Chapter 13 Bankruptcy: Living Expenses – Need vs. Want

When people consider filing for relief under Chapter 13 of the Bankruptcy Code they are typically consumed with the debts they owe, creditor harassment, and just making it day to day. Because this can be overwhelming, seeking counsel from an attorney can help put things into perspective.

Some people do not think in terms of needs and wants when it comes to considering bankruptcy or even spending and living on a budget. However, this is a major part of what Chapter 13 bankruptcy helps to accomplish.  In the bankruptcy world, a person’s expenses are looked at in two categories – necessary and non-necessary for reorganization purposes.  A necessary expense would be defined as food, clothing, and shelter.  Non-necessary expenses would be things such as cable, internet, gym memberships, etc.  People must begin to put their expenses in perspective and make tough decisions like whether to keep their home or surrender it or whether they can afford to keep their children in a private school which clearly is a non-necessary expense. 

For illustration purposes, let’s look at expenses for food, clothing and other items based on the IRS National Standards for Allowable Living Expenses in bankruptcy cases filed on or after March 15, 2009.  Per month, a household of two people can spend $537.00 for food, $66.00 for housekeeping supplies, $162.00 for clothing and services, $59.00 for personal care products & services and $197.00 for miscellaneous expenses.  These items become budgeted expenses in the sense that you are now limited to what you are allowed to spend on certain things.  Reality sets in quickly and it sometimes stirs up anger or bitterness in Chapter 13 cases when someone must be told that they have to remove their children from private school or give up the RV used for vacation or the boat used for recreation.   Remember, usually these issues only come up when someone files a Chapter 13 seeking to pay unsecured creditors less than 100%.

Anyone who files a bankruptcy is subject to these expense limits and must follow the confines of the law and the applicable rules if they want the benefits that bankruptcy offers. In other words, you have to take the good with the bad.   Because we must follow the IRS expense guidelines, a person can be forced to give up property in bankruptcy and/or reduce their spending in they want the benefits of a Chapter 13 reorganization.  So keep this in mind when you elect to file a Chapter 13 and attempt to pay your unsecured creditors less than 100%.

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