What is a luxury item and why does it matter for my Chapter 7 bankruptcy?

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Written by Andrea Wimmer, Esq.  
Updated January 7, 2020

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A luxury item is something that is not reasonably necessary for your maintenance and support. It’s something you don’t need to live. Non-luxury items, on the other hand, are things you purchase to cover necessities for yourself and your dependents. Things like groceries, utilities, rent, and gas. The term luxury item includes both products and services that cost more than $725.

There is really no hard and fast rule about what is considered a luxury item and what isn’t. It comes up in two contexts in a Chapter 7 bankruptcy. First, if you purchase a luxury item right before filing bankruptcy, there is a really good chance that you won’t be able to protect it with an exemption. This of course would mean that the trustee can sell it and distribute the proceeds to your unsecured creditors. So, money not well spent on your part. Additionally, if you purchase a luxury item on credit right before filing, that debt may not be covered by your discharge.

What does it mean that my debt may not be discharged? 

If you’re getting ready to file bankruptcy, you shouldn’t be charging anything on your credit card anyway, if you can. That’s because charging up your credit cards or incurring other new debt knowing that you’ll be filing bankruptcy and therefore won’t have to pay off the balance is considered bankruptcy fraud. Your creditors will review your charges in the months leading up to the filing. If they think that you intentionally used the credit card, knowing that a bankruptcy filing was imminent, they can file an adversary proceeding against you to object to having the debt discharged. 

An adversary proceeding is essentially a lawsuit that takes place in the bankruptcy court, as part of your bankruptcy proceeding. If you purchased things like groceries, prescriptions, or gas (all of which are pretty obviously not luxury items), the bank has to convince the court that you did that on purpose, knowing you wouldn’t have to pay for it, not out of necessity. 

If you’re like most Americans seeking bankruptcy relief, chances are that final charge had to do with the fact that you absolutely needed to get gas to make it to work or needed the groceries to feed your kids. For charges like this, the bank has to work pretty hard to convince the court that this should cause the debt to survive your bankruptcy. 

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What do luxury items have to do with this?

If you purchased luxury items - like a fur coat or jewelry - in the 90 days before filing your Chapter 7 bankruptcy rather than necessities, the burden shifts to you. This means that you have to prove to the court that you didn’t incur this debt because you knew you were filing bankruptcy and would get a discharge. Even though the bank starts the law suit, you’re going to have to do all of the legwork. This is called a presumption and it makes it much harder for you to convince the court that you should be able to eliminate the debt as part of your bankruptcy.

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Most low-income folks filing for bankruptcy protection won’t need to worry about this issue, as they’ve likely not purchased anything for more than $725 recently. If you know you’ll be filing bankruptcy soon, you should avoid using your credit cards completely. If you don’t, and the creditor points out that you purchased luxury items in the 90 days before filing your case, that debt may not be discharged. The same is true for cash advances taken in the 70 days before the bankruptcy filing. 

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