Can I spend before bankruptcy?

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Q. So I plan to file for bankruptcy but I kinda want to get one last Christmas out of my credit cards. If I charge whatever I need, though, I’ve heard that can be a problem if I already decided to file. What’s the deal?
— Spender

A. Be careful what you charge on your credit cards shortly before a bankruptcy filing.

Section 523 of the bankruptcy code gives many categories of debts that are not included in a discharge obtained by an individual in a bankruptcy case, said Ilissa Churgin Hook, a bankruptcy attorney and member of Hook & Fatovich in Wayne.

“Among the common exceptions to a discharge are consumer debts incurred for luxury goods or services, or cash advances obtained, within defined periods of time prior to the filing of a bankruptcy case,” Hook said.

For example, consumer debts owed to a single creditor and aggregating more than $675 for luxury goods or services incurred by an individual debtor within 90 days prior to a bankruptcy filing are presumed to be non-dischargeable, Hook said.

That means that those obligations will not be wiped out by a bankruptcy filing, and the debtor can remain liable for those debts after his/her case is closed.

Likewise, she said, cash advances on a credit card aggregating more than $950.00 within 70 days prior to a bankruptcy filing are also presumed to be non-dischargeable.

She said if you buy items such as basic clothing, gas and food shortly prior to filing a bankruptcy case, that should be okay, as the term “luxury goods or services,” as defined by the bankruptcy code, does not include food or services reasonably necessary for the support or maintenance of the debtor a dependent of the debtor.

But, she said, if you charged any luxury items recently, including but not limited to a vacation, jewelry, expensive electronic items, or if you took cash advances in the past few months, you may need to wait to file a bankruptcy petition.

“The purchase of luxury items or withdrawal of cash advances in a short period of time prior to the filing of a bankruptcy is a red flag, and a creditor or your bankruptcy trustee could argue that those debts should not be discharged as the purchases were not necessary, and/or were made at a time when you knew that you did not have ability to service the debt you were incurring,” Hook said.

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This post was first published in December 2016.

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