Pre Bankruptcy Planning Can Include New Debt For Proper Purpose

A common question during a pre-bankruptcy meeting with a bankruptcy client is whether a debtor can incur any new debt between the time he first meets his bankruptcy attorney and the filing date. The answer has two parts.

You cannot run up your credit cards prior to bankruptcy for non-essential items and wife those charges out in a Chapter 7 bankruptcy. Incurring new unsecured debt knowing you will never pay back any part of the debt is an abuse of bankruptcy. If challenged, the new debt will be non-dischargeable. If the amount of new unsecured debt is large enough you could have your entire bankruptcy petition tossed out.

You may incur new debt prior to filing if you intend to pay back the debt in full and you can show that the debt did not have a bankruptcy purpose. For example, you  incur a necessary expense, a medical expense or home repair for example, and you reaffirm the debt in a Chapter 7 bankruptcy the new debt should not cause a problem.

If you incur a secured debt which you intend repay in either a Chapter 7 or Chapter 13 plan the  new secured debt is probably ok. A good example is a debtor who buys a car jus t prior to filing bankruptcy. After the bankruptcy filing the debtor will find it more difficult to get car financing. The debtor needs reliable transportation for a fresh start financially. I think its reasonable for a debtor to buy a car prior to filing if he can show a rational transportation need.

New secured debts will help bankruptcy debtors qualify for Chapter 7 because required monthly secure debt payments are allowed expenses under the means test, and the secured debt reduces “available monthly income” in a Chapter 13 which, in turn, lowers the debtor’s required Chapter 13 plan payments.