Even if you don’t have a bunch of money to spend before filing your case, it’s important to know what to avoid in the months leading up to your filing, so you don’t inadvertently make your case more complicated than it needs to be.
Things you can spend your money on
If you find yourself in circumstances where you have too much cash or funds in a bank account to fully protect with available exemptions, it’s important to know how to spend down the money before filing your case in ways that are allowed. First, any money going toward your regular monthly living expenses should be fine, so you can make sure to pay all of those bills before filing your Chapter 7. Additionally, you can also buy necessities for yourself and your family, like clothes, household supplies, and furniture. It’s important to keep these purchases reasonable, however, because if you spend a large amount right before filing your case, these purchases very well might be examined by your Chapter 7 trustee.
Another item to consider would be a car that you can purchase outright, so long as its value is less than the exemption amount allowed for vehicles. This is an easy filing expense to justify if you’re in your bankruptcy. This allows you to walk away from any obligation to continue payments on that car loan or lease and you’ll have the peace of mind knowing that you have alternative transportation already secured.
Best practices while spending down money before filing bankruptcy
As mentioned above, any purchases that are made right before filing for Chapter 7 bankruptcy may be examined by your Chapter 7 trustee to determine that these were allowable purchases. As such, there are some best practices to keep in mind if you’re spending down income in anticipation of filing bankruptcy.
Things you should avoid
Just as there are things you can spend money on before filing for Chapter 7 bankruptcy, there are also payments you should avoid. You should avoid making any unreasonable or unnecessary purchases at this time. There isn’t a specific definition attached to unreasonable or unnecessary but it’s good practice to avoid luxury or high-end purchases and generally stay within the realm of your monthly income. You should always keep your receipts and have those available to show to your trustee if asked.
You should avoid spending money on assets. If your goal is to spend money to protect as much as possible then you’re not achieving it by shifting assets from one form that isn’t protected (cash or bank account) into another unprotected item. Ideally, you should spend funds in a manner that allows you to maximize your exemptions to protect as much as possible.
Don’t pay back family members
It’s also very important to not use your money to pay back family members or friends that you owe within a specific period of time before filing Chapter 7 bankruptcy. If you treat one creditor in a manner better than the others this can be seen as a , which is not allowed by the bankruptcy court.
You’ll also need to look out for any , which are transfers made with the intent to hide assets or transfers of property for less than the fair market value before bankruptcy.
Finally, it’s also not a good plan or withdraw cash to simply spend it. You’ll need receipts for everything you spend the cash on. And, even if you’re hoping to come out of your bankruptcy with one credit card relationship intact, you can’t choose to pay off one to keep at the expense of the others, as that is still considered a preferential payment.