By Kitty J. Lin
So you just withdrew $100 from your bank account, and by the end of the day you have $12 left, but you have nothing to show for it. Where did you spend your $88? What did you spend it on? If you’re like most people you probably have no idea. Most people do not have a clue how much they actually spend on their monthly expenses. If you don’t know how much you’re spending, how do you know how much you should be budgeting?
When we meet with clients during their free bankruptcy consultation most have underestimated their expenses by a quite a bit. After calculating their income and expenses, it appears that they have several hundred dollars left over as disposable income, which is normally not the case. How much do you spend on food each month? How much do you spend on gas each month? The answer is usually when I am hungry or need food I buy it. If my car needs gas I buy it. Our clients look at me in surprise if I ask them about the several hundred dollars disposable income. The usually response is, “Extra money? We haven’t had any extra money in years!” So, what happened in their calculations of expenses? This is where the memory lapse normally occurs – you spent that $88 you withdrew from your bank account, and that money went into a black hole. You have to think harder about how you are actually spending your income each month. Most likely, it went to items like food, drinks, groceries, and gas. Most people wouldn’t count that Starbucks drink they get every morning, even though it costs $5. Or that $10 spent on lunch each. Every dollar counts when you are making a budget! You would be surprised by how much those uncounted expenses add up.
So why is it important to make sure that your expenses are calculated correctly, especially if you are filing bankruptcy? There are several reasons. One of the most important reasons is that when you file for bankruptcy, you need to make sure that you are filing in good faith. One of the factors in determining whether you filed your bankruptcy case in good faith is whether there is any money left over after deducting your reasonable and necessary expenses from your monthly income. If you do have money left over, especially if it is a significant amount, then the bankruptcy filer has the obligation to pay what they can afford each month to their creditors in a chapter 13 bankruptcy.
If you are filing a Chapter 13 bankruptcy case, it is even more important that you calculate your expense correctly because you will be in the Chapter 13 plan for 3 to 5 years. If you underestimate your expenses, then you may end up paying more than you can afford in your bankruptcy case, which can deeply hurt your pocketbook. In order to calculate your expenses correctly, not only do you need to know how much you are spending on ordinary household expenses, like mortgage, rent, utilities, etc., you also need to estimate how much you spend on things you don’t pay for every month.
Even if you were not filing a Chapter 13 bankruptcy, these budgeting issues are important. You need to know exactly how much you have left over every month after paying all the necessary expenses so that you can come up with a realistic budget – and be able to stay within that budget – in order to truly receive the “fresh start” that you deserve.