Ninth Circuit affirms Chapter 13 plan for SLO client, finding good faith and eligibility under Bankruptcy Code section 109(e).

In 2010, Debtor filed a Chapter 7 bankruptcy case and obtained a discharge, including a discharge of her personal liability on the debts secured against her residence. More than four years later, Debtor filed for Chapter 13 relief. On her Chapter 13 bankruptcy schedules, Debtor identified her residence and the debts secured by the residence, including the junior lien of the lender. Since the amount of the senior lien exceeded the value of the residence, Debtor indicated her intent to avoid the junior lien. On Schedule D of her bankruptcy petition, Debtor listed the junior lien as a secured debt of $0 and identified her intent to avoid the lien. On Schedule F, Debtor listed the junior lien as an unsecured debt.

The Ninth Circuit affirmed the Bankruptcy Appellate Panel and the Bankruptcy Court’s orders determining that the Debtor was eligible for Chapter 13 relief under Bankruptcy Code section 109(e). The junior lender’s lien was unsecured because the amount of the senior lien exceeded the value of the residence. This was readily ascertainable from the bankruptcy schedules, which were made in good faith. The lender’s resulting unsecured junior lien was unenforceable because the Debtor’s personal liability had been previously discharged in a Chapter 7 case. Therefore, the Bankruptcy Court correctly determined that the lender’s debt did not place Debtor over the debt limits for the purpose of section 109(e) eligibility because the lender held neither an allowed secured claim where its lien was avoidable under section 506(a), nor an allowed unsecured claim because the Debtor’s personal liability on the debt had been discharged by her previous Chapter 7 bankruptcy case.  

The Ninth Circuit also affirmed the Bankruptcy Court’s determination that the Chapter 13 petition was filed in good faith because none of the relevant factors for evaluating bad faith were present. There was no evidence of misrepresentation, serial bankruptcy filings, filings to defeat state court litigation, or egregious behavior. Furthermore, the Ninth Circuit rejected the lender’s argument that the filing of a Chapter 13 petition after receiving a prior Chapter 7 discharge is bad faith per se because that conclusion is unsupported by the Bankruptcy Code and case law.