Chapter 13 Bankruptcy For Individuals With Irregular Income

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In this article, you can discover…

• Whether you can file for bankruptcy if your income fluctuates.
• Whether seasonal workers are eligible for bankruptcy in California.
• What happens should your income increase significantly during bankruptcy.

Can I File For Chapter 13 Bankruptcy If My Income Fluctuates?

The Bankruptcy Code in section 109(e) says that Chapter 13 is available only for someone with a regular income, and then it lists two debt ceilings – one for secured debt, the other for unsecured debt – to determine eligibility for Chapter 13 protection.

What do we mean by regular income? Does it have to be the exact same amount every single month? No. After all, most people are hourly wage earners rather than salaried employees, and so their income may fluctuate based on overtime. It may fluctuate seasonally. There is no absolutely rigid approach to the concept of regular income.

The Code says it has to be regular income, but it doesn’t really define what that is, so if you do have some fluctuation, as long as you put in the plan some sort of provision for addressing that fluctuation, then the chances are very good that you will be able to get the plan confirmed, as long as the fluctuations are not just wildly out of whack.

So, yes, you can do a Chapter 13, even if your income is not regular in the sense of the exact same amount each month.

How Does The Court Calculate Disposable Income For Someone With Irregular Earnings?

The Bankruptcy Code has a definition of disposable monthly income that is based on current monthly income.

Current monthly income is defined as the six-month arithmetic average of gross income from all sources for the six full calendar months immediately prior to the month you file your bankruptcy petition. We add it all up, divide by six, and that six-month arithmetic average of gross is called “current monthly income.”

To calculate disposable monthly income from current monthly income, we subtract the six-month average of the taxes and Social Security you were supposed to have paid over that same six-month period. Then we subtract living expenses, but not your real-life living expenses.

Instead, we subtract out the IRS standard living expenses for a family of your size. It’s based on the IRS standard family they have encased in plastic in Washington, DC; the poor creatures suffocated. Then we subtract any additional expenses you may have, that are not envisioned in the IRS standard expenses, but that you can justify to the Chapter 13 Trustee and the Judge assigned to your case. This includes such things as a car payment, health insurance, term life insurance, and obligations to pay child support or alimony. What’s left over is disposable monthly income. Since we are dealing with six-month window, some of the irregularity of the income is smoothed.

A typical example of someone with irregular income that can still file a Chapter 13 petition is a school teacher. Many school teachers do not work during the summer so they’re not paid for the summer. What is the solution to their irregularity of income?

How Can I Make Regular Bankruptcy Payments With Irregular Income?

One way to address this is with what’s called a summer saver account that is used by school teachers, at least in this part of the country. How does a summer saver account work?

Suppose, for example, the school teacher works and is paid 10 months out of the year. For each paid month a portion of the check is put into a summer saver account. The amount deposited in the summer saver each month is one-tenth of the amount deposited in the regular account, so the teacher has the same amount each month – including the summer months – for living expenses. This is common practice for teachers who are not seeking bankruptcy protection.

The practice is identical in a Chapter 13. However, a portion of the money for a given month is used to make Chapter 13 plan payments. The result: What started out as irregular income has now been turned into regular income.

Thus far we have looked at things using a six-month average of income, and IRS standard living expenses – each of which is a bit artificial as a financial measuring stick.

However, there is another place in the bankruptcy petition where we list income and expenses; but there we list income right now, not a six-month average, and real life living expenses, not IRS standard expenses. We then take the difference between the income and expenses to get another candidate for disposable monthly income. That one is more likely to be the one used to calculate plan payments, unless the current month is anomalous. The problem with this approach for someone with irregular income is that it fails to take into consideration the income fluctuations.

Another way to address irregular income in the Chapter 13 is to specify changes in the payments month by month. However, if there are many changes in the plan payment structure, this approach can be a bit unwieldy. Therefore, using a summer saver account is probably the best solution.

The most common reasons for having periodic changes in the Chapter 13 plan payment structure include paying off a car loan or a retirement loan during the pendency of the plan. Once that debt is paid, the money that had been devoted to those payments is then redirected to plan payments – unless the plan is already a 100% plan. Creditors are never entitled to more than a 100% payout – though they rarely get 100%.

A little bit of creativity and a good working relationship with the Chapter 13 Trustee assigned to the case can make this work out.

Are Seasonal Workers Eligible For Chapter 13 Bankruptcy In California?

Seasonal workers typically are people who have surges in income for a bit and then the income drops. However, Chapter 13 might not work out for a seasonal Santa Claus who only has income from that job in December. A Chapter 13 plan requires more than one plan payment per year. However, if the seasonal worker can present a good track record of income that lends itself to making regular plan payments, then the Court will probably confirm the plan.

The analysis depends, of course, on the facts of the case, and the answers to the questions: What is a seasonal worker? Is the seasonal worker somebody like a school teacher who works 10 months out of the year? Or is it something a little bit different? If the work is highly sporadic, then it might be impossible to come up with a confirmable plan.

What Happens If I Experience A Gap In Income During Chapter 13?

That depends. There are two things we can do.

Temporarily Suspend Or Reduce Plan Payments

If you have a temporary hiccup, maybe you’re going to be off work for a couple of months because you’re going to have a medical procedure and you simply can’t work during that time; but you’re going to be back in the saddle in a couple of months. In that situation, we can file a motion to either temporarily suspend plan payments, or reduce plan payments.

That type of motion is fairly routinely granted, provided that under the suspended or reduced payment structure the plan still satisfies the Chapter 7 liquidation requirement for Chapter 13: You must pay your general unsecured creditors over the life of the plan at least as much as they would have gotten in a Chapter 7 liquidation.

Modify The Plan

If your income is going to drop for the duration of the plan, but you can still make plan payments that satisfy the Chapter 7 liquidation requirement, then you can modify the plan to have a permanent reduction in plan payments.

What Happens If I Can No Longer Make Any Payment Plans?

Sometimes the reduction in income is so great that you cannot make any more plan payments. For example, you have a healthcare catastrophe, you’re not working anymore, and the disability that you’re receiving is insufficient to cover your living expenses and the plan payments.

Hardship Discharge

Under the right circumstances, we can file a motion for hardship discharge. For a hardship discharge you must satisfy all the following:

1. The Court must have already confirmed the plan;
2. You must have already paid through the plan what the creditors would have gotten in a Chapter 7 liquidation;
3. The reason you can’t make plan payments anymore, was not your fault: you can’t be justly held accountable for it; and
4. There’s no practicable way to modify the plan.

If you can satisfy these requirements, then you can get a hardship discharge under Chapter 13 without having completed all your plan payments.

Conversion To Chapter 7

Finally, you can convert to Chapter 7. However, there may be a potential problem with conversion. If you have nonexempt assets, then during the pendency of the Chapter 13 plan they may have gone up in value. If you convert to Chapter 7 you will face a Chapter 7 Trustee who has a lean and hungry look and who will liquidate nonexempt assets for the benefit of the creditors.

In sum, the Chapter 13 hardship discharge is probably the best solution – if you qualify for it.

There is a further benefit to the hardship discharge. If sometime after you receive a discharge you need to do another bankruptcy, the waiting period is shorter with the Chapter 13 hardship than with a Chapter 7 discharge.

For example, if you want to file the new bankruptcy under Chapter 7, you must wait eight years between filing dates if the prior discharge was under Chapter 7. But if the prior discharge was under Chapter 13, then the most you must wait is six years from filing date to filing date.

With each one of these answers that I have given, I issue an umbrella caveat: Everything depends on the facts of the case. I have given general principles.

Can I Modify My Repayment Plan If My Income Changes Unexpectedly?

You can file a motion to modify the plan due to changed circumstances. This typically comes up if your income has dropped, or if your car died and you need a new car. In the case of a car purchase, we file a motion for authority to incur debt, and when it’s granted, you go buy your new car.

Of course, the new car payments will reduce the amount available to make plan payments. Therefore, we simultaneously file a motion to modify the plan to reduce plan payments to accommodate that new car payment.

How Does Chapter 13 Accommodate Freelance And Gig Workers?

That gets back into the question: do you have regular income? If you have enough regular income – I have already talked about what that means – so that you can make predictable plan payments, or reasonably predictable plan payments, then the fact that you’re a gig worker or freelance worker really doesn’t play a role. However, if you don’t have reasonably steady income, you may have difficulty getting a Chapter 13 plan confirmed.

If you have a situation where you’ll get a job and it lasts two months, and then you’re looking around for six months without any work at all, and maybe you’re going to get another job, the Chapter 13 Trustee will probably object to your plan based on the speculative nature of your income.

But if your income if not speculative, and you have a nice employment track record, your income might not be speculative. As always, everything depends on the facts. As with so much in life, context is crucial to the analysis.

Are Self-Employed Individuals Treated Differently In Chapter 13?

Not in the sense that they must come up with a plan, and they have to make plan payments. However, the bookkeeping and the reporting requirements are considerably more complicated than for a W-2 employee. A W-2 employee’s income is much more predictable than the income of a self-employed person.

While we still calculate disposable monthly income, if you are a self-employed person, we also need 12 months’ of profit and loss, income and expense for the Trustee to see the pattern. In addition, some Chapter 13 Trustees have special self-employed individuals’ questionnaires we have to complete. In sum, there’s a lot more work involved in a self-employed person’s case than there is for somebody who is a W-2 employee.

If you’re self-employed you can still do the Chapter 13, and once the plan is confirmed, as long as you make those plan payments on time, you will have a successful case. And you are not going to hear from the Chapter 13 Trustee who, not only is the administrator of the plan, but also serves as sort of a policing agent to make sure the plan payments are being made on time, that you’re following the rules, that you are operating in good faith.

What Happens If My Income Increases Significantly During Chapter 13?

I generally take the position that my primary obligation is to my client. On the other hand, the Chapter 13 Trustee assigned to the case has an obligation to the bankruptcy estate, and as a result, sort of an attenuated obligation to the creditor body. The Trustee fulfills that obligation by maximizing the plan payments to maximize the return to the creditors. Therefore, if your income increases, the Trustee may ask to the Court to increase you plan payments.

How will the Trustee know that your income increased? Each year that you’re in the Chapter 13, you must send to the Chapter 13 Trustee copies of your income tax returns within 10 days of filing them.

In addition, if you’re in a less than 100% plan, you have to send the Trustee a portion of your tax refunds withing ten days of receiving them. The way it’s done here in the Central District of California is you keep $500 of the refunds for yourself, and the rest goes to the Chapter 13 trustee.

In fairness, this is really the way it should be because if you’re in a less than 100% plan, your creditors are getting shortchanged. You owed them the money prior to filing the Chapter 13, and if you are paying them less than 100% though the plan, and you get a dividend, you have to share that dividend with them – whether the dividend is a tax refund or a salary increase.

Can You Share A Story About A Client With Irregular Income Whose Case You Helped Succeed?

The standard example here is a school teacher, and the solution is using a summer saver account. For somebody whose income is irregular and is not a school teacher and doesn’t know about the summer saver program, I have that person set up a summer saver – or summer saver-like – account. I use the phrase “summer saver-like” because account deposits might not be specific to summer. Instead it might be a sort of rainy day account for those months where there is no income or there’s a greatly reduced income.

The Chapter 13 trustees are realistic and reasonable. They are not stupid people. If you have a reasonable way to deal with the irregularity of the income, they will not oppose you.

Standard Disclaimer

Thank you for watching these videos. I hope they’ve been very helpful. If you are in Los Angeles County or Orange County, I’d be delighted to be your bankruptcy attorney.

But if you’re not in those counties, or if you’re in another state, I cannot help you. In fact, I cannot give you legal advice if you are in another state, as I am only licensed to practice law in California. If I give you legal advice and you’re, let’s say, in Mississippi, then I will be practicing law in Mississippi without a license, which is a crime.

So, while I’m delighted that people throughout the country are watching these videos (and thank you very much for the messages that I receive occasionally via email and so forth), these videos do not constitute legal advice nationally.

Still Have Questions? Ready To Get Started?

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