Chapter 7 bankruptcy is a very useful tool for those with overwhelming debt. Provided that people can qualify to file based on their income, bankruptcy can help them discharge their eligible unsecured debts. The day that they file, they can also temporarily halt collection activity that might lead to the loss of certain property or court judgments.
Given that Chapter 7 bankruptcy is a relatively quick process and that it does not impose limits on the amount of debt someone can discharge, there are often concerns about the possibility of someone abusing a Chapter 7 filing. Sometimes, creditors will push back on someone’s bankruptcy because they claim the individual intends to abuse the process in one or more of the following ways.
Inappropriate use of credit
Some people decide to file for bankruptcy and after choosing to take on a substantial amount of new debt right before filing. They max out their remaining credit cards or even open a new line of credit. They may go to check-cashing businesses to seek cash advances knowing that they will not pay those amounts back in full if they are discharged by the court. If creditors can prove that somebody took on a large amount of debt without the intention of paying it as they should, that may constitute fraud that could impact someone’s eligibility for a discharge.
Inappropriate financial transfers
Chapter 7 bankruptcy sometimes requires the sale or liquidation of personal property. Individuals concerned about losing valuable resources might transfer some of their more expensive assets to others. The choice intentionally to avoid liquidation is also an abusive practice that could negatively impact Chapter 7 bankruptcy proceedings.
Intentionally reducing one’s income
Only those who can pass a means test will qualify for a Chapter 7 bankruptcy. Filers must adjust their income and then compare it to the median income for their household size. The courts generally look at someone’s income over the last six months, which means that people may intentionally leave their jobs or move into lower-paid professions just so they can qualify to discharge their debt. If creditors can raise a reasonable claim that someone’s reduction in income was intentional, that could potentially complicate the bankruptcy process.
Generally speaking, those pursuing Chapter 7 bankruptcy must do so in good faith if they hope to be successful. Avoiding behaviors that could trigger claims of abuse or fraud will make it easier for people to take control of their debt using the bankruptcy process.