What Is a Bad Faith Bankruptcy and Why Is It a Bad Idea?

Legal processes such as Chapter 7 and Chapter 13 bankruptcy provide some important benefits to those who are struggling financially. One of those benefits is known as the automatic stay. Creditors must cease collections on a debt once you include it in a bankruptcy petition, providing time for the bankruptcy process to go forward.

The automatic stay has allowed many people to stop foreclosures or other negative debt-related actions. However, you should not typically file a bankruptcy petition to get the automatic stay knowing that you have no intention of ever attempting to go through with the bankruptcy. That can be an example of a filing for bankruptcy in bad faith.

What Is a Bad Faith Bankruptcy Filing?

Filing a bankruptcy petition in bad faith typically involves an attempt to use the bankruptcy process in an inappropriate way, such as to defraud creditors, abuse the system, or unlawfully delay the legal collection of debt you owe.

The law doesn’t specifically define bad faith, and it is often up to the bankruptcy courts to determine if bad faith exists. Some examples of situations that have previously been deemed bad faith include:

  • Abuse of the automatic stay. As previously mentioned, filing a bankruptcy petition when you know you have no desire to carry through with the process and only want to get the automatic stay can be deemed bad faith.
  • Concealing assets. The bankruptcy process involves reviewing your assets to determine if you can use them to pay back your creditors. Any attempt to hide assets, including real property or cash in various types of accounts, is bad faith.
  • Transferring money to others strategically. If you give money to friends or family members to hold for you prior to or during bankruptcy to reduce how many assets you appear to have, this is actually akin to money laundering.
  • Making false statements. All the details about your finances, including your income, assets, and expenses, in your bankruptcy petition must be true to the best of your knowledge. Purposefully lying in court documents is perjury.
  • Repeated, abusive filings. While the bankruptcy system allows people to file more than one bankruptcy in their lifetime, it is not designed to be a get-out-of-debt-free card. Taking on debt you never intend to pay back and filing for bankruptcy repeatedly to discharge the debt is considered abuse of the system.

What Might Happen if You File a Bankruptcy in Bad Faith?

You can face a number of repercussions if you file a bankruptcy petition in bad faith. One of the most common consequences is that your bankruptcy will be dismissed. This means you lose the protection of the bankruptcy court and any automatic stay and you still owe all the debts you entered the bankruptcy with. In more egregious cases, the court might bar you from ever discharging those existing debts in a future bankruptcy, which means you don’t have the option to petition for bankruptcy with those debts again.

In some cases, you may face criminal charges. Bankruptcy fraud is a federal crime, and a conviction can come with a sentence of up to 5 years in prison and a fine of up to $250,000.

It’s important to note that the courts definitely consider intent and knowledge when considering whether a bad faith bankruptcy is egregious or if criminal charges might apply. A serious mistake on your petition might cause your bankruptcy to be dismissed, but if the mistake was not in bad faith, you may be able to refile and would be unlikely to face criminal charges.

Creditors Must Also Make Claims in Good Faith

The requirement for good faith is not solely on the person filing a bankruptcy petition. Creditors are also held to a standard of good faith in that they cannot file false claims against the bankruptcy estate. If they do, they can face consequences too, including losing the right to make a claim against the estate or even criminal fraud charges.

Talk to a Bankruptcy Lawyer About Your Situation

Bankruptcy is a serious legal process with numerous financial implications for the future. It’s not a process that should be entered into lightly, and it’s certainly not a process meant to be used in an abusive manner.

One of the best ways to ensure that your bankruptcy filing is in good faith—and is clear of the types of errors that might make it look otherwise—is to work with an experienced bankruptcy attorney. Of course, you also need to be as transparent with your lawyer as possible and provide your legal team with as much accurate information as possible about your finances. This way, they can include all applicable debts in your bankruptcy and provide you with advice about which bankruptcy option is right for you.

An experienced bankruptcy legal team also works on your behalf throughout the process, including answering questions issued by the Trustee or court about the nature of your petition or the accuracy of any information within it. If creditors question your motives or the information in your petition, your attorney can speak on your behalf and stand up for your rights.

To find out more about how a bankruptcy attorney can help with your debt situation, reach out to the Holland Law Office today by calling 970-232-3097.