What happens if your income goes up during the years of a Chapter 13 case?
A lot can happen during the 3 to 5 years of a Chapter 13 case. You may be thinking about taking advantage of the many benefits of Chapter 13, but are wondering what would happen if your financial circumstances changed mid-stream. Particularly, are there disadvantages if your income goes up, and what can be done to plan for them?
Income Increase May Not Make Any Difference
In many situations an increase in income will make no difference. Although if you make more money than you had originally expected your monthly plan payment can go up, in some circumstances it would not.
First, your increase in income may be so modest that it is merely keeping up with inflation. Or it may be such a relatively small increase that the trustee will not press you to increase your plan payment or make any other changes to your Chapter 13 plan. In some jurisdictions you are required to report an increase in income of a certain percentage over the amount projected in the documents filed at court (for example, if it’s 10% greater). So if the income is less than that stated amount you may not need to report the increase or make any changes at all. In most jurisdictions you are required to send annual tax return copies to your Chapter 13 trustee, who would inform you if he or she believes an increase in income requires a change in the monthly plan payment amount. Your attorney will advise you about whether you should be proactive about making such a change or instead should wait until hearing from the trustee.
Second, your increase in income may be matched by increases in expenses. If so, it may well be prudent to file new income and expense schedules justifying your inability to increase plan payments.
May Increase Your Plan Payments But Not the Amount Paid to Creditors
Your budget may justify paying a larger plan payment, yet in many situations that will simply enable you to pay off your Chapter 13 case faster, without paying anything more to your creditors. You may even be able to show higher expenses but choose to keep your budget tight in order to finish off the case faster.
In one common situation you are required to pay into your plan for a minimum of three years but your original income and expenses justify lower monthly payments. So at the beginning of your case you are allowed to voluntarily stretch out the plan payments longer than three years, up to the maximum of five years, to keep the monthly payment affordable. If later in the case your income increases so that you can afford a larger plan payment, that may just shorten the plan by a few months, without giving more to any of your creditors.
A Nice Promotion
We’ll illustrate how this can happen. In this series of blog posts (interrupted by the last few Thanksgiving-themed ones) we are using the example of a married couple, Andrew and Amanda, who filed their Chapter 13 case to save their home from foreclosure and to deal with a substantial income tax debt. Their monthly plan payment is $525 per month, which they were scheduled to pay for four years. Most of what they were paying into their plan was going to catch up on their mortgage arrears and to pay income taxes that they could not have discharged (legally written off) in a straight Chapter 7 bankruptcy case.
Now two years into their Chapter 13 case, Amanda just got a significant promotion, resulting in a net income increase of $400 per month. It requires her to commute much further, adding $85 per month to her gas and vehicle maintenance costs. So the couple now has $315 more in net disposable income per month.
After meeting with Amanda and Andrew, their attorney files an amended Chapter 13 plan, and supportive amended income and expense schedules, proposing to increase their plan payment by $315, from $525 to $840 per month. The effect of that is NOT to pay any more than they would have in their plan without this change. It just finishes their case that much faster.
The Amended Plan Details
They were originally going to pay 48 payments of $525, a total of $25,200, again mostly to cure a mortgage arrearage and a large income tax debt. Now, 24 months into their plan they had paid half of that, and had half to go—$ 12,600. At the new monthly plan payment of $840, instead of taking another 24 months to pay the remaining $12,600, it will take only 15 more months. The total length of their case is now projected to be 39 months (24 + 15), much shorter but still longer than the 36 month minimum that they were required to pay.
As a result, Andrew and Amanda are not paying any more to their creditors, but are finishing their case 9 months earlier than had been originally scheduled. This will enable them to start rebuilding their credit that much faster.
There certainly are Chapter 13 cases in which an income increase during the case will result in a larger payout to some of the creditors. But the effect of increased income can be minimized, or even negated as in this example. Be clear with your attorney at the outset about the likelihood of changes in your income, and her or she may well be able to use a variety of similar tactical devises to your long-term advantage.