Some might view a declaration of bankruptcy as a free pass to eliminate all debts and start over. However, financial hardship does not automatically qualify a person for bankruptcy.
The process is a legal proceeding, and a court may deny the request of someone who does not qualify.
An easy way to cause a court to deny someone filing for bankruptcy is for the person to commit fraud against the court or creditors. A person who destroys or falsifies documents necessary for the proceedings also commits fraud that can affect an attempt to declare bankruptcy. Even if someone unintentionally provides inaccurate information, a court may find against the individual and reject a bankruptcy filing.
Not passing the means test
When considering bankruptcy, many often think about Chapter 7, where a person liquidates assets and clears unsecured debts. Chapter 13 is a process that involves asset reorganization and requires some debt repayment.
To qualify for Chapter 7, the individual must pass the means test. This means demonstrating only having minimal income left over after paying living expenses, precluding the ability to cover outstanding debts. People with substantial income above their living expenses will not qualify for Chapter 7 filing but may be eligible for Chapter 13.
Besides income, people who have too many assets can fall into this category. While a person can protect real property, assets and retirement savings up to a specific amount, circumstances vary regarding what the court views as exempt assets.
Other issues can disqualify a person, so someone considering bankruptcy should educate themselves on the current conditions. While bankruptcy offers a way for those in sore financial straits to get back on their feet, the option is only open to those who meet the requirements.