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Effects of a Salary Increase on a Wage-Earner Plan Under Chapter 13

When a Chapter 13 debtor enters into a wage-earner plan, he or she commits the next three or five years' disposable income-that portion of the debtor's income not required to meet the necessary needs of the debtor and his or her dependents-to the repayment of debt. Often, a debtor's income will increase after the plan is in place, and the question arises as to what becomes of this increase in income. Bankruptcy lawyers can answer these and other Chapter 13 questions as they arise, providing information, reassurance, and competent and zealous advocacy throughout the bankruptcy process.

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Conclusion

The Debtor May Be Allowed to Retain
the Increase in Income Unless the
Increase is Significant and There Are No Offsetting Increases in Expenses.

The Bankruptcy Code requires that the debtor contribute his or her projected disposable income toward the plan payments for the first duration of the plan. Although the Code imposes this requirement only when the trustee or a creditor demands it, in reality the trustee always requires it, at least at the beginning of the plan. Whether changes in salary will change the payment plan depends on a complete consideration of all of the relevant circumstances.

If the debtor's income changes after the case has been filed but before the court has confirmed the plan, making it binding on the creditors (which can take as much as six months), the trustee will closely scrutinize the debtor's disposable income to make sure that the payments and the income are consistent and will incorporate any necessary changes into the plan. If the debtor's income changes within during the duration of the repayment plan, changes in income may not necessitate any changes in payments. The trustee may, however, ask that payments be adjusted if the debtor's income increases significantly. The trustee does not closely monitor the debtor's income, and it may actually be outside the scope of a trustee's duties to do so.

The trustee will consider not only the salary increase, but also whether there has been a corresponding increase in disposable income, on which the payments are based. Disposable income is the amount of the debtor's salary that is left after deducting all reasonable living expenses. If the debtor's salary increases but so do his or her expenses, there may be no increase in disposable income and therefore no change in the payment plan. If, however, there is a significant increase in disposable income, the trustee may ask for an increase in payments. In cases in which the plan extends over more than thirty-six months, the increased payments may actually reduce the length of the plan's term, so that the debtor has paid off the debts and receives a discharge sooner.

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It could be disheartening to a debtor to receive a raise and have to turn it all over to the trustee for debt repayment, but that is not always the effect of a salary increase. A lawyer experienced in bankruptcy law can put your mind at ease when questions about a Chapter 13 bankruptcy arise and help you plan for a sound and secure financial future.

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