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Repeat bankruptcy filer penalized under Bankruptcy Code

Ohio residents and others across the United States have the right to file for bankruptcy, though the process comes with certain rules and conditions that must be met. Violating the rules can result in penalties, as a bankruptcy filer in Kansas recently discovered.

The debtor had filed for Chapter 13 in July 2013, making this her fifth bankruptcy filing in 14 years. While there is no limit to the number of times a person can file for bankruptcy, the problem arose when the woman spent money she acquired while in this latest bankruptcy. The bankruptcy order forbade her to dispose of any assets without permission from the court, but she spent the $25,000 she received as a settlement in a legal case without getting permission from the court first. The trustee objected, and the debtor responded by dismissing her bankruptcy case while making it clear that she intends to file for Chapter 13 again.

The U.S. Bankruptcy Court decided that she has a right to dismiss her current bankruptcy case, but it exercised its right to penalize her by disallowing dischargeable debt should she file Chapter 13 again. The debtor has filed both Chapter 13 and Chapter 7 in the past, with the court pointing out that if she were allowed a discharge in a future case, it would be her fourth since 2002. The court stayed its order for 21 days to give her time to reconsider dismissing her case. She could instead choose to modify it.

Chapter 13 bankruptcy allows a person to keep their assets while paying off some of their debt on a payment plan for three to five years. After this, the remaining debt is discharged. The decision in the case in Kansas came about because the court ruled that the debtors' act of spending money was to the detriment of her creditors. Bankruptcy is designed to allow a debtor to get relief from overwhelming debt but at the same time to ensure that creditors are paid at least in part for debts owed. In Chapter 7, assets are liquidated to pay off creditors, and then remaining debt is discharged.

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