Filing for bankruptcy is a big financial decision. It is typically people who are overwhelmed by their unsecured debt and can’t possibly repay it who file for bankruptcy in their financial distress, as bankruptcy filing can offer a lifeline to people drowning in debt. Unfortunately, not all debtors qualify for bankruptcy protection.

Before you gather the paperwork or consult with an attorney or law firm, take a look at your financial situation and credit card debt because your financial situation could disqualify you from this debt-relief option.

Think of the bankruptcy process like applying for a new job: your financial history, recent actions, and current situation determine whether you are eligible to file for bankruptcy. Just as a job application requires honesty and proper documentation, bankruptcy demands transparency and sticking to specific rules to help you make a fresh financial start.

Here is a breakdown of what can disqualify you from a bankruptcy petition.

Previous Bankruptcy Filings

First of all, the timing of previous bankruptcy filings plays an important part in disqualifying you. Certain waiting periods are strictly enforced by courts and can’t be waived:

For Chapter 7 bankruptcy, often called "liquidation bankruptcy," individuals must wait eight years from the date of their previous Chapter 7 discharge before filing again. If the previous filing was a Chapter 13 bankruptcy, they must wait six years before filing for Chapter 7.
The waiting periods are different for Chapter 13 filings: individuals must wait two years after a previous Chapter 13 discharge or four years following a Chapter 7 discharge.

These timing restrictions exist to prevent abuse of the bankruptcy system. Bankruptcy is intended to remain a tool of last resort rather than a repeated solution to financial problems.

Income Limitations and the Means Test

Average income level is an important determining factor, particularly if you want to file for Chapter 7 bankruptcy.

The means test, implemented in 2005, determines whether an individual has sufficient disposable income to repay at least a portion of their debts. This test first compares the filer's average monthly income to their state's median income for a household of similar size.

If their income exceeds the median, they must complete a detailed analysis of their income and expenses. The test considers factors such as mortgage payments, student loans, medical bills, car payments, food, utilities, and other necessary expenses. Individuals with enough disposable income to make meaningful payments to creditors after subtracting these expenses may be disqualified from Chapter 7. However, they may still qualify for Chapter 13 bankruptcy, which establishes a structured repayment plan over three to five years.

Fraudulent Activities and Deceptive Behavior

The bankruptcy court takes a particularly dim view of any deceptive financial behavior, particularly actions taken in anticipation of filing bankruptcy.

Concealing assets

Concealing assets includes transferring property to family members or friends to protect it from creditors, hiding accounts, or undervaluing assets on bankruptcy paperwork.

Misleading or destroyed financial records

If you destroy financial records or fail to maintain adequate records of business transactions, you could be disqualified. False statements on credit applications or providing misleading information about income or assets will get you disqualified and can also result in criminal charges.

To prevent this, the bankruptcy judge examines financial transactions and behaviors in the months and years leading up to the bankruptcy filing. Specifically, they look for patterns that might indicate fraud or abuse of the bankruptcy system.

Recent Luxury Purchases and Cash Advances

The bankruptcy code specifically addresses recent credit card debt charges and cash advances. Certain types of recent debt repayment may be non-dischargeable.

For example, luxury goods or services purchased from a single creditor totaling more than $725 within 90 days of filing are presumed to be non-dischargeable.

Similarly, cash advances totaling more than $1,000 taken within 70 days of filing are also presumed non-dischargeable.

These presumptions exist because such activities suggest that the debtor may be taking advantage of credit with no intention of repayment. The term "luxury goods" doesn't include items reasonably necessary for support or maintenance, but it may include items such as expensive electronics, vacation packages, or designer clothing.

Prior Bankruptcy Dismissals

A previously dismissed bankruptcy can impact an individual's ability to file bankruptcy again.

If there was a formerly dismissed bankruptcy case within the past 180 days for specific reasons, the individual can’t immediately refile. Reasons for the dismissal include failing to appear in court, failing to comply with court orders, or voluntarily dismissing the case after creditors sought relief from the automatic stay.

This restriction aims to prevent individuals from repeatedly filing for bankruptcy solely to delay creditors. As these people have no intention of completing the bankruptcy process, the court naturally frowns upon such practices.

In particularly egregious cases, after the case is filed, it is "with prejudice," which can extend the waiting period before refiling beyond the standard 180 days.

Credit Counseling Requirements

The mandatory credit counseling requirement is an educational tool but also a potential barrier to filing.

This requirement, implemented as part of the 2005 bankruptcy reforms, mandates that individuals complete an approved credit counseling course within 180 days before filing. The course must meet budget analysis, available credit counseling alternatives, and debt repayment plan options.

You can’t simply take an unapproved financial management course, though. Counseling must come from a reliable credit counseling agency approved by the U.S. Bankruptcy Trustee Program. Also, filers must complete a separate debtor education course after filing but before receiving a discharge. If you fail in either one of these requirements, your case may well be dismissed.

Be Careful Before Filing for Bankruptcy

Bankruptcy is a last resort option for debt management relief that helps debtors make a fresh start. It shouldn’t be taken lightly and the United States courts make sure that debtors follow specific requirements.

Bankruptcy laws aim to balance providing relief to honest debtors and prevent abuse of the system. That’s why bankruptcy law requirements are so complex and specific.

Seek legal advice from a qualified bankruptcy attorney who will verify whether you qualify or don’t qualify. Otherwise, your application may be dismissed. Your bankruptcy lawyer will assess your financial situation and check for disqualifying factors. Once they have evaluated your case, you will know whether you can file for bankruptcy as a debt relief solution.

Talk to Us

Before you consider bankruptcy, you may wish to talk to one of our certified debt specialists. We will assess your situation, explain the available debt relief programs, and help you choose the right solution for you.

What Disqualifies You From Filing Bankruptcy