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Bankruptcy Code2 § 1307(b) has been called an “escape hatch”3 for “bad faith” Chapter 13 filers, facing creditors’ § 1307( c ) motions to convert their cases to Chapter 7. Those debtors assert § 1307(b)’s “absolute right”4 to voluntarily dismiss their case.
But, “how can a debtor assert § 1307(b) if they don’t qualify for Chapter 13 relief?”
Access to Chapter 13 relief has specific requirements.5 Failure to satisfy any of these requirements denies debtors Chapter 13 relief.6
A debtor’s § 1307(b) motion to dismiss may be a tactical response to a creditor’s motion to convert a bad faith case7. Courts are divided on whether dismissal is required,8 as opposed to conversion, due to bad faith.9
Thus, § 1307(b)’s reputation as an “escape hatch” which makes “section 1307(c) a dead letter and open up the bankruptcy courts to a myriad of potential abuses.”10
However, for debtors disqualified from Chapter 13, does § 1307(b) even apply?
Debtors’ absolute right to voluntarily dismiss bankruptcy cases is peculiar to §§ 1307(b) and 1208(b). § 1307(b)’s absolute right to voluntary dismissal is derived from the Thirteenth Amendment’s involuntary servitude prohibition.”11
However, 13th Amendment involuntary servitude concerns are “out of place” in conversions to Chapter 7 liquidation cases.12 There is no servitude.
Bankruptcy relief has rules and requirements.13 If you don’t do what’s required, you don’t get the benefits.14
Chapter 13 has other benefits, not available to non-Chapter 13 Debtors.15
It seems axiomatic that debtors who don’t qualify for Chapter 13 relief, don’t qualify for § 1307(b).
Recently, in In re Cenk,16 a debtor’s § 1307(b) motion to dismiss was granted due to unsubstantiated claims of “bad faith.” Still, considering that debtor’s access to § 1307(b) availability, the court opined:
If an ineligible debtor does not have an absolute right to dismiss under section 1307(b), Marrama’s17 reconversion under section 1307(c) would, in fact, be the “end result required by the Code.18
It then asked,
“. . . if a debtor’s bad faith preceded the chapter 13 petition or was concurrent with it, . . . is it possible that the debtor would not be “qualified” to be a chapter 13 debtor ab initio and therefore not have an absolute right to dismiss? Ultimately, these are questions for another day.”19
“Another day” may be now.
Not qualifying for Chapter 13 and rejecting chapter 11 leaves disqualified Chapter 13 debtors without a governing chapter. That does not mean bankruptcy limbo.
Chapter 7 apparently becomes the “default” chapter, if no others are available or desired.20
Disqualification for Chapter 13 may render § 1307(b) inaccessible to all affected. However, innocent debtors can be protected. Where a debtor’s § 1307(b) right is challenged, the court can hold an evidentiary hearing to determine if disqualifying bad faith exists.21
It appears that debtors filing Chapter 13 cases in bad faith do not qualify for Chapter 13 relief. Disqualified for Chapter 13, its privileges, including § 1307(b)’s absolute right to dismissal are unavailable. If other chapters are not available or desired, the case being converted to Chapter 7 seems inevitable.