Preparing Your Chapter 13 Budget–Part One

In a recent discussion among some colleagues here in South Carolina concerning the new IRS standards for living expenses, there was general agreement that the IRS standards for things like food, utilities and household expenses are higher than actual expenses reported by most of our clients.

One of the group remarked that maybe the reason so many Chapter 13 cases in our district fail is that people consistently budget too low for basic living expenses. After all, the IRS has been calculating those standards for a long time, and is not generally known for its generosity. (And others, in other districts, have different experiences.)

It’s certainly a valid question. One of the most important factors in determining the amount of a Chapter 13 plan payment is the household budget, and yet preparing that budget is often among the most difficult tasks, for me and my clients, in preparing to file a Chapter 13.

Sometimes I catch obvious omissions. For example, I recently reviewed a budget prepared by a couple I knew to be smokers. (I have a nose like a bloodhound.) Yet, their budget did not contain any expense for cigarettes. Now, if the plan is to quit and save that money, I applaud the decision. However, in preparing a budget for Chapter 13, we need to deal with the real world, though that requires admitting your vices, at least the expensive ones.But all omissions may not be so obvious.

Given the critical nature of getting the budget right, I thought some help might be in order. I wish I could tell you that you need to budget so much for food, and so much for telephone, and so forth. That’s what many of my clients would like for me to do.

Unfortunately, that wouldn’t work very well, on a number of levels. What I am going to try to do is discuss some approaches that may get closer to a real, workable budget, as well as preparing you to support your projected expenses if asked to do so.

Most of my focus is going to be on expenses. But first, a word about income. When your bankruptcy lawyer starts preparing documents and a budget, the starting point is going to be your average income over the past six months or so. Unless you have had a change in income (a new job, a retirement, etc.) that average is probably what you are going to report as income.

Many people are used to thinking in terms of take-home income, although there may be payroll savings deductions or debt payments that artificially lower that income. In preparing a budget, it is important to take all of those things into account, both in order to show an accurate income picture, as well as to get the expenses right.

Next, in Part Two, I’ll discuss how to begin the process of budgeting your expenses.