People often wonder if the bankruptcy court will tell them how to spend money, or prohibit or limit any expenses. The short answer is, no.
It is true that the bankruptcy court looks into whether the person has the financial means to make any payments to creditors, and requires information about the household’s income and expenses for this analysis.
What if the household has no disposable income after paying for all living expenses each month, or there is not much left over? Then, generally, at least based on the results of this test, the court would say that creditors would either get nothing or low monthly payments.
Here is a fairly common situation: a family is on a tight budget and spends modestly on pretty much everything, except for one or two things.
For example, I met a mechanic who slept in a garage at work instead of renting an apartment, didn’t travel, didn’t buy anything big – but spent a lot each month on eating out. I also had a client who was a chain-smoker and who paid about three hundred dollars for cigarettes each month. As another example, there was a family that spent little on groceries, carpooled, drove a 20-year-old car, counted every penny – and sent their son to private school and off to participate in different sports. Another client had family that lived far, and she was planning to travel to see them at some point after filing bankruptcy. In each of these cases, the person was very concerned as to what the bankruptcy judge or trustee would think about these expenses. They asked….
Would the bankruptcy judge tell you not to eat out, or smoke, or play sports, or send your kid to private school, or prohibit you from traveling to see family?
Would the judge say that instead of paying for cigarettes, you should start paying the same amount to creditors?
Would the judge want to be informed if you go out of town on vacation or save up money during the case?
Would the judge tell you how to spend money?
Would the judge monitor your every little – or big – expense while the bankruptcy case is open?
The answers to these questions are: no, no, no, no, and no. The court looks at your overall financial situation, and you should not be penalized if your spending in some categories is higher or if you have a particular hobby, vice or need – especially if spending in other categories of living expenses is low.
A different situation – and actually, it happens rarely – is when the family’s income is high, and yet there is no disposable income due to extravagant expenses across the board and the family can’t fathom cutting down any over-the-top expenses. The court would suggest, based on results of analysis known as the Means Test, that in order for this family to enjoy benefits of the bankruptcy case, the creditors should still get some fair payments based on standard expense allowances. Keep in mind that the court would not actually force this family to make specific payments – the case can be closed without clearing the debts, if the family feels it’s not working out due the court’s guidelines or for any other reason.
Most people find that bankruptcy is not as onerous as they imagined, and creditor payments – if any – are reasonable and manageable. This is what bankruptcy is designed to be – a benefit, a fresh start, a way for you to clear debts and reorganize financially, and not some awful burden or demeaning endeavor.
Bankruptcy formulas and procedures are complex but nothing to worry about if you have the right support. For this reason, if you are considering filing bankruptcy, I recommend finding a local bankruptcy attorney that you are comfortable with, who will analyze and present your situation to the court correctly, and who will truly help make bankruptcy a positive experience and a fresh financial start for you.