How Not to “Break the Bank” – Chapter 7 Pitfalls Following End-of-Year Spending

By Christopher Sunnen
Sunnen Law


While the term “Keeping up with the Joneses” has long been a part of the American lexicon and conspicuous consumption is marketed daily through e-mail, television, social media, and radio to the public, the reality is that these behaviors can have detrimental impacts for parties either considering a Chapter 7 bankruptcy in the new year, or parties that are in a Chapter 7 bankruptcy proceeding at the end of 2019 for simple reasons. For starters, it is important to remember whether a party has filed a case, or intends to file a case, their financial affairs will be scrutinized by the Office of the United States Trustee, their Chapter 7 Trustee, and the Court. This scrutiny can come in many forms, from the duty to provide a recent copy of a Federal and State Tax Return, or from the duty to report any and all property that a party has received, including end of year cash tips, or cash bonuses.

Correspondingly, a party who is already subject to the protections of the Bankruptcy Abuse and Consumer Protection Act (“BAPCPA”) should already be aware that this review is ongoing toward expenses found on their schedules and bank statements; and potential filers should be aware that this review will occur into the new year, even if they file their case in February, as the requirement to produce bank statements in Chapter 7 cases goes back ninety days. A review of spending habits, however, does not stop at bank statements. The questionnaire for the Southern District of California calls for both existing fliers and potential filers to disclose all “balance transfers” made on credit cards within ninety days of filing. This can complicate matters for parties who sought to free up space on nearly maxed out lines of credit to purchase gifts for friends, family, or co-workers at holiday time. Again, these filers or potential filers should be aware that their finances are, or will be reviewed by the administrative authorities, and or the Court, as the protections of the bankruptcy code only apply to those that qualify.


To be clear, a party seeking to make some end of year purchases may find themselves in a more precarious legal and financial situation by making such balance transfers without a valid or legitimate purpose during their case, or prior to a filing. A more serious outcome arises for parties who utilize their credit cards to purchase “big ticket” items – expensive trips; big screen televisions; electronic gaming systems; or jewelry on the eve of a bankruptcy filing. Such charges generally lead to the filing of what are known as “adversary actions” – companion cases brought by the lending institution that seek to deny part of a filer’s discharge under 11 U.S.C Section 523. These adversary actions can also have a spill-over effect into the larger case as a whole, and can lead to denial of a party’s whole discharge. As the discharge is the entire purpose of the Chapter 7 bankruptcy, a partial or total denial is something that should be avoided whenever possible.


Moving on from credit card issues, relating to purchases or balance transfers, transactions that occur during the holidays can also be problematic for other reasons. Like credit cards transfers, personal loans for gifts, and the attendant promises to repay can lead to exposure under Section 523 as well. Finally, parties should also be cautious as to their approach toward non-financial transactions. While it may seem like a good idea to give a son, daughter, brother, sister, or parent a boat or car, or other item as one does not have money during the holidays – especially in light of financial problems, such transactions also will be scrutinized either during the pendency of a case, or before. Most likely, many of these “gifts” – especially on the eve of filing – will lead to legal consequences in bankruptcy court.


Again, when one is struggling financially, the holidays can be a challenging time, especially because of the modern attitudes toward consumption. The best advice, however, for parties either on the verge of bankruptcy or in bankruptcy is to stay within the lines, only purchase what they can afford, and follow through on a plan that will ensure the next year has less litigation and problems, and more of a fresh start; the alternative can be a morass of consequences, litigation, and issues that can last over a year. In this light, the choice is simple – don’t break the bank; save the pennies; and take the steps to be successful for future holidays and beyond.