What Disqualifies You From Filing Bankruptcy?
Learn how specific financial behaviors, legal issues, and eligibility rules can impact your ability to file for bankruptcy protection.
Filing for bankruptcy can offer a path to financial recovery for individuals overwhelmed by debt, but eligibility is not guaranteed. The process has specific requirements, and failing to meet them can lead to a case being denied or dismissed. Understanding potential disqualifications is crucial before proceeding.
Fraud
Honesty and full disclosure are fundamental to the bankruptcy process. Fraudulent actions before or during the case can disqualify an individual from receiving debt relief. The integrity of the system depends on truthful reporting of assets, debts, and financial history.
Concealing assets is a common type of fraud. Intentionally hiding property or accounts that should be available to creditors undermines the fairness of the system. Federal bankruptcy law prohibits granting a discharge if a debtor, intending to hinder or defraud creditors or the trustee, hides or improperly transfers property within a year before filing or during the case.1Cornell Law School Legal Information Institute. 11 U.S. Code § 727 – Discharge Such actions can lead to the denial of the bankruptcy discharge.
Providing false information on bankruptcy documents, such as misrepresenting income, debts, or financial transactions, is another serious form of fraud. Knowingly making false statements on official forms or during required testimony can lead the court or the U.S. Trustee, which oversees bankruptcy cases for the Department of Justice, to seek dismissal or denial of discharge.2American Bankruptcy Institute. Making a False Oath Can Lead to Denial of Bankruptcy Discharge
Certain actions taken shortly before filing may also raise red flags. Incurring large debts for luxury items or taking significant cash advances close to filing without intending to repay might be seen as abusing the system. While this might primarily make those specific debts non-dischargeable, a pattern of such behavior could contribute to a finding of overall fraudulent intent, potentially jeopardizing the entire case.
Dismissed Bankruptcy Case
A previously dismissed bankruptcy case can affect your ability to file again, at least temporarily. Bankruptcy rules aim to prevent misuse of the system. When a case is dismissed without a discharge of debts, the filer essentially returns to their prior financial situation, and creditors can resume collection efforts.
The reasons for the dismissal determine future eligibility. Federal law imposes a mandatory 180-day waiting period before filing a new case if a prior case was dismissed within that timeframe for specific reasons.3American Bankruptcy Institute. Can You Refile If Your Bankruptcy Case Was Dismissed? These include the court dismissing the case due to the debtor’s willful failure to follow court orders or properly pursue the case.
This 180-day ban also applies if the debtor voluntarily dismissed their case after a creditor requested relief from the automatic stay – the legal protection that halts most collection actions. If a creditor sought permission to proceed with an action like foreclosure, and the debtor then withdrew the case, the law may interpret this as an attempt to manipulate the system, triggering the restriction.
A court can also dismiss a case “with prejudice,” a more severe action often resulting from bad faith or serious misconduct like hiding assets. This type of dismissal can prohibit refiling for longer than 180 days or even permanently bar the discharge of debts included in the dismissed case. Dismissals “without prejudice,” often due to procedural errors, typically allow for refiling, though sometimes with limitations.
Previous Discharge
Receiving a bankruptcy discharge provides significant relief but limits how soon you can receive another one. Bankruptcy law establishes waiting periods between discharges, varying by the type of bankruptcy filed previously (Chapter 7 or Chapter 13) and the type planned next. These time limits restrict eligibility for a discharge in the subsequent case; filing sooner might be possible but often lacks the primary benefit of eliminating debt.
If you received a discharge under Chapter 7 (liquidation bankruptcy), you generally must wait eight years from the date the first Chapter 7 case was filed before receiving another Chapter 7 discharge.4Upsolve. If I Received a Discharge, When Can I Refile?
If you need relief sooner than eight years after a Chapter 7 discharge, Chapter 13 (repayment plan bankruptcy) might be an option, but typically only after four years have passed since the Chapter 7 case was filed.5Nolo. How Often and How Many Times Can You File Bankruptcy? Filing a Chapter 13 less than four years after a Chapter 7 is possible, perhaps to stop a foreclosure, but you generally would not receive a discharge of remaining debts at the end of the Chapter 13 plan.
If your prior discharge was under Chapter 13, the rules differ. To file for Chapter 7 after a Chapter 13 discharge, you generally must wait six years from the filing date of the prior Chapter 13 case. However, this six-year wait does not apply if, in the previous Chapter 13, you paid back 100% of your unsecured debts, or if you paid at least 70% and the court found the plan was proposed in good faith and represented your best effort.
If you received a Chapter 13 discharge and need to file another Chapter 13, the waiting period is shorter. You generally cannot receive a discharge in a new Chapter 13 case if the prior Chapter 13 case was filed within two years of the new case’s filing date.
Debts Do Not Qualify
Bankruptcy aims to provide a fresh start, but not all debts can be eliminated. Certain obligations, known as non-dischargeable debts, survive the bankruptcy process. Even after successfully completing bankruptcy, the filer remains legally responsible for these specific debts. While having such debts doesn’t prevent filing, it can reduce the overall effectiveness if they represent a large portion of the financial burden.
Key examples of non-dischargeable debts, often excluded for public policy reasons, include domestic support obligations like child support and alimony. Most student loans are also difficult to discharge; eliminating them requires proving “undue hardship” in a separate legal action within the bankruptcy case, a standard that is challenging to meet.6Federal Student Aid. Discharging Student Loan Debt in Bankruptcy
Certain tax debts are also typically non-dischargeable, particularly recent income taxes. Older tax debts might qualify for discharge if specific timing rules are met, but debts related to tax fraud never qualify. Other common non-dischargeable debts include those for death or injury caused by driving while intoxicated, criminal fines and restitution owed to government entities, and debts not properly listed on bankruptcy forms (unless the creditor knew about the case).7Connecticut Bar Association. Bankruptcy Discharge Cheat Sheet
Debts incurred through misconduct, such as those obtained by fraud, embezzlement, or larceny, or resulting from willful and malicious injury to others or their property, are generally not dischargeable. If a significant portion of an individual’s debt falls into these categories, the practical relief offered by bankruptcy may be limited.
Non-Cooperation
Successfully navigating bankruptcy requires active participation and honesty. Filers have a clear duty to cooperate fully with the bankruptcy trustee assigned to their case. The trustee administers the case, reviews finances, potentially liquidates assets, and distributes funds to creditors. Failure to cooperate can lead to denial of discharge or dismissal of the case.
This duty involves more than just initial paperwork. Debtors must surrender relevant property and financial records to the trustee and respond promptly to inquiries. They must provide documents like tax returns, pay stubs, and bank statements as requested.
Mandatory appearances are a critical part of cooperation. Debtors must attend the “meeting of creditors” (also known as the 341 meeting) to answer questions under oath from the trustee and potentially creditors about their finances and property.8Strategic Bankruptcy Law Institute. Debtor Duties in Bankruptcy Failure to attend without a valid reason can be seen as non-cooperation and may lead to dismissal. Debtors must also attend court hearings related to their discharge if required.
Refusing to comply with lawful court orders or provide necessary information can directly result in the denial of a bankruptcy discharge, especially in Chapter 7 cases. Federal law allows denial if a debtor refuses to obey a court order or answer material questions. Knowingly withholding financial records from the trustee or failing to keep adequate financial records can also lead to discharge denial. Lack of cooperation fundamentally undermines the ability to obtain debt relief.
Income Is Too High
Income level is a key factor in qualifying for Chapter 7 bankruptcy. A “means test” was introduced in 2005 to assess whether allowing an individual to use Chapter 7 would be an abuse of the system, essentially gauging their ability to repay some debt.9U.S. Department of Justice. Means Testing If the test shows sufficient income to make meaningful payments, the person might be disqualified from Chapter 7, though Chapter 13 could still be an option.
The test starts by calculating the debtor’s “current monthly income” (CMI) – the average gross monthly income from most sources during the six months before filing (excluding Social Security benefits and certain victim payments). This average is annualized and compared to the median family income for a similar household size in the debtor’s state.10United States Courts. Bankruptcy Basics
If the debtor’s income is at or below the state median, they generally pass this first step, and Chapter 7 is more likely permissible. However, the court or U.S. Trustee could still argue abuse based on the overall circumstances, though this is less common.
If the debtor’s income exceeds the state median, the test calculates “disposable income” by subtracting specific allowable expenses from the CMI. These expenses are largely based on IRS standards for necessities (food, housing, transportation) plus certain actual costs like taxes, secured debt payments (mortgages, car loans), and child care.
This calculated monthly disposable income is projected over five years. If the total projected disposable income exceeds certain thresholds set by law, a “presumption of abuse” arises.11United States Courts. Bankruptcy Basics This strongly suggests the debtor does not qualify for Chapter 7. The U.S. Trustee or a creditor may then ask the court to dismiss the case or convert it to Chapter 13, unless the debtor can show special circumstances justifying Chapter 7. Having income high enough to trigger this presumption effectively disqualifies many individuals from Chapter 7 relief.