Filing for bankruptcy under Chapter 7 prevents debt collectors from contacting debtors and garnishing their wages. After the case is resolved, a court order may clear medical debt, personal loans, credit cards and other unsecured debts. Spending money, in some circumstances, can jeopardize this protection.
To obtain Chapter 7 bankruptcy protection, you must allow the court to have access to your complete financial situation. Certain spending, however, can show bad faith and cause other problems that jeopardize your bankruptcy case.
After filing, the court seizes money and assets. Dishes, clothing, and some furniture are exempt. Some funds in certain bank accounts are also exempt but these should only be spent on essential items. Any asset that is not considered essential will be sold and liquidated to pay creditors including money in bank accounts.
It appears suspicious if your spending increases in the months before filing because unsecured debts can be eliminated, especially if you were planning to file for bankruptcy.
Spending money on necessary items is allowed but purchasing items that appear frivolous or lavish may appear as fraud and overspending. Stocking up on household items is permissible. However, stay away from unnecessary large purchases and keep receipts for any purchases and document why they were necessary.
Property transfers must be disclosed in bankruptcy filings. Failure to disclose these transfers may be seen as hiding assets and possible bankruptcy fraud. This could prevent the discharge of debt and the bankruptcy trustee may attempt to recover the transferred property.
Settling a debt with friend, relative or a creditor can lead to the revocation of that money by the trustee. If this sum reaches a certain amount, the bankruptcy trustee can take back the money from the person or entity it was transferred to.
The court-appointed trustee is authorized to sell nonexempt possessions to repay creditors. The court may sell off your large purchases to repay creditors.
Debtors are also required to answer questions in court under oath about their spending. Consider how difficult it will be to explain large or lavish purchases.
Using credit cards and having a large card balance appears suspicious. Carrying a large credit card balance gives the impression that you do not intend to pay off this debt. Credit card companies may argue that your changes cannot be cleared, and you may have to pay for recent charges.
Attorneys can present options when debt becomes insurmountable. They can also assist you with meeting the requirements of filing for a Chapter 7 bankruptcy.