When NOT To File For Chapter 7 Bankruptcy

Knowing when NOT to do something can be as important as knowing when to do it. If you fit any of the descriptions below, you may want to reconsider filing for bankruptcy.

You own luxury items you're not willing to part with.

Chapter 7 bankruptcy is sometimes called "liquidation" because the bankruptcy trustee can liquidate, or convert to cash, any of a filer's possessions that aren't exempt under state law. Generally, states allow petitioners to keep life necessities like a home, clothes, books and work tools. If you've got non-essential items (like a fancy "toy" car or lots of jewelry), it's likely that your trustee could sell it and use the proceeds to pay off your creditors.

You only want to discharge certain debts.

If you'd like to be excused from only particular debts (such as back child support, alimony, taxes or student loans), Chapter 7 bankruptcy is not the right choice for you. First of all, some debts are considered non-dischargeable in Chapter 7, meaning that the court does not have the power to forgive them. The debts listed above are all examples of non-dischargeable debts. Secondly, bankruptcy affects the entirety of your finances - it can't be used on only a selection of your debts. Filing bankruptcy is a big decision in part because it has such widespread impact on your financial life.

You've figured out how to "hide" property or otherwise "get around the rules."

Fraud alert! Bankruptcy is governed by federal laws, which means that if you're caught cheating (e.g. by giving your second car and boat to your nephew before filing), you could face federal penalties, including hefty fines (up to $250,000) and jail time (up to five years). But not all bankruptcy fraud is committed maliciously. What happens when one of your creditors is a family member or close friend? While it may seem natural (and even noble) to pay back certain creditors in full before filing for bankruptcy, this sort of action is generally not permitted in court. Legally, you're obligated to all of your creditors, not just the ones you know and like. The court's job is to make sure your available funds are distributed equitably among all your debts.

You've got money coming your way.

If you're expecting to receive a significant amount of money in the next few months (from a lawsuit settlement, insurance policy, inheritance, pension, etc.), Chapter 7 bankruptcy may not be the best course for you. Your best bet if you're expecting a windfall is to consult with a bankruptcy lawyer, who can help you figure out how to list such expected assets and whether or not they will be exempted by the bankruptcy court.

You own property jointly with family members.

The laws concerning jointly-owned property are different depending on where you live. But in some cases, a bankruptcy filing by one joint owner can impact other owners. Consult with a bankruptcy attorney if you find yourself in this situation.

Your income is significantly greater than the median income for a family of your size in your state.

In order to file for Chapter 7 bankruptcy under BAPCPA, you must pass the Chapter 7 means test, which compares your income to the median income level where you live. If you make substantially more than the median family of your size, you're unlikely to qualify for Chapter 7 protection. In fact, if you have a steady, regular income, you may benefit more from a Chapter 13 filing. Your bankruptcy lawyer will be able to help you make this determination.

You can't afford the attorney's fees required to file Chapter 7 bankruptcy.

Unfortunately, because of certain BAPCPA-mandated changes to bankruptcy law, attorney's fees, administrative fees and new requirements cost bankruptcy petitioners more than ever before. If you can't afford the more than $1,000 in costs associated with a bankruptcy case, it may not work for your situation.