Certain moves before you file, like preferential payments or asset transfers, can delay your case or cost you your Chapter 7 or 13 bankruptcy discharge.
Before filing for Chapter 7 or Chapter 13 bankruptcy, you'll want to avoid paying certain creditors more than others, transferring or hiding assets, running up credit cards, cashing out retirement funds, leaving anything off your paperwork, and skipping required tax returns. Any of these can delay your case, undo a payment or transfer, or cost you your discharge entirely. If you've already done one of these things, it might be best to delay or even avoid filing altogether.
That's not to say you can't pay your bills or conduct necessary transactions. Once you learn the basic rules below, you'll understand when to spend before filing for Chapter 7 or 13, when to delay your filing, and when spending cash is perfectly fine.
Don't Do These Things Before Bankruptcy
The exact lookback period of particular transactions depends on the circumstances.
Leaving Debts, Assets, or Income Off Your Paperwork
You must disclose all of your income, assets, debts, and financial transactions under penalty of perjury. Leaving out a creditor, an asset, or a source of income—even by accident—can delay your case, and doing it on purpose can cost you your discharge or lead to fraud charges. (11 U.S.C. § 727(a).)
Example. Marcus purposefully fails to list a $3,000 personal injury settlement he's owed. When the trustee later discovers it, Marcus risks losing his discharge for all debts, not just having to turn over the settlement.
Transferring Property or Hiding Cash Before Filing for Chapter 7 or 13 Bankruptcy
Hiding assets, giving away property, or selling something for less than it's worth can trigger a “fraudulent transfer” claim that reaches back two years. The trustee can even reclaim an innocent gift, though you won’t face penalties unless the bankruptcy court finds actual fraud. (11 U.S.C. § 548.)
Example. Allison has $10,000 in a savings account. To hide it from the trustee, she moves the money to her brother's bank account and files for bankruptcy six months later. The trustee can demand the money from Allison's brother, and because it’s actual fraud, Allison might face additional penalties.
Example. Trish gave her sister $5,000 of her big gambling win as a birthday gift. Almost two years later, Trish filed for bankruptcy. Because two years hadn’t elapsed since Trish gave away the money, the trustee could demand $5,000 from the sister as a fraudulent transfer.
Paying Certain Creditors
Under bankruptcy law, you can't choose or “prefer” one creditor over another. That’s not to say you can’t pay your regular monthly bills—you can. But, if you pay more than $600 to any other creditor within 90 days before filing, the Chapter 7 trustee can require the creditor to return the funds.
The lookback period increases to an entire year if the creditor is someone close to you or an “insider” and there isn’t a minimum allowed amount. Insiders are typically family members and business partners, and even paying a bill on behalf of an insider will trigger the rule.
Example. Joe pays Bank $1,500 and files for bankruptcy 62 days later. The trustee will likely demand the return of $700 ($1,500 - $600 = $700).
Example. Chris repays $2,400 to his mother six months before filing for bankruptcy. The trustee will want Mom to turn over the $2,400. When Chris learns this from the trustee, he might decide to pay it himself to prevent the trustee from suing Mom and obtaining a money judgment against her. (11 U.S.C. § 547.)
Charging Luxury Goods or Taking a Cash Advance
Charging luxury goods or taking out a cash advance shortly before you file is treated as fraud under the “presumptive fraud” rule, which makes it easier for creditors to recover the money. Your fraudulent intent will be presumed—the creditor doesn’t have to prove it—if the purchase falls within these guidelines (amounts apply to cases filed between April 1, 2025, and March 31, 2028):
- You charged over $900 on luxury goods or services on an account within 90 days before filing for bankruptcy.
- You took out cash advances totaling more than $1,250 within 70 days before filing. (11 U.S.C. § 523(a)(2)(C).)
You won’t want to use your credit card to purchase multiple pairs of Adidas Yeezys at the Shoe Stop within 90 days of filing for bankruptcy or take out cash advances of over $1,250 within 70 days before bankruptcy. However, an exception exists for charging necessary items, but be prepared to show that your child needed snow boots or that you didn’t have another way to pay the heating bill. Learn more about when to stop using credit cards before bankruptcy
Withdrawing Money From a Retirement Account
Most retirement accounts, including 401(k)s and IRAs, are protected from creditors in bankruptcy. Withdrawing those funds to pay off debt before filing turns protected money into cash a bankruptcy trustee might be able to reach (and you'll likely owe taxes and an early withdrawal penalty on top of it). (11 U.S.C. § 522(d)(12), (n); 11 U.S.C. § 541(c)(2).)
Example. Diane cashes out $12,000 from her 401(k) to pay down credit card debt before filing for Chapter 7. Had she left the money alone, it would have been fully exempt. Instead, any cash sitting in her bank account on the day she files could become part of the bankruptcy estate if she can't protect it with a bankruptcy exemption covering cash.
Skipping Required Tax Returns
You must provide your most recently filed tax return in a Chapter 7 case and the last four years of returns in a Chapter 13 case. Filing without them can result in dismissal of your case. (11 U.S.C. § 521(e); 11 U.S.C. § 1308.)
When You'll Want to Delay Filing for Bankruptcy
Should you wait to file? Yes, if you're expecting a windfall, planning to file again soon, don't yet qualify for Chapter 7, or you're mid-negotiation on a mortgage modification.
Delaying Bankruptcy If You’re Expecting a Windfall
You're probably not bankrupt if you’re expecting a large amount of money from any source. The good news? You’ll likely be able to get yourself out of debt.
Don't be tempted to save a few bucks by filing a quick Chapter 7. It's rarely a good strategy. You must report any money you’re owed or entitled to in your bankruptcy paperwork, even if you haven’t received it, because it becomes part of your bankruptcy estate. And reporting requirements don’t end when your bankruptcy closes. You must tell the trustee about any inheritance and lottery winnings you receive in the following six months. (11 U.S.C. § 541(a)(5).)
However, if you don’t think you'll get much, you could hold off on filing. Instead, spend the money on necessities like car repairs, replacement appliances, and dental work. Just keep good records. The trustee appointed to your case might ask you to prove you bought needed items and that you're not using a strategy to avoid paying creditors.
Delaying When You Want to File for Bankruptcy a Second Time
If you receive a discharge in a Chapter 7 bankruptcy, you can't get another Chapter 7 discharge for eight years. Also, you can't get a discharge in Chapter 13 bankruptcy unless you wait to file for four years after filing the Chapter 7 case. (11 U.S.C. § 727(a)(8); 11 U.S.C. § 1328(f).)
However, these rules don't prevent you from filing for bankruptcy. They only prohibit a discharge. You can file for Chapter 13 bankruptcy immediately after completing Chapter 7, but you won't receive a discharge of your remaining debts at the end of your Chapter 13 repayment plan.
So why would you want to file a Chapter 7 or Chapter 13 case without receiving a discharge? In Chapter 7, you might want the trustee to sell and distribute assets to creditors transparently. Chapter 13 filers can use the filing to stop collection actions and force creditors into a payment plan over time.
Also, sometimes people benefit from filing for Chapter 13 right after finishing Chapter 7. It's common enough that it has earned its informal name of "Chapter 20 bankruptcy." You can use a "Chapter 20 bankruptcy" to deal with debts not discharged through your Chapter 7 bankruptcy. The Chapter 13 repayment plan gives you an opportunity to pay off those debts over three or five years with the protection of the bankruptcy court.
Delaying Filing for Chapter 7 Qualification Purposes
If you don't qualify for Chapter 7 now but will in a few months because of a drop in income, consider waiting to file until you're qualified. For instance, suppose you recently lost a high-paying job and would like to lighten your debt load by filing for Chapter 7. You might not qualify because the Chapter 7 means test averages your income over six months, but give it time. Your average income will go down each month you remain unemployed.
Delaying a Bankruptcy Filing When Modifying a Mortgage
If you're working with your mortgage lender to modify your home mortgage and want to file for Chapter 7, consider waiting until you've completed the modification. Why? Because most lenders will stop working with you once the automatic stay goes into effect. If you're behind on your payments, you could risk losing your house because Chapter 7 doesn't have a mechanism to help people keep homes from foreclosure.
Otherwise, consider Chapter 13 if you’re facing foreclosure. If you make enough to catch up on the payment arrears and pay other required amounts, you can eliminate debt and keep your home.
When Spending Cash Before Filing for Chapter 7 or Chapter 13 Bankruptcy Is Okay
You can spend cash before bankruptcy if you're using it to pay for necessary bills because you have the right to pay for the things you need to work and live. However, avoiding taking on new debt and not paying one creditor off while leaving the others high and dry is a good practice.
For instance, the bankruptcy trustee responsible for your case likely won't object to using cash for food, school supplies, needed work clothes, rent, or your cellphone bill. If money is tight, you can sell your property and spend the cash on what you need. But keep good records in case the bankruptcy trustee asks about the transactions.
Navigating Your Bankruptcy Case
Your safest move is to talk to a bankruptcy attorney before you file, not after. Bankruptcy is essentially a qualification process that is more often complicated than not, and the best way to protect your assets is by hiring a local bankruptcy lawyer. In the meantime, here are more easy-to-understand articles:
