Chapter 7 bankruptcy offers the promise of a new financial start for what the court calls "honest debtors." Although the actual process of a Chapter 7 bankruptcy is fairly automated after the filing of the initial petition, things can and do sometimes go wrong. A Chapter 7 discharge can be denied for simple paperwork miscues, but in other cases it might be caused by more serious problems. In either case, the reasons for a bankruptcy denial are pretty clear-cut and can usually be avoided with careful preparation.
Frequency of Denial
While some Chapter 7 bankruptcy cases are kicked out of court before discharge, statistics indicate that this isn't the norm. According to the U.S. Courts website, when Chapter 7 cases are correctly filed, they result in a successful discharge of debts more than 99 percent of the time.
Reasons for Denial
Some bankruptcy cases are over before they even begin if the debtor fails to file a complete bankruptcy petition or pay the required fees. Denial of discharge after a Chapter 7 case begins is usually due to a lack of honesty on the part of the debtor. Although you might want to keep some financial secrets when you file Chapter 7, the court requires that you bare your financial soul if you want a discharge. If you cover up or destroy financial records, fail to turn over documents requested by the court, make false statements about your finances or hide any money or assets, you're likely to get your case dismissed before receiving a discharge.
You might also be denied a discharge for certain technical reasons, such as failure to complete the required credit counseling and financial management courses. If one of your creditors objects to your filing, the court will schedule a hearing to determine whether you acted fraudulently with regard to the debt you owe that creditor. If the court upholds the creditor's objection, your discharge may be denied.
Bankruptcy fraud is a serious crime that can result in much more serious consequences than a simple dismissal of your case -- you could face prison time.
Conversion to Chapter 13
A new bankruptcy law enacted in 2005 resulted in many changes in bankruptcy proceedings. Debtors now have to pass a means test to qualify for a Chapter 7 discharge. The means test presumes that any debtor who files for Chapter 7 with an income over his state's median income is abusing the bankruptcy process unless he can prove that his expenses are such that he can't possibly pay his debts. These "over-the-median" debtors are often pushed into converting their Chapter 7 cases into Chapter 13 cases as a result. Chapter 13 bankruptcy requires a monthly payment plan to satisfy debts. If the bankruptcy trustee recommends conversion to the court, you can either go with a Chapter 13 or accept dismissal of your Chapter 7 case.
All bankruptcy cases require specialized knowledge of federal and state bankruptcy rules, but Chapter 13 cases can be particularly daunting. Consider consulting a local attorney before filing any bankruptcy case, especially a Chapter 13 conversion.