When Chapter 7 Bankruptcy May Not Help You

Sometimes Chapter 7 is not the right solution to your money troubles.

Filing for Chapter 7 bankruptcy is one way to solve debt problems -- but, it's not the only way. In several common situations, bankruptcy is either unwise or legally impossible.

1. You Previously Received a Bankruptcy Discharge

You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts under Chapter 7 or Chapter 13 in a case begun within the past six years. If, however, you obtained a Chapter 13 discharge in good faith after paying at least 70% of your unsecured debts, the six-year bar does not apply. The six-year period runs from the date you filed for the earlier bankruptcy, not the date you received your discharge.

Chapter 13 bankruptcy has no such restriction; you can file for it at any time. So if you are barred from filing Chapter 7, and you want to file for bankruptcy quickly (for instance, to stop creditors' collection efforts), Chapter 13 may be an option.

Also, you cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

• you violated a court order, or
• you requested the dismissal after a creditor asked for relief from the automatic stay.

2. A Friend or Relative Cosigned a Loan

A friend, relative or anyone else who cosigns a loan or otherwise takes on a joint obligation with you can be held wholly responsible for the debt if you can't pay it. If you file for Chapter 7 bankruptcy, you will no longer be liable for the debt, but the cosigner will be left on the hook. If you don't want to subject a cosigner to this liability, explore paying off the debt over time.

3. You Could Pay Your Debts Over Three to Five Years

A bankruptcy judge who decides that you have enough income to repay some or all of your debts in a Chapter 13 case can dismiss your Chapter 7 bankruptcy on the ground that to grant you a discharge would be a "substantial abuse" of the bankruptcy laws.

If your monthly income exceeds your monthly expenses, giving you disposable income that can be used to pay your debts, you're at risk of having your case dismissed unless you agree to convert it to a Chapter 13 bankruptcy.

4. You Want to Prevent Seizure of Wages or Property

You may not need to file for bankruptcy to keep creditors from seizing all your property and wages.

Normally, a creditor's only legal means of collecting a debt is to sue you, win a court judgment and then try to collect the amount of the judgment out of your property and income. A lot of your property, however, including food, clothing, personal effects and furnishings, is probably protected by law (exempt) from being taken to pay the judgment. And, quite likely, your nonexempt property is not worth enough to tempt a creditor to go after it, as the costs of seizure and sale can be quite high.

Creditors usually first go after your wages and other income. Here too, however, laws protect you. Only 25% of your net wages can be taken to satisfy a court judgment (up to 50% for child support and alimony). And often, you can keep more than 75% of your wages if you can demonstrate that you need the extra amount to support yourself and your family. Income from a pension or other retirement benefit is usually treated like wages. Creditors cannot touch public benefits such as welfare, unemployment insurance, disability insurance or Social Security.

5. You Just Want to Stop Harassment by Creditors

If your only concern is that creditors are harassing you, bankruptcy is not necessarily the best way to stop the abuse. You can hang on to your bankruptcy option but still get creditors off your back by taking advantage of federal and state debt collection laws that protect you from abusive and harassing debt collector conduct.

6. You Defrauded Your Creditors

Bankruptcy is geared towards the honest debtor who got in too deep and needs the help of the bankruptcy court to get a fresh start. A bankruptcy court does not want to help someone who has played fast and loose with creditors or tries to do so with the bankruptcy court.

Certain activities are red flags to the courts and trustees. If you have engaged in any of them during the past year, do not file for bankruptcy until you consult a bankruptcy lawyer. These no-nos are:

• unloading assets to your friends or relatives to hide them from creditors or from the bankruptcy court
• incurring debts for non-necessities when you were clearly broke
• concealing property or money from your spouse during a divorce proceeding, and
• lying about your income or debts on a credit application.

In addition, if you've recently run up large debts for a vacation, hobby or entertainment, filing for bankruptcy probably won't help you. Most luxury debts incurred just before filing are not dischargeable if the creditor objects. And running up unnecessary debts shortly before filing casts a suspicion of fraud over your entire bankruptcy case.

Last-minute debts presumed to be nondischargeable include:

• debts of $1,150 or more to any one creditor for luxury goods or services made within 60 days before filing, and
• debts for cash advances in excess of $1,150 obtained within 60 days of filing for bankruptcy.

To discharge luxury debts, you will have to prove that extraordinary circumstances required you to make the charges and that you really weren't trying to put one over on your creditors. It's an uphill job. Judges often assume that people who incur last minute charges for luxuries were on a final buying binge before going under and had no intention of paying.

Credit Card Fraud Increasingly, the creditors most likely to object to the discharge of a debt are credit card issuers. There are few specific rules about what constitutes credit card fraud in bankruptcy. But courts are increasingly looking to the following factors to determine fraud: short time between incurring the charges and filing for bankruptcy consulting an attorney before incurring more debt recent charges over $1,150 many charges under $50 (to avoid pre-clearance of the charge by the credit card issuer) when you've reached your credit limit charges after the card issuer has ordered you to return the card or sent several "past due" notices changes in your pattern of use of the card (for instance, much travel after a sedentary life) charges after you're obviously insolvent (no job, income or savings); you could probably defeat a claim of fraud because of no job if you diligently sought employment charges for luxuries, and multiple charges on the same day.

7. You Attempt to Defraud the Bankruptcy Court

Just as a bankruptcy court won't tolerate a debtor who plays fast and loose with his creditors, the court will toss (and possibly jail) someone who defrauds the bankruptcy court. If you lie, hide or cheat, it will probably come back to haunt you to a far greater degree than your current debt crisis does.

Filing for bankruptcy is not considered a crime. But you must sign your bankruptcy papers under "penalty of perjury" swearing that everything in them is true. If you deliberately fail to disclose property, omit material information about your financial affairs or use a false Social Security number (to hide your identity as a prior filer), and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud.