Your increased or decreased income could affect your Chapter 13 bankruptcy.
When filing a Chapter 13 bankruptcy case (not to be mistaken with Chapter 7), your household income may be considered when calculating your Chapter 13 plan payment. Most people rely on employment as their sole source of income. So, their Chapter 13 repayment plan is based on their income, assets, expenses, and debt. But, if you have other sources of income, the income will also affect your repayment plan.
Since Chapter 13 plans can take between three and five years, a lot can happen during that time. You might get an extra source of income or get promoted, increasing your income. Here is how getting an increase in income will affect Chapter 13 bankruptcy. You will also get answers to questions relating to extra income in Chapter 13 and suggestions for alternative options to bankruptcy.
What If I Am Now Unemployed?
If you are recently unemployed, you may want to understand whether you qualify for unemployment, how much you will get, and how long unemployment will last.
Also, you may want to consider speaking with your Chapter 13 bankruptcy attorney if you become unemployed. For example, you may get unemployment, but that may not cover you Chapter 13 plan payment.
Does a Trustee Monitor Income?
You will need to submit some copies to the trustee when filing your case, including your paystub. However, you are not regularly asked to submit copies of your payslip or quarter or annual income reports after that. But if you are self-employed, you get income that fluctuates like income based on commission; your trustee might require you to submit your income statements frequently to verify income.
The trustee might randomly ask for evidence of current income during the bankruptcy case. Your trustee might also ask for copies of tax returns. During the Chapter 13 bankruptcy case, you are legally required to report any changes to your income to your trustee immediately.
Reporting Income Changes in a Chapter 13 Bankruptcy Case
If you have any changes in income, you should report them immediately. However, you can report to your trustee after consulting with your bankruptcy attorney. Your attorney can help suggest options on how to limit the negative effects of an increase in income. On the other hand, a decrease in income might get you a lower plan payment.
NOTE: It is your responsibility to notify your trustee and the court of any changes in income during Chapter 13 bankruptcy. If you aren’t working with a bankruptcy attorney or wouldn’t want to hire one, you are legally required to take the necessary steps and notify the trustee and out of these changes.
What if I Get a Bonus During My Chapter 13 Case?
If your employer gives you a bonus like during Christmas, it counts as extra income. Therefore, you should consult your bankruptcy attorney. If the bonus is small, you can keep it in most cases. However, significant bonuses can affect your Chapter 13 plan, and the trustee might take part or the entire bonus.
So, if you usually receive yearly or periodic bonuses from your employer, you should tell your Chapter 13 attorney about them. Your attorney can factor these bonuses into your Chapter 13 plan. Accounting for your bonuses in your payment plan can allow you to keep them.
What If I Start “Side Hustle” Income or Get Part-time Income?
All your incomes, expenses, assets, and debts are considered when calculating your Chapter 13 plan payments. So, if you get a side hustle or part-time job during your payment plan, you are obliged to report the income to the trustee assigned to your case.
If you are taking a part-time job to get finances for medical bills, buy clothes for your children or pay fees for a new course you would like to take, consult your bankruptcy attorney. Sometimes, your Chapter 13 plan may not be amended unless you earn significant income from the side hustle or keep the part-time job for more than several months.
How are Tax Refunds Treated in a Chapter 13 Bankruptcy Plan?
In a bankruptcy case, a tax refund is considered an asset. Therefore it is considered when calculating your repayment plan. Tax refunds are regarded as disposable income because you can use the funds to repay your unsecured lenders. So, when you get tax refunds, your Chapter 13 plan may ask you to turn over the refunds to your trustee, who then uses the funds to pay off your unsecured lenders.
However, it depends on where you live. In some states, you can exempt your tax refunds, claiming the refund as a liquid asset. Therefore, it depends on your state and the bankruptcy exemption you choose. The court might ask you to submit copies of your tax returns to your Chapter 13 trustee every year until you finish making your payments.
What Happens If I Get Promoted or Get a Raise During Chapter 13?
A Chapter 13 plan is a long-term commitment, and during the Chapter 13 plan, you might get promoted or get a raise. Legally, you should report any changes in income to your Chapter 13 trustee. However, it is wise to consult your attorney before reporting to your trustee.
Your attorney will help look into the raise and calculate how much it can impact your case. For example, if you are paying 100% of your unsecured debts, you shouldn’t have an increase in your payments. However, you can willingly choose to pay off your debts earlier by making higher payments.
So, if you get a raise, your Chapter 13 payments can increase. However, your attorney can help limit the increase by reviewing the change in income and your monthly expenses. They need to determine if your expenses will increase with your income or not. If your expenses increase as well, there will be a minimal change on the disposable income, so you may not have to increase your Chapter 13 payments.
Is My Spouse’s Income Considered When Calculating My Chapter 13 Plan Payment?
When calculating a Chapter 13 plan payment, the household income is considered. Household income comprises your and your spouse’s income. So, even if your spouse did not file for bankruptcy, their income contributes to your plan payment. However, you can add your spouse’s expenses when writing down your expenses or budget.
If your spouse has some allowable deductions on their income, you can use these deductions to increase your household disposable income. Although your spouse’s income is considered, your spouse can increase the amount you deduct for basic expenses like food, clothing, and utilities.
Note that spouses’ debts are not included in the plan, despite their income being considered. So you can ask your spouse to file for bankruptcy to eliminate their debt. You can file bankruptcy jointly or separately. Filing jointly, however, is easier and saves more than separate filing.
What’s the best option for you?
There are a lot of shared horror stories by people who filed for Chapter 13 bankruptcy and later realized it wasn’t the best option for them. So, before filing, are you sure Chapter 13 is the best option for you? Should you pursue a Chapter 13 dismissal and refund? Will you face a wage garnishment if your Chapter 13 is dismissed?
That said, you can use a free Chapter 13 bankruptcy calculator to estimate your payments under a Chapter 13 plan payment. You can also consider other debt options and their cost.