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What is good faith in bankruptcy?

Good faith provisions strengthened under bankruptcy reform

Good faith has always played a major role in bankruptcy cases because the U.S. Bankruptcy Court relies on the integrity of people who file to present their financial histories accurately and honestly. Otherwise, if people borrowed or obtained money with no intention of paying it back, it would amount to theft.

"Not surprisingly, 'good faith' is an important theme in, and even a prerequisite to, the 'fresh start' offered by bankruptcy," writes Pennsylvania attorney William Andrew McNeal on the website of the American Banking Institute.

Court officials use certain criteria to determine if debtors are acting in good faith in their attempt to get relief from insurmountable debts. They view those filing bankruptcy in the "totality" of their financial circumstances by judging whether all financial disclosures are accurate, a large debt was incurred shortly before the filing, if creditors were misled or assets have been hidden.

However, rather than try to prove good faith, the court often focuses on whether people filing petitions have committed acts of bad faith. Several provisions within the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which reformed the United States Bankruptcy Code in 2005, are based on this premise.

Those provisions are among the many requirements that debtors must fulfill to obtain a discharge of debts, as well as the court's protection against collection efforts and lawsuits by creditors while a bankruptcy case is active.

BAPCPA provisions

The means test that prevents high-income debtors from filing under Chapter 7, a liquidation process, is considered by many legal experts as the most important provision of the bankruptcy reforms. The result is that more debtors with regular earnings are forced to file under Chapter 13, which requires them to pay back creditors at least a portion of what they are owed over several years.

Good faith requirements were also strengthened by BAPCPA's mandatory credit counseling for debtors, the inability to discharge student loans from both government and private lenders and the enactment of home exemption limits in states where they had been unlimited previously. In addition, credit card purchases made shortly before filing were no longer dischargeable, limited automatic stays were placed on serial filings and minimum lengths of time that are imposed between bankruptcies.

Most importantly, when there is a lack of good faith from debtors, bankruptcy officials dismiss their cases, leaving debts in place with no protection against creditor claims. In Chapter 13 cases, the court may deny confirmation of the creditor payment plan or force the debtor into liquidation under Chapter 7.

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