The Impact Of Bonuses On Your Chapter 13 Bankruptcy Case In Los Angeles County

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In this article, you can discover…

• If annual bonuses are treated differently than base salary increases in Chapter 13.
• How to account for large or regular bonuses during bankruptcy.
• Whether it’s possible to shield or protect a bonus from bankruptcy.

Are Annual Bonuses Treated Differently Than Base Salary Increases?

Any annual bonuses will be reflected on your income tax return. A Trustee may assert that you must share an annual bonus with your creditors unless you’re already in a 100% repayment plan. It may be that by the time the Trustee finds out about the annual bonus, you’ve already spent it, but a bonus is certainly something a Trustee will be very interested in.

How Can I Account For Large Bonuses As I Make My Payments?

If you’ve gotten a large bonus, you probably will be asked to increase your plan payment. So, one thing you can do if you’re going to get regular annual bonuses is something similar to what school teachers do. I’ve certainly done many Chapter 13 bankruptcies for school teachers. Many school teachers only work 10 months out of the year; they don’t generally work in the summer. When they’re not working in the summer, how are they going to make their summer Chapter 13 plan payments?

Banks have something called a “Summer Saver” account where a teacher has the checks deposited in the summer saver account, and then the amount is spread out over 12 months. So in summer, the teacher uses the money in the summer saver account to make plan payments and, of course, cover living expenses.

That option can also be applied, mutatis mutandis, to bonuses. For example, if you get a 10% bonus each year, you might want to set up something equivalent to a summer saver account to spread the bonus evenly over the 12 months. You will then use the post-tax bonus to increase plan payments.

If you receive a one-time bonus, you may have to have a tete-a-tete with the Chapter 13 Trustee to explain that the one-time bonus does not accurately reflect your future income.

Again, with this question, as with the prior question, because of the ambiguity of the terms, it’s a little hard to give a nice, clean answer. The best we can do is give general principles and then apply them on a case-by-case basis.

Are There Legal Ways To Protect A Bonus During My Chapter 13?

Not really. It’s income. While you might argue that it’s an exempt asset in the sense of Chapter 7, in Chapter 13 you won’t get very far.

The reason is that your disposable monthly income is calculated based on your income, minus your expenses. What goes into the Chapter 13 Bankruptcy Estate is going to include your income because that’s used to pay creditors.

It might help as a concept to think about it in these terms: Prior to filing your Chapter 13 bankruptcy case, you have debts. You have assets. When you file the bankruptcy case, that act creates a bankruptcy estate, and those debts become claims against the estate. What goes into the estate? Anything you own or have an interest in on the day you file the petition, plus anything you become entitled to receive by inheritance, bequest, devise, life insurance payout, or marital property settlement agreement during the life of the plan. This is not the case in Chapter 7, where the period is 180 days after the petition date.

There is a provision in Section 541(a) of the Bankruptcy Code that says that those five things: inheritance, request, device and so forth, only go into the estate during the 180-day post petition period. But the Ninth Circuit said that in Chapter 13, anything you become entitled to receive from those sources throughout the life of the plan goes into the bankruptcy estate and is available to pay creditors.

In sum, the bonus will play a role in how much you’ll have to repay over the life of the Chapter 13 plan.

Standard Disclaimer

Thank you for watching these videos! I hope they’ve been very helpful, and 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 because 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, and that’s 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?

For more information on Chapter 13 bonuses in Los Angeles County, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.