The entire purpose of going through the arduous process of filing for chapter 7 bankruptcy is to get relief from your debts by having the court discharge them. However, things don't always go as planned, and the court may dismiss your case rather than grant you a discharge. Here are two reasons why this may happen and what you can do to avoid it.
Attempted Fraud or Misrepresentation
Possibly the most common reason people have their bankruptcy discharges denied is because of fraud or misrepresentation. This typically involves attempting to hide, transfer or destroy assets, concealing or falsifying information submitted to the court, using bankruptcy to defraud creditors, and outright lying to the judge or trustee.
Sometimes people do file bankruptcy with the intent to commit fraud or a crime. In 2014, the IRS investigated 44 cases of bankruptcy fraud and managed to get indictments in about 12 of them. For the most part, though, many people run afoul of the bankruptcy court out of sheer ignorance of the law.
For instance, selling off non-exempt property prior to filing bankruptcy is generally discouraged since that property is considered part of your bankruptcy estate and the trustee will sell it to pay your creditors. You could get into trouble for selling an asset, particularly if you sell it to a friend or family member, sell it for far less than it's worth, or use the proceeds from the sale to buy or increase the value of exempt property.
Another thing that trips people up is forgetting to list assets on their bankruptcy schedules or severely underestimating the value of items. For instance, if you state your vehicle is worth $5,000 but the Kelly Blue Book stays the car is valued at $10,000, the court may think you're trying to pull a fast one, especially if multiple assets have been undervalued on your schedules.
To avoid unintentionally sabotaging your bankruptcy discharge, it's essential that you work with a knowledgeable attorney who can educate you about the relevant laws and guide you through the process. At the very least, you should research bankruptcy laws in your area to ensure you're complying with the requirements of the court. Take time to accurately assess the value of your assets, and don't be afraid to consult experts if need be (e.g. art expert to evaluate value of artwork).
Failing to Follow Court Orders or Procedure
When you file for bankruptcy, there are certain requirements you must complete to obtain a discharge. One of those is taking a credit counseling and financial management course. You must also show up for court dates (such as the meeting of creditors) and hand over records when requested by the court or bankruptcy trustee. Failure to do any of these things or comply with special court orders handed down by the judge can result in your case being dismissed or, at minimum, your bankruptcy discharge being put on hold until you complete the requirements.
Again, you want to take some time to read up on how the bankruptcy process works. In general, when you file for chapter 7 bankruptcy, you must:
- File the paperwork
- Pay the court fee
- Take a credit counseling course
- Appear at the 341 hearing (meeting of creditors)
- Take a financial management course
- Hand over any non-exempt assets to the trustee
More steps may be involved depending on the circumstances of your case. For instance, if you're getting a divorce at the same time, you may need to update your bankruptcy schedules to reflect a loss of property to your ex.
Even if you're in a hurry to file so you can stop a legal action initiated by a creditor (e.g. wage garnishment), you need to take time to either consult with a bankruptcy attorney.
For additional info on bankruptcy or if you think you've made a misstep while filing for bankruptcy that may get your case thrown out or you want assistance with filing a petition, consult with a chapter 7 bankruptcy attorney near you.