A good deal of the fantasy volume, The Hobbit by J.R.R. Tolkien concerns the dieting of one Bilbo Baggins. Like many a Hobbit or Halfling, he is not averse to food. Yet, he is among that minority of complacent bloated Hobbits called upon by a wily wizard to adventure. And in the wilderness of Middle Earth, away from one’s cozy Hobbit hole, one must settle sometimes for fewer than 6 meals a day.
In Bilbo’s case there is literal belt tightening. On the road dodging Goblins and Wolves, a Hobbit’s spare tire sheds quickly. The Bankruptcy Belt is figurative. On the road of credit card debt, the debtor sheds not-so-spare necessities. At the expense of their families’ welfare, they maintain minimum payments on old, stale charges. They perform a Sisyphean task. They don’t put a dent in the principal, though they may pay it many times over in interest, all the while wearing a corset-like belt.
This bankruptcy blog–and bankruptcy itself–deals with the proverbial loosening of the debt belt.
I. Moving Past Credit-Card Payments
Upon the debtor’s realization that they’re on a road to minimum-payment-nowhere, the debtor elects to file bankruptcy.
In preparing to file the debtor’s case, the bankruptcy attorney drafts Schedules, which relate to different aspects of the debtor’s financial affairs. Chief among the Schedules are Schedule I (for Income) and Schedule J (for Expenses). Schedules I and J reflect the debtor’s budget AFTER filing bankruptcy; the itemized expenses on Schedule J exclude the credit-card debts to be discharged.. For the debtor deserving of bankruptcy relief, the sum of Schedule I (all the debtor’s income) minus the sum of Schedule J (all the debtor’s necessary and reasonable expenses) yields insufficient funds to repay debt. That insufficiency is what demonstrates the deserving of debt relief.
II. A New Bankruptcy Budget
If the debtor had sustained a pre-petition (before bankruptcy-filing) budget including allocation to credit-card payments, they must contemplate a new post-bankruptcy budget on Schedule J. The credit-card payments presumably entailed sacrifice of necessary expenditures. When the credit card obligations vanish with the bankruptcy filing, they leave a void. The void must be filled if there were heretofore suppressed expense-categories. If the debtor fails to fill the void, they may create a false impression of debt-repayment ability that would preclude eligibility for Chapter 7 bankruptcy (which discharges debt for zero cents on the dollar) or compel high payments (“too many" cents on the dollar) in Chapter 13 Bankruptcy. Does the debtor have to fill that void or fill it in full?
While they commonly do, note that I deliberately referenced presumed self-sacrifice and the possibility (but not certainty) of suppressed expenses.
After one cuts out high credit-card payments to obtain debt relief through bankruptcy, one must create a new budget that would fill a presumable void effected by suspension of credit-card payments. But the new budget must be guided by the principle (or platitude?) of what is reasonable and necessary. Often enough, that void is readily filled by irrefutably necessary expenses and the debtor may qualify for the usually-ideal chapter 7 bankruptcy. Yet, the void is not necessarily fully fillable in every case; in that event, Lucky Chapter 13 bankruptcy may be in the cards.
Let’s explore the plight of the Smiths, below to illustrate the budgetary concerns that arise with filing bankruptcy after stopping credit-credit payments:
The Smiths–a family of 5–have been struggling to pay $1,000 in monthly minimum-payments on the credit-card debt they incurred many years past. They haven’t seen the inside of a movie theater in 6 months, because the money’s not there. Arguably, there hasn’t been a decent movie to watch, but that’s not the point. Anyway, they reexamine a post-bankruptcy-petition budget that doesn’t compel that $1,000/mo. payment. They determine the following: with a weekly trip to the multiplex (add popcorn, Mike and Ikes, Whoppers, Raisinettes, and a Diet Coke times 5), that extra thousand’s gone in a blink). And with no remaining ability to repay debt, they assert eligibility for chapter 7 bankruptcy. But Yours Truly (their attorney) suggests to the Smiths that they rethink this proposed new bankruptcy budget. After much mulling, the Smiths redetermine they will visit the theater once monthly, and their kids will drink water from the tap. They will buy in advance candy at Ralph’s and only attend progressive theaters like AMC that permit outside food (last time I checked). As it turns out, they would then have $300 left over each month, after providing for the family’s necessary and reasonable expenses. While not eligible for chapter 7 bankruptcy, the Smiths can file a chapter 13 bankruptcy.
Sometimes bankruptcy debtors presume that chapter 13 bankruptcy is an inherently bad thing. For many reasons it’s not and for some bankruptcy debtors, it may provide a far-more-powerful solution than chapter 7 bankruptcy. For today, we’ll skip the strategical benefits of chapter 13 bankruptcy, and focus on the Smiths.
Here’s a summary of the Smiths’ status of debt before and after filing Lucky Chapter 13 bankruptcy: Before bankruptcy: they owe $100,000 in credit-card debt at 15% APR. In their case, to pay it off through chapter 13, they would commit 60 monthly payments of $300 for a total of $18,000. The $82,000 principal balance (plus interest) would be forgiven after they complete their limited payments. Alternatively, if they were to pay $300/mo. outside of bankruptcy they would pay off the debt…. NEVER. Or, if they wished to pay it off within 60 months outside of bankruptcy, they would need to pay $2,649/mo. adding up to $158,940. Compare: $18,000 to $158,940.
Now, there’s more to movie tickets in determining the degree of what are reasonable and necessary expenses.
A decent reference point for reasonable expense-allowances is the set of “Standard Allowances" applied in bankruptcy law, which derive from the Bureau of Labor Statistics Consumer Expenditure Survey [not one, but two mouthfuls, you can luckily shorten to (BLS) and (CES)]. These guidelines or deductions factor into the checking of budgets for higher-earning bankruptcy debtors in chapter 7 bankruptcy and chapter 13 bankruptcy. The Standard Allowances may fall short or exceed one’s actual expenses, depending on the expense category. At the least, the Standards are a reality check to help one avoid extremes of either indulgence or inhibition, in completing Schedule J and adapting to a new budget. And in examining–and thus avoiding–the extremes, we turn to the Hobbits (natch).
III. Bilbo Baggins: a Model of Schedule-J Excess
Bilbo Baggins–remember, is our indomitable Hobbit who’d shed many Hobbit pounds in his travels, his belt tightened tight o’er his tunic. His hard path was the road of credit cards payments. Yet, ultimately, an adventure-weary Bilbo found respite in the the Last Homely House at Rivendell, being the residence of the magnanimous Elf, Elrond. Elrond’s crib is a place of sumptuous beds, and plentiful eating, in which Bilbo overly indulged. Rivendell was his Bankruptcy Schedule J and it was marked by excess. Hence, we conclude: as a bankruptcy debtor drafting Schedule J, don’t be a Bilbo. (As it were, Bilbo returned from his exploits laden with sacs of Misty-Mountain gold, so he wasn’t really a good bankruptcy-candidate to begin with.)
IV. Frodo Baggins: a Sample of an Unsustainable Schedule-J
Frodo Baggins, the Hobbit, and stalwart nephew of Bilbo did not follow his uncle’s gluttonous path; he was a tortured soul, who never quite recovered from many months of deprivation. His arduous journey to discard some jewelry was the tedious predicament of credit-card debt. Ultimately, his debt–being his so-called Ring of Doom–was cast into the flames of Mordor. Its fires would be Frodo’s Bankruptcy Discharge. Yet, afterwards, he remained a burdened, rather sad fellow (he was short a finger, too, if you recall). See, when his perils concluded, he never revisited his Schedule J to pursue a minimally-decent standard of living that an heroic Hobbit deserved. Thus in finding what is reasonable and what is not, Frodo is not much help either.
Instead, we look to common sense [which is one of those misnomers like a “near miss" (which means a near hit), because sense is certainly not common). We carefully consider what are necessary expenditures for our families’ welfare. We ask, “Must my kid’s shoes bear holes before I replace them?" Or, “Must I keep letting my wife cut my hair and tell her I love it, when I don’t?" The good-faith debtor pursues a respectable lifestyle and believes in the notion of living beneath one’s means. Except, we’re also not destined to deprive our children and our well-being, to repay in perpetuity the punishing-interest creditors demand, though the principal-debt-incurred may have long-been paid twice- and three-times over. We don’t become indentured servants to collections, and we don’t suffer the tragic circumstances of one Frodo Baggins.
P.S. The Hobbit movie version–directed by indomitable Kiwi, Peter Jackson–is coming to a Theater Near You in Winter 2012. Remember then the rules of tap water and supermarket candy. Though, even if you’re post bankruptcy-discharge at that time (or post chapter-13-confirmation) you’ll probably want to pack a good deal of candy: these indulgent Jackson-movies tend to run insufferably long. They are also to blame for belabored bankruptcy metaphors.
San Diego Bankruptcy Attorney, Asaph Abrams Offering free, no-obligation bankruptcy consultations in San Diego. Visit us at http://www.bankonitsd.com/ or call 858-344-0500. E-mail [email protected] to set an appointment. Also representing Imperial County residents.