 Bankruptcy law irony: Working overtime can hurt
|  Dear
Bankruptcy Adviser,
I have extreme credit card debt. Over the past
few years I have worked a lot of overtime just to pay the minimum on the credit
cards. Recently, I have not been able to work overtime and I am considering a
Chapter
13 bankruptcy. My question is, if I continue to work overtime up to
filing for bankruptcy, will that extra salary affect the payment schedule under
a Chapter 13?
-- Jeff
 Dear
Jeff,
First of all, I commend you for doing your best to try to pay
back your debt. The bankruptcy laws are designed for people like you -- people
who are doing their best to dig themselves out of a hole that may be just a little
bit too deep.
The answer to your question is this: Yes, working
overtime will affect your payment schedule. The reason is, when you file
for bankruptcy under Chapter 13, the bankruptcy court creates a repayment plan,
under which you repay creditors over three to five years. Income from the previous
six months is used to calculate an average, which is then used to help determine
your monthly payment. After your Chapter 13 payment plan is initiated, you need
to keep the trustee informed when your income increases or decreases. Your trustee
may seek to increase your payment accordingly.
Changes made
to the bankruptcy laws in 2005 hold attorneys to tougher ethical standards. While
I would advise you to stop killing yourself with overtime (unless it is absolutely
necessary), it may be bad faith if I told you to quit you job in order to qualify
for bankruptcy. Your bankruptcy petition would have to indicate that your income
will be increasing soon after the bankruptcy. This would look suspicious.
Personally, I am not a big fan of Chapter 13 plans. The purpose of
a Chapter 13 plan is to protect an asset such as a home. It's a good idea,
but the costs are considerable. The plan takes up to five years. In an economy
where your income may fluctuate, this makes them especially hard to get through.
Chapter 13 bankruptcies have a low completion rate. In a Chapter 13, you will
need to put every available dollar into your plan payment either until the debt
is paid in full or you complete the three- to five-year payment plan. You will
find it very difficult to save anything or prepare for emergencies until you receive
your bankruptcy discharge.
Some people who file Chapter 13
end up needing to convert to Chapter 7. This entails additional expenses. You
may not be able to maintain your Chapter 13 payment plan, but you may also have
too many assets to qualify for Chapter 7. Suddenly, you're facing the prospect
of having your debts come back to life. Plus, you cannot get the bankruptcy off
your credit report for the next 10 years once it has been filed. That's not good.
Instead, I tend to advise clients, if possible, to file Chapter
7 bankruptcy or to use available assets to negotiate a deal with their
creditors. While it seems natural to want to protect the assets, I've found that
an immediate settlement with a fresh start can be superior to a five-year payment
plan.
Justin Harelik is a practicing attorney in Los
Angeles. To ask a question of the Bankruptcy Adviser go to the "Ask
the Experts" page, and select "bankruptcy" as
the topic.
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