What is Chapter 13 Bankruptcy?
Sometimes called the “wage earner’s plan,” Chapter 13 bankruptcy allows those with regular income to form a strategy to repay all or some of the debts that they owe. Typically, the individual will have three to five years to pay back the debts. A plan is put in place based on their income and the amount of debt they owe, and regular payments are generally made monthly.
Ensuring that you may be eligible for Chapter 13 means that your total debt must be below a certain amount (the amount or threshold can change; speak with your trusted attorney to ensure that you are below the threshold) and that you haven’t filed for bankruptcy in the last 180 days and been denied due to not showing up to court or complying with the terms.
What Makes Chapter 13 Bankruptcy Appealing?
Several advantages to filing for Chapter 13 are stopping foreclosure processes, extending secured debt payoff plans (other than mortgages), and the ability to make payments directly to a trustee and avoid communication with creditors.
Once the bankruptcy process begins, individuals are safe from losing their homes in most cases and can attempt to clear up past-due mortgage payments over time. Extending secured debt payments over the life of the bankruptcy process can also offer some breathing room as it may lower some monthly payments.
Another significant advantage of filing for Chapter 13 is that once the process begins, the debt is considered to be on an automatic stay, which means that most creditors can no longer proceed with collection efforts.
Do I Have to Report a Change in Income During The Chapter 13 Process?
Debtors have an obligation to follow through with the payment plan as directed and to report if there have been changes to their income. Whether the change means that their income has increased or decreased, this information must be reported.
The critical item to note here is that disposable income is what trustees will look at, not net income. What this can mean is that if the debtor takes on a second job or otherwise increases their income but also increases living expenses, they may not be forced to make larger monthly payments for the remainder of the payment plan.
If living expenses remain the same, but the income increases, the debtor may be forced to increase the monthly payments that were originally arranged.
In the situation where a debtor plans to pay off their debt entirely through the payment plan, they may wish to pay off debt sooner using their increased income and complete the Chapter 13 process sooner. This option may appeal to those who want to rebuild their credit quicker, as bankruptcy will remain on your credit for several years.
Other Changes to Finances During Chapter 13
If income significantly decreases after the payment plan has been arranged, it may be an option to reduce the amount of monthly payments that are required. Speak with your experienced bankruptcy attorney to determine what your best options are and to ensure that you remain in compliance with the payment plan.
Additionally, incurring new debt during the life of the bankruptcy process should not be done without consulting the trustee. The general rule of thumb would be to discuss any significant changes in income and expenses while the payment plan is in place. If you can now take on more debt due to a rise in income, being fully transparent with changes and possible new debt will keep you safe from penalties or punishment.
What if a Debtor Fails to Report an Increase in Income?
Some debtors fail to report the increase in income to allow themselves a headstart or more wiggle room in their finances. The downside to this, however, is that if a trustee discovers that the income had increased and was not reported, it can lead to having the bankruptcy abruptly end, leaving the debtor likely back in the same position as when they started. Similarly, if the original payment plan called for some of the debt to be discharged at the end of the allotted time, the debtor may lose this option as well, meaning they will now be responsible for that debt as well.
Another essential item to note is that if the debtor isn’t fully transparent about their income or withholds information, and it is later discovered, they may be at risk of being charged with bankruptcy fraud. Bankruptcy fraud charges are serious matters and can lead to up to five years in prison and up to $250,000 in fines.
Bankruptcy Can Provide a Fresh Start
Regardless of how you came to the decision to move forward with bankruptcy, you may feel disheartened or frustrated. Bankruptcy can provide a fresh start for the right candidates as long as they are willing to be transparent and honest about their financial situation currently and throughout the life of the bankruptcy process.
Set yourself up for success by consulting a competent and compassionate attorney. They can become your most prominent advocate and ensure you are getting the best out of the bankruptcy process and setting yourself up for future success. Navigating the bankruptcy process can be challenging, and having someone to rely on to guide you along the way can be invaluable to anyone considering bankruptcy.
Contact our office at (317) 623-4546 to learn more. We provide professional services for everyday people, and we look forward to helping you.