What are the Effects of a Salary Increase on a Wage-Earner Plan Under Chapter 13?
When a Chapter 13 debtor enters into a wage-earner plan, he or she commits the next three years' disposable income - that portion of the debtor's income not required to meet the necessary needs of the debtor and his or her dependents - to the repayment of debt. Often, a debtor's income will increase after the plan is in place, and the question arises as to what becomes of this increase in income.
The Debtor May Be Allowed to Retain the Increase in Income Unless the Increase is Significant and There Are No Offsetting Increases in Expenses.
The Bankruptcy Code requires that the debtor contribute his or her projected disposable income toward the plan payments for the first thirty-six months of the plan. Although the Code imposes this requirement only when the trustee or a creditor demands it, in reality the trustee always requires it, at least at the beginning of the plan. Whether changes in salary will change the payment plan depends on a complete consideration of all of the relevant circumstances.
It is possible that a debtor's income could change after he or she files the petition, but before the court has confirmed the plan, which makes it binding on the creditors. A debtor may change jobs, get a raise or start a second job. During the time between filing and confirmation, the trustee will watch the debtor's disposable income to make sure that the payments fit with the debtor's income level and make any changes to the plan.
If the debtor's income changes within the first three years (36 months) of the repayment plan, it may not be necessary to make changes to the payment amounts. However, if the debtor's income increases by a significant amount, the trustee may ask that payments be adjusted accordingly. The trustee generally is not responsible for closely monitoring the debtor's income. After three years of a confirmed plan, if the plan even extends that long, there is no specific requirement in the Bankruptcy Code that disposable income be contributed to the plan, so an increase in income at that point in time would probably make little difference.
The trustee will consider not only the salary increase, but also whether there has been a corresponding increase in disposable income, on which the payments are based. Disposable income is the amount of the debtor's salary that is left after deducting all reasonable living expenses. If the debtor's expenses increase along with his or her salary, the debtor's disposable income may not change and the payment plan will not change either. If the debtor's disposable income increases by a substantial amount, the trustee may ask for the payments to also increase. If the plan goes beyond 36 months, the increased payments may actually reduce the length of the plan. This would mean that the debtor has paid off his or her debts sooner and would receive a discharge earlier.
It could be disheartening to a debtor to receive a raise and have to turn it all over to the trustee for debt repayment, but that is not always the effect of a salary increase.
A bankruptcy lawyer at our firm can answer these and other Chapter 13 questions as they arise, providing information, reassurance and competent and zealous advocacy throughout the bankruptcy process.
Copyright © 2008 FindLaw, a Thomson Reuters business
DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
Copyright © 2010 by Gregory R. Heline & Associates. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.