Spotting the Critical Issues in Bankruptcy Schedule J (Expenses)

Welcome to another segment focusing on the official Bankruptcy Petition schedules: Schedule J: Your Current Expenses. While the process of completing the forms is straightforward, the core skill and focus of legal practice lies in issue-spotting.

An oversight can lead to significant consequences, including the conversion of a Chapter 7 case to Chapter 13 or, in serious instances, the dismissal of the case. If a case is dismissed, the protection of the automatic stay is lost.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Listen: The Professor’s Audio Briefing.

Schedule J: Your Current Expenses. Official Bankruptcy Form 106J (Individuals)

Welcome to another segment focusing on the official Bankruptcy Petition schedules: Schedule J: Your Current Expenses. While the process of completing the forms are straightforward, the core skill and focus of legal practice lies in issue-spotting. An oversight can lead to significant consequences, including the conversion of a Chapter 7 case to Chapter 13 or, in serious instances, the dismissal of the case. If a case is dismissed, the protection of the automatic stay is lost.

Schedule J is not merely a list of monthly bills, but a critical component that must balance withSchedule I: Your Current Income.

With Schedule J focusing on expenses and Schedule I on income for the month of filing, the goal is to prove there is minimal disposable income.

The Effect of a Joint Filing, Divorce, and Marital Property

A joint case means you and your co-debtor are filing together. While most joint filers live together, two distinct households are possible.

 Pre-Divorce Filing Strategy

If you are considering divorce, I typically recommend filing for bankruptcy first. This is often because:

Doubled Exemptions: Many states allow you to double your exemptions when filing jointly.

Protecting Assets Converted to Cash: If you sell a house as part of a divorce, the net proceeds are often not protected in a subsequent bankruptcy filing unless you immediately roll the money into a new exempt asset.

Professor’s Note: Before making any major decisions regarding bankruptcy or divorce, always consult with an experienced lawyer to ensure you choose the best option to protect your assets.

Dependents: Who Can You Claim on Your Tax Returns?

Schedule J asks you to list your dependents. While this naturally includes children, many people list parents or other family members they are supporting. This is a critical area where the Bankruptcy Trustee will look for contradictions.

The Contribution Conflict

If you are supporting a parent or relative, several issues should be considered:

1. Is that family member or dependent residing with you?
2. If the dependent is residing with you, then normally household expenses increase, so the additional expense and contribution should be reflected in the schedules. Any contribution would be reflected in Schedule I as income to the household.

The Professor’s Warning: Don’t Hide Information! Bankruptcy Trustees have access to a wealth of public information and financial data. Lying about who lives in the household has led to severe consequences for filers. Always be truthful.

Tax-Claimed Dependents and Tax Returns

Be careful of situations where a dependent is listed on your tax returns and whether they are residing with you. If they are not residing with you, then you should be able to prove that you support them financially, whether by paying certain bills or by transferring funds regularly, even if they are not listed as dependents on your tax return.

If there is a contradiction, you may need to consult with an accountant and may even be advised to amend your tax returns to avoid opening a door to Trustee objections.

Be very careful when listing payments to support family members outside the country. A Trustee may view these payments as discretionary funds that should be paid to creditors, especially since it is difficult to confirm how the money is actually used.

Expense Red Flags: Exaggeration and Luxury

Trustees scrutinize expenses to ensure they are reasonable and necessary. Excessive or non-essential expenses are major targets for objection.

Home Maintenance & Exaggeration

Be careful not to exaggerate maintenance costs. If you spent $400 on upgrading or maintaining your home the month prior to filing for bankruptcy, you cannot claim that as regular ongoing expenses, as it is only one month. You would need to average out that expense over a 12-month period.  

Private School Tuition

High-cost expenses like private school tuition are frequently objected to. A Trustee may argue that public schooling is an adequate alternative, and that money could be used to pay creditors. This can be a major hurdle, sometimes forcing a debtor to choose between keeping their child in private school and filing Chapter 7.

Luxury and Entertainment

Certain lifestyle costs are likely to be objected to by the Bankruptcy Trustee:

Club Memberships: In a Chapter 7 bankruptcy, you cannot continue paying hundreds of dollars a month for a non-essential club membership.

Luxury Assets: If you are paying a monthly note for a luxury asset like a camper, the Trustee will likely demand you surrender the asset, and the loan balance (deficiency) would be treated as unsecured debt. The monthly payment can then be reallocated to your creditors.

Avoiding Duplication: The Schedule I vs. J Trap

A common mistake is duplicating deductions between Schedule I (Income) and Schedule J (Expenses). For example, health insurance.

If your employer automatically deducts your health insurance premium from your paycheck on Schedule I, and you list it again as an expense on Schedule J, you have doubled the deduction.

The Consequence: If the Trustee removes the duplicate deduction, the resulting disposable income suddenly becomes substantial, potentially forcing a conversion from a Chapter 7 to a Chapter 13.

Always compare these two schedules line-by-line to ensure expenses like taxes, health insurance, and retirement contributions are not counted twice.

Correctly Listing Monthly Payments Related to Debts

Sometimes, a debtor may have a debt listed in their name, but they are not making the payments. For example, a car loan is listed in the debtor’s name, but their adult son or daughter is making the payments. In that situation, the payment must still be listed on Schedule J, but then the payment is reflected as a contribution/income on Schedule I.

The opposite situation is when the debtor is making monthly car payments, but the auto loan is listed in someone else’s name. For example, a parent with better credit. The payment is listed on Schedule J as an expense, but it’s not listed as an asset on Schedule A/B. You are also not reaffirming the debt because the debt is not yours. The Trustee will verify that you are truly making these payments.

Post Bankruptcy Filing: The Six-Month Rule

The bankruptcy estate lasts for six months after your filing date. This is why Bankruptcy Trustees ask about being the beneficiary of a life insurance policy.

The Trustee is essentially determining: Is the person insured knocking on heaven’s door?

If you are set to receive a substantial life insurance payout or other windfalls like an inheritance within that six-month window, the proceeds can become property of the bankruptcy estate. This often requires delaying the filing of the case. The amount of time it should be delayed is based on the lawyer’s experience. For example, I have had to delay cases by as much as two years to avoid issues with the bankruptcy trustee.

The Final Match: Disposable Income is Key

Schedule I Income – Schedule J Expenses = Disposable Income

This gap must be minimal. The closer to zero is better. For example, if you have several hundred dollars in disposable income available, you will not qualify for a Chapter 7, or you have made an error in either your income or expenses.

A common issue is eliminating a major expense just before filing, such as turning in a car on a voluntary repossession.  If that expense is not replaced or there is a reduction in income for the same amount, then there is disposable income, which converts your case from Chapter 7 to Chapter 13.

The Professor’s Conclusion

Ultimately, the lesson of Schedule J is that it must work with and balance out with Schedule I. The equation Schedule I Income – Schedule J Expenses = Disposable Income is the final hurdle for a Chapter 7 filing. If the gap is anything more than minimal, the Trustee will view it as funds available for creditors, converting the case from Chapter 7 to Chapter 13.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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