## Facts

- A creditor, Jerry D. Watson, held a debt against debtor Edwin R. Smith arising from fraud and breach of fiduciary duty.
- In Smith’s earlier Chapter 7 case, that debt was adjudicated nondischargeable.
- Smith later filed a Chapter 13 case and proposed a repayment plan that, if confirmed and completed, would allow discharge of the same debt under Chapter 13’s broader discharge provisions.
- The bankruptcy court confirmed Smith’s Chapter 13 plan.
- The district court affirmed the confirmation order.
- Watson appealed, arguing the plan was not proposed in good faith because it was structured to discharge a debt previously found nondischargeable due to fraud.

## Issues

1. Whether a Chapter 13 plan is proposed in “good faith” under 11 U.S.C. § 1325(a)(3) when it is designed to obtain discharge of a debt previously held nondischargeable in a prior Chapter 7 case.
2. Whether the bankruptcy court’s confirmation of the plan should be reversed as clearly erroneous or an abuse of discretion based on the debtor’s bankruptcy history and the nature of the underlying debt.

## Decision

- The Seventh Circuit affirmed the district court and the bankruptcy court’s confirmation of Smith’s Chapter 13 plan.
- The court held the bankruptcy court did not clearly err or abuse its discretion in finding the plan was proposed in good faith under § 1325(a)(3).
- The court rejected a per se rule that using Chapter 13 to discharge a debt previously held nondischargeable in Chapter 7 necessarily constitutes bad faith.
- The court applied a “totality of the circumstances” inquiry, treating the debtor’s prior conduct and case history as potentially relevant but not dispositive.

## Legal Principles

- “Good faith” under 11 U.S.C. § 1325(a)(3) is evaluated under the totality of the circumstances.
- The core good-faith question is whether the debtor is attempting to pay creditors to the reasonable limit of the debtor’s ability or attempting to thwart them.
- A debtor’s prior bankruptcy history and the origins of the debt may inform the overall good-faith assessment, but the statutory focus remains on the plan proposed and its operation within Chapter 13.
- Because Congress permits discharge in Chapter 13 of some debts that are nondischargeable in Chapter 7, courts should not impose categorical bad-faith rules that override the statutory scheme; instead, they must apply the fact-specific § 1325(a)(3) inquiry.

## Conclusion

The Seventh Circuit upheld confirmation of a Chapter 13 plan that sought discharge of a fraud-based debt previously deemed nondischargeable in Chapter 7, holding that § 1325(a)(3) requires a totality-of-the-circumstances good-faith analysis rather than a categorical bar based solely on the debtor’s prior Chapter 7 outcome.


In re Smith, 286 F.3d 461 (7th Cir. 2002)