If you are reorganizing your debt using Chapter 13 bankruptcy, wondering what happens if you do file Chapter 13 but your income increases, or you are suddenly and unexpectedly able to pay off your plan early, this is the article for you.
Noted Philadelphia bankruptcy lawyer David M. Offen explains how Chapter 13 works and what happens if your disposable income changes while you are in your Chapter 13 plan.
If you are considering filing Chapter 13 bankruptcy, give us a call at (215) 625-9600. Your initial consultation is free of charge, and we will discuss all options available to you in your financial situation.
Chapter 13 Bankruptcy Plans
People filing Chapter 13 bankruptcy usually do so to catch up with past-due payments or to pay off debts such as:
- Mortgage arrears
- Rent arrears
- Car loan or car lease arrears
- Child support debt
- Spousal support debt
- Past-due student loan payments
- Nondischargeable income tax debt
- Government fines or fees
- Chapter 13 bankruptcy attorney fees
Chapter 13 debtors make monthly payments to the Chapter 13 trustee who in turn distributes funds to the debtor’s creditors. When the three- or five-year plan is complete, the debtor is caught up with arrears and their remaining unpaid unsecured debt is discharged.
Filing Chapter 13 forces creditors to accept payments through the plan and stays collection efforts such as wage garnishment, bank account levy, and lawsuits. The length of the plan and the amount the debtor pays in monthly plan payments depend upon how much disposable income the debtor has and how much past-due debt they must pay.
What happens if the debtor gets a new job or a significant raise in pay? What happens if the debtor receives an unexpected windfall, such as an inheritance or lottery win?
You Usually Can’t Pay Off Chapter 13 Early
Creditors & Trustees Usually Won’t Allow It
Creditors are bound by a confirmed Chapter 13 plan in that they must accept payments through the plan and refrain from taking action against the debtor for the debt that they owe. If the debtor completes plan payments, creditors must treat the debtor as if they had paid as agreed all along. In return for all of this, creditors are entitled to receive all of the debtor’s disposable income for the length of the plan.
If a Chapter 13 debtor’s disposable income increases, they must disclose that to their attorney, the bankruptcy court, and the Chapter 13 trustee. Why? Because a Chapter 13 debtor’s creditors are entitled to receive more money from the debtor if the debtor’s disposable income increases.
In the case of an increase in disposable income, the debtor’s attorney recalculates the amount of the new monthly plan payment and files a Chapter 13 plan modification with the bankruptcy court. After plan confirmation, the debtor must pay the new amount to the trustee for the remainder of the modified plan in order to complete the plan and get a discharge of unpaid unsecured debt.
If a Chapter 13 debtor does not complete their plan for any reason, they will not receive a discharge of their unpaid unsecured debt unless they are eligible for a hardship discharge or can convert their Chapter 13 to a Chapter 7 bankruptcy.
Paying Off Chapter 13 Bankruptcy
Paying the Entirety of Your Plan
If a Chapter 13 debtor has the means to pay off the plan entirely, in some cases their attorney must notify the court and their creditors. The debtor’s attorney should contact the trustee’s office to find out if it is likely that the Chapter 13 trustee, the creditors, or both will object to plan payoff. Why?Again, under the Bankruptcy Code, creditors are entitled to all of the debtor’s disposable income. What if the debtor’s income increases further?
The only time a Chapter 13 debtor can overcome an objection like this is if the creditors receive 100% of what they are owed. This includes unsecured creditors such as credit card lenders. If the debtor has a windfall that allows them to pay 100% of the debt they owe, the bankruptcy court may allow them to pay off their plan.
Modifying Your Plan
If a Chapter 13 debtor’s income increased (or decreased) somewhat, their attorney files a modified plan reflecting the new amount of disposable income available to fund the plan. After confirmation, the debtor pays that new amount, and when the plan is complete, the debtor receives a discharge of the remaining unpaid unsecured debt.
Converting to Chapter 7 Bankruptcy
If the debtor’s income stream is reduced or lost and the debtor can no longer afford to fund their Chapter 13 plan, the debtor’s attorney files a Notice of Conversion. After the debtor pays a conversion fee, the debtor then completes a Chapter 7 case rather than Chapter 13. This means the Chapter 13 plan is no longer in effect. The debtor does not have to make plan payments, but the debtor also does not realize the benefits of a Chapter 13 plan.
In order to convert a Chapter 13 to Chapter 7, the debtor must pass the Chapter 7 means test.
If a Chapter 13 debtor cannot make plan payments for the foreseeable future through no fault of their own, they may be eligible for a hardship discharge if their creditors have received as much as they would have gotten had the debtor filed Chapter 7 and the trustee seized and sold nonexempt assets.
The following claims must be paid to get a hardship discharge:
- Administrative claims such as the Chapter 13 trustee’s administration fee and your attorney fee.
- Priority claims such as child or spousal support or recent income taxes.
- Secured claims such as past-due mortgage or car payments.
Benefits to Completing a Chapter 13 Repayment Plan
Besides receiving a discharge of unpaid unsecured debt, a Chapter 13 debtor has the power to do the following if they complete their plan payments:
- Strip off a second mortgage or HELOC as unsecured debt and have it discharged.
- Cram down a car loan to current retail value, pay it off over the life of the plan at prime plus 1-3% interest, and own the car when the plan is complete.
- Pay off an end-of-lease balloon payment through the plan and own the car when the plan is complete.
Consult an Experienced Bankruptcy Lawyer in Philadelphia
Chapter 13 bankruptcy is a three- or five-year financial commitment. You may be able to realize your financial goals by filing Chapter 13 bankruptcy, but before you file you should know all of the power and all of the responsibilities that come with it.
Contact The Law Offices of David M. Offen and put our over 20 years of experience to work for you. During your free, no-obligation case consultation, we will discuss all of your options, including both Chapter 13 and Chapter 7 bankruptcy. Let Philadelphia bankruptcy attorney David M. Offen, Esq. help you get a fresh financial start.