheme in mind
when filing; malfeasance is not a prerequisite to bad faith.8
Bankruptcy courts in this district generally have followed
the “mainstream” totality of the circumstances test employed
by other Circuits.9 Under the mainstream test, the debtor’s
ability to pay his debts is the primary factor and other
factors should be considered on a case by case basis.10 When
determining whether a debtor has the ability to pay his debts,
it is proper to consider all the debtor’s assets, including exempt
assets.11 As explained by the Second Circuit, “a totality of the
circumstances inquiry is equitable in nature and the existence
of an asset, even if exempt from creditors, is relevant to the
debtor’s ability to pay his or her debts.”12 In one particular
case, a bankruptcy court in this district focused heavily on the
fact that a debtor could have paid a $525,000 obligation from
his $2.3 million dollars in exempt life insurance and pension
funds, even noting “that no court can require him to do so and
that he likely never will is beside the point.”13
Courts should also consider the debtor’s future income in
determining whether the debtor has the ability to pay his
debts.14 This factor is interesting because, in Chapter 7
bankruptcies, the debtor’s future income is usually only
relevant in consumer cases. For instance, a court can dismiss
a bankruptcy case under §707(b) for substantial abuse based
upon the debtor’s future income and expenses,15 but that section
only applies when a debtor’s debts are “primarily consumer debts.”16 While a debtor’s future income is not the determining
factor under §707(a), like it can be for the substantial abuse
analysis under §707(b), the future income can be considered
by the court as part of the totality of the circumstances under§707(a), even for debtors with primarily commercial debts.
A comprehensive list of factors to be considered in addition
to the debtor’s ability to pay his debts does not exist. As one
court put it, “the facts required to mandate dismissal are as
varied as the number of cases.”17 A New York bankruptcy
court has enumerated a fourteen-item list of factors that will
be considered when applying the totality of the circumstances
test under §707(a), but that court stressed that all other factors
which may bear on whether a debtor’s filing was in bad faith
or good faith are also relevant.18 One significant factor is
whether the debtor is willing to make lifestyle changes to pay
his debts.19 Courts in this district have made bad faith
determinations based upon a debtor’s unwillingness to cutback
family vacations20 and debtors’ unwillingness to downsize their
housing expenses.21 The court may also consider a debtor’s
charitable or religious contributions to determine if he has
made lifestyle changes to pay his debts.22
Another factor is whether the debtor has manipulated the bankruptcy
process to frustrate one particular creditor.23 To make
this determination, courts can look to see if the debtor has
paid or reaffirmed his debts, either before or after filing, with
the sole exception of one particular creditor.24 There is also a
temporal element to this factor. Courts can consider whether the debtor filed bankruptcy shortly before a state court deadline
to produce documents,25 or whether the case was filed in
response to a judgment or pending litigation.26
Chapter 13 Bankruptcies.
In Chapter 13 bankruptcies, the obligation of good faith is
imposed upon the debtor at two different stages. First, the
debtor must file his petition for Chapter 13 bankruptcy in
good faith.27 Second, the debtor must file his Chapter 13 plan
in good faith. 28 Cases discussing good faith in the Chapter
13 context distinguish between these two situations because
a lack of good faith in filing the petition can lead to dismissal,
while the consequence of a lack of good faith in proposing a
plan may be less severe and lead only to the requirement of an
In determining whether a petition has been filed in good faith,
the court once again performs a totality of the circumstances
analysis involving both objective and subjective inquiries.30
Factors to be considered include “the nature and potential
dischargeability of scheduled debts, the timing of the case
filing; the circumstances of how particular debts were
incurred; the debtor’s motive for filing; how the debtor’s
actions affected creditors; the debtor’s treatment of creditors
before and after filing; and whether the debtor has been
forthcoming with the court and creditors.”31
In considering whether a plan is filed in good faith, the court
asks of the debtor: “Is he really trying to pay the creditors to
the reasonable limit of his ability or is he trying to thwart
them?”32 The court considers whether the plan accurately
reflects the debtor’s financial condition and affords substantial
protection to unsecured creditors.33 Factors to be considered
when evaluating whether a plan has been filed in good faith
include whether the plan states the secured and unsecured
debts of the debtor accurately; whether the plan states the
expenses of the debtor accurately; whether the percentage of
repayment of unsecured debts is correct; whether inaccuracies
in the plan amount to an attempt to mislead the bankruptcy
court; and whether the proposed payments indicate a
fundamental fairness in dealing with creditors.34 The Seventh
Circuit has stressed that the above list is not exhaustive.35
Procedure and Timelines.
A motion to dismiss a bankruptcy for cause is a “contested
matter” under the Federal Rules of Bankruptcy Procedure.36
The Rules do not contain a deadline for filing a motion to dismiss
under §707(a).37 But the Rules do say that a discharge may not
be entered while a motion to dismiss under §707 is pending.38
So, it appears that a motion to dismiss for cause may be filed
at any time before discharge. Creditors need to be aware of all
other relevant timelines, however, when developing a strategy
to contest a bankruptcy proceeding. For example, if the
motion to dismiss is unsuccessful, the creditor may want to file an
adversary complaint objecting to the debtor’s discharge. A
complaint objecting to discharge needs to be filed no later than
60 days after the first date set for the meeting of creditors.39
That deadline can be extended, but the motion for extension
of time must be filed before the deadline has expired.40 Also,
a creditor may want to conduct discovery prior to hearing on
the motion to dismiss. Traditional avenues of discovery are
available in contest matters, including interrogatories,
production requests, requests to admit, and depositions.41
Before spending too much time briefing a motion to dismiss,
or conducting discovery, the creditor will want to docket the
date by which he must file any available adversary proceedings.
A wide variety of circumstances can lead to a bankruptcy
court determining that a debtor has filed a petition in bad
faith. Creditors’ counsel should familiarize themselves with
the cases and bankruptcy rules in this area to see if a motion
to dismiss for cause can be utilized as a preliminary matter
before jumping into a more costly and time consuming
1.11 U.S.C. 707(a).
3.In re Tallman, 417 B.R. 568, 575 (Bankr. N.D. Ind. 2009).
4.In re Jakovljevic-Ostojic, 517 B.R. 119, 126 (Bankr. N.D. Ill. 2014).
5.In re Collins, 250 B.R. 645, 653-654 (Bankr. N.D. Ill. 2000).
6. In re American Telecom Corp., 304 B.R. 867, 870 (Bankr. N.D. Ill. 2004).
7. In re Sekendur, 334 B.R. 609, 619 (Bankr. N.D. Ill. 2005).
8. In re American Telecom Corp., 304 B.R. 867, 870 (Bankr. N.D. Ill. 2004).
9. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000).
11. In re Kornfield, 164 F.3d 778, 784 (2nd Cir. 1999).
13. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000).
14. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000); In re Perlin, 497 F.3d 364, 372 (3rd Cir. 2007).
15. In re Roppo, 442 B.R. 888, 892 (Bankr. N.D. Ill. 2010); 11 U.S.C. 707(b)(3)(B).
16. In re Terzo, 502 B.R. 553, 556 (Bankr. N.D. Ill. 2013).
17. In re Sekendur, 334 B.R. 609, 619 (Bankr. N.D. Ill. 2005).
18. In re O’Brien, 328 B.R. 669, 675 (Bankr. W.D. N.Y. 2005).
19. In re Kornfield, 164 F.3d 778, 784 (2nd Cir. 1999); In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989).
20. In re Collins, 250 B.R. 645, 655 (Bankr. N.D. Ill. 2000).
21. In re Roppo, 442 B.R. 888, 895 (Bankr. N.D. Ill. 2010); In re Bacardi, 2010 Banrk. LEXIS 3 (Bankr. N.D. Ill. 2010).
22. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000); In re Griffieth, 209 B.R. 823, 828 (Bankr. N.D. N.Y. 1996).
23. In re Collins, 250 B.R. 645, 654 (Bankr. N.D. Ill. 2000).
24. In re Davidoff, 185 B.R. 631, 634 (Bankr. S.D. Fla. 1995).
25. Piazza v. Nueterra Healthcare Physical Therapy, LLC, 469 B.R. 388, 393 (S.D. Fla. 2012).
26. In re O’Brien, 328 B.R. 669, 675 (Bankr. W.D. N.Y. 2005).
27. 11 U.S.C. 1307(c); In re Love, 957 F.2d 1350, 1354-55 (7th Cir. 1992).
28. 11 U.S.C. 1325(a)(3); In re Schaitz, 913 F.2d 452, 453 (7th Cir. 1990).
29. In re Youngblood, 2013 Bankr. LEXIS 4260 (Bankr. N.D. Ill. 2013).
30. In re Youngblood, 2013 Bankr. LEXIS 4260 (Bankr. N.D. Ill. 2013).
32. In re Smith, 286 F.3d 461, 466 (7th Cir. 2002).
34. In re Rimgale, 669 F.2d 426, 432 (7th Cir. 1982).
36. Fed. R. Bankr. P. 1017(f)(1).
37. In re Tanenbaum, 210 B.R. 182, 187 (Bankr. D. Colo. 1997).
38. Fed. R. Bankr. P. 4004(c)(1)(D).
39. Fed. R. Bankr. P. 4004(a).
40. Fed. R. Bankr. P. 4004(b)(1).
41. Fed. R. Bankr. P. 9014(c).
Michael W. Huseman is a partner at Dreyer, Foote,
Streit, Furgason & Slocum, P.A. in Aurora. He
practices primarily in the areas of commercial
litigation, sophisticated asset recovery, and bankruptcy
litigation. Mr. Huseman received his Juris
Doctor from Northern Illinois University College
of Law and his Bachelor of Arts from St. Joseph’s
College in Rensselaer, Indiana. Mr. Huseman also edits the Northern Law Blog.