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Do you need to pause spending if you declare bankruptcy?

On Behalf of | Apr 21, 2024 | Bankruptcy

If you’re going to declare bankruptcy, you know that your debts are going to be eliminated in some fashion. For instance, maybe you want to use Chapter 7 bankruptcy. This means you have to liquidate non-exempt assets, pay off a portion of the debt and then other debts are just forgiven.

With this in mind, you may consider spending money prior to filing for bankruptcy. Perhaps you want to run up the charges on your credit card, for example. You know that the balance of that card is going to be eliminated anyway, so does it make sense to spend more?

Avoid frivolous spending

The problem is that excessive or frivolous spending prior to filing for bankruptcy can be an indicator of fraud. Certainly, intentionally spending money just to have it forgiven in an upcoming bankruptcy case is fraudulent and cannot be done. But even if you claim you didn’t do it intentionally, the court may believe that you did if there’s a notable uptick in unnecessary purchases.

But this does not mean that you can’t spend money at all. You likely still have day-to-day needs that have to be met. Bankruptcy can take months. You still have to be able to provide food and shelter for your family, you may have to pay for utilities and much more. All of these smaller payments are fine, as long as you avoid frivolous or potentially fraudulent spending.

The bankruptcy process certainly can be complex, but there are many tools that people can use when they are facing overwhelming debt. Be sure you know exactly what legal steps to take if you find yourself in this position.