The Short Answer
Yes, you can still file bankruptcy after a recent financed purchase — but timing and intent matter a great deal. Purchases made within 90 days before filing may be scrutinized as potentially fraudulent, and depending on the amount or circumstances, creditors or the court may look even further back. The key factors are whether the purchase was a necessity, whether it was reasonable, and how it was financed. Talking with a bankruptcy attorney before you file is critical if you've made any significant purchases recently.
If you recently financed a purchase, e.g., a home, car, furniture or appliance, you should definitely speak with your attorney. Any purchase made within the 90 days prior to filing bankruptcy may be considered a fraudulent transaction. Depending on the amount of the purchase or how the funds were obtained to finance the purchase, the Court and/or your creditors could argue there was fraudulent intent even beyond the 90 days.
There are several things the Court may consider when someone purchases an asset shortly before filing bankruptcy:
Was the purchase for a necessity? If you financed a vehicle because your previous car had a major mechanical problem and needed costly repairs, you may be able to explain why it was necessary to make the purchase shortly before filing bankruptcy. The same may be true if an appliance, e.g. your refrigerator, stopped working.
Was the type of purchase reasonable? Did you purchase a used 2006 Honda Odyssey or did you purchase a new 2011 Hummer? You needed a vehicle large enough for your family of five, but you must use the reasonable test. The 2006 Honda will probably serve your family’s needs and be a bit more economical than the 2011 Hummer.
Was the financing completed with a legal process? This is best demonstrated with two examples.
If you went to your local dealership and obtained financing, you will probably have no problems with the financing following all of the legal steps. The only question for this type of financing is whether the dealership and their finance company should have known you were insolvent, bankrupt, at the time they provided the loan to you. This is an issue that could be played out in the bankruptcy court, but in most cases is not an issue.
If your brother-in-law gave you a $10,000 loan to purchase that used car and did not put a lien on the title of the vehicle, you and your brother-in-law will have some concerns and issues after you file bankruptcy. Without a valid lien on the title, the loan is not considered a “secured” loan but an “unsecured” loan. In other words, your brother-in-law cannot legally repossess the vehicle if you fail to make payments to him. In your bankruptcy, he would be treated like a credit card or medical bill and paid nothing or only a percentage of the amount owed to him depending on the type of bankruptcy you file. In addition, you may not be able to fully protect the equity in the vehicle. In that situation, the bankruptcy Trustee could actually sell the car and use the proceeds to pay your creditors. Needless to say, you or your brother-in-law will be happy with this outcome.
How was the asset purchased? If you recently purchased an asset and charged it on a credit card, you may be required to repay the debt. If you used a credit card to purchase that $10,000 car with hopes of discharging or eliminating the debt in bankruptcy, you should think again. Any purchase on a credit card will be reviewed, but any large purchase will most certainly be scrutinized by the credit card company and their attorney. You can expect a lawsuit in bankruptcy, also known as an adversary proceeding, to be filed against you by the credit card company. They will argue this debt should not be eliminated in bankruptcy and they will most likely win that argument. Similarly, if you decided to remodel your home and purchase new stainless steel appliances on your credit card, that debt will most likely not be eliminated. You may even find that the credit card used to purchase those items is considered a secured creditor.
Was the purchase used to protect an otherwise unprotected asset in bankruptcy? This approach is most often taken by someone who thinks he or she understands the implications of filing bankruptcy. Again, an example is the best way to explain. A person had $20,000 in stock that could not be protected in bankruptcy. Rather than lose the stock, the person decided to cash out the stock and use it as a down payment on a new home. Now the $20,000 of stock is invested in the home. It is no longer an unprotected asset, since the person can use his homestead exemption, currently $35,000 for an individual and $70,000 for a couple in North Carolina, to protect the equity in his home. But not so fast, the person must disclose the sale of an asset within two years of the bankruptcy filing. Failure to disclose the sale of the stock within the two years would most likely be discovered on review of the person’s tax returns. Needless to say, the Court would almost certainly see this as an attempt to defraud or perjury if it were not listed on the bankruptcy filing.
Not all purchases financed shortly before filing bankruptcy are problematic, some are for legitimate reasons. However, you should expect any purchases financed within three to six months of filing bankruptcy to be scrutinized. This timeframe could be for even longer if the assets purchased were for large dollar amounts or items not necessarily considered a necessity. You should obviously discuss any recent purchases with your attorney.
Key Takeaways
- Purchases made within 90 days of filing bankruptcy can be reviewed by the court and creditors for signs of fraudulent intent, and larger or unusual purchases may be examined even beyond that window.
- A financed purchase is more defensible if it was a genuine necessity — like replacing a broken-down vehicle or a failed appliance — and the item bought was reasonably priced for your situation.
- Using a credit card to finance a large purchase shortly before filing is one of the riskiest moves you can make; the creditor will likely file an adversary proceeding to block that debt from being discharged.
- Informal loans from family members that aren't secured by a proper lien on the asset can create serious problems in bankruptcy — for both you and the family member who lent you the money.
- Converting a non-exempt asset into an exempt one right before filing (such as cashing out stocks to pay down a mortgage) can be treated as bankruptcy fraud, even if it seems like smart planning.
- Any significant financial transaction made in anticipation of filing bankruptcy should be discussed with your attorney before you file — not after.
Attorney Insight
The mistake I see most often is someone trying to be clever — cashing out a non-exempt asset like stocks or a savings account right before filing and using the money to pay down their mortgage or buy something they think is protected. What they don't realize is that NC trustees are experienced at spotting these transactions, and what feels like smart planning can be treated as fraud. I've also seen family loan situations go badly sideways: a brother-in-law lends money without putting a lien on the title, and the bankruptcy trustee ends up treating that loan as unsecured debt — which means the family member gets paid little or nothing, and the car may still be at risk. These are conversations we need to have before you file, not after the paperwork is already in front of the court.
