In re Sun, __BR__24-20581 (Bankr. D.N.J. Sept. 29, 2025)
Bankruptcy Judge Meisel implores the Third Circuit to follow other circuits on dismissing bad faith debtors’ chapter 13 petitions but with bars to refiling.
Regarding the right of a chapter 13 debtor to dismiss a case filed in bad faith, Bankruptcy Judge Stacey L. Meisel of Newark, N.J., said it all in the second paragraph of her opinion:
A Chapter 13 Debtor possesses an absolute right to dismiss his bankruptcy case . . . even if the debtor acts in bad faith. However, this does not mean that a debtor gets a free pass to abuse the bankruptcy process. A bad faith debtor must bear the consequences of his actions. An appropriate remedy is to bar a bad faith debtor from filing bankruptcy for a certain period.
In her September 29 opinion, Judge Meisel tracks the evolution of the law on a debtor’s right to dismiss a bankruptcy case from the years before and after Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), through the revolution effected by Law v. Siegel, 571 U.S. 415 (2014).
The Bad Faith Filing
The debtor was the owner of a restaurant. He and his business had been sued in federal district court for violating federal labor laws. Not long after being sued, the debtor filed a chapter 13 petition. The debtor’s schedules contained little of the required information.
The chapter 13 trustee filed a motion to dismiss under Section 1307(c), based on the debtor’s filing deficiencies. Also under Section 1307(c), the plaintiff in the labor lawsuit countered with a motion to convert the case to chapter 7. The debtor consented to dismissal under Section 1307(b).
Judge Meisel held a trial to decide whether she was required to dismiss the chapter 13 case or whether she had discretion to convert the case to chapter 7. If dismissal was necessary, she explored the court’s authority to couple dismissal with a bar to refiling.
After trial, Judge Meisel found as a fact that the debtor “participated in pre-petition transactions that transferred assets that would have been available in his bankruptcy case.” The petition and schedules, she said, were “woefully deficient in disclosing all assets, liabilities, and various other items required.”
Judge Meisel found “a concerted effort by the Debtor to conceal his financial status and transfer his assets and liabilities away from himself. The only conceivable purpose for these acts was to prevent [the labor law plaintiff], and any other creditor, from reaching the Debtor’s assets.” Overall, she said that the “Debtor’s testimony was purposefully evasive and confusing, and — at times — untruthful.”
In sum, Judge Meisel found that “the Debtor is not credible and filed his Chapter 13 case in bad faith.” She wrote a 36-page opinion because the Third Circuit has not resolved the question of whether Section 1307(b) grants an absolute right to dismiss when the filing was in bad faith.
Marrama and Law v. Siegel
Judge Meisel was first tasked with deciding whether the debtor had an incontrovertible right to dismiss under Section 1307(b) despite his bad faith filing. The subsection reads:
On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.
Before Marrama, Judge Meisel said that “courts were split on whether a Chapter 13 debtor’s right to voluntary dismissal was absolute.” In Marrama, the chapter 7 debtor sought conversion to chapter 13. She described the Supreme Court as having held that “the debtor was ineligible to be a Chapter 13 debtor because his bad faith filing would constitute ‘cause’ under Section 1307(c) to dismiss or convert his case.” The Court, she said, “clarified that bankruptcy judges are granted broad authority to take necessary or appropriate action to prevent abuse of the bankruptcy process.”
After Marrama, Judge Meisel said that “most courts agreed that the right to voluntarily dismiss a Chapter 13 case was not absolute for bad-faith debtors.” But then came Law v. Siegel, where she described the Supreme Court as having “clarified the scope of Marrama.” The lower courts in Law had surcharged the individual debtor’s homestead exemption based on his fraudulent misrepresentations.
The Supreme Court in Law reversed. Judge Meisel quoted the Court for holding “that Section 522 ‘does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate.’” In other words, she described the Court as saying “that [] bankruptcy courts’ inherent powers to sanction abusive litigation practices are subordinate to statutory directives.”
Judge Meisel ended her discussion of Law by noting how the Supreme Court “reiterated that courts have alternative methods to punish bad faith debtors.”
The Law After Law
After Law, Judge Meisel cited the Ninth Circuit for reversing its prior decision, which “erred by withholding the debtor’s absolute right to voluntarily dismiss under Section 1307(b).” In re Nichols, 10 F.4th 956 (9th Cir. 2021). To read ABI’s report, click here.
Similarly, Judge Meisel cited the Sixth Circuit for having “held that Section 1307(b) mandated dismissal of the debtor’s case.” In re Smith, 999 F.3d 452, (6th Cir. 2021). To read ABI’s report, click here. After Law, she said that “no circuit court has found an implied equitable exception to Section 1307(b).”
The same question not having been decided by the Third Circuit, Judge Meisel analyzed Section 1307(b) and decided that the “statute leaves no discretion to the court” and “that courts cannot utilize discretion if it contradicts the express language of the Bankruptcy Code.”
Given how “the mandate under Section 1307(b) is clear,” Judge Meisel held that the “Debtor’s alleged bad faith does not negate the clear directives contained in Section 1307(b). Bad-faith circumstances do not empower bankruptcy courts to rewrite the Bankruptcy Code.”
Even though the debtor’s bad faith did not negate dismissal, Judge Meisel said that “the Court may still issue other orders necessary to prevent abuse of the bankruptcy process.” More specifically, she said that the court “may, however, use its Section 105(a) powers and inherent authority to sanction the Debtor in a manner that does not contravene the Bankruptcy Code if the Debtor acted in bad faith.”
Judge Meisel cited bankruptcy courts in the Third Circuit for having barred a bad faith debtor from refiling for six months to two years. And that’s what she did. Judge Meisel granted the motion to dismiss but imposed “a two-year bar on filing against the Debtor based on the Court’s finding of bad faith.”