Chapter 13 is known as the “wage earner’s bankruptcy.” Under this chapter, you agree to pay back at least a portion of your debts with a three- or five-year repayment plan. If you are currently in the midst of a Chapter 13 plan, you are likely considering how to get your financial house in order once you are discharged.
Chapter 13 Requires a Payment Plan
Chapter 13 is less about eliminating your debt and more about restructuring your finances. When you file for Chapter 13 and go through the process of having the plan approved by the bankruptcy trustee, you agree to make a set payment each month towards your debts. The trustee then divides this up and disburses it to your creditors. At the beginning of your plan, this payment will likely take up the great majority of your disposable income, leaving you with no money left over to save.
If Your Income Improves
You may be lucky enough to have an improvement in your income over the term of your repayment plan, if you get a promotion or take a new job. Because your repayment remains at a set amount each month, this will leave you with extra disposable income, over and above meeting your obligations under Chapter 13. If the improvement in your income is 10 percent or more, you are obliged to contact your bankruptcy trustee and inform him of your change in circumstances. Below that amount, and you can save or spend the extra disposable income without informing the trustee.
Savings and the 100 Percent Plan
If your plan already had you paying back 100 percent of your debts, there should be no need to adjust your payment, and you will be free to do as you see fit with your extra income. However, if you were not already committed to pay back 100 percent, but had agreed to a lower amount, you may find that the Trustee will renegotiate your plan and ask you to pay some of your extra income, leaving you again with little room to save.
Save If You Can
If you are allowed to, saving your extra income is likely a very wise idea as your prepare to emerge from bankruptcy. You will continue to face financial challenges because of your filing, even after your bankruptcy plan in completed. The filing will remain on your credit for at least seven years, and will probably mean you have difficulty in obtaining good rates for major loans such as a car note or mortgage. Having extra savings in this situation gives you more flexibility and allows you to avoid future financial trouble.