Having to file for bankruptcy may be the hardest financial decision you will have to make. After trying for so long to keep your head above water, this may be your only option. It is not a quick fix but can afford you some peace of mind. However, there will be consequences such as a huge hit to your credit score. It will result in a negative reporting on your credit score for at least 7 years. However, there is a possibility that this option might not be available to you. Can a bankruptcy discharge be denied? Let’s explore this possibility and any additional questions you should consider.
Yes, it is possible for a bankruptcy discharge to be denied under certain circumstances. A bankruptcy discharge is a court order that releases a debtor from personal liability for certain types of debts. It prohibits creditors from taking further action to collect those debts. However, there are certain situations where a discharge may be denied or revoked.
What are the bankruptcy filings available when pursuing this option? What procedures to take in the bankruptcy process? Should I retain a bankruptcy attorney? What is the bankruptcy law in my state? How long are the bankruptcy proceedings? Can bankruptcy lead to a fresh start?
Most people think that filing for bankruptcy will eliminate all their financial obligations to pay back their creditors. For the most part, this is true. However, there are three types of bankruptcy to consider, and you should learn the difference between Chapter 7, Chapter 11, and Chapter 13 Bankruptcies. It is in your best interest to take advantage of any free consultation provided by a bankruptcy lawyer before making a final decision on which one to choose. Bankruptcy Lawyers will help guide you through the legal process during the bankruptcy proceedings. Please note that the cost of bankruptcy filing varies from state to state. The cost and fees range from about $2,000 to $20,000 depending on the type of filing, the state, and the complexity of the case per Debt.org.
However, bankruptcy laws do not vary by state. Under the U.S. constitution, Article 1, Section 8, Clause 4, bankruptcy falls under federal law. Therefore, states have no authority to decide bankruptcy cases. This distinction belongs to the Federal Bankruptcy courts.
The State of Bankruptcy In The United States
All these legal processes are readily available. Therefore, the occurrence of filing bankruptcy has increased or declined based on the financial health of the country. Inflation is a huge contribution to the debt load of every American. When goods and services increase it affects the ability of consumers to maintain their lifestyle without going into debt.
Also, when bankruptcy filings are up it indicates that the country is experiencing an economic downturn. Hence, during the Pandemic when there was government assistance provided the number of bankruptcies dropped by 6.3% per debt.org. However, they are up again as of January 2023 by about 19% per debt.org.
However, there is a correlation between the level of median income and the filing of bankruptcy. States with a low median household income experience higher rates of personal bankruptcy filings per Finmasters.com. However, California, Florida, Georgia, Illinois, and Texas are the top 5 states with the most bankruptcies per debt.org.
Therefore, an individual debtor filing for bankruptcy has exhausted all options and this is their only option. They have tried to pay off the debt but have not found another way out. The types of debts like medical expenses can rack up so quickly that no amount of emergency fund can cover them. Therefore, this is a result of the lack of affordable healthcare in this country. Also, sometimes living life above your means can land you in financial trouble. However, sometimes life happens and drastically impacts your financial condition. The most common reasons for filing are job loss, death, an accident, multiple or large, unexpected expenses, or escalating mortgage payments. Hence, most cases of bankruptcy are from lower-income individuals than those with higher incomes. They just cannot afford these types of expenses.
Bankruptcy Filing Demographic Data
Let’s review these statistics from thebalancemoney.com regarding who files for bankruptcy.
64% of bankruptcy filers are married.
60% of bankruptcy filings make less than $30,000 annually.
36% had a high-school education level.
29% had some college education.
20% of bankruptcy filers are 65 and older.
16% are repeat bankruptcy filers.
Types Of Bankruptcies
How much income and assets you have might determine whether you file for Chapter 7 or Chapter 13 to erase qualifying debt. The Chapter 7 Means Test Calculation will help determine if your medium income is sufficient for Chapter 7 or Chapter 13 filing. Let’s review the types of Bankruptcy protection currently available.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as the “liquidation bankruptcy” is the reorganization of debt where assets are sold to pay off creditors. However, there is a qualification process that measures income and expenses called a means test. An account of all assets and liabilities should be present for the court to determine eligibility. If the bankruptcy petition is approved, the bankruptcy trustee will sell assets to pay creditors. This process typically takes four to six months. Therefore, during this bankruptcy filing creditors are prevented from trying to collect debt. This is part of the bankruptcy filing process. Most importantly, the debtor must be an individual.
Also, Chapter 7 bankruptcy will allow for bankruptcy discharge where you can get rid of unsecured debts such as credit card debts, personal loans, and medical bills. However, debt such as back taxes, student loans, and child support will typically prompt denial of discharge. A Chapter 7 bankruptcy stays on your credit report for 10 years, but you can begin to repair it immediately.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows corporations or partnerships to reorganize their business to keep it going and allow them to pay their creditors over time. A Chapter 11 bankruptcy case can take 36 to 60 months to close. This type of bankruptcy stays on your credit report for seven years.
Chapter 13 Bankruptcy
This type of bankruptcy focuses primarily on secured debts such as your home or your car. However, can also be used to discharge unsecured debt (credit cards, personal loans, and medical bills). Chapter 13 bankruptcy requires a set amount to be paid until the mortgage or car note is paid off. The average monthly payment is about $500 to $600 but can vary depending on the bankruptcy court’s judgment. However, you will need to allocate most of your disposable income until the Chapter 13 plan is satisfied. Hence, between 40 percent to 70 percent of Chapter 13 cases complete the repayment plan successfully. Chapter 13 bankruptcies take about 95 days to close. However, the repayment plans typically take three to five years to complete but stay on your credit report for seven years.
Can Bankruptcy Discharged Be Denied?
About 1 to 2% of cases result in a discharge denial for various reasons. Therefore, 98 to 99% of cases are approved. This is an indication that those individuals in debt are truly in need of this service. There is still that slim chance that you could be denied. Therefore, you need to take care to listen to the advice of an attorney every step of the way.
The court may deny a bankruptcy discharge for any of the reasons described in section 727(a) of the Bankruptcy Code.
19 Reasons Bankruptcy Petition Can Be Denied Or Revoked
- Not taking the required personal financial management course
- You own non-exempt assets.
- Provide false statements.
- Committed bankruptcy fraud.
- Failure to disclose previous bankruptcy filed.
- Filing for additional bankruptcy within 6 to 8 years depending on the prior filing date.
- Not providing tax returns.
- You can afford the monthly payments based on passing the “means test”.
- Disqualifying asset transfers.
- Your income is judgment-proof. i.e., Social Security.
- Not enough debt to file for bankruptcy.
- You fail to complete all required actions to file for bankruptcy.
- Debts do not qualify for a discharge.
- Not paying the court fees.
- Neglecting to file all required forms and supporting documentation.
- Not attending the mandatory hearing called the Meeting of Creditors.
- Failing to follow a Chapter 13 repayment plan.
- Violating a Court Order.
- Type of debt. i.e., most taxes, student loans, domestic support, fines, penalties, personal injury, or death caused by the debtor, debt from approved Reaffirmation Agreement, debt from prior bankruptcy.
This is not an exhaustive list but just for general information. It’s important to note that the decision to deny a discharge lies with the bankruptcy court. The court will consider the specific circumstances of each case. If a discharge is denied, the debtor may be required to continue repaying their debts or explore alternative options, such as a Chapter 13 bankruptcy repayment plan.
The Downside Of Bankruptcy
The downside to filing a bankruptcy petition is that a bankruptcy discharge stays on your credit report for years. However, missed payments, defaults, repossessions, and lawsuits will hurt your credit far more. These types of remarks on your credit report will be more difficult to explain if you need additional credit. However, there are still consequences for filing bankruptcy that will take years to reverse.
Consequences Of Bankruptcy
- Stays on the credit report for 7 to 10 years.
- Some loss of assets.
- Time and energy in improving your credit.
- Limited access or no access to additional credit.
- Higher than average interest rates.
- Can impact your ability to get certain jobs, insurance, an apartment, or a mortgage.
Steps To Avoid Bankruptcy
- Create a budget to get a handle on your financial situation.
- Save money in an emergency fund.
- Set up a repayment plan to apply as much of your disposable income as possible.
- Contact your creditors for any relief programs available.
- Sell any assets and apply the proceeds to your debt.
- Get an additional source of income.
- Live below your means.
- Educating yourself by improving your financial literacy.
- Enroll in a free credit counseling course.
- Get help from family and friends.
A Fresh Start
Bankruptcy can lead to a fresh start in most cases. When insurmountable debt is discharged your financial condition improves immediately. It will feel like a huge weight has been lifted from your shoulders from the debt relief. Learn and grow from this experience. If possible, put guardrails in place that will help you avoid this situation in the future if overspending is the issue. However, there is nothing you can do about major life experiences except save and try to be prepared for the worst.
This post is for informational purposes only. Please consult a financial advisor and a bankruptcy lawyer for legal advice. They are best able to determine the best course of action that will meet your financial needs.