5 Issues That Can Lead to Denial of a Chapter 7 Bankruptcy
When you file for bankruptcy under Chapter 7, the outcome of your filing is not a foregone conclusion. While many people have the perception that they can expect to simply file and receive a fresh start (largely due to misleading advertisements from non-law firm servicers), this is not the case. Filing for bankruptcy under Chapter 7 is a process, and various issues can arise along the way.
With this in mind, when preparing to file for bankruptcy under Chapter 7, it is important to have a clear understanding of the rules, requirements and restrictions that apply. While issues can arise, it is also possible to avoid these issues with forethought and planning.
When Can a Chapter 7 Bankruptcy Filing Be Denied?
So, what do you need to know? Here are five issues that can lead to denial of a Chapter 7 bankruptcy filing:
1. You Don’t Satisfy the “Means Test”
In order to file for bankruptcy under Chapter 7, individual filers must satisfy the Chapter 7 “means test.” Since a successful Chapter 7 filing results in the discharge of the filer’s eligible debts, the U.S. Bankruptcy Code limits Chapter 7 eligibility to those who are truly unable to meet their financial obligations as they come due. Or, as the Legal Information Institute (LII) explains, “[t]he purpose of the means test is to see . . . if the debtor is abusing the bankruptcy system by filing Chapter 7 bankruptcy cases even though they could afford to pay at least some of their debts.”
The means test requires Chapter 7 filers to make a complicated calculation that considers various factors both related and unrelated to their assets, income and debts. If a Chapter 7 filer incorrectly determines that they “pass” the test, their bankruptcy filing will be denied.
Keep in mind, however, that if you use Chapter 7 to file for business bankruptcy, the means test does not apply. If you intend to use Chapter 7 to close your business and start again, you can file regardless of whether you would be able to satisfy the means test as an individual.
2. Your Debts Aren’t Eligible for Discharge Under Chapter 7
The bankruptcy court will also deny your 7 liquidation filing if your debts are not eligible for discharge under Chapter 7. While most types of debts are eligible for discharge under Chapter 7, some are not. For example, debtors generally cannot eliminate the following liabilities through a Chapter 7 bankruptcy filing:
- Unscheduled debts (debts you fail to list on your bankruptcy filing)
- Debts arising out of a divorce
- Debts arising out of a personal injury case
- Certain tax liabilities
- Government fines and penalties (including court-imposed fines and penalties)
- Child support and alimony
- Student loans
- Business debts when filing under Chapter 7 as an individual
Additionally, Chapter 7 allows creditors to object to debtors’ efforts to discharge certain types of liabilities. Depending on the circumstances, if a creditor objects to the discharge of any of the following, the court may decide that a discharge should not be granted:
- Cash advances
- Credit card debt for luxury goods
- Debts incurred due to willful and malicious injury or property damage
- Debts obtained by false pretenses or fraud
If some of your debts are eligible for discharge, you can file under Chapter 7 (assuming you otherwise qualify) to eliminate those debts while retaining the ones that are ineligible. In this scenario, however, it may make more sense to pursue a reorganization bankruptcy under Chapter 11, or to consider other alternatives that may be available to you.
3. You Omitted Necessary Information from Your Chapter 7 Filing
When filing for bankruptcy under Chapter 7, individuals and businesses must submit a substantial amount of information to the bankruptcy court. Along with the Chapter 7 bankruptcy petition, debtors must also file:
- Schedules of assets and liabilities
- Schedule of executory contracts and unexpired leases
- Schedules of income and expenditures
- Statement of financial affairs
Completing these forms requires debtors to have the following information (among much else):
- Identity and contact information for all creditors
- Amount and nature of all debts
- Source, amount and frequency of all forms of income
- Lists of the debtor’s tangible, intangible assets and living expenses
If you omit necessary information from your Chapter 7 bankruptcy filing, this can also lead to a denial. While bankruptcy courts will excuse innocent mistakes in some cases, this is not guaranteed. As a result, Chapter 7 filers must carefully review their submissions prior to filing to ensure that they are complete, and they should work with experienced counsel to ensure that they are maximizing their opportunity to discharge as many of their debts as possible.
4. You Misrepresented Your Assets, Debts or Income (Intentionally or Unintentionally)
In addition to the omission of material information, the misrepresentation of material information can lead to a denial of discharge under Chapter 7. If you misrepresent your assets, debts or income—whether intentionally or unintentionally—this can also lead to your Chapter 7 filing being denied. Again, it is critical to meticulously examine your petition and schedules before you file, and it is best to work with an attorney who can help make sure that you are not “defrauding” the bankruptcy court.
5. You Previously Received a Bankruptcy Discharge (and Not Enough Time Has Passed)
Finally, the bankruptcy court can deny your Chapter 7 filing if you previously received a bankruptcy discharge and not enough time has passed. In general, debtors are ineligible to file for bankruptcy under Chapter 7 if they either (i) received a discharge under Chapter 7 within the past eight years or (ii) received a discharge under Chapter 13 within the past six years. Debtors are also ineligible to file under Chapter 7 if they have had a prior petition dismissed “due to . . . willful failure to appear before the court or comply with orders of the court, or . . . voluntarily dismissed [a] previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.”
Speak with a Bankruptcy Lawyer in Miami for Free
Do you have questions about filing for bankruptcy under Chapter 7? If so, we encourage you to get in touch. Please call 305-768-9909 or contact us online to schedule a free consultation.