One of the key disclosures in a bankruptcy petition, whether it be for a chapter 7 or a chapter 13, is your budget. What are your living expenses? This may seem simple, but it isn't always. Many people that I help with filing give me a list of expenses that are accurate, but could cause them problems in their bankruptcies.
How Can Your Living Expenses Get You Into Trouble?
A debtor filing a bankruptcy can only incur going forward monthly expenses "reasonable and necessary" for his or her support and that of dependents. The courts understand that it costs you money to live, but they also know that you owe creditors a lot of money that you should pay back, even in part, if you can.
But what is an "unreasonable amount"? How is that determined? To some extent, as Justice Scalia said of pornography, you know it when you see it. Some amounts just jump out at you, and the further away that you get from the basics like food and shelter, the more scrutiny those expenses tend to get.
An Object Lesson in Unreasonable Expenses
I reported a few years back about Mel Gibson's ex-wife Oksana Grigorieva who, after a bitter and contentious divorce, filed a chapter 13 bankruptcy. She had incurred over $250,000 in legal bills from the divorce, along with $51,000 in credit card debt she had run up just before filing, bringing her overall debt load to $438,000. She claims to have just $10 in cash to her name, and $48,000 overall in assets.
Her plan proposes that she pays $372 per month for five years based on her disposable income, claiming that that is all that she can afford, despite receiving $22,500 per month in child support. Not so fast, said the trustee. Let's take a look at those expenses!
The trustee assigned to her case declared many of Oksana's monthly expenses as frivolous, including:
- $2,000 a month in home maintenance
- $750 in electricity and heating
- $300 cell phone
- $300 personal care
- $90 a month for gopher patrol (Gopher Patrol? Seriously?)
As I said, with this kind of debt, a person can be expected to make some sacrifices and cut back on the expenditures, especially when they are higher than normal or just unnecessary. The sudden $51,000 in credit card debt was also not lost on said trustee, which probably has him scrutinizing the case even more!
Trustees Try to Determine Ability to Pay Debt
The purpose of this scrutiny on reasonable expenses is to determine your ability to pay back creditors, and to what extent. If you are in a chapter 7, you are saying that you can't pay any of it back at all. If you are in a chapter 13, then you are saying you are putting forth how much you can pay back over what period of time (with a 5 year maximum).
Ms. Grigorieva's plan proposed to pay creditors 5 cents on the dollar. But just by eliminating half of the utilities and cell phone, two thirds of the personal care expense, three quarters of the home maintenance, and ALL of the gopher patrol (a savings of $2,315 per month), she could increase her payment to creditors by 32%.
Anyone considering filing bankruptcy needs to look carefully at their monthly expenses to make sure that they are reasonable. If they do, the trustee will be more likely to accept your proposed repayment plan (in a chapter 13) or your complete inability to repay (in a chapter 7), and your filing will have smoother sailing.
Best to Have a Lawyer Help You with This
A bankruptcy filing is complicated, and can be fraught with traps for the unwary beyond what is discussed here. You need an experienced professional by your side to guide you through the process.
If you live in Burlington, Camden, Gloucester, Salem or Cumberland County and are considering filing bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.
If you have more questions about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.
If you are looking for more information on how bankruptcy might help you with your divorce, then you should download my free book, Top Questions Divorcing Couples Ask About NJ Bankruptcy.
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