Bad Faith Dismissals in Chapter 7

(Excerpt) Title 11 of the United States Code (the “Bankruptcy Code”) provides a fresh start to the “honest but unfortunate debtor.” Chapter 7 therefore permits a debtor to “discharge their outstanding debts in exchange for liquidating their nonexempt assets and distributing them to their creditors.” Dismissals in chapter 7 are governed by section 707 of the Bankruptcy Code. Section 707(a) governs all chapters of bankruptcy filings and applies when adequate “cause” is shown. There is currently a circuit split regarding whether a debtor’s lack of good faith constitutes cause for dismissal under section 707(a). Under section 707(a), a case may only be dismissed for cause after notice and hearing. Section 707 does not define “cause,” offering only a non-exhaustive list of what may constitute cause. This includes unreasonable delay, nonpayment of fees, and failure to file required information on motion of the U.S. Trustee. As a result, bankruptcy courts are given significant discretion when asked to determine whether there is cause to dismiss under section 707. This is a fact-based inquiry. Courts have found cause to dismiss, for example, where the administration of the estate would require the Trustee to operate the debtor’s business in violation of federal law, or where the dismissal would further the judicial economy without harm to either the debtor or their creditors. This article explores the circuit split surrounding whether a debtor’s lack of good faith is cause for dismissal under section 707(a). Part I analyzes the approaches of the various circuits, beginning with the majority view established by the Sixth Circuit in In re Zick that bad faith is grounds for dismissal. Part II analyzes case law on the issue of bad faith dismissals out of lower courts within the Second Circuit, which has not yet heard the issue. The article concludes with a finding that the Second Circuit is likely to follow the Sixth Circuit’s approach in Zick and accept a debtor’s bad faith as grounds for dismissal under section 707(a) in cases of egregious misconduct