Fourth Circuit Blocks Chapter 13 Plan That Would Have Left Creditors With 8 Cents on the Dollar While Debtor Kept Three Luxury Cars

RICHMOND (LN) — The Fourth Circuit on Monday affirmed the rejection of a North Carolina debtor's Chapter 13 plan that would have paid unsecured creditors just 7.7 cents on the dollar while using five years of trustee disbursements to retire the loans on a Corvette, a GMC Sierra, and a Genesis G70, holding that technical compliance with the means test under § 1325(b) does not immunize a plan from the independent good-faith requirement of § 1325(a)(3).

Bobby Goddard, a Department of Labor employee and Army retiree earning roughly $12,268 a month in gross income, filed for Chapter 13 protection in September 2023 after purchasing the three vehicles over a 32-month window and taking out at least four personal loans — more than $35,000 worth — around the same time. When he ran the numbers through the statutory means test, his allowable deductions for secured debt payments produced a negative disposable income of $234 per month, leaving nothing for the roughly $84,700 in general unsecured claims.

His fourth proposed plan called for the trustee to receive $3,070 per month for two months and then $3,700 per month thereafter, with $2,958 of those monthly payments going to the vehicle lenders. Over the 60-month plan, unsecured creditors would collect about $6,500 total. Goddard would emerge with three unencumbered vehicles and a discharge of more than $78,000 in unsecured debt.

The bankruptcy court refused to confirm the plan, concluding that Goddard had not established any practical necessity for all three vehicles and that the plan was designed to improve his financial position at his creditors' expense. The court stated: "The Debtor's testimony did not establish any necessity for all three Vehicles. If the Debtor had his way, the Trustee would disperse nearly $3,000 each month toward claims secured by vehicles that adorn the Debtor's driveway and allow for luxuries at the expense of his creditors."

On appeal, Goddard argued that BAPCPA's 2005 overhaul stripped bankruptcy courts of discretion over what counts as a reasonably necessary expense, and that once a debtor satisfies § 1325(b)'s mechanical formula, the good-faith inquiry under § 1325(a)(3) cannot reach the same conduct. The Fourth Circuit, in an opinion by Judge Niemeyer, rejected that argument on six independent grounds.

The panel held the logic structurally flawed: removing judicial discretion from the means-test calculation does not eliminate the need for a separate equitable review. The scope of the good-faith requirement, the panel explained, is much broader than simply reviewing the means-test calculation. The panel also observed that Congress never intended Chapter 13 to serve as a haven for debtors who wish to receive a discharge of unsecured debts without making an honest effort to pay those debts, quoting the circuit's 1982 decision in Deans v. O'Donnell.

The panel also addressed Goddard's reliance on the Ninth Circuit's 2013 decision in In re Welsh, which held that BAPCPA forecloses a court's consideration of a debtor's payments to secured creditors as part of the good-faith inquiry under § 1325(a). The Fourth Circuit acknowledged Welsh might support Goddard's narrower point about the means-test calculation itself, but said it could not agree with Welsh's suggestion that retaining luxury items while paying relatively little to unsecured creditors is irrelevant to the broader good-faith inquiry. The panel noted that even Welsh had recognized the two inquiries as "separate and distinct."

To illustrate the stakes of Goddard's reading, Niemeyer sketched a hypothetical: a debtor borrows two-thirds of the cost of a $100,000 painting on an unsecured loan, finances the remaining third with a secured loan, then uses Chapter 13 to pay off the secured portion and discharge the unsecured debt — walking away with an unencumbered painting for one-third of its price. "While the debtor would have complied strictly with § 1325(b) to do so, he would have acted in bad faith by taking advantage of § 1325(b) to his own benefit and at the calculated expense of his unsecured creditor," the panel wrote.

The bankruptcy court had also flagged the timing of Goddard's borrowing: "Based on the timing of the Debtor's personal loans, it appears that during the 21 months prior to filing his petition, the Debtor may have serviced the debts related to the Vehicles with the very loans he now seeks to discharge. Compliance with 11 U.S.C. § 1325(b)(1)(B) cannot and should not provide cover for such financial indiscretions." The Fourth Circuit held that the bankruptcy court did not clearly err in those factual findings.

At oral argument, Goddard conceded that a debtor who actually manipulates the means test could face a good-faith challenge — a concession the panel said he was right to make.

The decision creates an explicit circuit split with the Ninth Circuit on whether means-test compliance can foreclose good-faith review, a divide that now spans two of the country's busiest bankruptcy jurisdictions.