Dear Bankruptcy Adviser,
A client of mine filed for Chapter 13 to avoid the sale of his residence. His Chapter 13 plan consisted of paying one amount for the first year of the plan. Then, the payment goes up at different time during the bankruptcy payment period. Why is this if his income after expenses (excluding mortgage) is not high enough to make that increased payment?
You are talking about the intricate details of a Chapter 13 repayment plan. Obviously, there is no way to be sure why the payment of your client, known in bankruptcy terms as “the debtor,” will increase over the course of the case, but I can give some general ideas why this happens.
Chapter 13 is a repayment of none, some or all of your debt over a three- to five-year period. Most or all of your creditors are lumped together into one large pool. Then, you make payments each month to the person assigned to your case, called a trustee. The trustee distributes your payment to the creditors.
There are numerous factors that could affect the plan payment.
1. Overtime pay
The trustee will review six months’ worth of pay stubs and also will consider income fluctuations. For example, the debtor might have received extensive overtime hours for one or two months, but that overtime has ended. Overtime pay can play into the increase or decrease in the plan payment.
Typically, sporadic overtime will not be considered a reason for an increased plan payment because the trustee is aware that if the overtime ends, the plan will have to be changed. This is additional work for the trustee and the debtor. The trustee does not want an amended plan to be filed every other month, depending on potential but inconsistent overtime.
2. Car payments
Many people file a bankruptcy while making a car payment. However, the car payment could be paid in full before the Chapter 13 bankruptcy has been completed. The trustee believes that once this car payment is gone, you will have additional money to pay to your creditors in the plan.
3. Retirement loan repayments
In other situations, a debtor might be paying back a retirement loan. This is a loan taken out against a 401(k), 403(b) or pension. The retirement loan also will be paid in full before completion of the Chapter 13 bankruptcy. The plan payment can increase once retirement loan payments end.
4. Child support, spousal support and child care expenses
A debtor could have child support and/or alimony that will end at some point during the course of the plan. Once those payments end, the plan payment can increase. For example, a debtor could have child care expenses that will end when the child starts school.
There are many issues to consider prior to filing bankruptcy and to anticipate throughout the payment plan. While a snapshot of your financial picture is taken when you file, your situation can change over time. The trustee will want your plan payment to adequately reflect those changes, and you will want your payment to appropriately represent your situation as well.