Before filing for bankruptcy, we encourage the debtor to understand the plan and how it works. Understanding how Chapter 13 bankruptcy works before filing can help avoid horror stories you have heard about the plan. A common factor that most debtors share in their Chapter 13 bankruptcy horror stories is how their income affected their plan.
When filing for Chapter 13 bankruptcy, a significant factor the court will consider to determine your plan payment is your household income. Other factors like expenses and debt will also be considered.
While most debtors rely on employment as their sole source of income, some have income from additional sources. Since all your income is considered, how will additional income affect your Chapter 13 plan payment? Here is everything you need to know about how extra income may affect your plan.
How Will my Tax Refunds Affect My Chapter 13 Bankruptcy Plan?
A tax refund is classified as an asset when in bankruptcy. Therefore, the amount of tax refund you receive will be included as income when calculating your plan payment. Tax refunds are also considered disposable income; thus, the funds will be used to repay your unsecured creditors. You will therefore be required to submit your tax refunds to your trustee every year, who will then use the money to pay your unsecured debts.
Fortunately, bankruptcy exemption laws vary from state to state. So, depending on your state, you can exempt your tax refunds. Consult a bankruptcy attorney in your state to know whether or not you can exempt your tax refunds.
Will a Bonus Affect My Chapter 13 Case?
It depends. Usually, small bonuses do not affect your case and will not interfere with your plan. On the other hand, large bonuses might affect your plan, and the Chapter 13 trustee assigned to your case might take your bonus. Therefore, contact your bankruptcy attorney and let them know when you receive a bonus.
If you receive periodic or annual bonuses from your employer, it is important to inform your Chapter 13 bankruptcy attorney. Your lawyer can factor these bonuses into your payment plan, allowing you to keep your bonuses.
Does a Payment Raise Affect a Chapter 13 Plan?
While a pay raise is a dream come true for many, it will affect your Chapter 13 plan payment. While in Chapter 13 bankruptcy, you must notify your Chapter 13 trustee of any income changes, including an increase in income. But before rushing to notify your trustee, it is important to consult your attorney first.
Your lawyer will calculate how the raise might affect your Chapter 13 case. In most cases, if you have received a significant raise, then your payments under the plan may increase. Consulting your lawyer before may help as they might try to limit the increase of your payments by reviewing your monthly expenses, as sometimes expenses increase with an increase in income.
However, debtors paying their unsecured debts fully should not have their payments increase. However, they might willingly increase their payments to finish their Chapter 13 payments earlier.
What About Income from a Part-time Job or a "Side Hustle"?
Chapter 13 bankruptcy considers income from all sources, including side hustles and part-time jobs. So, you must include all these sources when filing for bankruptcy, and they will be considered when calculating plan payments under Chapter 13. Should you get a part-time job or a side hustle after filing your case, you must disclose the information to the Chapter 13 trustee.
If you are taking up the extra job or gig for a short time or to meet an immediate need like buying school clothes or affording Christmas gifts for your children, discuss this with your bankruptcy lawyer.
Most Chapter 13 plan payments are only amended if you will be continuing with the job for a significantly longer time or the new source of income is bringing considerable income. So, a short-lived job to help you meet some current expenses will not always increase your plan payments.
Will My Spouse's Income Affect My Chapter 13 Plan Payment?
Since Chapter 13 bankruptcy considers household income, your spouse's income will affect your plan payment. Household income is inclusive of your and your spouse's income, irrespective of whether they file for bankruptcy.
Fortunately, since their income is considered, so are their expenses. You can also add your spouse's expenses when calculating your budget. There are some tips and tricks you can use when creating a budget. If your spouse has some allowable deductions applying directly to them, you can use them to lower your disposable income. Besides, having a spouse means increasing living expenses like food and utilities, decreasing your disposable income.
Note: While Chapter 13 bankruptcy includes your spouse's income, their debts are not included. So, if your spouse is also in debt and would like to get rid of their debt through bankruptcy, they might either need to co-file bankruptcy with you or file a separate bankruptcy case. It is best to consider filing joint bankruptcy as easier and more affordable than filing separately.
Is the Chapter 13 Trustee Going to Monitor My Income?
As a debtor, you are not required to submit your quarterly or annual income reports or copies of your pay stubs to your Chapter 13 Trustee. However, if you are self-employed or don't have a regular income, e.g., if you work a commission-based job, the trustee might need you to periodically submit your income statement so they can verify your income.
However, the Chapter 13 trustee can request evidence of income at any time, provided you are in Chapter 13 bankruptcy. While only some debtors might need to share their tax returns with the trustee every year, all debtors must promptly report any income changes to their assigned trustee.
My Income Recently Changed: How Do I Report These Changes in a Chapter 13 Bankruptcy Case?
Every debtor should report any changes in come, but how do you report? An easy way is to directly contact the Chapter 13 trustee handling your case and report the income changes. We always advise debtors to consult their attorneys before contacting their Trustee.
Your bankruptcy lawyer might have valuable suggestions to limit the extent to which your plan payment will increase due to increased income. If your income recently decreased, your plan payment might be lowered to accommodate the change.
You are legally obligated to report a change in income during Chapter 13 bankruptcy. If you don't have legal representation and wouldn't want to consult a bankruptcy lawyer, you should take it upon yourself to notify the trustee and the court.
Is Chapter 13 Bankruptcy the Best Option for You?
Somehow, bad reviews and negative news travel fast. If you have heard about Chapter 13 bankruptcy horror stories, you might wonder if it is the best way out of debt for you. Unsure of whether to proceed and file? Give our free Chapter 13 bankruptcy calculator a try. It will give you an estimate of your Chapter 13 plan payment, and you can decide if it is better or more expensive compared to other debt-relief options.
If you want a different debt relief option other than bankruptcy, use this Savvy Debt Payoff Planner app and find the best way to get rid of debt without filing bankruptcy. You can call or text or reach out to us online and get a step closer to leading a debt-free life.