Last updated July 17, 2018.

Why Can Bankruptcy Be Denied?

The goal of consumer bankruptcy is almost always the bankruptcy discharge. A discharge is a federal court order that effectively wipes the slate clean and eliminates your debts. It is a powerful tool that allows almost a million people every year the opportunity to start fresh financially.

However, a discharge can be denied for many reasons, most of which involve fraud or mismanagement of your property. This article explains the basics of why a discharge can be denied. For a more detailed list, take a look at 11 USC 727.

Fraudulent Destruction of Property

If you destroy, attempt to hide, or transfer any property in order to defraud your creditors, then your discharge can be denied. In other words, if you try to avoid paying a debt by concealing the fact that you have property that can be taken from you to satisfy that debt, your discharge will be denied.

For example, in one case out of Louisiana, a husband and wife attempted to conceal the fact that they owned a home by transferring title of that home seven years prior to filing for bankruptcy. The court found that they transferred the house in order to avoid having it taken by a creditor to satisfy a debt that arose from a personal injury lawsuit.

Thus, they attempted to conceal the ownership with the intention of defrauding their creditors, and they were denied a discharge as a result.

Destroying Financial Records

In order for a bankruptcy case to run smoothly, you need to have your financial records in order so the Court can review your debts and assets. Accordingly, if you have attempted to destroy or hide any financial records, your discharge can be denied.

Also, if you have failed to maintain comprehensible financial records, neither your creditors nor a bankruptcy trustee will be able to determine your actual ability to pay your debts. So, if you are considering filing for bankruptcy, do what you can to ensure your finances are reasonably well organized.

Making a False Claim

Another situation in which your discharge can be denied is if you have made any false claims or misrepresentations during your bankruptcy case. The number one rule of bankruptcy is full disclosure. In other words, DO NOT LIE about anything relating to your bankruptcy case, because if the court finds out, you will lose your chances at benefiting from a bankruptcy discharge.

Now, to be denied a discharge for lying, the evidence must show that you lied on purpose. If you are unsure about any representations that you may have made during the course of your bankruptcy, be sure to let your attorney know.

There can also be criminal penalties for lying in your bankruptcy paperwork, as well. So, DO NOT LIE.

Failure to Obey a Court Order

During your bankruptcy case, the court may impose certain requirements. If you fail to comply with a court order, your discharge can be denied.

For example, in some instances the trustee may request that you provide information relating to your past tax refunds. If this occurs, and you do not provide the information requested, your discharge can be denied. This exact situation has occurred before and could have been avoided very easily by simply complying with the court’s request. (See this Ohio bankruptcy case for an example.)

Previous Bankruptcy Discharge

If you have gone through bankruptcy before, then you may not be entitled to a second discharge. If you have received a Chapter 7 Bankruptcy discharge within the past 8 years, or you have received a Chapter 13 discharge with the past 6 years, then you are ineligible for another discharge until 8 years or 6 years, respectively, have passed.

Failure to Complete Your Financial Management Course

In most bankruptcy cases, the court will require you to take a course on managing your personal finances. If the court requires that you enroll in such a course, you MUST successfully complete the course before you can receive a discharge. Otherwise, your discharge may be denied.

Conclusion

All of the reasons presented above for why you might be denied a discharge have two common themes: 1) Organization and 2) Honesty. If you are organized and up front about all of your finances, then you are on the right track.

To summarize, to reduce the risk of having your bankruptcy discharge denied, you should:

Get your records in order;
Do not try to hide anything; and
Just do whatever a bankruptcy judge requires.

It is important to keep in mind that each bankruptcy case is different. Therefore, this article speaks in very general terms. To ensure that your case is managed properly, it is best to consult an experienced bankruptcy attorney.

Image from Flickr user Takvoryan Attorneys

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