Can you spend money during a Chapter 7 bankruptcy?

With credit card debt sitting at record levels and more Americans struggling under the weight of high-rate balances, bankruptcy filings have become an increasingly common consideration for borrowers who need financial relief. And, the appeal is understandable: Chapter 7 bankruptcy can eliminate most unsecured debts in as little as a few months, offering a fresh start for those who've exhausted other options. Still, the bankruptcy process comes with strict financial oversight that filers don't always anticipate.

That can greatly complicate things in terms of your finances. You still have living expenses to worry about, after all, and will need to find ways to pay for housing, buy groceries, keep the lights on and handle any unexpected expenses that inevitably arise. However, your spending during this period falls under the scrutiny of a court-appointed bankruptcy trustee who has legal authority to examine your financial decisions. And, any missteps you make with your money can derail your case.

As a result, it's important to understand what happens with your money during a Chapter 7 bankruptcy. So, can you spend money after filing this type of bankruptcy — and if so, what are the restrictions?

Find out what types of debt relief you could qualify for here.

Can you spend money during a Chapter 7 bankruptcy?

The short answer is yes, you can spend money during a Chapter 7 bankruptcy, but there are significant limitations. Any income you earn after filing your bankruptcy petition is generally yours to keep and spend on reasonable living expenses. This includes your salary, wages, and other post-petition earnings. However, reasonable is the key word here. The bankruptcy trustee will be monitoring your financial activity, and you're expected to spend the money on necessities rather than luxuries.

Reasonable expenses typically include housing payments, utilities, groceries, transportation costs for work, medical care, insurance premiums and other basic living needs. You can continue paying for your children's essential needs, including school supplies and reasonable extracurricular activities. If your car breaks down, you can pay for repairs. If you need new work clothes because your old ones are worn out, that's generally acceptable.

What you cannot do is make large discretionary purchases or dispose of assets in ways that could be seen as hiding money from creditors. For example, buying a new car, taking a vacation, making significant home improvements or purchasing luxury items will likely trigger questions from your trustee. These types of expenditures suggest you have disposable income that could potentially be used to pay creditors, which contradicts the financial distress that qualifies you for Chapter 7 relief in the first place.

You also cannot pay back friends or family members for loans they gave you before bankruptcy, as this could be considered preferential treatment of certain creditors. Similarly, you shouldn't transfer money or assets to others in an attempt to shield them from the bankruptcy estate. The trustee can reverse these transactions and pursue those assets.

In other words, your spending should reflect the financial situation you presented in your bankruptcy petition. If you claimed you couldn't afford to pay your debts, then suddenly spending thousands on non-essentials during your case will appear contradictory and potentially fraudulent. Most trustees review bank statements during the bankruptcy process, so while you can spend money after filing Chapter 7, maintaining transparency and reasonableness in your spending is essential.

Learn more about the bankruptcy alternatives available to you now.

Should you consider the debt relief alternatives before filing?

Before committing to Chapter 7 bankruptcy and its spending restrictions, it's generally worth evaluating whether any of the other debt relief options you have might better suit your situation. Bankruptcy remains on your credit report for up to 10 years, after all, and can affect everything from rental applications to job opportunities in certain industries, so it typically shouldn't be your first move if other solutions are viable.

One option you have is debt settlement, which allows you to negotiate with your creditors to try to pay less than you owe, typically in a lump sum. While your credit score will often take a hit during the process, it's typically less severe and shorter-lasting than bankruptcy. This option works best, though, if you have some ability to save money but can't keep up with minimum payments on multiple high-rate accounts.

Working with a credit counselor on debt management is another alternative to consider, as this route allows you to consolidate your unsecured debts into one monthly payment, typically with reduced interest rates and fees that are negotiated by the counseling agency. You still have to pay back the full amount owed, but you do so on more manageable terms, and you avoid the legal process and restrictions of bankruptcy entirely. This approach requires you to have a steady income and commit to a multi-year repayment plan, but you maintain more control over your finances during the process.

The bottom line

Spending during Chapter 7 bankruptcy is permitted, but it must be limited to reasonable, necessary living expenses. Your post-filing income still belongs to you, but the bankruptcy trustee will scrutinize how you use it to ensure you're not hiding assets or living beyond the means you claimed when filing. 

So, be sure to stick to essentials, avoid luxury purchases and maintain the financial discipline that demonstrates your genuine need for bankruptcy protection. And, if the spending limitations seem too restrictive for your situation, exploring debt relief alternatives before filing could be worth it, as doing so can provide a more flexible path to financial recovery.