What Does it Mean to File for Bankruptcy in Bad Faith?

Everyone who files for bankruptcy is expected to do so in good faith. That is, to use the process the way it's intended to be used—as a way to help debtors get back on their financial feet. By contrast, a bad faith filing occurs when someone tries to game or abuse the system for reasons other than improving their finances.

A bad faith bankruptcy filing can have serious consequences. You shouldn't file for bankruptcy relief if you don't plan to complete your case or be honest in your paperwork. Read on to learn more about bad faith bankruptcy filings

For more information on filing considerations, see Should I File for Bankruptcy?

What Is a Bad Faith Bankruptcy Filing?

Bad faith filings come in different flavors. Filing to delay creditors with no intent to follow through with the case is likely the most common.

Suppose you're facing foreclosure, and you learn that bankruptcy's automatic stay will stop the sale. If you file for Chapter 13 bankruptcy the day before the foreclosure auction but later dismiss the Chapter 13 case, you'd be acting in bad faith if you never intended to complete the bankruptcy. You would have misused the bankruptcy process and have cost the mortgage lender money by preventing the sale of the home.

Other bad faith tactics used to delay or defraud creditors include:

• Filing Chapter 7 to stop a lawsuit or collection action but failing to file a form or the debtor education certificate so the court will dismiss the case (a filer can't dismiss a Chapter 7 without court approval).
• Filing Chapter 7 to gain the benefits of the automatic stay before converting from Chapter 7 to Chapter 13 to allow the debtor to dismiss the case without court approval.
• Hiding property that would normally be sold for the benefit of creditors in Chapter 7.
• Underreporting income in Chapter 7 to avoid repaying creditors through Chapter 13.
• Intentionally failing to list nonexempt assets—assets that aren't protected by exemption laws—to avoid paying the property's value to creditors through the Chapter 13 repayment plan.

Any knowing misrepresentation or omission of information on the petition can be bad faith, as well as any other attempt take advantage of the bankruptcy system.

How to Spot a Bad Faith Bankruptcy Filing

Numerous factors can indicate that someone is trying to gain an advantage not intended in bankruptcy, and the court will look at all of them. The courts call this standard the "totality of the circumstances." Allowing judges to apply commonsense and look at the big picture helps stop wrongdoing cold.

Here are some factors courts consider when routing out a bad faith filing:

• the frequency and number of prior bankruptcy filings and dismissals
• misrepresentations or omissions in the petition
• the feasibility of a repayment plan
• any failure to comply with procedures after filing the case
• increasing expenses to qualify for Chapter 7 instead of Chapter 13 (such as by financing an expensive car), or
• any other egregious conduct.

Consequences of Filing for Bankruptcy in Bad Faith

Filing for bankruptcy in bad faith can get you in trouble. The consequences of a bad faith filing can vary depending on the egregiousness of your conduct. But they can include dismissal of your bankruptcy, forever losing the right to discharge debts existing at the time of your filing, and loss of your nonexempt assets.