Avoid Spending Sprees: A Cautionary Tale on Filing for Chapter 7 Bankruptcy


Avoid Spending Sprees: A Cautionary Tale on Filing for Chapter 7 Bankruptcy

One of the things which makes law a fascinating field is how it is so unpredictable. No two cases are exactly the same, and this makes for a profession which is both difficult and challenging, but also interesting as well. The fact that each case is unique is part of why attorneys can be so valuable: because attorneys study judicial reasoning, and memorize the outcomes of previous cases, attorneys are often capable of accurately predicting how a new case will be resolved. Fortunately, our blog here at the Financial Freedom Advocates enables us to share some of our experiences so readers can benefit from our knowledge. Recently, we became aware of a Chapter 7 case which featured an unusual twist. We’d like to share this with our readers today in the hope that they can take away a useful lesson.


The Story: A Case of Frivolous Spending

In this case, a young woman initiated a Chapter 7 bankruptcy with the intention of discharging various unpaid debts. The young woman filed her initial bankruptcy paperwork, including financial records, and then attended her 341 hearing (“Meeting of Creditors”). As we’ve noted, 341 hearings are typically very relaxed and stress free, and this is mainly because debtors usually have everything in order. In this situation, however, the Trustee noticed something amiss in this young woman’s bank records. Specifically, the Trustee inquired about a $50,000 deposit to her bank account just 2 months before the 341 hearing. The woman replied that the money was a settlement from a lawsuit. The Trustee inquired about what became of the funds, to which the woman replied that she engaged in a “spending spree” in which she spent large sums on frivolous items (new clothes, jewelry, etc.) instead of paying down her debt. As the case stood following the hearing, the woman’s case couldn’t go through, at least not until she takes the steps to rectify her mistake.


Lessons: Avoid Frivolous Spending & Consult with an Attorney

The young woman thought she found a clever loophole in federal bankruptcy law: she received a windfall, spent the money rapidly, and then proceeded to declare bankruptcy to dissolve her debts. Unfortunately, what the woman didn’t realize is that this type of behavior qualifies as an example of bankruptcy fraud. The reason is because the woman clearly didn’t intend to use her newly acquired windfall in a good faith effort to repay her creditors, and instead viewed the windfall as an opportunity to engage in frivolous spending. In order for her case to proceed, and potentially receive a discharge, the woman would need to repay the entire $50,000 settlement to the Trustee.

What can we take away from this story? We think there are (at least) two lessons: avoid frivolous spending and consult with an attorney prior to filing for bankruptcy, especially if you intend to pull any maneuver such as the one pulled by this young woman. Since she was getting ready to file for bankruptcy, this woman should’ve known that this type of frivolous spending wasn’t likely to yield any positive consequences. This is particularly true given that she clearly had the chance to use the money to pay back creditors. What’s more, if she had simply consulted with attorney prior to filing, she would’ve learned that this sort of behavior isn’t acceptable in bankruptcy.

It is important to remember that bankruptcy is a great remedy that is available to the honest but

unfortunate debtor. The penalty for lying or fraud prior to the bankruptcy can include a denial of

discharge, monetary fines up to $500,000 and/or up to 5 years in a federal prison.

If you’d like to learn more, reach out to Financial Freedom Advocates today by calling us at 786-668-6688.

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