A couple of days ago I wrote about ways income and expenses influence your Chapter 13 plan payments. Today I want to encourage people preparing for bankruptcy to invest time into a careful look at your income and expenses. Because your plan payment in a Chapter 13 must be at least the amount of your disposable income, then accuracy matters in figuring out what that is. Once you have put the amounts in your Schedules (Schedule I is income an Schedule J for expenses), you are locked into them unless you can verify changes with documentation.
It is incredibly common, though, that people really do not know what they spend on expenses. Sometimes, people do not have an accurate idea of income either. This is less of an issue if all your income show up on pay advices (pay stubs) from wages. It is a bigger challenge for independent contractors and business owners. Almost no one, though, accurately tracks all personal expenses.
Despite the challenge presented by the lack of tracking, it is crucial to be as accurate as possible with expenses. If you underestimate your expenses, your plan payment may end up being too high to maintain resulting ultimately in dismissal of your case. Over-estimating your expenses may keep you from being able to show a plan payment of a certain amount (an amount required to pay arrears on a house, priority tax debt, or other mandatory items) to be feasible.
So, it is worth spending a few hours going back over bank statements or other documents that can help show average monthly expenses. If you have time before filing, it would be helpful to do a detailed tracking of expenses for a month. This can be very revealing and may also help you figure where things can be cut.
This accuracy, though, in determining income and expenses can mean the difference between a successful Chapter 13 bankruptcy and one that is dismissed or converted to a Chapter 7.
The major driving force in determining what your Chapter 13 bankruptcy plan payment will be are your household income minus reasonable and necessary expenses, at least in the Eastern District of Kentucky. I encounter two general situations when looking at household income and expenses to determine what a debtor’s plan payment will likely be in a Chapter 13: 1) people who have constrained their expenses to an unsustainable point in order to try to stave off bankruptcy, and 2) people who find it very challenging to tighten their belt.
The first scenario can show up different ways. They may have stopped paying into voluntary retirement plans in hopes to make things work. Or, perhaps they went against personal convictions and stopped tithing to their church believing it would be a short-term constraint. With these two approaches, they are essentially locking themselves in to being unable to go back to tithing or retirement funding for the three to five-year duration of their Chapter 13. This is because the Chapter 13 trustee will expect documentation of consistent and ongoing tithing or payments into retirement. This is to preclude people who suddenly decide to do these things just to help their own bottom line as opposed to a conviction or long-held practice. The remedy for this requires very early bankruptcy planning and is not easily fixed; it often must be lived with for the term of the bankruptcy.
The second scenario is easier to fix, but tougher for debtor’s to swallow. Those who most often find themselves in this situation have had a healthy income for a long time and unforeseen circumstances, like job loss, drop them into a very constrained income. Most people expand their spending to fill up their income. This is not wise, but it is terribly common. Once certain “luxuries” become routine expenses, it is incredibly hard to reverse them. I see this with higher food expenses for top-of the line organics and fresh food, health supplements, or personal training expenses. Other ways it manifests are in high-end clothing or nice (“dependable”) cars. The remedy is simple: cut expenses. However, it is tough to swallow the idea of trading in the expensive SUV for an old economy car. It is hard to cut food costs without buying processed food. Hard won fitness is hard through personal training is hard to exchange for a modest gym membership and self-training.
However, to get the discharge of debt and relief from foreclosure that Chapter 13 offers, tough decisions and sacrifices must be made.
Kentucky has a set of statutes known as the “Financial Responsibility Law” which can lead to the loss of your driver’s license based on a debt you owe. Thankfully, it is not just any debt. The debt must arise from a judgment out of a court of law and it must be a debt related to a motor vehicle related damages. Here is the key definition from KRS 187.290(3):
“Judgment” means any judgment which has become final by expiration without appeal of the time within which an appeal might have been perfected, or by final affirmation on appeal, rendered by a court of competent jurisdiction of any state or of the United States, upon a cause of action arising out of the ownership, maintenance or use of any motor vehicle, for damages, including damages for care and loss of services, because of bodily injury to or death of any person, or for damages because of injury to or destruction of property, including the loss of use thereof, or upon a cause of action on an agreement of settlement for such damages.
In combination with other provisions under this same code section, the essence of this law is to discourage people from driving without insurance that meet certain statutory minimums [see KRS 187.290(11)]. So, if you have been sued and a judgment issued as a result of operating or owning a car that was in a wreck, then your driver’s license will likely be suspended after 90 days. There are 30 days in which to appeal the judgment, after which it becomes final. Then, if the judgment is not satisfied within 60 more days, the court clerk sends the judgment to the Department of Motor Vehicles and they suspend your license.
To avoid losing your driving privileges, it is essential to take action within those 90 days. You either must pay the judgment in full, settle with the plaintiff for less, get the court to approve installment payments, or file bankruptcy. If you wait to pursue bankruptcy AFTER your license is suspended, you will have to wait until the Order of Discharge has been entered to get your license reinstated. That can be around five months or more down the road.
If you have received a discharge of the debt causing the loss of license, then you or your bankruptcy attorney simply needs to fax or mail the Order to the Department of Motor Vehicles. Then, go to a field office of the DMV, pay a $40.00 reinstatement fee and take an eye exam.
If you have started the process of filing bankruptcy, your attorney has likely asked you to produce a large quantity of documents. This can be a daunting task for many because, truth now, many of us are horrible about record keeping. However, if you are in need of a fresh start financially, then you want your bankruptcy to go smoothly. And, you could actually be prevented from receiving a discharge of debt in your Chapter 7 if you failed to keep good records:
11 USC Sect. 727(a)(3) states that a debtor will get a discharge unless “the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;” (emphasis added)
Basically, if you are in financial trouble and looking at the prospect of bankruptcy, keep track of what you are spending things on. One way to help with this is to hold on to receipts, bank statements, pay stubs and other income documents. Trustee’s rarely get down to the level of looking at receipts for debtors, but every once in a while, expenses get challenged and it would be great to have documents handy to answer the challenge.
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