Bankruptcy is designed to provide debt relief to financially distressed consumers, many of whom are struggling under the weight of outrageous medical bills, sky-high credit card balances and other debts.
If there’s any possibility that you may need to file bankruptcy soon, however, you need to approach your holiday shopping with care. The wrong moves now could cause significant problems for your bankruptcy petition later.
What’s holiday spending got to do with your bankruptcy?
The bankruptcy process is designed to be fair to both debtors and their creditors. As such, the bankruptcy court reserves the right to scrutinize a debtor’s financial transactions in the period immediately prior to when a bankruptcy petition is filed.
If it appears that you took on unnecessary debts right before seeking relief, you may be penalized. The court can (and probably will) refuse to discharge any debts obtained under “false pretenses, false representation, or actual fraud.” Generally speaking, that includes:
- Debts to a single creditor that total $675 or more in the 90 days prior to the point where your bankruptcy petition is filed
- Cash advances from a single creditor that total more than $950 in the 70 days prior to your request for debt relief
Broadly, the court will look to see if the purchases you made were out of necessity or whether they were something that could be considered “luxury goods or services.”
What does that mean in practical terms? Well, holiday-related luxury goods and services might include things like:
- Gifts for your adult friends, relatives, co-workers or neighbors, no matter how modest
- Special grooming procedures, like having your nails professionally done
- Holiday decorations, including trees, lights, animatronics and similar items
- Travel expenses, including plane tickets and hotel accommodations
On the other hand, the court will usually be forgiving of expenses that were solely designed to meet your basic needs, like groceries, utilities and emergency car repairs.
Bankruptcy can feel like a daunting prospect. Understanding how bankruptcy works and what to expect can often ease your concerns and help you know what kinds of mistakes to avoid at the holidays and moving forward.