Can You Spend Money Before Filing Chapter 7 Bankruptcy? How Much?

Can You Spend Money Before Filing Bankruptcy?

Yes, you can spend money before filing bankruptcy. You’ll need to keep paying your housing cost, utilities, and other bills as well as buying groceries and other necessities. The main thing to keep in mind is that buying expensive or luxury items will raise a red flag for the bankruptcy trustee. There are also rules about paying back friends or family or paying more than $600 to any single creditor in the months before you file your case.

Why Does It Matter How Much Money You Have When You File Chapter 7 Bankruptcy?

When you file your bankruptcy petition, you’ll need to provide a full picture of your income, money, and everything you own (your assets). This includes checking and savings bank accounts, retirement accounts, real estate holdings, and 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. But, this happens in less than 10% of all personal bankruptcies.^[1]

In exchange for this oversight, you get to take advantage of many benefits. The biggest benefit Chapter 7 offers is the bankruptcy discharge, which wipes out all your eligible debts. This includes credit card debts, medical bills, some federal student loans, and other debts. Filing bankruptcy also triggers the automatic stay, which stops debt collectors from contacting you or pursuing wage garnishment and repossession. 

Do You Get To Keep Your Tax Refund if You File Chapter 7 Bankruptcy?

Whether or not you get to keep your tax refund depends again on whether it’s protected by a bankruptcy exemption.

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 Bankruptcy?

The amount of cash you can keep when you file your Chapter 7 case depends on which bankruptcy exemptions you’re using. You’ll have the option to use either federal or state bankruptcy exemptions, but you can’t mix and match. Most people using the federal bankruptcy exemptions find that the cash they have is covered by the 13,950federal wildcard exemption. If you’re using your state’s exemptions instead, you’ll need to check to see which exemption you can use to protect your cash on hand.

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? 

If you have more money than you can protect with an exemption, the bankruptcy trustee will ask for the extra money so it can be used to pay your unsecured 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, bankruptcy laws 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. 

If you aren’t sure how to legally spend the money you have before you file your case you can always set up a free consultation with a bankruptcy attorney to get some insight into your personal situation.

What Can I Spend Money on Before Filing Chapter 7 Bankruptcy? 

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 case. 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 so you can keep it. 

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: 

• 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 on any given purchase. 

• 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. 

Money Actions To Avoid 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. These include spending money on luxury goods and paying back friends or family members.

Avoid High-End/Luxury Purchases

Avoid spending money on luxury goods. If your goal is to spend money to protect as much as possible, you won’t achieve that 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 allowed to pay back your family member after filing bankruptcy. But you can’t do so beforehand. 

Can I Use My Credit Cards Before Filing Chapter 7 Bankruptcy?

It’s generally not a good idea to take on new debt before filing bankruptcy. In fact, in some cases this could be considered bankruptcy fraud. Recent credit card charges and cash advances can also trigger an objection from the credit card company. This in turn can make the debt non-dischargeable. 

You can learn more about when to stop using your credit cards in this article: When To Stop Using Credit Cards Before Filing Chapter 7.

Let’s Summarize...

Bankruptcy exists to give relief to folks who are stuck in a financial situation that makes it impossible to get out of debt. The Bankruptcy Code outlines the rules you must follow when you file your case. This includes exemptions laws and rules about how much money you can have on hand when you file your case. If you’re confused about exemptions or how to protect yourself and your finances, you can schedule a free consultation with a bankruptcy lawyer to get personalized advice.