In both Chapter 7 and Chapter 13 bankruptcy cases, a debtor is expected to list their regular monthly income and expenses. While the bankruptcy court does expect individual debtors to “tighten their belts” when filing, the courts also understand that people need to spend money to exist. Thus, individual debtors are required to inform the court of their monthly expenses. The only requirement for these monthly expenses are that they must be “reasonable.” But what is reasonable in the eyes of the court? Are there limits to what a person can spend before they cross the threshold into an unreasonable expense?
A chapter 13 plan is based on the higher of the following: either (1) the debtor’s disposable income or (2) the non-exempt equity a debtor has in their assets. The non-exempt equity determines the amount a debtor would receive in a theoretical sale of their property, minus any bankruptcy exemptions. The debtor’s disposable income is determined by finding the difference between the debtor’s income and monthly reasonable expenses. Here, we will explain how a court finds an expense reasonable.
Expense Categories
In a Chapter 7 or Chapter 13 petition, the bankruptcy court provides specific expenses that it expects people to incur. These expenses are calculated on a month-to-month basis. This includes the following:
Rent or home ownership expense – this includes the monthly payment a debtor needs to make to continue to live at their current home;
- Real estate taxes;
- Property, homeowner’s, or renter’s insurance;
- Home maintenance, repair, and upkeep expenses;
- Homeowner’s association or condominium dues;
- Payments to all utilities including gas, heat, electric, phone and internet;
- Food and housekeeping supplies;
- Childcare and children’s education costs;
- Clothing, laundry, and dry cleaning;
- Personal care products and services;
- Medical and Dental Expenses;
- Transportation – this includes any maintenance and fuel for the vehicle;
- Entertainment and recreation;
- Charitable contributions;
- Insurance including health, life, or vehicle insurance;
- Taxes due;
- Installments or lease payments, including car payments or solar panel payments;
- Payments of alimony or child support;
- Payments made to those who do not live with the debtor.
The expense categories may seem very niche in some cases, but the purpose is to allow a debtor to account for all of their regular monthly expenses. The bankruptcy courts want people to continue to buy food for their families, and to be able to continue to get to and from work. The purpose of bankruptcy is to get the debtor a clean slate, not to punish them for financial missteps. As long as these expenses are reasonable, the court will allow them.
There is one final category that says “Other.” This allows a debtor some leniency in terms of categories, to include monthly expenses that may not be included in the above. Often, these include monthly payments for timeshares, student loan repayments, or debts owed by the debtor’s non-filing spouse. The purpose of the expenses in a bankruptcy is to account for anything that might prevent a debtor from paying their obligations in full.
Reasonableness
With the categories of expenses, what is considered reasonable? Well, like many legal answers, it depends. A family of four with a food bill of $1,000 per month would likely be reasonable. A single person with an entertainment expense of $1,000 per month would likely not. It all comes down to what the average person spends on the same expense.
On the chapter 13 means test, the debtor must reconcile their monthly expenses with the IRS national standards for their region. The amounts allowed by the IRS increase as the number of people in a household increases. Generally, as long as the debtor’s monthly expenses are near where the IRS standards are, the court and trustee will not have an issue with them. The standards are exactly that, standards. While they may be a good benchmark, they are not necessarily the final say in what is allowed or disallowed as an expense.
As long as the expenses are within reason, they will normally be allowed. The trustee and the bankruptcy court do not want to see a debtor seeking to discharge their debts, while simultaneously paying thousands of dollars per month on luxurious expenses. Daycare is a much higher expense than many realize, and is often an unavoidable expense with the amount of households where both parents work. On the other hand, there is no reason a debtor should be paying private school tuition for their child if an appropriate public school is available. The main point is the creditors are going to be suffering a loss when a debtor gets discharged, and the purpose of the bankruptcy code is to make that loss as fair as possible.
Questions about reasonable expenses in a bankruptcy case? If you are considering filing for bankruptcy, contact an attorney at Scura, Wigfield, Heyer, Stevens & Cammarota LLP today.
