Spending every dollar they make, and then some, is often how our Chapter 13 clients got into financial trouble.
Yet Chapter 13, as practiced, validates the practice of continuing to spend 100% of each month’s income during the life of the plan. In doing so, we, as a society, squander the chance to use Chapter 13 to teach new budgeting habits.
Shame on us.
It was more obvious before BAPCPA: we calculated the debtor’s projected income and living expenses, and all of what was on the bottom line was paid into the plan.
Now, we use Congress’ objective measure of what it should cost to live, and pay 100% of the arbitrary formula into the plan. There is no provision in the Chapter 13 means test for savings other than long term retirement savings required by an employer.
I’m not knocking saving for retirement. In fact, as debtor’s counsel, my most oft-repeated reason for clients reluctant to take the plunge and file bankruptcy is to provide for retirement.
American Express does not have to retire, and you do. What have you saved for that day?
But every household needs some savings for today, for tomorrow, and next month.
The Supreme Court’s Ransom decision reinforces the sense that saving is not a financial virtue.
A debtor with a paid for car is not reminded that the old car will need to be replaced, and saving toward that inevitability is a good thing. Rather, the car is paid for and we’ll indulge in the idea that the car will last another 5 years and devote that cash flow to unsecured creditors.
We have effectively mandated that, instead of putting a serious down payment on the next car, our client will again finance the next purchase at whatever interest rate is available to the newly discharged. The cycle of borrowing is perpetuated.
Debtors are required to take a class in personal financial management to get their discharge. Those classes surely do not promote consuming 100% of one’s income. Short term saving is needed to provide for the unexpected and the infrequent. Otherwise, you continue to live on the financial brink.
It is ironic, but true, that a Chapter 7 debtor can begin reforming the way she handles money almost immediately after filing bankruptcy. A Chapter 13 debtor lives for 3 to 5 years with a budget that makes no provision for an emergency fund.
I would like to think that Chapter 13 is rehabilitative, that it uses the duration of the plan to build new and better habits of money management. That isn’t what’s happening. As it is, the system’s distaste for savings while debts are unpaid perpetuates budgeting to spend every single dollar the debtor handles.
The language of our confirmation order provides that the debtor’s post petition income is submitted to the supervision and control of the Chapter 13 trustee. What kind of financial professional is the Chapter 13 trustee if that supervision and control doesn’t encourage some level of savings?
Or is the required financial management class just window dressing whose lessons don’t really apply until the creditors have gotten their pound of flesh?
Image courtesy of kenteegardin