Income is a pivotal factor in Chapter 13 bankruptcy. Unlike Chapter 7, where the trustee liquidates your assets to pay off as much of your debt as possible, your earnings fund your payment plan and pay creditor claims in Chapter 13. If your income drops significantly, it can derail your plan. If it increases, your unsecured creditors may be entitled to more money.
The Payment Plan
A Chapter 13 payment plan lasts a minimum of three years and may extend to five years. During the first three years, you’re obligated to give the trustee every dime of your disposable income -- what’s left over after you pay your reasonable monthly expenses and make payments on debts secured by collateral, such as your car and home. If you’re lucky, your trustee might let you keep a little of this extra money, but it’s rare. You must usually contribute all your disposable income to the plan.
Before Confirmation of Your Plan
Your bankruptcy case isn’t immediately official when you file your petition. It exists in a sort of legal limbo for a few months until your confirmation hearing, where the court officially accepts or rejects your proposed payment plan. If your income goes up during this time and the increase is significant, you’ll almost certainly have to tweak your plan to give more money to your unsecured creditors. How much they receive in Chapter 13 depends on how much you have left after paying your regular monthly bills, including secured creditors who must be paid in full. The more money you have left over, the more payment your unsecured creditors receive. The trustee usually monitors your income pretty closely during these first few months, so if you get a raise, he’ll know about it. He’ll most likely object to the plan you initially submitted and ask that it be amended before the confirmation hearing to reflect your extra income.
The First Three Years of Your Plan
Because your plan must last at least three years, a raise during this time may also increase your plan payments. If the increase is minimal, the trustee might not bother trying to claim a few more dollars for your creditors. But if it’s sizeable, he’ll probably require that you modify your plan.
Where you live and how the trustees there conduct business determine whether your trustee becomes aware of your increase in income during this time. Trustees in New Jersey typically want annual tax returns from their Chapter 13 debtors for the first two years. If you receive a raise during this time, the trustee will see the change in income. Some California districts are stricter; their trustees require a copy of your tax return every year until your plan is completed. According to the U.S. Bankruptcy Court, this is the level of diligence expected of trustees.
The Last Years of Your Plan
The rules relax if your Chapter 13 plan lasts longer than three years. According to Todd Murphy Law in New Jersey, you’re no longer obligated to give all your disposable income to the trustee after the first 36 months. The trustee probably won’t require that you turn over extra earnings if your income goes up then, and you can object if he does.
Your Corresponding Expenses
Another consideration is whether your living expenses remain the same while your income increases. Even during the first three years, if you’re earning an additional $400 a month but your property taxes have skyrocketed since the time you first filed for bankruptcy, the court is unlikely to require that you pay more into your plan. If your expenses have increased significantly, you may have been struggling to keep up with your plan before you got the raise.
If the trustee requires that you modify your plan and give your extra income to your creditors, there’s usually a silver lining. Your plan typically gets paid off sooner with this extra funding. If your plan was originally for 60 months, you might be able to wrap it up in 48 or 50 months and put your bankruptcy behind you so you can move on with your life.