Creating a household budget can be a highly useful step to take in preparation for filing a bankruptcy in Michigan. Alternatively, it can also be a useful means of avoiding the need to file bankruptcy—if your circumstances allow.
If proceeding with a Chapter 7 or Chapter 13 bankruptcy, a realistic household budget, calculated even prior to meeting with a Michigan bankruptcy attorney, will help your lawyer to give you the best forecast of success and potential costs possible.
A good household budget will help you, most importantly, understand your own financial condition. Simply understanding where you stand, financially, can relieve the stress and fear that a lack of knowing brings.
Yes, filing for bankruptcy can be a difficult and overwhelming experience for those of us in Metro Detroit. Whether your financial hardship has been caused by job loss, burdensome medical bills, tax issues, mortgage payment issues, or even identity theft or fraud, however, a Chapter 7 or Chapter 13 bankruptcy can be the most effective means of dealing with such hardship.
In this Article, we will discuss the household budget as a tool for facilitating freedom from debt and collections.
We will also, in particular, discuss the role that the household budget you create prior to filing bankruptcy will also be used by your Michigan bankruptcy attorney in your bankruptcy petition schedules and documentation.
First, how do you make a budget to begin with?
Step 1: Determine Your Income
The first step in creating a household budget is to determine your income. Not just yours but your spouse’s as well. Depending on their ability to contribute, any income provided by adult children, in-laws, or other wage-earners residing under your roof should also be determined.
But what’s income? Just the paycheck from your actual day-job?
For bankruptcy purposes, no. (Probably also not for IRS-related or other purposes, but we’ll stick to bankruptcy.)
This includes all sources of income, such as your salary, bonuses, and any other income streams you may have. Including cash-under-the-table or “handyman”-type jobs, business or self-employment income, stock distributions, interest and royalty payments, and anything else that injects money in any form into your household.
Once you have a clear understanding of your income, you can use it as a starting point to create your budget.
Step 2: List Your Expenses
Next, list all of your expenses. Don’t overthink this or be shy. Initially, list everything that your household spends money on every month. This includes things like clothing that you may not expend funds for every, single month.
It does not include your debts. Just your household expenses. (However, do include car payments and mortgage or rent payments.)
For “sporadic” but regular expenses such as clothing or medical expenses, think about how much you spend out of pocket annually and then divide that by 12 months. (We are calculating a monthly budget here)
That said, include obvious monthly bills such as rent or mortgage payments, utilities, car payments, insurance, and all other fixed expenses. Include monthly average amounts for discretionary expenses, including classes, educational activities for your kids, recreation, groceries, and even alcohol, tobacco, and other such expenditures.
Don’t leave anything out. Resist the urge to feel “judged” while doing this. No one is watching you. At least not until you visit a bankruptcy attorney. Be realistic, even if you, privately, feel that you’ve been over-spending or blowing money on silly things.
You need to understand where your money has been going before proceeding to Step 3, below.
Step 3: Identify Areas to Cut Back
After you have listed all of your expenses, the next step is to identify those which are, strictly speaking, unnecessary.
These would include expenses such as eating out, subscription services, or luxury items. These would also include “hard choice” expenses such as private school for your children or hobbies or that Corvette you bought when you turned 50.
Remember: You haven’t filed for bankruptcy yet. You’re creating this budget preliminarily. It’s’ for your eyes only!
However, you should expect, if you do file for bankruptcy, that luxury-level or unnecessary expenses will be scrutinized. In fact, you should expect to be required to delete these from the version of this budget that ends up in your bankruptcy petition schedules.
But you’re not there yet. Your bankruptcy attorney will advise you as to any specific expenses that “won’t fly” in a Chapter 7 or Chapter 13 bankruptcy. This is discussed further below.
For now, it’s important to be realistic and honest with yourself about what expenses truly don’t represent a household necessity.
Step 4: Do the Math
After itemizing all sources of income (A) and all expenses (B), total both columns up and subtract B from A.
The resulting number will be either positive or negative. It may be greatly positive, which is good news, or greatly negative, which, obviously, is not.
If you strip out all of the unnecessary, luxury-level, or hobby-related expenses, and it’s still well into the negative, you know with certainty that a visit to a Metro Detroit bankruptcy attorney is warranted.
Remember: You still haven’t decided to file for bankruptcy yet. No pressure. But you do know, at this point, that the conversation you have with a bankruptcy attorney will be worth having.
How Bankruptcy Attorneys Will Read Your Budget
Your bankruptcy attorney will review your budget from the standpoint of US bankruptcy law. What does that law say about your household income and expenses? And who else in the bankruptcy process will have an opinion about your budget?
Good Faith Debtors Only
The bankruptcy process in the United States is Federal. Its requirements and its process arise from a statute called the US Bankruptcy Code.
The Code, in particular, states that only “good faith” debtors are eligible for a discharge of their debts in bankruptcy. While the Code does not define “good faith,” many Bankruptcy Courts have developed a general definition of the concept.
In particular, a “good faith” bankruptcy debtor is, confusingly, simply not a “bad faith’ debtor. (Most of the case-law dealing with these terms concern debtors who have been alleged to have filed a Chapter 7 or Chapter 13 bankruptcy case in “bad faith.”)
Bad faith can mean a lot of things within the bankruptcy process. However, from a budgetary standpoint, it means that a debtor seeks to avoid repayment to creditors in order to indulge in unnecessary or luxury expenses.
Should you be allowed to walk away from your credit card or medical debt in order to make a $900 per month car payment? (Hint: The Eastern District of Michigan Bankruptcy Court would say no, that is a bad faith proposition.)
Thus, to this end, you must complete, when you file for bankruptcy, Schedules I and J, which itemize for the court’s review your average monthly household income—and expenses. If the end-result of the math you did above is positive, you will have issues filing for Chapter 7 bankruptcy in particular.
Note that this is true even if you pass the “Means Test” Chapter 7 eligibility test. You can pass the Means Test and still have a good faith/bad faith issue because of that $900/month car payment. Or your child’s private school tuition. Or any number of other “unnecessary” expenses.
Household Income Required
By the way, yes, all household income is required to be disclosed in your bankruptcy schedules. And in your Means Test. This is true even if your spouse is not filing for bankruptcy jointly with you.
If there is a specific instance in which a specific source of income need not be disclosed, this will be subject to the advice of your bankruptcy attorney. It is not a decision that should be made by a non-attorney.
When disclosing your expenses to your bankruptcy attorney, disclose all of them, including those of your spouse and mother-in-law or whomever else lives and earns under your roof. Your conversation will flow from that initial, full, honest disclosure.
Chapter 13 Bankruptcy and Your Household Budget
The Schedules I and J that you file will directly affect the overall cost of your Chapter 13 bankruptcy proceeding.
In a Chapter 13 bankruptcy process, you are required to repay some of what you owe in a 3-5-year payment plan supervised and enforced by the Bankruptcy Court. During this process, you make a monthly payment to the Chapter 13 Trustee assigned to your case by the court. That Trustee then disburses those funds out to your creditors in a priority order mandated by the Bankruptcy Code based on the type of debt owed.
Unsecured debts such as credit card balances and medical bills are paid last. The creditors holding those debts receive only whatever is left over out of your monthly payments, after all higher priority parties (including your bankruptcy lawyer and the Trustee) are paid first.
Whatever they get is all that they get. The balance owed to those creditors “on paper” is then discharged at the end of the process.
They may not get much. However, what you pay monthly is determined by your budget. Whatever that “A-B” number is (i.e., your net monthly available income, after expenses), that is what you pay to the Chapter 13 Trustee each month.
If you have $100 left over at the end of the month per your budget, that is your Chapter 13 Plan payment. If you have $1,000 left over, that is your Chapter 13 Plan payment.
Chapter 13 Trustees will therefore object to any expense that seems unnecessary or a luxury or “puffed” in any way. (In Detroit, Chapter 13 Trustees do this with a certain, messianic zeal, in fact.)
Household Budgets and Bankruptcy: The Bottom Line
The bottom line is that calculating an accurate and honest household budget will only help your potential bankruptcy filing. Beyond that, it may be that drafting a budget shows you, in writing, that you have a path forward that avoids bankruptcy through reduction of or elimination of unnecessary expenses.
But you don’t know if you don’t try.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully assisted thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If your budget leads you to the bankruptcy conversation you may need, contact us to schedule your free initial consultation.