Most folks looking for debt relief options are not out spending lavishly on gifts for their family, friends, or themselves. They’re trying to stay ahead and make ends meet. But, with the holidays just recently behind us, it makes sense to discuss how gift giving is viewed in a subsequent bankruptcy.
The bankruptcy system doesn’t care about the fact that you purchased your kids some toys for Christmas, or that you’re giving a friend a $10 gift card for their birthday. As long as the gift is reasonably modest and there is an actual reason for giving the gift, no one will bat an eye. Chances are no one will even notice.
Not so modest gifts
You will be required to list all persons who received gifts with a combined value greater than $600 within the 2 years before your bankruptcy case is filed. This information must be disclosed on your Official Form 107, Statement of Financial Affairs in response to question 13. If you made donations to any charities totaling more than $600 in the two years before filing your case, you’ll have to disclose the contributions in response to question 14 on the Statement of Financial Affairs.
Giving gifts before filing bankruptcy can raise some red flags, especially if the gift if very valuable. Most folks don’t have a nefarious purpose in their gift giving - they merely wish to brighten someone’s day. That’s why you get ample opportunity to describe the gift (and the reason for gifting it) in response to question 13.
Giving away unprotected property
It’s a little different if you have money in a savings account that you have to spend down before your Chapter 7 bankruptcy can be filed. Turning your savings into a gift for another person makes it look like you’re merely parking your savings with that person for the duration of your bankruptcy.
Example: Person A knows he will need to file for Chapter 7 bankruptcy relief in the new year. Things are simply not adding up and creditors are knocking down his doors. He files his tax return as soon as possible in the new year and gets a tax refund of $2,500. There is no available exemption to protect this tax refund. So, Person A goes and purchases a Peloton bike for his friend, Person B. He knows Person B has wanted one of these bikes, but hasn’t yet filed their tax return or saved enough money to buy it for themselves. Person A figures that Person B can pay him back for this gift later - maybe even with a similarly valuable gift.
The problem with Person A’s actions is that it’s a classic example of bankruptcy fraud. Person A took an asset (money) that would have otherwise been distributed to his unsecured creditors as part of his Chapter 7 bankruptcy (because it was non-exempt). If a trustee determines that a filer had similar motivations when making a high value pre-petition gift to a family member or friend, the trustee is not helpless. They can go after you and the recipient of the gift to get that value back for your creditors.
Buying gifts on credit
If you already know that you’re in too deep and can’t afford to pay your bills as they come due, you shouldn’t be using your credit cards anymore. More importantly, if you know that you’ll be filing for bankruptcy relief in the near future, you can’t go out and max out all of your credit card balances, simply because they’ll be discharged anyway. That’s another form of bankruptcy fraud. You can’t incur debt with the intent of eliminating it in a bankruptcy.
Credit card companies typically do a routine review of a person’s spending habits in the months before their bankruptcy. If you purchase a gift (for yourself or someone else) on credit, the bank can object to getting this debt discharge. In fact, if you purchase something considered a luxury item (so, in this context, really anything other than necessities) using a credit card in the 90 days before filing your case, this debt is presumed to be non-dischargeable. The same is true for any cash advance as person takes out in the 70 days before filing. That means the bank won’t even have to show the court that you intentionally tried to defraud them. Instead, you have the burden to show that you weren’t doing anything that would make the debt non-dischargeable.
Giving gifts to your loved ones before filing bankruptcy is ok, as long as it’s a modest gift. Keep in mind, however, if you’re in dire straits financially and on the verge of filing bankruptcy, not giving gifts to your loved ones is ok too! They’ll understand and should be patient, not pressure you into doing something that would complicate your bankruptcy case or risk your discharge. If you’ve given a single person gifts with a total value of more than $600 in the two years before filing, make sure you disclose it. Otherwise, you risk losing your discharge completely, not just with respect to a single debt.