The best practice is to put away the credit card as soon as you consider filing for bankruptcy. Why? Because even though you’re allowed to charge necessary items in an emergency, you don’t want to go too far and find yourself accused of committing actual or presumptive fraud. Here’s how it works.

• Actual fraud. Once you realize that you can’t afford to pay for a purchase bought on credit—or don’t intend to pay the bill when it comes due—you open yourself up to an accusation of fraud. If you file for bankruptcy, and your creditor proves that you committed fraud, you’d likely be denied a discharge of the debt (you’d have to pay it). Worse yet, if the matter was egregious enough, you could find yourself facing criminal fraud charges. In bankruptcy court, obtaining money or property by fraud is punishable by fines up to $250,000, 20 years in prison, or both. (18 U.S.C. §§ 152, 1341, 1519, 3571 (2016).)
• Presumptive fraud. In bankruptcy, using a credit card to purchase luxury goods totaling $675 or more during the 90 days before filing for bankruptcy is presumptively fraudulent (as of April 1, 2016). “Presumptive fraud” means that you’ll automatically lose a case filed against you unless you can successfully dispute the charges. Luxury items include things that you don’t need to live. For instance, a new set of golf clubs, a snowboard, and jewelry would all be luxury items.
• Exception—necessary purchases. An exception exists, however. You can charge essential things, such as food, gasoline, or clothing from a discount store. For instance, buying wood or propane to heat your house during the winter shouldn’t be problematic. The same would hold true if you needed to charge car repairs to get to work.

Before making any credit card purchases shortly before bankruptcy, you should seek the advice of a local attorney. A lawyer in your area will understand how the local bankruptcy court responds to allegations of fraud. (For more information, see What Happens to Debt Resulting from Fraud in Bankruptcy?)

Bankruptcy works by breaking the contracts that you entered into when you borrowed money—at least many of them. What happens next depends on the type of chapter that you file.

Chapter 7 or “liquidation” bankruptcy is the faster of the two bankruptcy types. If you qualify (your income must be below certain limits), your dischargeable debt will get wiped out in approximately four to five months without the need to pay into a monthly repayment plan. You’re allowed to keep (exempt) property that you’ll need to live, such as household furnishings, clothing, and a modest car. The bankruptcy trustee—the individual responsible for administering your case—will sell any nonexempt property and distribute the proceeds to your creditors.

Chapter 7 bankruptcy tends to work best for:

• people who are caught up on a mortgage or car payment (unless they’re willing to surrender the property to the bank), and
• individuals with dischargeable debt, such as utility bills, credit card balances, medical bills, and payday (or other personal) loans.

Chapter 13 or “reorganization” bankruptcy is better suited for those people who cannot pass the means test (the qualifying test for Chapter 7 bankruptcy) or who have a significant amount of debt that won’t get wiped out in bankruptcy (nondischargeable debt). Typical examples of nondischargeable debt include domestic support obligations, such as spousal or child support, and past-due taxes.

In Chapter 13 bankruptcy, the filer pays all disposable income (the amount left over after paying reasonable living expenses) to the trustee for three to five years. In turn, the trustee pays the creditors. The balance of any dischargeable debt remaining after the completion of the plan gets wiped out. (For more in-depth information, read Chapter 13 Wage Earner Bankruptcy Basics.)

Plus, Chapter 13 has a mechanism that can help you keep a house or car that Chapter 7 doesn’t have. When you took out your car loan, you agreed to put up the car as collateral to guarantee the debt. As a result, if you fall behind on your payment, the lender gets to repossess (take back) the house or vehicle. This rule doesn’t change just because you file for bankruptcy, despite the common, yet erroneous belief that you can keep property without paying for it in bankruptcy (it’s not true).

However, a Chapter 13 bankruptcy can help you keep your house or vehicle if you’ve fallen behind on payments. You’ll have to continue making your monthly payments while catching up on the past due amount over three to five years (the length of your repayment plan).

(Learn more by reading Secured Claims in Chapter 13 Bankruptcy: Can I Catch Up on My House or Car Payment?)

Bankruptcy law has a soft spot for people who’ve been unfortunate enough to have paid on a car loan for a significant amount of time. If you’ve been paying on your vehicle for years and still owe more than what it’s worth, you might be able to “cramdown” the loan—pay the market value of the vehicle instead of your entire balance—in a Chapter 13 bankruptcy. Not only will you be able to keep the car, but you’ll get a break on the amount that you’ll have to pay back.

If you’ve paid on your loan for more than 910 days before filing for bankruptcy and the car isn’t worth what you owe, you can take advantage of a benefit of bankruptcy—the cramdown rule. Instead of paying the outstanding balance, you’ll repay the market value of the car only. In other words, the lender will only get what the car is worth.

Example. Over two and a half years after buying your car, you file for Chapter 13 bankruptcy. When you file, you owe $15,000, but the car is only worth $7,500. Instead of paying off the entire balance in your repayment plan, you’ll pay the actual value of $7,500, or half of what you owe.

A bankruptcy petition is an official form that you must fill out when you declare bankruptcy. If you're married and you file for bankruptcy, your spouse isn't required to file with you. You are free to file on your own, and, in some cases, it makes sense to do so. For instance, it would be illogical to damage a debt-free individual's credit with a bankruptcy filing-especially when the financially healthy spouse's strong credit score could come in handy if the couple needs to make a significant purchase in the future.

If both spouses have debt issues, however, they could file together in a joint petition—and filing a joint petition is likely a good idea. Why? Because it will save money. Not only do many attorneys charge the same flat fee for two spouses as for one, but you'll pay one filing fee, as well.

Keep in mind that everyone's financial situation is different. If you're not sure whether filing a joint bankruptcy petition is right for you, you should consult with a local bankruptcy attorney.

It’s perfectly acceptable for one spouse to file for bankruptcy, and in fact, in some cases, doing so makes sense. What will happen, however, will depend on the particular circumstances of the case.

If the married couple lives in the same household, the filing spouse must include the income of the non-filing spouse on the bankruptcy paperwork filed with the court. In a Chapter 7 bankruptcy, the information will determine whether the filing spouse’s income is low enough to pass the means test (the financial qualification test). As a result, a married couple making too much to qualify for Chapter 7 bankruptcy cannot get around the income requirements by filing separately.

If the couple is married, but each spouse lives in a different house (for instance, they might work in separate cities), the filer must include the income of both spouses in the means test calculations. However, because the filer can list the expenses of both households, the filing spouse will likely be in a better position to pass the means test.

If the couple is separated, the non-filing spouse’s income will not be included on the petition. The filing spouse should be prepared to present proof of the separated marital status, however.

It’s important to know that in each of the above scenarios, the non-filing spouse might need to sign a waiver that acknowledges that the filing spouse plans to use the couple’s exemption rights to protect property. (You’re allowed to exempt (keep) a certain amount of assets in bankruptcy.) By signing the waiver, the non-filing spouse agrees that the filing spouse can use the exemption even though it won’t be available if the non-filing spouse needs to file bankruptcy at a later date. (To learn more about protecting property in bankruptcy, read Keeping Property Using Bankruptcy Exemptions: You Don't Lose Everything.)

Not only do exemption laws vary from state-to-state, but a failure to understand the law could result in a loss of valuable property or future rights. To prevent an unwelcome surprise, you should seek the advice of a local bankruptcy attorney.

The process starts after you complete official bankruptcy paperwork and file it with the court. To meet your credit counseling course requirement, you’ll include a certificate of completion from an approved credit counseling provider. Also, you’ll pay a filing fee unless your income is less than 150% of the national poverty guidelines. If that’s the case, you can submit a fee waiver application, instead. If you don’t have the entire filing fee, you can request to pay in installments.

A good way to start preparing for your bankruptcy filing is by downloading the fillable petition and schedule forms. While reviewing the forms, you can make a list of all the information you’ll need to answer the questions. Next, you’ll gather together your financial documents, including the following:

• two most recent tax returns
• bank, retirement, and investment statements
• credit card, utility bill, and other debt statements, and
• paycheck stubs, or, if you run a business, profit and loss statements.

For a more detailed list, read Bankruptcy: Preparing to Meet with a Lawyer. You can find the official forms on the U.S. Court website.

While you might be able to complete most of the paperwork on your own (if not all), some aspects can be challenging. For instance, if you file for Chapter 7 bankruptcy, you’ll need to prove that you’re qualified to do so by filling out lengthy means test forms. Filing for Chapter 13 bankruptcy requires you to complete another complicated task—preparing a workable repayment plan (and showing that you have enough income to support it).

Also, it’s essential to understand how bankruptcy will affect your property before you file. Making a mistake on your petition can lead to an irreversible loss of an asset, and a sizeable loss might completely overshadow any debt savings you would have received otherwise. If you’re not sure how bankruptcy works or aren’t comfortable looking up the law, it’s advisable that you consult with a bankruptcy attorney.

To qualify for bankruptcy relief, you must first take a mandatory course from a nonprofit credit counseling agency within 180-days before filing your petition. The credit counseling course is designed to help you come up with an alternate debt payment strategy that will allow you to avoid bankruptcy altogether.

After completing the course, the counseling organization will give you a certificate that you’ll file along with your other bankruptcy paperwork. You’ll also receive a copy of any repayment plan you developed. You aren’t obligated to follow the recommendations, however.

Most providers have classes online and over the phone, and you’ll likely complete the course within one to two hours. You can find a course approved by your local bankruptcy court by visiting the U.S. Trustee’s website.

You’ll take two classes when you file for bankruptcy: The first is a credit counseling class, and the second is debtor education training. Here is a brief explanation of each course.

Filing for bankruptcy isn’t for everyone, and it has a lasting effect on your credit. So before you file, you must explore alternative options. The first course—the pre-filing credit counseling course—helps you do just that.

In the course, you’ll review the type of debt you have, your income, and debt repayment strategies. If after completing the class it appears that bankruptcy is a good match, you’ll submit your completion certificate along with your bankruptcy petition and schedules (the official bankruptcy paperwork) to the court.

The second class—the post-filing debtor education course—teaches sound financial management techniques that will help you remain solvent after your bankruptcy case. You can expect topics to explore the following areas:

• establishing a budget
• saving for unexpected expenses
• purchasing insurance
• building a retirement account, and
• avoiding financial scams.

You’ll take the debtor education course after you file for bankruptcy. If you filed for Chapter 7 bankruptcy, it’s due within 60 days of the date first set for the 341 meeting of creditors. (It’s a good idea to complete it soon after filing so that you don’t forget to take it later.) In a Chapter 13 bankruptcy, you'll want to finish the course before making your last monthly repayment installment.