What happens if my income changes during chapter 13?
A Chapter 13 plan lasts three to five years, and few households go that long without a raise, a layoff, a new baby or a large medical bill. The Bankruptcy Code expects this. Your payment is fixed when the judge confirms your plan, but it can be changed later if your circumstances change.
How your payment is set in the first place
Your plan payment is built from your disposable income, meaning what is left after allowed living expenses. It also has to cover what the law requires for secured and priority debts, and it must give unsecured creditors at least what they would have received in a Chapter 7 case. If your income is below your state’s median, the plan normally runs three years. If it is above the median, the plan runs five years and many of your expenses are measured against IRS standards. To find out whether Chapter 13 is open to you at all, see Who Files Chapter 13 Bankruptcy?
If your income goes down
- Ask to modify the plan. After confirmation, the plan can be modified to lower the monthly payment, to stretch it up to the five-year limit, or to reduce what unsecured creditors receive (11 U.S.C. § 1329). The judge approves the change if the modified plan still meets the Code’s requirements.
- Catch up after a short setback. If you fall behind for a month or two, a modified plan can often fold the missed payments into the rest of the case.
- Convert to Chapter 7. You have the right to convert your case to Chapter 7 at any time. If you qualify for Chapter 7 under your new circumstances, conversion can bring the case to a faster close.
- Ask for a hardship discharge. If you cannot finish the plan, the court may still grant a discharge when three conditions are met: the failure to pay is due to circumstances you should not justly be held accountable for, your unsecured creditors have already received at least what Chapter 7 would have paid them, and modifying the plan is not practicable (11 U.S.C. § 1328(b)). A hardship discharge covers fewer debts than a discharge earned by completing the plan.
If your income goes up
The trustee or an unsecured creditor can ask the court to raise your payment when your income rises (11 U.S.C. § 1329). Many trustees review each year’s tax return, and some plans require you to report raises or turn over tax refunds. A raise does not always change the payment, especially when your expenses have grown too, so ask your attorney before you assume either way.
Act before you miss a payment
If payments stop, the trustee can ask the court to dismiss the case. A dismissal ends the automatic stay, and creditors can resume collection and foreclosure. Call your attorney as soon as your income changes, while there is still time to adjust the plan.
Talk with us
Lincoln Law represents Chapter 13 filers in Utah and California from the first consultation through the final payment, including plan modifications when life changes. If you are considering Chapter 13 or already in a plan that no longer fits, schedule a free consultation.
Author: Carl Gustafson
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