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North Carolina Bankruptcy Judge Denies Debtors’ Motion to Convert from Chapter 7 to Chapter 13 Due to Bad Faith

Michigan Bankruptcy and Chapter 7 to 13 Conversion.

The Chapter 7 Debtors failed to disclose in their petition their interests in various real estate partnerships and multiple foreclosure proceedings, which the Chapter 7 Trustee discovered through reviewing the Debtors’ tax return and public records.  The Debtors then sought to convert to Chapter 13 and the Chapter 7 Trustee objected.

The Court held the Debtors  initial schedules were so misleading as to give rise to an inference  of bad faith, which in turn prevents conversion. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007).  The debtors argued that providing the 2009 tax return, which disclosed some of the missing items, demonstrates they were not purposefully concealing matters from the Trustee.  The Court rejected this, holding that Debtors cannot pick and choose items for disclosure in their petition and rely on the trustee to uncover the rest through investigation of public records and the conversion was, accordingly, denied.