Day care costs likely allowed in bankruptcy

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Dear Bankruptcy Adviser,
I will be filing for bankruptcy soon. I have an 18-month-old daughter who stays at a sitter’s home during the day. She is not learning anything with the sitter and her pediatrician suggests that she go to a day care center to be around other children. She is falling behind on problem solving and communication skills. I intended to place her in a center before deciding to file bankruptcy. However, centers are almost twice as much as what I am paying the sitter. Will the trustee make me take my daughter out of a center because of the expense? Might they consider it fraudulent? Should I hold off filing?
— Perplexed

Dear Perplexed,
I think you are prudent to consider this issue. Without knowing more about your income and expenses, I can only answer this question in general terms.

You are right to think that an expense, albeit a necessary one, could be challenged as unnecessary. Depending on your income and other expenses, this type of expenditure could be questioned. However, if you can show that the cost is reasonable and necessary, and the expense is roughly equal to other day care centers in the area, you should be fine.

When you file bankruptcy, there are two parties that review your paperwork. One is the local trustee. This trustee is assigned to look for unprotected assets that you may have, sell those assets and pay back your creditors. Trustees do look for excessive expenses as well. But that is not their main goal. The local trustee is mainly looking to find money for your creditors.

The second party assigned to every case is the Excutive Office of the U.S. Trustee, or EOUST, except in North Carolina and Alabama, which have their own bankruptcy administrators. The EOUST looks out for abuses of the system. Specifically, they’re watching for people who are trying to take advantage of the bankruptcy code, which is meant to protect those in need of financial relief.

EOUST has extensive guidelines and procedures to consider. In general, they look at the Internal Revenue Service standards for expenses in your area and compare those averages to what you are spending. For instance, if your rent is $2,000 per month, but the average rent in your area is only $1,500, it could negatively impact your bankruptcy filing. This mainly becomes an issue when your income is above the median for the state in which you live, and is subject to what is known as the “means test,” which can determine what type of bankruptcy protection you are eligible for.

Child care expenses can vary greatly. For example, religious beliefs could impact your day care choices. Sometimes, a child has special needs and requires extra attention. With that extra service comes higher-than-average expenses.

You probably researched the day care centers in your area and concluded that the one selected best fit your budget and met your child’s needs. As long as the expense is reasonable, you shouldn’t have a problem.

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