By Charlotte Triggs
June 28, 2010 12:00 PM

When Teresa Giudice began planning her $1.7 million dream home, she thought big. “It was always going to be a blowout,” the Real Housewives of New Jersey star told PEOPLE last summer as she showed off the recently completed 10,000-sq.-ft., 16-room Towaco, N.J., mansion, which boasts a wine room, a jacuzzi in the bathroom, a lavish fountain and maids’ quarters. Her goal? To throw some killer parties at Casa Giudice. But as the stay-at-home mom poured hundreds of thousands of dollars into the onyx-, marble- and granite-filled construction, “I realized I’m not into having lots of people here,” she said. “I worked so hard on the house, I want to keep it nice!”

These days her main concern is simply keeping the house at all. On Oct. 29, 2009, Teresa, 38, and her husband, Joe, 40, filed for bankruptcy, listing a staggering $10.98 million in debt, a combination of multiple mortgages on their properties, unpaid balances on nine credit cards, materials and construction services-even IVF treatments that had gone into collection.

Teresa and Joe blame a downturn in the economy, which took their annual income from $575,000 in 2008 to just $79,000-including Teresa’s income from the Bravo reality show-in 2009. (They received $120,000 in support from family members.) Joe, who owned four apartment buildings in East Orange, N.J., says he suddenly found himself struggling to collect rent from down-on-their-luck tenants. “Bottom line is, when the market crashed, everything crashed,” he says. “If I’d sold those buildings at the height of the market, I would have made a lot of money.” Undeterred, he says the couple filed for bankruptcy “to get rid of the dead weight so you can move on.”

But now critics-and creditors-are coming forward to blame the reality stars’ over-the-top spending habits and risky business decisions for their predicament. “He did have money at one time,” says Jon Fellgraff, an architect who, according to bankruptcy documents, is owed $7,000 for his services. “But their spending got out of control, and they thought they could keep replenishing it. That didn’t happen, so they just stopped paying their bills. They blew all their money.” Adds Bob Kaslander, owner of Excelsior Lumber, who is owed $91,000: “These are not innocent people who got caught in circumstances beyond their control. They charged everything. Then they file for bankruptcy, so they don’t have to pay.”

An attorney for the couple, Jim Kridel, admits those who are owed are in for a wait. “The whole point is that bankruptcy forces you not to treat creditors preferentially,” says Kridel, meaning that the Giudices can’t pay one creditor at a time. (Instead, assets surrendered to a trustee are liquidated and proceeds are divided equally.)

Fans of the show may be shocked that Teresa, who earned a reputation as a big spender on Housewives, no longer had the cash to back up her flash. During the first season, the mom of four-daughters Gia, 9, Gabriella, 5, Milania, 4, and Audriana, 9 months-boasted that her husband “is very successful and lets me spend money.” And plenty of it. Joe ponied up more than $8,000 on a breast augmentation for his wife, and she showed her credit cards no mercy. Meital Benaroya, owner of the high-end Englewood, N.J., boutique Reve, where Teresa continues to shop, says her friend’s love of luxury is undeniable. “Teresa is a woman of good taste,” she explains. “And good taste doesn’t come cheap.”

Joe was well-aware of his wife’s burning urge to shop-but says the expenses were manageable during cash-flush times. “For the nine years we’ve been married, she had a credit-card bill, and I would pay it. She might spend $10,000 on stupid things, but I didn’t question it-and it always got paid.”

Teresa also ploughed considerable funds into daughter Gia’s modeling and acting career-hiring photographers and acting and dialect coaches. “Parents can spend a few thousand dollars on acting classes alone,” says Gia’s manager Maria DeSantis of Xist Model and Talent in Caldwell, N.J. Nevertheless, Teresa still insists, “we were living within our means.”

While Teresa’s personal shopping habit ($695 Christian Louboutins, $1,400 cocktail dresses) helped pile up more than $80,000 of credit-card debt, building and furnishing the family’s mansion was the most intense drain on the family finances. “She couldn’t make up her mind about the plans,” says their former architect Fellgraff. “She went on flights of fancy that were totally impossible to execute. A huge kitchen, fancy stairways. She wanted all the most luxurious features. It was unrealistic. I don’t think she had any concept of the finances.”

As they sank money into building the house, Teresa shopped for luxurious furnishings. In one Housewives episode, she dropped $120,360-cash-on furniture for a single room. “That was just for the show, and I would never do that again,” Teresa insists. (Both the Giudices and the store, Unique Furniture and Design, were subsequently audited by the IRS. A store source says Teresa normally wrote checks and had opened lines of credit in her parents’ names to pay for her purchases.)

Teresa began showing signs of financial strain last year when she stopped decorating the home with four rooms complete. “She still hadn’t even done the dining room,” says the source. By then Joe was busy fighting off debt associated with his real estate ventures; Teresa didn’t realize the extent of their money problems. “She knows nothing about the finances. She hates it all,” says Joe.

A successful businessman with multiple small companies-including pizzerias, laundromats and a stucco and stone distribution service-Joe had invested in several inner-city apartment buildings, becoming vulnerable to the volatile downturn in the market. But sources tell PEOPLE the market alone wasn’t to blame for their increasingly dire money problems. “They got money from me that was supposed to go to one of his apartment buildings, but I found out they spent it on their house,” says Joe’s former partner Joe Mastropole, who is embroiled in a separate lawsuit with Joe Giudice; bankruptcy documents show the Giudices owe him $586,000. “He wanted to collect rent and not pay the bills. He raked in $150,000 a month, without paying the bills, utilities or taxes on the buildings.” Joe Giudice’s attorney Jim Kridel explains that while it became impossible to afford the mortgage payments as tenants left the building en masse, “whatever money he did collect in rent, he was putting back into fixing the buildings.”

That’s one claim that has been disputed. Tenant Ruby Persha sued Joe after falling down stairs that she said had been left in disrepair; she won a $129,826 settlement by default when Joe didn’t show up to court. The balance remained unpaid at the time of the bankruptcy filing. “I haven’t seen a cent,” she says, adding that Joe often let the city cut off water and even heating oil at times for lack of payment. “He did everyone here extremely dirty.”

Joe says he never heard of the incident until court papers were filed, and that his buildings all had active superintendents-in fact he even spruced up the buildings himself. “These were crack houses. They were disgusting!” Teresa says, adding that once her husband fixed them up, “they were absolutely gorgeous.” As for utilities being out of commission, Joe acknowledges that “maybe that would happen, but they never went a whole night without heat or anything. They’re exaggerating.”

When they filed for bankruptcy last fall, Teresa and Joe surrendered two properties, two cars and other personal property in order to pay back creditors as required, but their main residence remains safe for now. “If they can’t afford it, they’ll surrender it at a later date,” says attorney Kridel. (The home was briefly listed for $3.99 million before Joe pulled it from the market on June 11.)

As for their lifestyle today, the bankruptcy only affects the assets they held prior to filing, so the couple are free to spend any newly earned cash as they please. Teresa’s cookbook Skinny Italian is on the bestseller list (a second book is in the works), and Joe has started a new business. “You gotta spend money. You gotta buy things,” says Joe. But Teresa insists they’re being careful. “I don’t spend money that I don’t have,” she says heatedly. “Believe me, going forward, I’ll show that.”