Many people assume that those who declare bankruptcy to clear their debts can only do so if they live a bare-bones lifestyle. While protecting assets with bankruptcy exemptions is important, they are generally high enough to allow the debtor to maintain a reasonable standard of living. But what is to be said about those small splurges in life that start to feel like a necessity, such as a Netflix subscription? Read on to learn more about what kind of lifestyle a bankruptcy debtor can expect. To discuss your debt situation with an experienced Arizona bankruptcy lawyer, call Atlas Bankruptcy Lawyers at 602-649-4949.
Reasonable vs. Discretionary and Luxury Expenses
Bankruptcy debtors are required to list all of their monthly memberships and subscriptions in Schedule J – Your Monthly Expenses. This gives the bankruptcy trustee, an attorney appointed by the government to oversee your case, a chance to review all of your monthly expenditures in detail. Bankruptcy trustees aren’t instructed to take all of a debtor’s assets and slash all of their monthly services until they live like a monk. Bankruptcy rules are written to allow debtors to have a reasonable monthly budget for entertainment and personal maintenance. A subscription to a service like Netflix, which typically costs less than $20 per month, will almost always be viewed as reasonable. This is comparable to a cable bill, which has been a standard household expense for several generations. The same goes for bills like Hulu and other streaming services, as well as your home Wi-Fi. However, the trustee may raise an eyebrow if you are subscribed to every single streaming service.
This same logic applies to other monthly services like cell phone service, water, and electricity. These are non-negotiable living expenses that can’t be removed from a person’s budget if they want to live like a civilized human being. But some subscriptions are clearly discretionary expenses that the debtor can live without. Joining a Planet Fitness or 24 Hour Fitness gym is fine, but joining a country club or Equinox gym is a luxury expenditure. So are monthly memberships to luxury services like high-end wine clubs, cosmetics clubs, and other subscriptions. If the debtor has digital debt from these types of in-app purchases, it qualifies as unsecured debt that can be cleared by bankruptcy.
Credit Card Debt in Chapter 7 and Chapter 13 Bankruptcy
Most of us charge monthly services like Netflix to our credit cards to accrue the points and contribute to our credit scores. While filing for bankruptcy won’t force a debtor to cancel these accounts, they will lose their credit cards and need to update their form of payment to a debit card or another method to avoid a lapse in service. If the debtor fell behind on payments before filing for bankruptcy, those bills can be among the debts cleared by filing for bankruptcy. They are unsecured without an asset attached to them as collateral, and don’t have priority status like domestic obligations, recent taxes, student loans, etc. While this makes them simpler to clear in bankruptcy, they do receive different treatment in chapter 7 and chapter 13 cases.
Chapter 7 bankruptcy is a fast, straightforward, and powerful form of debt relief for households struggling with unsecured debt. Except for excessive luxury purchases and cash advances shortly before the petition is filed, credit card debt can be cleared with no limit in chapter 7 bankruptcy. This also applies to debts like medical bills, personal loans, and remaining balances with utilities and other service providers. Chapter 7 cases generally only last about 3 to 6 months, at which point, debts are cleared and the debtor moves forward with a clean slate.
Chapter 13 bankruptcy operates far differently than chapter 7 bankruptcy. Instead of debts being wiped away, they are repaid in a payment plan lasting either 3 or 5 years. The payment plan is based on how much money the debtor has left at the end of the month after paying for their reasonable and necessary expenses. To qualify, the debtor must be able to pay off their bankruptcy costs, secured debts, and priority costs during that 3 or 5 years, depending on how their household income compares to the state median. The rest of the time remaining on the plan will be used to pay unsecured debts, like credit cards. Whatever unsecured debts are left remaining at the end of the payment plan term are cleared.
Other Lifestyle and Bankruptcy Questions
Can I keep my same cell phone and phone number?
Yes. Filing for bankruptcy does not clear your phone number, and trustees know that it is almost impossible to work and function in today’s society without a smartphone. The only potential concern is if you pay for your cell phone in monthly installments through your phone bill. Lenders can require that bankruptcy debtors sign contracts reaffirming their debts, but because phones are relatively low-value, most lenders will just let it slide.
Do I have to cancel Amazon Prime if I file for bankruptcy?
Most of us have ordered something off of Amazon Prime that we later determined to be a waste of money. However, bankruptcy trustees don’t view an Amazon Prime membership itself as a luxury purchase. It is just another monthly membership that can be reasonable, but looks more wasteful if it is one of endless monthly subscriptions. The trustee may also want to review the debtor’s Amazon purchases if their Amazon credit card spending is particularly high. Just like your other monthly services, change your payment method if you are filing for bankruptcy and pay for your Amazon Prime membership with your credit card.
Is the trustee going to come to my house to look at my stuff?
The trustee does have the right to inspect your home and its contents, although this is extremely rare. For bankruptcy purposes, household items are worth their market value, not their original purchase value, so keeping everything inside a house within the bounds of the existing exemptions isn’t typically too much of an issue. However, there are certain red flags that might cause the trustee to visit for a home inspection.
Live Comfortably After Clearing Debts- and Stress- with Bankruptcy
Anyone who is considering bankruptcy is right to be concerned about the impact it could have on their lifestyle. While you may need to cancel some of your subscriptions and memberships, you can still keep things like Netflix, Amazon Prime, and Hulu as reasonable expenditures for entertainment and personal care. You can also say goodbye to wage garnishments, interest payments, and the other costs of drowning in debt that make it even harder to get back on the right path. Both chapter 7 and chapter 13 bankruptcy debtors see better results when they retain qualified legal counsel for their filings. But many debtors don’t seek out an attorney because they assume they can’t afford one. Self-represented bankruptcy cases are dismissed at higher rates, and could have issues arise like adversary proceedings or debts being excluded from discharge. If you want your case filed right, schedule your free consultation with Atlas Bankruptcy Lawyers today at 602-649-4949 for more information.
