It is nearly impossible to predict what the future holds in life. Therefore, when you enter a five-year chapter 13 bankruptcy plan, you never know what life changes may be thrown your way during the plan period. You may lose your job, obtain a significant increase in income, or receive an inheritance amongst other possibilities. This blog will explore how common life changes will impact your chapter 13 plan and what your options are to react to those changes.
WHAT HAPPENS IF YOUR INCOME IS REDUCED OR YOU LOSE YOUR JOB?
If you are entering into a five-year chapter 13 plan, you may be wondering what will happen if you lose your job or experience a reduction in income prior to completing the plan. 11 U.S.C. § 109(e) requires a chapter 13 debtor to have regular income in order to be eligible for a chapter 13 bankruptcy. Regular income can be in many forms including household income, rental income, social security benefits, etc. If you experience a change in financial circumstances while your chapter 13 bankruptcy case is ongoing, then it must be reported through an amendment to your bankruptcy schedules. Failure to make your monthly chapter 13 plan payments will eventually result in the dismissal of your chapter 13 bankruptcy case. However, a reduction in income may allow you to reduce your plan payment going forward depending on if the circumstances in your case permit you to reduce the plan payment.
If a reduction in your income or the loss of your job does not make your chapter 13 bankruptcy case feasible, then an option that you have is to convert your bankruptcy case to a chapter 7 bankruptcy case pursuant to 11 U.S.C. § 1307(a). However, it is important to consult with your bankruptcy attorney by having an open and honest dialogue about your financial affairs prior to deciding to convert your case to a chapter 7 bankruptcy case. Depending on your financial circumstances, a chapter 7 bankruptcy case may have implications that you would like to avoid. For example, if you have significant equity in real property, then converting your case to a chapter 7 bankruptcy may not be in your best interest since the trustee appointed to administer your case is likely to involuntarily sell that property for the benefit of your creditors. Your bankruptcy attorney will be able to talk you through what to expect in a chapter 7 bankruptcy and help you determine whether the conversion is in your best interest.
A CHANGE IN CIRCUMSTANCES MEANS THAT AN INCREASE IN INCOME DURING THE COURSE OF YOUR CHAPTER 13 BANKRUPTCY CASE OR THE ACQUISITION OF AN ASSET ALSO MUST BE REPORTED TO THE COURT
Similarly to how a reduction of income must be reported to the Court, an increase in your income also must be reported to the Court and accounted for in your chapter 13 plan. 11 U.S.C. § 1306 (a) states that “Property of the estate includes, in addition to the property specified in section 541 of this title- (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title whichever occurs first; and (2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title whichever occurs first.” This Bankruptcy Code section creates what is known as the expanding chapter 13 estate meaning that anything acquired during your bankruptcy estate or an increase in your income during the bankruptcy case must be accounted for in the bankruptcy case. Therefore, if your income increases, then it likely will cause your plan payment to have to increase for the remainder of your chapter 13 plan period. It is your responsibility, as a chapter 13 debtor, to report these changes to the Court. Failure to do so can result in the denial of your discharge and could have even further implications that you want to avoid.
Pursuant to Section 1306(a), it is not only income that must be reported to the Court. Any asset that you acquire during the course of the chapter 13 bankruptcy case will also be a part of your bankruptcy estate. Common examples of assets that may be acquired during the course of a chapter 13 bankruptcy case include a right to an inheritance and the right to a claim for a personal injury. It is essential that you report any acquisition of an asset to your bankruptcy attorney promptly, so they can properly advise you as to how to proceed in the case. If the asset exceeds your allowed exemptions, then the amount that is repaid to creditors will also need to be increased accordingly.
If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and present you with the potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.