Don’t spend money before bankruptcy

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Dear Bankruptcy Adviser,
I am going to file for a Chapter 7 bankruptcy, but I bought some things before I figured out that I needed to file for bankruptcy. By spending money so close to my filing, will my bankruptcy be at risk? And what is the appropriate time limit between doing my last major spending and filing bankruptcy? And what amount is considered reasonable by the court?
— Tim

Dear Tim,
Everyone filing Chapter 7 bankruptcy is strapped for cash and wants to use up all available credit prior to filing. The main question is the reasonableness of the pre-filing credit use. For example, if you buy a new, flat-screen television in the few months before filing bankruptcy, it has all the appearance of fraud. You don’t want to jeopardize your pending bankruptcy case by trying to make unreasonable and pricey purchases in the months leading up to the filing.

Once you have decided to file for Chapter 7 or have hired an attorney, don’t spend money. All credit card use must stop. You have no intention of paying that debt back, therefore you need to start using cash or debit cards only.

Most people will immediately say, “I will just keep trying to pay and continue to use the cards until the cards are maxed out. Then I will decide to file bankruptcy.” This is not uncommon and credit card companies, or their legal departments, are fully aware of the decision to spend money before bankruptcy. The creditor will review every single account at the time of filing. It will be looking back, usually for at least one year, to review all purchases or cash advances. If the creditor deems your spending behavior abusive, it will challenge your right to eliminate some or all of the debt you incurred on its card.

Creditors are very efficient at challenging your right to eliminate debt. And if you think about it, the creditor has a lot of incentive to do so. You are going to eliminate a large percentage of the debt you incurred. Therefore, trying to force you to pay back some of it is worth the creditor’s time. Because you will have additional cash after filing because all of your debts will be gone, the creditor will consider you a prime candidate to challenge your right to a complete elimination of debt.

You are likely to eliminate 100 percent of your unsecured credit card or loan debt in your bankruptcy. The vast majority of cases result in the complete elimination of debt. However, you still must look at your spending from a reasonableness standard. If you think that recent activity is excessive, it probably is.

The ultimate goal of filing for Chapter 7 is to give you a fresh start. You can increase the likelihood of receiving that by thinking logically and rationally about credit use prior to filing.

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