Chapter 7 bankruptcy can be a fast and relatively straightforward way of overcoming substantial unsecured debt. Individuals with massive credit card debts or medical bills that they cannot pay may choose to file for Chapter 7 bankruptcy as a way of taking control of their finances again. A successful Chapter 7 bankruptcy leads to a discharge of someone’s eligible debt. They will no longer have an obligation to pay the qualifying unsecured debts included in their bankruptcy filing.
People need to pass the means test to determine if they qualify for Chapter 7 bankruptcy. Unfortunately, even people who theoretically qualify for Chapter 7 bankruptcy sometimes find themselves embroiled in conflicts that prevent them from obtaining a discharge of their debts. Creditors might raise claims that someone engaged in fraudulent activity to keep certain debts out of the bankruptcy or prevent someone’s discharge. The following scenarios have the strongest association with fraud allegations during Chapter 7 bankruptcy.
Major debts taken on close to the filing
Credit card companies and payday lenders may resent the inclusion of the full balance of someone’s accounts in a bankruptcy filing. They may try to claim that someone took on another loan or increased their credit card balance when they already knew that bankruptcy was imminent. If a creditor can show that someone took on debt with the intent of including it in bankruptcy instead of making a reasonable effort to repay it, that might lead to the courts excluding that debt from the bankruptcy or denying someone their discharge.
Transfers to family members or trusts
Asset transfers are another common source of bankruptcy litigation. Creditors may believe that someone moved assets into a trust or gifted them to family members to prevent their liquidation during bankruptcy. The timing of a transfer will have a major impact on how the courts someone’s financial conduct. Asset transfers immediately prior to bankruptcy or after taking on debts will seem more suspect than transfers conducted years before someone’s current financial hardships. Both resources that someone moves to a trust and gifts that they make to friends or family members could result in claims of fraud.
For an individual to qualify for Chapter 7 bankruptcy, their adjusted income must be below the state median for their household size. Some people will seek to reduce their income by pursuing jobs that pay them under the table. If creditors suspect someone of having unreported income, that could potentially lead to fraud allegations in court.
Understanding what behaviors might lead to increased conflict during bankruptcy and reduced likelihood of a discharge may help people better plan for a Chapter 7 filing.