Bankruptcy courts are fairly liberal in allowing a debtor who has filed a chapter 7 case to convert it to a chapter 13 case, if necessary. That ability to convert, however, is not absolute. In reviewing such an application by a debtor, the court will look to see if the debtor had engaged in any kind of bad faith or improper behavior that would make it unfair for a debtor to convert her case. In this particular case, it cost the debtor his Porsche.
This case comes out of the bankruptcy court for the Eastern District of North Carolina. In the case, the debtor had filed for chapter 7 bankruptcy relief. In his bankruptcy filing, he listed a 1987 Porsche 911, and valued it at $500.00, and using an exemption to protect the car. At the 341 hearing, the trustee questioned the debtor about the car, including condition and mileage. The debtor indicated that the car was inoperable and not in good condition. The trustee, however, asked the debtor to provide photographs of the car. When the debtor sent photos to the trustee, it appears that the pics were vague and unclear, being shot in a dim garage. The trustee requested more photos, which the debtor provided. Based on these second photos, the trustee had an auctioneer appraise the car, and valued it between $12,000.00 and $30,000.00, in addition to finding that the car was in working order.
After receiving this new valuation and information, the trustee demanded that the debtor surrender the vehicle to the trustee for sale, or to pay the trustee $14,000.00 to keep the car. Rather than surrender or agree to pay the trustee, the debtor filed a motion to set aside his discharge, and to convert the case to one under chapter 13.
In reviewing the motions, the court reviewed the debtor’s bankruptcy filings and his behavior. From the outset, the court noted that the debtor’s dealings with the trustee, as they related to the car, were in bad faith. The debtor misrepresented the condition and the value of the car in his papers. When asked for pictures of the car to see its condition, the debtor provided pics that were not usable. Moreover, in contemplating the debtor’s motion to convert the case to chapter 13, the court found that the income and expenses listed showed no monthly net income that would allow for a chapter 13 plan. The debtor then amended his schedules to decrease his expenses, which the court found to be “unrealistic at best, or indicative that expenses in the original Schedule J were inflated, at worst.”
Based on the totality of the debtor’s actions and misrepresentations, the court denied the debtor’s motion to set aside the discharge and convert the case to a chapter 13. The court indicated that it will not allow a debtor to file for bankruptcy, make misrepresentations to obtain a discharge of debt, and then allow the debtor to obtain favorable treatment in a chapter 13 just because the misrepresentations were discovered. As the court stated, “[t]he Debtor’s attempt to convert to Chapter 13 reeks of bad faith and undermines the Code’s primary goal to provide a clean slate to the ‘honest but unfortunate debtor.’ [ . . . ] This court will not permit the Debtor to keep a luxury sports car, no matter the age, while struggling to pay creditors and other obligations [ . . . ]. In re Fields, 15-5957-DMW (Bankr. E. D. N. C., June 2016).
The takeaway is simple. Be candid, thorough and forthright in your bankruptcy filing. Discovery of misrepresentations can have devastating consequences for a debtor – not only denial of discharge or surrender of property, but criminal consequences as well.