Have more money than you can protect with an exemption? Wondering what you can spend it on so the bankruptcy trustee won’t raise any eyebrows? This article explains how it’s possible to have “too much money” and what steps you can take to best protect your fresh start.
It’s strange, yes, but it’s not uncommon for folks who are getting ready to file Chapter 7 bankruptcy to find themselves with “too much money.” Rarely is it truly “too much.” It’s more of a timing issue for most. Like when you receive your tax refund right before you’re ready to file your case. If you can’t protect the refund with an exemption, you’ll want to spend it before filing your case.
Why It Matters How Much Money You Have on the Day of Filing
A Chapter 7 bankruptcy filing gives you many benefits, mostly in the form of a bankruptcy discharge. Whether you can eliminate a debt depends on the type of debt. You can fully discharge any unsecured debt, like credit cards, or medical bills. Some debts are considered nondischargeable, including alimony, child support, and most student loans. Filing bankruptcy also triggers the automatic stay, which in turn stops any future garnishment or repossession.
In exchange for these protections, you provide a full picture of all of your assets on your bankruptcy petition. This includes bank accounts (both checking and savings accounts), retirement accounts, real estate holdings, and yes, even cash.
If you own any assets that aren’t protected by an exemption, the bankruptcy trustee can sell them and use the funds to pay your creditors. This happens in less than 10% of all personal bankruptcies.
A Note About Tax Refunds
If you’re filing your Chapter 7 bankruptcy close to tax season list any tax refund you may receive as an asset and protect it with an exemption if available. Some states provide specific bankruptcy exemptions for things like the Earned Income Tax Credit or the Child and Dependent Care Tax Credit. Otherwise, you can use a wildcard exemption, if available.
How much cash can you keep when filing Chapter 7?
The answer to this question depends on what exemptions you’re able to claim. If you are not in an opt-out state, chances are the cash you have on you is covered by the 13,950federal wildcard exemption. If you’re not using federal bankruptcy exemptions, you’ll want to check your state exemptions.
Important: Some exemptions protect money in a bank account but not actual cash.
What happens if I have more money than I can protect with an exemption?
In that case, the bankruptcy trustee will ask for the extra money so it can be used to pay your creditors. Unfortunately, it doesn’t matter if the money is set aside for a specific bill or purpose; if it’s not exempt, the trustee can take it.
You are allowed to spend the money you have before filing your case. Although that may sound a bit strange, the bankruptcy law and exemptions exist to protect you. Your goal should be to set yourself up for the best possible fresh start after bankruptcy by using the funds you have wisely.
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What can I spend money on before filing Chapter 7?
Think necessities. 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. Be careful about pre-paying any bills, though, as that may not be allowed.
Depending on how much money you have to spend down, heading to Costco to stock up on toilet paper and non-perishables may be all you need. It can also mean getting your kids a new set of clothes for the upcoming school year, stocking up on other household supplies, or getting furniture.
If you have a large amount of money to spend, it may make sense to purchase a (new to you) car. This is an easy filing expense to justify if you’re surrendering your current car in your Chapter 7 or Chapter 13 bankruptcy. Just make sure the car you purchase is protected by an exemption.
Best Practices While Spending Down Money Before Filing Bankruptcy
Anything you do in the weeks or days leading up to your bankruptcy filing may be reviewed by the trustee. Their job is to make sure you’re not trying to “get away” with something that’s not allowed. Here are a few things you can do to prepare for dealing with your trustee on this.
Update your list of assets. Whatever you buy before filing is an asset of your bankruptcy estate and needs to be listed on your Schedule A/B.
Keep receipts. That way, you can show the trustee what you purchased. This is especially important if you’re spending more than $50 in any given store.
Avoid withdrawing cash. Use your debit card instead. If you withdraw large amounts of cash before filing bankruptcy be prepared to have receipts for every single dollar you spent. Otherwise, it’ll be hard to prove to the trustee that you don’t still have the cash.
Don’t buy gift cards. They’re basically the same as cash.
Be reasonable. This is not about buying fancy things. This is about making sure you spend the money on things you need. Your purchases should be in line with your regular monthly income.
What can you not do before filing Chapter 7?
Just as there are things you can spend money on before filing for Chapter 7 bankruptcy, there are also things you should avoid.
Avoid High-End / Luxury Purchases
You should avoid spending money on luxury items. 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.
Instead, spend your funds in a manner that allows you to maximize your exemptions to protect as much as possible.
Don’t Pay Back Family Members Or Friends
Don’t use your money to pay back family members or friends. Even though it may feel like the right thing to do at the perfect time, it’s not.
Bankruptcy law doesn’t allow you to treat one creditor better than others. If you pay back a creditor within a specific period of time before filing bankruptcy, the payment is considered a “preferential transfer.” The bankruptcy trustee can “undo” a preferential transfer by asking you or your relative to give back the money.
You are of course allowed to pay back your family member (or any creditor of your choosing) after filing bankruptcy. But you can’t do so beforehand.
Can I use my credit cards before filing Chapter 7?
No, don’t take on new debt. We’re talking specifically about spending down cash you have now. Even if you have an available balance on a credit card, don’t use it while you’re getting ready to file bankruptcy. Recent charges and cash advances can trigger an objection from the credit card company. This in turn can make the debt non-dischargeable.
Bankruptcy exists to give relief to folks who are stuck in a financial situation that makes it impossible to get out of debt. To make the most of this debt relief tool, be mindful of your exemptions and spend any nonexempt cash wisely before filing your case.
- American Bankruptcy Institute. (2002). Bankruptcy by the Numbers - Chapter 7 Asset Cases. ABI Journal. Retrieved August 4, 2020, from https://www.abi.org/abi-journal/chapter-7-asset-cases