Three Red Flags That May Complicate Your Bankruptcy Application

Posted on: 14 June 2016

If you want your Chapter 7 bankruptcy application to proceed efficiently and fast, you need to avoid anything that will raise red flags on the trustee's radar. The trustee has tremendous powers; they can even object to your discharge if they think the circumstances warrant it. Here are some of the red flags that may jeopardize your bankruptcy application:

Discrepancy Between Reported Income And Supporting Documents

The trustee has to know your income to determine if you pass the means test. The test compares your average income, computed over six months, to the median income for a similar household in your state. You automatically pass the means test if your average income is less than your state's median income.

However, the trustee has to ensure that they are using the right figures in the calculation. This means you have to provide supporting documents for all your sources of income. So if you claim to be making $2,000 from your day job, your pay stub must reflect the same thing. The trustee will be suspicious if there is a discrepancy between your reported figures and the supporting documents.

Undervalued or Missing Property

One of the duties of the trustee is to take stock of your assets and determine their value to determine how much you can afford to pay your creditors. If you have nonexempt property, the trustee can sell them and use the money to pay your debts.

You can now see why lying about a property's value or hiding an asset is frowned upon. It is a form of fraud because you are hiding money (the undisclosed value of the property) that can be used to pay your debts. For example, if you have several cars, among them a classic worth $30,000, you may be tempted to list the classic as just another old car worth $5,000. In this case, you are hiding $25,000, and the trustee won't like it.

Excessive Household Expenses

When applying for bankruptcy, you will be required to fill a form known as "Schedule J: Your Expenses." Just like the name suggests, this form requires you to list all your household's expenses. This is to enable the trustee to determine how much of your income you need for your necessary expenses so that the rest can be paid to creditors.

Some people try to be "clever" by exaggerating their expenses so that they can reduce the money available for settling debts. Unfortunately, the bankruptcy court knows all about these tricks, and will be keeping an eye out for them during your bankruptcy process. Instead of resorting to these tricks, talk to a bankruptcy lawyer to help you streamline your application.