Filing Bankruptcy? Know Thy Expenses!

If you’re filing bankruptcy, you’ll need to know your monthly expenses–food, clothing, transportation, medical–you name it. And you need to help your attorney know those expenses, too.

Accurately budgeting for expenses is extremely important. Expenses can determine (1) whether you’ll file Chapter 7 or Chapter 13 and (2), if you file Chapter 13, how much your payments will be–generally for five years.

Don’t give your bankruptcy attorney a list of crap

When I review most clients’ expenses, I see a sloppy, ill-prepared list of expenses which usually makes no sense and looks like the client spent about ten minutes completing the form. It’s not that my clients don’t know it’s important, either. On the top that page on my client questionnaire, it says, “THIS SECTION IS VERY IMPORTANT. IT CAN DETERMINE WHETHER YOU ARE ELIGIBLE FOR A CHAPTER 7 OR CHAPTER 13 BANKRUPTCY. PLEASE MAKE SURE TO LIST ALL YOUR EXPENSES, EVEN ONES WHICH DO NOT FALL WITHIN THESE CATEGORIES.” Still, after this not-so-subtle reminder of how “very important” this is, I usually get a half-hearted attempt at listing expenses. In a nutshell, I get a list of crap.

Know Thyself!

A smart guy named Socrates once said, “Know Thyself.” Filing bankruptcy is all about that. You and your bankruptcy attorney need to know everything about your finances–assets, debts, income, expenses–everything. And you most certainly need to know what your expenses are.

I recently had clients understate their medical expenses. The means test defaults to $60 per person for out-of-pocket medical costs. That’s probably a good guess, but it’s just that, a guess. On the day the clients came in to sign their bankruptcy, and after an hour or two working on their budget, I met with them to go over their Chapter 13 plan and schedules. Finally, it came out: “Our medical expenses are much higher than that!”  But the clients, despite having had a month or so to (1) fill out the questionnaire accurately and (2) address this issue with me and my paralegal, still had not spent any time on accurately determining their out-of-pocket medical expenses.  And their medical expenses were significantly higher than $60 per person.

Do you want to flush $6,000 down the toilet? Do you want to be in bankruptcy for five years instead of  five months?

That’s what you’re doing if you understate your expenses by $100 and file Chapter 13 ($100 times 60 months). It could also mean the difference between being in a Chapter 7 bankruptcy for five months or in Chapter 13 for five years. Pretty bad idea, right? Then spend some time on accurately determining your expenses!