Legitimate Reasons for Bankruptcy

If you're experiencing financial hardship and considering filing for bankruptcy, you'll need to have a legitimate reason. Individuals usually file under Chapter 7 bankruptcy proceedings -- sometimes called "debt wipeout," or under Chapter 13, which offers a repayment plan with creditors while the debtor is under court protection. Before you file for bankruptcy, consider your financial circumstances, your debt level and your reasons for doing so -- bankruptcy will impact your finances beyond your immediate debts.

Which type of bankruptcy filing you're eligible for using depends on your debt level, your current income and the amount of your assets. To qualify for Chapter 7, you must fall at or under the median income in your state or pass a means test. The court uses a means test to evaluate your debt and income ratio to determine whether you have enough assets to repay your creditors. If you fail the means test, you can't file for bankruptcy under Chapter 7.

To file under a Chapter 13 proceeding, you must earn enough money each month to pay your living expenses and make payments to your creditors. Your combined debts must fall under the limits set by your state.

The FBI has set out some reasons it considers legitimate for filing for bankruptcy. These include being unable to pay your debts because you lost your job, experienced a medical crisis or suffered a divorce. The loss of income for a divorced spouse, as well as child support and alimony expenses often seriously damage personal finances. Also, if you become disabled, you may have to file bankruptcy because you can no longer earn income or pay medical expenses. Many people file under Chapter 13 to save a home that is in, or going to be in, foreclosure. Chapter 13 allows a restructuring of debt payments.

Unlawful reasons for filing bankruptcy may take many forms and often involve fraud. Federal law sets the circumstances of bankruptcy fraud. For example, filing bankruptcy for the sole purpose of not paying creditors even when you're financially able to do so is a form of bankruptcy fraud. Hiding your assets, such as transferring a car into a friend's name before you file so you can qualify for bankruptcy or keep property is fraud. If you run up your credit cards and other lines of credit because you're planning to file bankruptcy to clear the debts, you're committing fraud.

Read More: Types of Bankruptcy Fraud

The court appoints a trustee to manage your bankruptcy proceeding. Part of the trustee's job is to evaluate your case to make sure you're filing for legitimate reasons. If you conceal assets or put false information on your bankruptcy petition, the trustee will investigate. If you file multiple bankruptcy petitions, which is legal, the trustee will look at your case closely because multiple filings are often a sign that a debtor is trying to hide assets. Any attempts to use another person's identity or provide false information related to your identity is considered fraudulent. The trustee reports any suspected fraud to the U.S. Trustees Office, and the information is reported to the FBI and the local U.S. attorney's office for further investigation and prosecution. If you're found guilty of fraud, you'll face fines, imprisonment of up to five years or both.

If you want to save your home from foreclosure through bankruptcy, but don't have sufficient assets to qualify for Chapter 13, you may lose your home during the Chapter 7 proceedings. If the court decides you can't afford the home, the court may lift the stay against the lender and allow the foreclosure.