Bankruptcy – Court rejects repayment plan that was not proposed ‘in good faith’

Where the debtor proposed a repayment plan that would pay his creditors less than eight cents on the dollar, would leave him with ownership of three luxury vehicles and would discharge most of his unsecured debt, the bankruptcy court did not clearly err in rejecting the plan on the ground that it was not proposed “in good faith,” as required by 11 U.S.C. § 1325(a)(3).

Background

Bobby Goddard Jr., a debtor in a Chapter 13 bankruptcy proceeding, proposed a plan by which the trustee would pay off loans on his three luxury vehicles but would pay unsecured creditors less than eight cents on the dollar, thus leaving Goddard at the end of the proceeding with ownership of the vehicles and a discharge of most of his unsecured debt. The bankruptcy court rejected the plan on the ground that it was not proposed “in good faith,” as required by § 1325(a)(3). The district court affirmed.

Analysis

Goddard essentially argues that his compliance with the disposable income requirement of § 1325(b) immunized him from the bankruptcy court’s consideration of whether he filed his plan in good faith under § 1325(a)(3). Goddard points out that, prior to 2005, Chapter 13 debtors were required to devote all their “disposable income” to paying unsecured creditors, but what constituted “disposable income” was determined on a case-by-case basis. But with the changes made in 2005, Congress removed that discretion from the determination of whether a debtor’s expenses were reasonably necessary and provided “a bright-line statutory test for debtors . . . whose income was above the median.”

And it follows, he contends, that a bankruptcy court cannot find a lack of good faith based on the debtor’s decision to retain certain assets, when the payments for those assets are deemed to be “reasonably necessary” under § 1325(b). He thus concludes that once it is determined that he complied with the terms of § 1325(b), his plan’s proposed treatment of assets serving as collateral for several loans and its minimal payment to unsecured creditors cannot, as a matter of law, support a finding under § 1325(a)(3) that his plan was not proposed in good faith.

Goddard’s logic is flawed. He argues that because *discretion *was removed from the provision calculating disposable income with the means test, the need to consider *good faith *was effectively eliminated. But taking away that discretion does not ensure that all plans that comply with § 1325(b) were filed in good faith. And it simply does not follow that eliminating discretion in the means-test calculation thereby eliminated the need for a good-faith assessment of a Chapter 13 plan.

Next* *and similarly, Goddard construes the good-faith requirement far too narrowly. Its scope is much broader both in geography and in its elements. Good faith reaches beyond mere compliance to assess whether a proposed plan, even if in technical compliance, would nonetheless abuse the provision’s purposes or violate the spirit of Chapter 13 or the Bankruptcy Code more broadly.

Moreover, the 2005 legislation deliberately left in Chapter 13 — despite the elimination of discretion within the means-test provision — as an equitable overlay to preclude, among other things, plans that would serve as a “haven for debtors . . . to receive a discharge of unsecured debts without making an honest effort to pay those debts.” Similarly, § 1325(a)(1) requires every Chapter 13 plan to comply with all the provisions of Chapter 13, not only § 1325(b)’s disposable income requirement. Finally, the structure of the means test itself demonstrates that good faith remains a separate, independent requirement.

Goddard maintains that the Ninth Circuit’s decision in *Drummond v. Welsh *(*In re Welsh*), 711 F.3d 1120 (9th Cir. 2013), supports his position. But it does not support his argument that the correct calculation under § 1325(b) somehow immunizes his Chapter 13 plan from any examination under the good-faith standard, as required by § 1325(a)(3). Having concluded that compliance with § 1325(b) does not immunize a debtor from the requirement of proposing a Chapter 13 plan in good faith, the court concludes that in the circumstances presented here, the bankruptcy court did not clearly err in finding a lack of good faith.

Affirmed.

Goddard v. Burnett, Case  No.  25-1303 , April 28, 2026.  4th Cir. ( Niemeyer ), from EDNC at  Raleigh ( Dever III ). Travis P. Sasser for Appellant. Michael Brandon Burnett for Appellee. Richard Preston Cook for Amici Curiae . VALW 026-2-149 .  18 pp.

Full-Text Opinion

VLW 026-2-149
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