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Chapter 11 bankruptcy’s good faith requirement

by | May 19, 2021 | Bankruptcy

Before accepting a Lexington business’ Chapter 11 bankruptcy filing, a bankruptcy court judge must be certain that the filing is made in good faith. The good-faith requirement is intended to prevent abuse of Chapter 11 bankruptcy by using it for other than its original purpose: to allow businesses and other entities the chance to keep going despite debt problems while also satisfying creditors as much as possible.

Chapter 11 and good faith

The law sets out several examples of abuse or failure that can constitute bad faith by the debt and result in having their case dismissed. These include:

  • Continuing loss to or diminution of the estate
  • Unreasonable delays
  • Inability to carry out their bankruptcy plan

This requirement has been in the news recently after a bankruptcy court judge dismissed the National Rifle Association’s Chapter 11 filing. The judge concluded that the NRA did not act in good faith but was trying to use bankruptcy to “gain an unfair litigation advantage” and “to avoid a state regulatory scheme.” The judge also expressed concern about the “manner and secrecy” surrounding the group’s filing.

Unlikely to be an issue

The vast majority of business owners seeking Chapter 11 bankruptcy protection act in good faith. With the help of their bankruptcy attorney, they understand what bankruptcy can do to help them preserve their company and regain control over their debt load. But while this is rarely an issue, it is important to know that the court might take action if it suspects some kind of deceit or less-than-honest agenda. If it is a potential issue in your business’ bankruptcy, your lawyer will work with you to confront it.