About Me

Factors Courts Consider When Determining Bad Faith Bankruptcy

Bad faith is one of the factors that can make the bankruptcy court dismiss your petition. Bad faith filing means that you have a way of repaying your loans, but have chosen to file for bankruptcy instead. It is an abuse of the system that courts frown upon. There isn't a single issue that courts rely on, but they consider the totality of the circumstances of the petition. Here are some of the factors courts consider in the totality of the circumstances test:

Number of Previous Filings

There is no limit to the number of times you can file for bankruptcy as long as you satisfy the waiting periods between subsequent filings. However, the court will scrutinize your petition more keenly if you have previous discharges or filings as opposed to a first-time applicant. The suspicion is that you may be the type of person who resorts to bankruptcy every time you are faced with a financial difficulty, instead of looking for a way out first.

Improper Exemption Maximization

Bankruptcy exemptions allow you to keep some properties after a bankruptcy discharge; only some properties can be exempted. State laws allow you to maximize the amount of exempted properties as part of pre-bankruptcy planning. However, the maximization must be done within specified rules; your actions may be considered fraudulent if you go overboard, making it seem like you intend to defraud your creditors.

Purchase of Luxury Items

The court may also consider you a bad faith applicant if it learns that you purchased luxury items shortly before filing for bankruptcy. As you know, you should only file for bankruptcy if you are truly unable to pay your debts. However, it defeats logic to claim that you are unable to pay your debts if you are also buying luxury items. In such a case, the court will suspect that you are abusing the system. Moreover, if you buy the luxury items on credit, you may not be able to discharge their debt even if you succeed in getting a discharge.

Non-Compliance with Court Rules

Lastly, your compliance with bankruptcy rules and court directives will also be scrutinized. This is necessary to weed out those who are using the application to delay their loan obligations from those who truly want to be declared bankrupt. For example, the court may be suspicious with your application if you started debt counseling (a requirement for Chapter 7 bankruptcy) but failed to complete it; it may think you never intended to complete the process in the first place.

If you truly want a bankruptcy discharge, you should be careful to avoid getting tagged as a bad faith applicant. The best way to do this is to consult a bankruptcy attorney like Thomas A Blake as early as possible in the process.