Can You Spend Money During Bankruptcy?

For many individuals with debts that they cannot adequately pay, bankruptcy offers a solution that lets both the debtor and creditors get what they want over time. The creditor gets paid, and the debtor can start fresh after bankruptcy proceedings are over. An important component of bankruptcy is making sure that the debtor is not destitute when proceedings end and can adequately move on with their life.

However, just because bankruptcy strives to preserve a debtor’s livelihood does not mean that they should act as if nothing is going on. Bankruptcy is still a process that should be taken very seriously. While debtors in bankruptcy are still allowed to spend their own money on whatever they want, they should do everything possible to avoid spending beyond essential purchases. Any luxury assets the debtor has when they file for bankruptcy can generally be sold to satisfy their debts to creditors during bankruptcy proceedings. Moreover, filing for bankruptcy under certain chapters allows debtors to take assets you obtain after you file.

For assistance navigating the complex process of bankruptcy, call our Bucks County bankruptcy lawyers with Young, Marr, Mallis & Associates at (215) 701-6519 for Pennsylvania or (609) 755-3115 for New Jersey to get a free case review.

What is Bankruptcy?

Bankruptcy is a process by which the court puts together a plan for debtors to pay back their creditors. There are a lot of misconceptions about bankruptcy, thanks to the common public perception that it is a decision made by desperate people or companies that have poorly managed their assets. The reality is that bankruptcy is designed to make sure that the needs of debtors and creditors are met. Debtors cannot be harassed by creditors or be left destitute, and creditors get their debts paid over time. Thus, both sides will end up satisfied and able to move on with their lives in an ideal bankruptcy proceeding.

One of the most important aspects of bankruptcy is something called an “automatic stay.” This is put in place immediately after you file for bankruptcy and prevents creditors from taking action to try and collect their debts. Instead, you pay off your debts in a controlled fashion over the course of bankruptcy proceedings.

Spending Money During Bankruptcy

You can spend money after you file for bankruptcy. However, it is not advisable to sell any assets or buy new ones prior to or during bankruptcy proceedings. Doing so can make you look bad in both the eyes of the court and your creditors.

Creditors cannot monitor your everyday spending during bankruptcy, so they will not know if, for example, you go out for a nice dinner or take a road trip. However, creditors can request bank statements at any time during bankruptcy, so they will be able to see your spending habits if they care to look.

Ultimately, bankruptcy proceedings only care about getting the creditor paid. The best way to do that is to only spend what is necessary during bankruptcy proceedings. Afterward, you will have a fresh start and be able to spend as you please.

Claw-Backs

You should be extremely wary of selling off any assets that are not exempt from bankruptcy proceedings. When you sell off an asset that can be “liquidated,” or sold for cash to satisfy debts, the creditors can do something called a “claw-back.” A claw-back is when a creditor can take something you sold from the person it was sold to. For example, if you have a nonexempt car and sell it to your friend during bankruptcy proceedings, the debtors may be able to take that car from your friend and sell it to help pay your debt. This is likely to make both creditors and your friend very unhappy with you.

After-Acquired Property

You should also be careful about obtaining any new assets during bankruptcy proceedings. When you file for bankruptcy, all of your current assets are tallied up and marked as either exempt or not exempt. Exempt assets cannot be sold off, while non-exempt assets can. The assets that can be sold off become part of what is called the “bankruptcy estate,” which is managed by a trustee. Anything you obtain after bankruptcy proceedings have started is called after-acquired property. After-acquired property is not listed as exempt. However, the after-acquired property is not part of the bankruptcy estate, so it is generally shielded from being sold off to pay your debts. That being said, if you file for bankruptcy under Chapter 13, the after-acquired property is part of the bankruptcy estate and can be sold off. Make sure you take note of the Chapter of bankruptcy you file under with our Philadelphia bankruptcy lawyers so that you appropriately manage your spending expectations.

Spending Prior to Filing for Bankruptcy

It is a good idea to avoid making any purchases that are not necessities just before filing for bankruptcy. Not only does it look bad in the eyes of both creditors and the court, but those purchases then become assets that can be liquidated in bankruptcy proceedings. Therefore, it is advisable to avoid making expensive or frivolous purchases prior to filing for bankruptcy. Do not invest in a new house or new car, avoid activities like expensive vacations, and do not transfer assets to friends or family just before filing. If you transfer assets in this way, it will not look good in the eyes of the court or creditors. If you have recently acquired significant assets just before filing bankruptcy, you should speak with our Pennsylvania bankruptcy lawyers about what to do in your situation.

Talk to Our Bankruptcy Lawyers Today

Young, Marr, Mallis & Associates’ bankruptcy lawyers can help with your case when you call (215) 701-6519 for Pennsylvania or (609) 755-3115 for New Jersey.