Whether you’ve lost your job, are carrying an excessive amount of credit card debt, or have big medical bills and are dealing with mounting debt, you may have considered filing for bankruptcy to get a fresh start with your finances.
A recent FindLaw.com survey revealed that one in eight Americans, or 13% of us, have considered filing for bankruptcy protection. And in 2010 alone, 1.5 million U.S. consumers declared bankruptcy, according to the American Bankruptcy Institute.
While filing for Chapter 7 or Chapter 13 bankruptcy can be a way to help you reduce unmanageable debts, not everyone’s case is accepted by bankruptcy courts.
Your bankruptcy filing can be rejected for a number of reasons – often due to mistakes or omissions in your paperwork. That’s why it’s important to educate yourself on the rules and limitations of each type of bankruptcy, and also to consider working with an experienced bankruptcy attorney to assist you with the process.
Here are a few reasons why your bankruptcy filing could be rejected:
1. You don’t pass the “means” test in court.
In order to initially qualify for a Chapter 7 bankruptcy, where most of your unsecured debts are eliminated – or “discharged” in legal speak – you must pass a “means” test imposed by the court. In a nutshell, a means test is a way for the court to determine how much disposable income you have. If you’re deemed to have too much money, a court may reject your Chapter 7 bankruptcy request.
A good attorney should be able to review your situation and provide you with a free, initial consultation, including advising you whether or not you’ll likely qualify for Chapter 7. If you don’t qualify, or if your bankruptcy petition is rejected because you don’t pass the means test, you can still consider filing Chapter 13.
2. You fail to provide requested tax documents or show up at the creditor meeting.
To get bankruptcy protection, you’ll need to provide a series of financial documents to support your case and prove that you really don’t have the money to pay all your creditors. Among those documents are your income tax returns.
The court may reject or “dismiss” your bankruptcy case if you misrepresent your tax information or fail to provide tax documents altogether. In years past, you didn’t have to file tax records in order to pursue bankruptcy. But ever since bankruptcy reform passed in 2005, this has become a requirement.
With a Chapter 13 bankruptcy, you must file all tax returns for the four years prior to your bankruptcy filing. If you don’t supply the court with your tax records, your Chapter 13 repayment plan will not be approved. In Chapter 7 bankruptcy cases, you must also provide requested tax documents to the court, or else your debts won’t be eliminated.
For many people, the requirement to file your taxes is increasingly a barrier to getting a bankruptcy discharge, especially in this tough economy where many individuals may not have filed their taxes for a variety of reasons.
Exactly when you have to submit your tax records – and to whom – can vary from state to state. In my home state of New Jersey, for example, you don’t have to file tax returns with the bankruptcy court. But you do have to provide your tax records to the appointed trustee.
In the Garden State, your tax returns should be supplied to the trustee in either a Chapter 7 or Chapter 13 case within seven days of the so-called “341 meeting of creditors.” In layman’s terms, that’s the get-together you must have with the bankruptcy trustee and your creditors where you answer questions under oath about your assets and liabilities. You’re required to attend that meeting. If you don’t show up, your bankruptcy petition can be dismissed.
Although this meeting may sound intense, consumers and bankruptcy attorneys say it’s not that eventful. Creditors usually don’t show up at all, mainly because most people seeking bankruptcy protection are broke and don’t have any major assets. If you have a lawyer, he or she will attend the meeting with you. During the meeting, you’ll mainly be asked – by the trustee – to confirm your identity, show your tax returns, and verify the basic information shown in your bankruptcy filing. The whole process typically takes five to 10 minutes.
Since this creditor meeting usually takes place about a month after your bankruptcy petition is first filed, if you want to prevent tax issues from blocking your bankruptcy case from proceeding, it’s always best to have your tax returns completed before you seek bankruptcy protection.
3. You submit a proposed repayment plan that’s not feasible.
With a Chapter 13 bankruptcy filing, you repay some of your debts over a period of three to five years. If you file for Chapter 13 bankruptcy and set up a repayment plan, your proposed plan must be feasible in order to be accepted by the courts. The courts will review your current income, debts and assets to determine whether you can realistically pay back your creditors under the Chapter 13 plan. If not, they can reject your case.
You may be able to file again with a more feasible repayment schedule. But to avoid this hassle, make sure your initial proposed repayment plan is realistic and can be achieved over the required three-to-five-year time frame.
4. Someone challenges your bankruptcy request.
Once you’ve filed for Chapter 7, you’re still not totally in the clear since someone could challenge your right to have your debts wiped out.
At the end of the Chapter 7 process, the goal is to get a “discharge” of your debts. A discharge is a permanent court order that relieves you of any legal liability to pay things like medical bills or credit card debts.
For those filing Chapter 7, a discharge is granted nearly automatically. However, this may not happen if a creditor or the bankruptcy trustee challenges your discharge. A “challenge” – where an individual tries to prove you’re not eligible for a bankruptcy discharge – typically occurs if someone believes you were dishonest, or committed fraud, in some way.
For instance, if you hide assets, make false statements about your circumstances, or even just fail to appear to take mandatory credit counseling, any of these reasons could result in a challenge.
In such instances, that challenge could lead to your Chapter 7 discharge being denied or revoked. To avoid this scenario, be as honest and thorough as possible with all information you supply the court, and follow all court instructions. Again, a skilled attorney should be able to help you successfully navigate all the complexities of the bankruptcy system.
Remember also that while bankruptcy should be a last-ditch option, it’s not the end of the world. If you have no other alternatives but to file for bankruptcy, take heart in knowing that you can rebuild your credit, finances and emotions after bankruptcy – perhaps faster than you might think.
