Filing for bankruptcy is very often the best option for someone who is in a financial position where they are unable to afford to pay their ongoing bills and expenses in addition to their debts. When this happens, a person should try their best to continue paying their necessary ongoing expenses and bills, such as their mortgage payment, car payment, utility bills, and groceries. These needed expenses are more important than paying on old debts, especially if a person is planning on filing for bankruptcy and getting rid of those old debts anyways.
Bankruptcy law is designed to ensure creditors get their fair share but not at the expense of leaving the debtor without the means to support themselves and maintain a basic standard of living. This is why, in addition to the regular expenses described above, the debtor is also permitted to spend a reasonably necessary amount of money on things for themselves, and for their immediate family, like health care, personal care products (i.e. grooming and hygienic products), clothing, childcare costs, educational costs, services used for work and communication (i.e. telephone and internet), transportation expenses (i.e. gas and vehicle maintenance), and even some modest entertainment expenses (everyone deserves to be able to go out to eat or to the movies once in a while). Debtors are also allowed to pay for things like basic insurance policies and retirement accounts to protect themselves, and their families, for the future. All of these ongoing regular expenses are permitted so long as they are not excessive or unreasonable.
The debtor’s regular ongoing expenses are very important in a chapter 13 bankruptcy as the debtor is required to pay all of their disposable income (i.e. their remaining income after paying their regular expenses) to their creditors, each month, during their repayment plan. Chapter 13 trustees carefully scrutinize, and commonly challenge, the debtor’s expenses, as listed in their bankruptcy petition, when the expenses seem unreasonably high. In those situations the debtor may have to modify their proposed repayment plan to reduce such expenses, which often results in more available income to pay to creditors, and consequently, a higher monthly payment. For this reason, it is very advisable to have an experienced bankruptcy attorney assist a person with the drafting of their chapter 13 repayment plan. In a chapter 7 bankruptcy case, expenses are not quite as important, as the debtor is not required to make payments to creditors, but can certainly be relevant, in certain circumstances. For example, if the debtor does have lot of monthly expenses in relation to their income, which leaves a large amount of disposable income, the chapter 7 trustee may ask the court to convert their case into a chapter 13 repayment plan, with the argument being that the debtor has sufficient income to make regular payments to their creditors. This is true even though a debtor who earns less the median gross income, based on household size, normally qualifies to file a chapter 7 case. Debtors in both chapter 13 and chapter 7 cases must file their cases in good faith. Therefore, debtors who deliberately overstate their expenses, either to reduce their chapter 13 repayment plan, or to ensure they can remain in a chapter 7 case, run the risk of getting in trouble with the court, may have their case dismissed or discharge revoked, and can even suffer worse consequences (i.e. being convicted of perjury) in extreme cases. This is another reason why the bankruptcy petition should be drafted with the help of an experienced bankruptcy attorney.
Prior to filing for bankruptcy, debtors should be cautious about spending a lot of money on things that they don’t need. It is perfectly acceptable to spend reasonably modest amounts of money on non-needed items or entertainment expenses (i.e. a cheap concert, a massage, an inexpensive above-ground pool, etc.). However, when large amounts of money are expended for non-necessary “luxury” items or services (i.e. front-seat Superbowl tickets or a hot tub) there may be in issue, especially if done so shortly before filing for bankruptcy. In such cases, the trustee may argue that the debtor spent an excessive amount of money with the intent of getting rid of the money to defraud creditors (to avoid giving the money to the creditors instead). The same is true if the debtor gives away money or property, or sells property to someone else for less than it’s worth. The theory being that the debtor should have received fair value for the transferred property, which could have then been used to pay creditors. In these “fraudulent transfer” cases, the trustee may have a legal right to pursue the person whom received the money or property from the debtor to get back the money that should have gone to creditors.
If the debtor engaged in such a transaction to deliberately defraud their creditors they also run the risk of having their discharge denied by the court. Notably, a person considering filing for bankruptcy should also be extremely cautious about incurring new debt shortly before filing for bankruptcy. Taking out small amounts to pay for necessary items or services (i.e. groceries or fuel for your car) will likely be okay, although should be avoided, if possible. However, spending a lot with a credit card or taking out a large cash advance shortly before filing for bankruptcy can be a problem, especially if the credit/money was used to purchase unnecessary luxury items or services. These large incurred debts may be challenged by the creditor as “fraudulent”, and consequently, may be ruled as non-dischargeable by the court, meaning the debtor will end up remaining responsible for that even after receiving their discharge. These transactions also jeopardize a denial of a discharge for all of the debtor’s debts if the act was intentionally done to defraud the creditors.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW FIRM
This is a generalized overview of what spending is appropriate, and what is not, before filing for bankruptcy, and during bankruptcy, and is not designed to be a comprehensive discussion of the law. A person considering filing for bankruptcy should consult with an experienced bankruptcy attorney to be best advised on how to spend money and manage their finances before, and during, their bankruptcy case. See us at LifeBackLaw.com!
