Bankruptcy isn’t a one-size-fits-all solution to debt, especially if it reaches a tipping point during the holidays. While you are highly unlikely to achieve a Chapter 7 discharge for debt accrued for gifts and other luxury purchases, you might be able to consolidate these debts under a Chapter 13 repayment plan.
Why Chapter 7 Isn’t a Good Option for Holiday Debt
If a significant portion of your debt comes from elective expenses on luxury goods or services, Chapter 7 is unlikely to help.
Under bankruptcy law, a luxury purchase is generally considered an item or service that is not necessary for basic living needs. Essentials like groceries, clothing for work, or utility payments wouldn’t typically fall into this category. However, purchases for holiday gifts, expensive meals, vacations, and other luxuries would.
The Bankruptcy Code specifically addresses these types of transactions to prevent abuse of the system, implementing a lookback period that evaluates purchases made within 90 days of filing for bankruptcy. If you purchase $800 or more in luxury goods or services within three months of filing for bankruptcy, this debt is nondischargeable. For cash advances, the limit is $1,100 within 70 days of filing for bankruptcy.
If a significant amount of your debt comes from essential expenses, however, then pursuing a Chapter 7 discharge might be advantageous.
Chapter 13 Can Help You Deal with Luxury Spending Debt
Suppose you went over your budget for the holidays, or a financial hardship hit after you spent all kinds of non-returnable luxury goods and services. You might be stuck with this debt, but you can leverage options in Chapter 13 to make it work better for your financial situation.
Instead of outright discharging debt, Chapter 13 helps people reorganize it into a structured payment plan. The plan lasts three to five years, and the debt is either paid off or wiped out upon completion. The plan also covers all of your debt, so it could also be an effective way to deal with mortgage or auto loan arrears when you wish to avoid foreclosure or repossession.
If a debtor defaults on the Chapter 13 plan, however, the court may cancel it, and creditors can initiate legal actions against the debtor. Having legal support on your side, however, can help you create a realistic reorganization plan that’s fair to your financial situation and interests.
Consult with a Bankruptcy Lawyer to Learn More
Bankruptcy can be a great way to deal with overwhelming debt, but it may not be the best option for everyone in every situation. That’s why it’s essential that you consult with an experienced bankruptcy lawyer to learn more about your legal options. With guidance from a dedicated legal professional, you can pursue your options for debt relief with confidence.
If you want to explore how bankruptcy can help you, contact Nguyen Law Group today to request a consultation.