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A New Ruling on Dismissing a Chapter 13 Bankruptcy Case

| Jun 11, 2021 | Bankruptcy, Bankruptcy, Debt

By: Dean Langdon

Chapter 13 bankruptcy is often used by individuals to stop a foreclosure sale of their home and give them a chance to catch up the past due payments. Sometimes debtors abuse the bankruptcy process by filing Chapter 13 to stop a sale, then dismiss their Chapter 13 case. Ronald Smith did just that on three occasions – first in 2007, then in 2017, and finally in 2019. The bankruptcy court dismissed each Chapter 13 case upon his request shortly after the case was filed. About three months after his last case was dismissed, the mortgage lender asked the bankruptcy court to vacate the order dismissing Smith’s Chapter 13 case and lift the automatic stay of a period of two years. The bankruptcy court agreed in June 2019. Smith appealed and asked to stay the order reinstating his case. The district court denied the stay but certified the issue to the Sixth Circuit which agreed to take the case directly from the bankruptcy court.

On June 9, 2021 the Sixth Circuit reversed the bankruptcy court and held that it could not disregard the specific provisions of the Bankruptcy Code which give a debtor the right to dismiss a Chapter 13 case upon request. The case was returned to the bankruptcy court with instructions to dismiss it. The gist of the Sixth Circuit’s ruling is that the Supreme Court decision of Law v. Seigel made it clear that while bankruptcy courts have flexibility under the Bankruptcy Code, they cannot just disregard them to reach what they think is a fair result. The Court of Appeals also held that while the procedural rule used by the mortgage lender to set aside the dismissal of Smith’s case applied in cases of fraud, misrepresentation or misconduct, it did not trump the actual Bankruptcy Code. In other words, the law controls over the procedural rules.

It will be interesting to see what happens next between Mr. Smith and his mortgage lender. It is unclear if the mortgage lender has tried to continue the foreclosure while the case was on appeal. With the bankruptcy case dismissed, there is nothing to prevent the mortgage lender from moving forward. Nor is there anything to keep Mr. Smith from filing yet another Chapter 13 case to stay another foreclosure sale. Can Mr. Smith simply repeat this process over and over to stymie his mortgage lender? Probably not.

There is a provision of the Bankruptcy Code that prevents a debtor from filing a new case for 180 days if a creditor files a motion for relief before a case is dismissed. The mortgage lender could act quickly to file such a motion if Mr. Smith files a new case. There is another provision of the Bankruptcy Code that automatically lifts the stay 30 days after a case is filed if a debtor had a case dismissed within a year of filing the new bankruptcy. In Mr. Smith’s case, should that time be measured from when his 2019 case was initially dismissed, or from when it is dismissed again after remand? The bankruptcy court also has some ability to impose conditions or sanctions on Mr. Smith as a repeat filer if it determines he is abusing the protections offered by the Bankruptcy Code. No matter what happens with Mr. Smith and his mortgage lender in the future, we now have clear guidance from the Sixth Circuit Court of Appeals that Chapter 13 debtors should be allowed to dismiss their cases upon request, and that bankruptcy courts don’t have the ability to circumvent the clear language of the law that debtors have that right.

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