Reasonable allowable expenses for Chapter 7 under the post-2005 law

[nozar]

I'm reading through the FAQ and saw this thread. It's closed so I can't reply to it, but it ends with a message saying the new law is different and the thread is no longer useful.

Can that thread be updated? What are the new reasonable expense guidelines?

[justbroke]

The United States Trustee (UST) publishes the expenses. They are all based on the IRS Collection Financial Standards (CFS) but broken down a little bit more granularly than the IRS publishes.

The UST Program (USTP) is located here; https://www.justice.gov/ust/means-testing

Because the law made everything a "mechanical" approach in the Means Test, there's no way to really talk about "expense" guidelines outside what's published at the USTP Means Testing site. While some Trustees give a little more leeway on thins, each case is unique. Everything matters. Even which Trustee you draw can matter.

Having wrote all that, the USTP Means Testing expenses are the starting point. Exceed any one of those and expect to have the Trustee demand you provide reasonable documentation as to why you exceed the IRS CFS.

[flashoflight]

Filling out part 2 of the means test and I/J is more than just filling in bigger numbers that will get you into a 7. They really designed it so that above median folks will have a difficult time squeezing into a 7. It's much easier with a big fat California mortgage payment and high property taxes. If you don't have a huge mortgage payment/PITI, it can be extremely difficult to squeeze into a 7 with above median. The large but low hanging fruit for above median are mortgage PITI, medical expenses, and regular charitable contributions. The other categories won't matter enough with significantly above median.

If you don't have receipts for the past several months to justify the expense claimed, assume you will lose that expense when the trustee asks for receipts. It's more than just filling in bigger numbers. You actually have to incur those expenses in real life. In addition, you have to convince the trustee to accept the expense even with the receipts. This is why a good lawyer won't give you the maximum numbers when you fill out your forms. He wants you to give the true honest incurred numbers. If you are pre-planning expenses, then we can talk strategies depending on how far above median you are.

[justbroke]

I can attest that without a huge mortgage, two car payments, and a family size of at least 4 will make it difficult for someone who is 2X, 3X or more over the median-income. Without those "allowed" expenses, the BAPCPA (the new law) does its job at sending more median-income folks into Chapter 13s.

[shipo]

These last three comments are interesting to me; before I got serious about filing, and long before I had learned anything about anything regarding bankruptcy, I assumed my best bet was to liquidate as much as I could and downsize as far as was humanly possible. Gone was the 4,500^2 foot house on three wooded acres, gone was the new car, gone was much of the furniture and art work and sporting equipment..., you get the idea. I ended up driving a 12 year old Honda Accord with LOTS of miles on it and living in a 1,000^2 foot "caretaker" apartment on a horse farm where I need to shovel a half-ton of horse manure per week (literally) as part of the deal for living there for so cheaply. Then I started shopping for an attorney...

When she took a hard look at my expenses she said something like, "You are so far under the guidelines for so many of your expenses you have no chance of a Chapter 7." The only advice she gave me in that regard was to buy a new car, advice, which in my infinite wisdom, I ignored. Had I found this web site before I downsized, who knows, maybe a Chapter 7 would have been possible. Oh well, live and learn.

[flashoflight]

I forgot the car payment. I guess I forgot because I think car loans are total evil except possibly within bankruptcy for an above median trying to fit into a 7 or anyone in a 13. The financed car comes with an additional ownership expense that is unavailable with a cash junker. A newer replacement car with remaining factory warranty would be a good way to unload cash too while avoiding a lot of the depreciation hit. I would buy the manufacturer's most expensive extended warranty and their most premium maintenance plan, which can be financed as well to slightly increase the monthly payment.

[nozar]

the USTP Means Testing expenses are the starting point. Exceed any one of those and expect to have the Trustee demand you provide reasonable documentation as to why you exceed the IRS CFS.

OK, so the housing limits for the means test in the SF Bay Area range from $2090 to ~$2700 for 1 person renting, and in the San Jose Division the max is $2481/mo. I have a choice of Airbnbs in the $3k - $4k/mo range. Which end of the range should I aim for?

As for income, I had under $5k of wage income this year because I worked for sweat equity, then our startup shuttered when Covid-19 crashed the market. I haven't even started looking for a new job with all this bankruptcy stress on my mind.

I did have income from capital gains (trading) before Covid, but not "dividends or interest" as SOFA mentions. Do day trading proceeds count as income?
Anyway, that's completely dried up, because my brokerage account went under zero when the market crashed at the end of March, so it's not any kind of ongoing income. If the past trading proceeds no longer count as income, then I'm well under the median. Do I need a special affidavit to show that the trading account is no longer capable of producing income?

As for a car, the attorney advised buying a used car up to $5k, which I'll need to commute to work when I find a job. But flashoflight is saying I should finance a new car with the most expensive warranty and maintenance plan, presumably with a large down-payment as well?

When she took a hard look at my expenses she said something like, "You are so far under the guidelines for so many of your expenses you have no chance of a Chapter 7." The only advice she gave me in that regard was to buy a new car, advice, which in my infinite wisdom, I ignored. Had I found this web site before I downsized, who knows, maybe a Chapter 7 would have been possible.

I'm not sure I understand this. What's wrong with spending little when you have consumer debt you must pay back, and file for Chapter 7? Or maybe shipo did not have consumer debt?

[shipo]

I'm not sure I understand this. What's wrong with spending little when you have consumer debt you must pay back, and file for Chapter 7? Or maybe shipo did not have consumer debt?

You missed what I was saying; I had unsecured consumer debt totaling several times my annual gross income. If I'd filed for bankruptcy before I downsized, there were pretty good odds I'd have qualified for a Chapter 7, however, I didn't know about a huge chunk of my debt (my former business partner had three credit cards in my name and two lines of credit); the downsizing effort was an attempt to pay off the debt I knew about. When the full breadth of my indebtedness became apparent (when collections calls from the previously unknown debt), I started shopping for a bankruptcy attorney; when she looked at my debt, and then looked at my current income vs. expenses, I was nowhere near being qualified for a Chapter 7.

In the end, I had my 60 Chapter 13 discharged in early March of this year. As I wrote prior, had I followed my attorney's advice and bought a new(er) car before my Chapter 13, I would have been effectively able to buy a car for nothing as it would just have been considered part of my bankruptcy. Instead I went forward with a 2001 Honda Accord, and it only made it three years before corrosion killed it and had to dig deep into my piggy bank and buy a new(er) car for cash.

[justbroke]

nozar a lot of the questions you are asking are very fact and debtor-specific. I can't tell you how far or how wide the Trustee will look into all your dealings. Every penny that you received (whether earned or unearned, taxable or non-taxable) is income for purpose of bankruptcy. There are only 3 things that don't qualify as income (income from the Social Security Act, the COVID-19 stimulus and some obscure war-related payments). How you account for your trading will likely be scrutinized with quarterly statements of other account statements... should the Trustee decide that they want to take a deeper dive. No one but that Trustee can tell you if they're going to dive deep; which Chapter of bankruptcy could make a difference in this regard.

If you're going down this bankruptcy pre-planning route, I highly suggest you speak with a bankruptcy professional. It can be a fine line between bankruptcy planning by spending down money... and hindering, delaying and defrauding creditors.

[flashoflight]

nozar I think it's a fine idea to do pre-BK planning. What you will find is that BK lawyers, including the best ones, will not stick their necks out very much and give you a 10-step plan of fitting into a 7 or minimizing the 13 payment. They will give you one or two nuggets of pre-BK advice for situational local questions like the district trustees' toleration of eve of BK IRA contributions. I would not assume you will be able to deduct more than the local housing standard in rent unless your attorney says otherwise. As JB says, just about any income counts against you. So you need a very good rationale that the day trading income won't continue. Not to be offensive but for purposes of trying to get through BK, I see daytrading the same way as gambling. It's almost impossible to have positive income long term with it. Even advantage blackjack card counters to me are a myth since they get regularly trespassed by the casinos. I don't think you're making money from daytrading anyway since the account balance is negative.

As far as the car: Outside of BK reasons I would never, ever finance a car. But it can be useful if you need help passing the means test. Sound like you don't need help with the means test anymore. So the lawyer telling you to buy a $5k junker I would do that.