Avoid Common Mistakes in Bankruptcy Filing

Filing the bankruptcy petition is not as simple as it seems. Unfortunately, many debtors believe that just completing the forms is enough to qualify for Chapter 7 bankruptcy. But simple errors can result in having to file a Chapter 13 bankruptcy instead. Let’s review some common mistakes I have witnessed with prior bankruptcy cases.

Key Points:

• Disposable income could result in having to file Chapter 13 instead of Chapter 7 bankruptcy.
• Don’t make any financial decisions until first discussing it with your bankruptcy attorney.
• The means test under the Bankruptcy Code is not the only factor in determining if you qualify for Chapter 7 bankruptcy.
• Make sure that your bankruptcy attorney reviews the petition with you.

Income and the Bankruptcy Petition

When filing for Chapter 7 bankruptcy, your income and expenses are considered. On the bankruptcy petition, the current monthly income is included as part of Schedule I, which is Official Bankruptcy Form 106I Schedule I: Your Income (Individuals), and that is compared to expenses on Schedule J, which is Official Bankruptcy Form 106J Schedule J: Your Expenses (Individuals).

A large gap in disposable income, meaning comparing your income to your expenses, could result in filing for Chapter 13 bankruptcy instead of Chapter 7.

Suppose a debtor has a car and, at the initial consultation, tells the bankruptcy lawyer he’s keeping the car. At the end of the consultation, the bankruptcy lawyer advises the client that they qualify for Chapter 7 bankruptcy. Fast forward a few months, and the lawyer is now saying that Chapter 13 has to be filed. Why? What has changed? The client’s mind.  

Qualifying for Chapter 7 Bankruptcy

Most people go online and do a quick Google search to find out that to qualify for Chapter 7 bankruptcy, they must pass the means test, which is based in part on comparing their income to the state’s medium income for six months before the bankruptcy is filed. If the debtor’s income is below the median or state average, they pass the means test. But to be honest, it’s not that simple.

• Did Your Bankruptcy Lawyer Ask You These Questions?

The means test is only one step in qualifying for Chapter 7 bankruptcy. Not only does disposable income need to be calculated, but so do any issues with nonexempt assets.

So, the bankruptcy lawyer calculated, based on the debtor’s income and expenses, that there was a minimal amount of disposable income. But at some point, the debtor decided it wasn’t worth keeping the car.

The monthly car payment was $500, and the debtor, without consulting with the bankruptcy lawyer, voluntarily surrendered the car to the creditor. The debtor figured it was better financially to buy a more affordable vehicle to avoid a car payment and save some money. Since bankruptcy would eliminate the debt of the original car, there would be no problem. But there is because now the debtor has $500 of disposable income available and no longer qualifies for Chapter 7 bankruptcy.

Even worse, with Chapter 13, those $500 will be paid into the bankruptcy plan. That wasn’t the debtor’s intention, but the bankruptcy trustee doesn’t guide themselves by intent but by what’s before them on paper in black and white. But that’s why it’s crucial that you confirm any possible consequences with the bankruptcy lawyer before any financial decisions are made.

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Even more importantly, before your bankruptcy petition is filed, your bankruptcy attorney should review the entire petition with you to ensure there hasn’t been any change in circumstances that could affect the case, whether it’s for Chapter 7 or Chapter 13 bankruptcy. Simply overlooking what may be considered a minor issue could be resolved by merely delaying the filing of the bankruptcy petition and avoiding unnecessary complications.

Besides reviewing the bankruptcy petition with your attorney before filing, you should also confirm that the petition was filed shortly after. I’ve seen costly mistakes made by lawyers due to not doing so.

For example, one lawyer failed to file the bankruptcy petition months after it was ready. The client passed away, and since those debts were not eliminated in bankruptcy, creditors filed a claim against the probate estate, reducing the overall amount that beneficiaries were to receive.

Another lawyer failed to finish the Last Will and Testament of a client before he passed away, leaving it to the children to spend thousands of dollars litigating the issue in probate court.

My favorite example is one bankruptcy attorney who failed to reinstate a Chapter 13 case, and the home was sold at a foreclosure auction. Knowing this would lead to a malpractice complaint and most likely disbarment, the lawyer bought the house at auction and held the mortgage. So now the lawyer was the lender, receiving payment from the former client.

Luckily, it turned out to be to the client’s advantage because the interest rate was very low, and the debtor was still able to keep their house. But regardless, all these examples of a legal disaster could have been avoided.

But to be honest, bankruptcy lawyers missing sale dates on foreclosures happens more than one would think, or at least hope.

I always review the bankruptcy petition with the client on the day of filing. If not, the client who is two months behind on the mortgage or car payment is at risk of losing their home or car if I file the Chapter 7 bankruptcy petition.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon Books. To access my YouTube channel, click this link.

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• Bankruptcy
• Your Wallet

Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Updated on April 28, 2025.