Bankruptcy as Budgetary Relief

Bankruptcy provides strong debt relief, although different aspects of bankruptcy relief appeal to different people. A few common sorts of relief:

1. The relief of keeping property: The power of chapter 13 to prevent foreclosure, stop repossession, and allow continued ownership of property, even property that cannot be claimed as exempt.
2. Relief from uncertainty: one can never be sure about lingering debts: Is the creditor going to try to collect the judgment next year? Is this phone call from a debt collector? Bankruptcy provides certainty when it provides relief from debt.
3. Monthly budget debt relief: ends don't meet because debt payments consume too much income each month.

This post discusses the last point: when bankruptcy can be effective at balancing your household budget.

When your expenses are more than your income, the household budget is in an unsustainable position. For the short term, the gap might be filled with borrowed funds, drawing down savings, or selling off assets. The wisdom of any of these short-term strategies varies for each individual situation. For most people, eventually one of two things has to change: income must increase or expenses must decrease.

Bankruptcy provides debt relief. This basic concept drives the determination of how helpful filing bankruptcy might be as a tool to bring a budget into shape. Some household budgets can be balanced by debt relief, and others can be brought close enough to hold out for improved income opportunities. In assessing a budget, a few points can be examined with the expenses in hand:

Payments on Unsecured Debts

Payments on unsecured debts include ongoing credit card payments, payments on personal loans, installment payments on medical bills, and other similar items. These general unsecured debts are eligible to be discharged in a bankruptcy, and stand to be altogether removed from the expense side of the budget. An individual who could balance their budget by removing payments to unsecured lenders can often find great benefit from filing bankruptcy.

Car Payments, Mortgage Payments, and Other Secured Loans

Secured debt payments provide another opportunity to reduce expenses in bankruptcy. In some situations, car payments can be reduced in chapter 13, either by spreading out the remaining payments or by paying certain older loans off at the value of the car. Occasionally, second mortgages can be removed in a chapter 13 when the home is worth less than the first mortgage. Of course, if one wishes to get rid of the payment and the collateral, bankruptcy can also be effective at facilitating release of the property.

Leases and Contacts

Bankruptcy seldom provides opportunities to re-work a lease or contractual obligation. However, one can walk away from the obligation altogether, with early termination penalties getting discharged with other unsecured debts.

Repayment of Certain Debts

Sometimes one's expenses include payments on a non-dischargeable priority debt, such as a recent income tax liability. Chapter 13 bankruptcy may be effective at spreading out the payments and decreasing the monthly burden.

Does the Budget Matter in Bankruptcy?

After one goes through a budget and figures out how bankruptcy would improve expenses, a natural question is how this budget affects the bankruptcy itself. A debtor's budgeted expenses is disclosed as schedule J to the bankruptcy petition.

Overall, the schedule J actual budget is more important in chapter 13 bankruptcy than in chapter 7. In chapter 13, this budget contains the answer to the crucial question of whether or not the debtor can afford the plan payment required in the case. A deeply negative budget will lead to difficulty obtaining plan confirmation, and difficulty in making plan payments if confirmation were obtained.

The bankruptcy means test, which in chapter 7 serves to determine eligibility and in chapter 13 influences repayment to general unsecured creditors, does not directly use the actual budget of expenses. Only some means testing categories are influenced by actual expenses. The means test is often a poor approximation of the debtor's ability to repay creditors, so conclusions should not be quickly drawn from an actual budget about eligibility and repayment questions.