Dealing with Income Changes in Chapter 13 Bankruptcy

Income Changes in Chapter 13 Bankruptcy

The purpose of Chapter 13 bankruptcy is to help debtors restructure outstanding debt by following a payment plan approved by the court. The payment plan is determined based on what disposable income is available after paying necessary living expenses. The trustee appointed to your case makes sure payments are received and forwarded to creditors. Chapter 13 has a significant set of rules and regulations that govern how the bankruptcy process precedes, so when changes to your income are experienced, it’s important to report it as it happens to your trustee.

Once living expenses are determined, disposable income (what is left over after making essential payments) is dispersed among creditors. Determining disposable income may involve several steps. You’ll review what your average income amount is, usually over a 6 month period. Certain amounts are set aside for living expenses and secured debt such as mortgage and vehicle payments. Priority debts are also placed in line for payment such as child support, alimony or other debt that is considered non-dischargeable. Some states may include medical expenses related to health as a necessary living expense.

Changes to your income should be reported as they happen in a reasonable amount of time. Keep in mind, in some states the term “income” may be in the form of different monetary payments including wages, gambling winnings, lottery or monetary gifts. If you acquire a second job, this should also be reported but expenses in relation to this job may be considered by the trustee; meaning this could increase your living expenses amount.

On the other hand, if your income is reduced its likely payments to your creditors can be reduced as well. If you lose your job, your case could be converted to Chapter 7 bankruptcy .  Failing to report income changes could result in your bankruptcy petition being terminated or dismissed.  This could leave the debtor fully responsible for all outstanding debt.