Note: Evan’s story is a fictional scenario presented to help illustrate how Chapter 7 bankruptcy affects what you can and can’t buy.
What is Chapter 7 bankruptcy?
First, let’s talk about what Chapter 7 bankruptcy is. Chapter 7 bankruptcy is the most common type of bankruptcy for consumers. It is a legal process that helps individuals or businesses eliminate most of their debts by selling non-exempt assets to pay creditors. Let’s break down what this means.
Your first question might be, “What are non-exempt assets?” Examples of these include:
- Luxury items
- Expensive vehicles
- High-priced collectibles
- Investments that are not for retirement
- Property that is not your primary residence
Your second question might be, “Who are creditors?”
Creditors are people or entities who have a claim against a debtor that was made before the debtor filed for bankruptcy. Creditors can be paid in a number of ways, and they can also file a proof of claim to register their claim and indicate how much they are owed.
Other names for Chapter 7 bankruptcy are “liquidation bankruptcy” and “straight bankruptcy.” Liquidation refers to the process of converting something of value into something of immediate cash value.
For example, if you have money tied up in the stock market, selling that stock for cash withdrawal means the money is now liquid. Chapter 7 bankruptcy is also referred to as “liquidation bankruptcy” because you must liquidate non-exempt property to repay a small portion of your debts.
Your third question might be, “How does the process work?” In Chapter 7 bankruptcy, a court-appointed trustee oversees the process of liquidating non-exempt assets to pay off creditors. Debtors can keep exempt assets.
Now that we’ve explained what Chapter 7 bankruptcy is, let’s get into the good stuff: what you can and can’t buy.
What can I purchase?
While filing for Chapter 7 bankruptcy, you can generally only purchase the following basics, as long as they are considered necessary:
- Food
- Utilities
- Clothing
- Groceries
- Medication
- Life insurance
- Transportation
- Household goods
- Government benefits
You may only buy these items if they fall within your state’s exemption limits. Exemptions also typically have dollar ceilings on them, meaning they are only exempt up to a certain value. In Chapter 7 bankruptcy, every state has different rules regarding property exemptions.
In the state of Arkansas, you can choose between state and federal exemptions. In Oklahoma, you must abide by the state’s exemptions. This article contains a list of federal and state exceptions in Arkansas.
A bankruptcy attorney can help you determine what you can and can’t have. In addition to consulting with a lawyer, you will want to keep your receipts. This ensures that the trustee can see that the items you bought are basic essentials. Document all purchases, especially if you’re spending money from your savings account or a recent tax fund.
What can I not purchase?
You may not purchase excessive items such as:
- a second car
- designer items
- vacation homes
- high-end jewelry
- stocks and bonds
Discretionary spending when it comes to non-essentials is off the table. Basically, anything you want that doesn’t meet a need is off limits. There may be some gray area depending on the monetary value of the item.
For example, a watch your father gave you may be considered unnecessary, but to you it holds sentimental value. This may be up for discussion depending on how much money the watch is worth and whether or not it is considered exempt by your state. When filing for Chapter 7 bankruptcy, avoid pre-paying large bills without first consulting with a lawyer. Steer clear of making any large purchases that significantly exceed your usual living expenses.
Although there are many desirable items you can’t buy, you are a human being with rights. The courts can’t take that away from you. You deserve to have your basic needs met while still abiding by the law. An attorney can make sure you know what you are and aren’t allowed to have in your possession.
Evan’s Story
Evan lost his job due to getting COVID-19, and he was no longer able to pay his bills. He filed for Chapter 7 bankruptcy, after which he had questions about what he can and can’t purchase.
There were two things he wanted to buy: the lakehouse that belonged to his grandfather (where he could peacefully recover from his long-haul symptoms), and a test from the COVID clinic to check his IL-6 levels.
Because the lakehouse was not a basic essential, his lawyer denied this request. However, the blood test was deemed medically necessary. His lawyer granted him permission to buy the test and recover from Long COVID in the home he already had.
How we can help
Our lawyers can teach you about property exemptions so you can make informed decisions about your purchases. We are here to protect your rights and make sure you’re complying with the law to ensure smooth payback of your debts.
Here at The Law Offices of Craig L. Cook, we have over 40 years of combined experience serving clients in need of a bankruptcy lawyer. We understand money challenges can be scary, and the laws involving bankruptcy can be confusing. Your financial security and peace of mind are of utmost importance to us. Everyone deserves to get the help they need in repaying their debts. Book a free consultation with us if you have questions about filing for Chapter 7 bankruptcy. We are here to help!
