Chapter 7 bankruptcy quickly wipes out bills such as credit card balances, medical charges, and personal loans for those who need relief from overwhelming debt. While almost all Chapter 7 cases go through without a problem, if a filer fails to fulfill all bankruptcy requirements or commits fraud, the court will deny the discharge (the order that officially wipes out debt).
Even so, you can rest assured that anyone who is forthright and provides financial information in a transparent manner is likely to breeze through the process without a hitch.
How Does the Court Find Out There’s a Problem?
Before you’re entitled to receive a discharge, you must meet several requirements. For instance, you need to complete and file a packet of official bankruptcy forms, pay a filing fee (or apply for a waiver), and take two bankruptcy courses. If you fail to satisfy one of these obligations, your case will get dismissed automatically.
However, the court won’t know about other types of problems unless someone objects to your discharge—and a limited number of people have standing (the right) to file such an objection.
- A creditor. A creditor (someone you owe money) might object to the court wiping out a debt if there’s reason to believe that the filer obtained a line of credit or property under false pretenses—a type of fraud. For instance, a filer who falsifies income on an application or purchases goods while knowingly intending not to pay might be found to have committed fraud. If the creditor wins the case, the filer will remain responsible for the particular debt after the case concludes.
- The U.S. Trustee or bankruptcy trustee. The U.S. Trustee is responsible for managing all bankruptcy cases, much like a district attorney oversees criminal cases. By contrast, the bankruptcy trustee is the court-appointed official responsible for handling a particular matter. Either can object to a case in its entirety.
If a creditor or trustee files an objection, the case will proceed through litigation. Ultimately, the bankruptcy judge will review the evidence presented and decide the outcome.
Reasons a Trustee Might Object to Your Discharge
If a more serious problem arises—perhaps the trustee observes seemingly fraudulent behavior or catches the filer intentionally misstating a fact—legally, the trustee must make the court aware of the issue by objecting to the discharge. For instance, the trustee must take action if the filer:
- hides property to prevent it from being sold for the benefit of the creditors
- destroys or fails to turn over financial records, such as bank statements and tax returns
- lies when testifying under oath or on the bankruptcy paperwork
- bribes someone involved in the bankruptcy
- refuses to comply with a court order
- conspires to do any of the above with a friend, family member, or business partner in another bankruptcy case, or
- files the current case too soon after a previous bankruptcy.
Learn when you’ll be able to file for bankruptcy again.
Timing the Objection
An objection must be filed within 60 days of the date first set for the 341 meeting of creditors (the court appearance that all filers must attend). The court can extend this time if the situation warrants it.
Getting Your Discharge Revoked After the Case Is Over
It’s important to understand that a filer isn’t necessarily in the clear after receiving the discharge. If a previously unknown wrongdoing surfaces during the following year, the court can unwind the bankruptcy.
For instance, suppose that the filer hid a valuable tractor that should have been part of the bankruptcy. If the trustee found out about it, the court would likely revoke the discharge. The same might hold true if a business creditor discovered that the owner sold off business equipment and, rather than paying down business debt, used the funds to go to Paris.
The penalties for committing fraud in connection with a bankruptcy case—including hiding property and failing to be honest—include any combination of the following: up to 20 years of prison time and a fine up to $250,000.
You can find answers to more questions in Bankruptcy FAQ: After You File.