If it feels like debt payments consume your paycheck, a chapter 13 bankruptcy plan can help alleviate some of your financial stress. Chapter 13 bankruptcy is a debt consolidation plan that lets you make one debt payment for qualifying debts for a specific duration (typically 3 to 5 years). When you complete the plan, the bankruptcy court forgives the balances for certain unsecured debts.
One misconception regarding a chapter 13 plan is the notion that your payment is set in stone. Here are a few reasons your payment might increase and your options for handling the increase.
1. You Got a Raise
Chapter 13 payments usually don't increase due to standard cost-of-living wage increases, but larger raises may cause an adjustment in your payment. It might seem counterproductive that receiving a raise would cause your chapter 13 payment to increase when you're trying to improve your financial situation, but this is how these payments work in many cases.
One of the factors that the court uses to determine your chapter 13 payment is the amount of your disposable income (how much income you have after covering your expenses). If you get a raise, this likely increases your disposable income.
One way to combat a payment increase related to your raise is to demonstrate that your expenses have also increased. For example, if you now have to spend more on childcare, transportation, health insurance premiums, or work-related costs because you are working more hours or at a new employer, use receipts or bank statements to prove your expenses are higher.
2. You Fell Behind on Your Payment Schedule
Though some counties take chapter 13 payments directly from plan participants' wages, other counties may permit debtors to make their own payments. However, if you don't make your payments according to the agreed upon schedule, you may have a deficit in your plan payments. Your bankruptcy trustee may handle this arrearage by ordering a temporary increase in your monthly payment.
For example, assume that your monthly payment is $1,000, and you are a month behind your payment schedule. To make your account current, you will pay $1,100 for ten months. Once your arrearage is gone, you can ask the trustee to reduce the payment to the normal amount.
3. You Paid Off Something Outside of the Chapter 13 Plan
Some debts or obligations may be excluded from your chapter 13 plan. Some loans that you might exclude include 401(k) loans, mortgages, and vehicle loans. However, if you pay this loan off during the duration of your chapter 13 plan, the trustee may expect you to send some of the former payment amount to your chapter 13 plan payment. Again, the reasoning behind this is that you now have more disposable income.
Sometimes, you agree to the payment increase when your first propose your chapter 13 payment to satisfy the trustee's expectations. Other times, you might need to report the removal of this obligation to the trustee once it ends. This also applies to items like alimony and child support that might cease during your plan's term.
4. You Acquire New Cash Assets
If you receive gifts of value during your plan, these gifts may increase the amount that you must pay to your creditors. Cash inheritances and cash gifts are two items that can throw a wrench in your payment plan. Whether or not your cash asset increases you plan depends on a few different variables.
Each court system treats cash gifts and inheritances differently. A bankruptcy attorney in your area can help you understand what to expect. Some court systems treat gifts more favorably than inheritances, while others view both as windfalls that call for larger plan payments. The length of time between your plan's start and your receipt of the asset may also influence your payment increase.
Ready to get your debts under control? Contact C. Taylor Crockett, P.C., today for a free consultation.