Bankruptcy / Bankruptcy Dismissal / Filing Bankruptcy / Managing Your Finances

Four Good Reasons For Spending Down Cash Before Filing Bankruptcy

Under the laws governing bankruptcy, a debtor seeking bankruptcy relief under Chapter 7 bankruptcy or Chapter 13 bankruptcy can be denied a bankruptcy discharge or their repayment plan can be dismissed for the following reasons:

  1. The debtor intentionally tried to hinder, delay or defraud a creditor or the bankruptcy system and keep them from accessing their assets during bankruptcy.
  2. The debtor has transferred, removed, destroyed or attempted to conceal assets with one year prior to filing bankruptcy.

So what are the valid reasons for liquidating assets such as cash prior to filing bankruptcy?  Let’s take a look at a few:

  1. It is completely valid for a debtor to spend cash prior to bankruptcy to buy food and household supplies because this is something that they need, not because they are trying to keep money from creditors when they file for bankruptcy.
  2. It is completely reasonable for a debtor to pay on their mortgage/rent prior to filing bankruptcy because if they fail to pay their mortgage/rent they will be evicted and end up on the street.  However, a debtor cannot pay their mortgage/rent for the sole purpose of avoiding payment to creditors during bankruptcy.
  3. If a debtor is in jeopardy of losing their job because they don’t have a car, it may be completely reasonable for that debtor to purchase a car prior to filing for bankruptcy.  However, it would not be acceptable for a debtor to purchase a car before bankruptcy just because they would prefer to spend their cash on a car instead of repaying their creditors during bankruptcy.