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Chicago Bankruptcy Question: What are allowable expenses in a Chapter 7?

Chicago Bankruptcy Question of the Day: What are considered allowable expenses in a Chapter 7 bankruptcy?  This is often a very problematic question in Chapter 7 bankruptcy cases.  Section 521 of the U.S. Bankruptcy Code requires all debtors in bankruptcy to file a schedule of current income and current expenditures; that is all the guidance the Bankruptcy Code gives us.  The courts, in a variety of holdings, have refined this to a "reasonable and necessary for an effective reorganization" standard and review this on a case by case basis when it is questioned or challenged.

The first step in reviewing expenses for a Chapter 7 bankruptcy is passing the "means test" (please see my prior blog for details on this).  The allowable expenses used in the Current Monthly Income analysis come from a variety of sources.  Some from IRS tables, some from Department of Labor Statistics standards and some from actual expenses of the debtor.  While there are some "gray areas" in this calculation, the majority of allowable expenses fall within relatively strict guidelines.

Assuming you can qualify for Chapter 7 bankruptcy by passing the "means test", then you must also qualify under the very subjective "reasonable and necessary" standard with regard to your monthly budget.  In the majority of Chapter 7 bankruptcies in Chicago, this is a pretty straight-forward process.  After scheduling such ordinary items and rent/mortgage payments, utilities, food, fuel & transportation and insurances, there is little room in the budget for anything further and the reasonableness of the budget does not come into question.

It's the unusual expenses that bring the attention of the trustee, U.S. Trustee and the courts.  Is it reasonable and necessary for you to be maintaining a mortgage payment on an investment property that is vacant and underwater; for private school tuition for your children, for the Harley Davidson you financed when times were better, etc.?  You must keep in mind that you are asking the court to discharge your liability on other debts, or all of your debts, while you maintain these payments.  If the court determines that the expenses are not reasonable and necessary, they can require conversion of you case to a Chapter 13 bankruptcy, dismiss your case or deny you a discharge.

This is one of many reasons that you need the representation of an experienced Chicago bankruptcy attorney.  A good bankruptcy lawyer will warn you of potential issues prior to the filing of your case and the consequences of your expenses being challenged.  They will gather and prepare the supporting documents and arguments necessary to overcome such a challenge.  At Ledford & Wu, bankruptcy and consumer rights is all that we do.  We are intimately familiar with what expenses the court will allow and what will be questioned or challenged.  We will also prepare contingency plans in case your expenses are questioned and work with the trustee and U.S. Trustee to get you a discharge.  Call us today for a free consultation.

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