How Raises Impact Chapter 13 Bankruptcy In Orange County, CA

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In this article, you can discover…

• Whether you are required to report a raise to a bankruptcy trustee.
• If a raise may increase your monthly payment amounts.
• What to do if your raise is temporary or performance-based.

Am I Required To Report A Raise To The Bankruptcy Trustee?

That’s an interesting question because things are a little vague here. In theory, yes, you should keep the Chapter 13 Trustee appraised of what is going on. But remember that each year that you’re in bankruptcy, you are required to send copies of your tax returns to the trustee no later than 10 days after you file them.

Trustees then will look at those tax returns, and they look at them quite carefully. In fact, in Orange County, the Chapter 13 Trustee there is a CPA, not a bankruptcy attorney. He is razor sharp, and he will see what’s going on.

Could A Raise Result In A Higher Monthly Repayment Amount?

Yes, it certainly can.  If a client gets a five-cent-per-hour raise, it’s probably not going to make much of a difference, and it’ll be chewed up by the increase in expenses and by inflation. It’s nice to have income go up, but sometimes the income doesn’t go up quite as rapidly as inflation rate does. Ultimately, it depends on exactly how big the raise is.

If you get a really significant raise, the Chapter 13 Trustee will find out about that when you submit your income tax returns to the Trustee.  The Trustee will then ask the judge to increase your plan payments so that your creditors can share in the dividend.

With one exception:  If you already have a 100% plan, meaning you’re paying your creditors 100% of what you owe them over the life of the plan, then you do not have to increase your plan payments. I will say, though, 100% plans are not the norm. I’ve certainly put people in 100% plans, but most Chapter 13 plans are less than 100%.

Will A Raise Delay Or Accelerate My Completion Timeline?

There are two types of timelines in a Chapter 13 bankruptcy plan. One is a timeline for somebody whose income is below the median income for a family of that person’s size. That plan lasts 36 months, although the debtor can petition to have it increased up to the maximum timeline permitted, which is 60 months. The plan cannot last more than 60 months.

There was a temporary situation during the COVID pandemic where debtors were allowed to extend their plans up to 84 months, and I did have some cases where that was done. But now that’s all in the rear-view mirror of the nation’s life; the maximum amount of time you can have in a Chapter 13 is 60 months. The plan ends on the 60th month when you’ve made that 60th plan payment.

If you get a raise, it doesn’t necessarily increase the amount of time in the plan. If you have a 60-month plan, it just may mean that the size of the monthly payments will increase. However, if you’re in a 36-month plan and you get a significant raise and the Trustee says, “Hey, fellow, you need to increase your plan payments to share that dividend with your creditors,” you might need to petition the court to modify the plan to increase the length of the plan to the full 60 months.

That way, the increased plan payment amount will be less than if you suddenly had to increase plan payments considerably. But again, that’s going to be if somebody is below the median income and if there’s been an increase in income that warrants a modification of the plan to increase plan payments.

If you’re below the median income, chances are it’s going to be a real hardship to increase your plan payments by much. That’s when we might want to extend the plan so that the increase in plan payments is smaller.

What Happens If My Raise Is Temporary Or Performance-Based?

Temporary is different from performance-based.  If it’s temporary, then you’re getting back to the same idea of having a bonus. For example, suppose the raise is for three months. On one level, that’s really indistinguishable financially from getting a bonus that’s the size of the differential that the raise produces in your income over the three-month period. The Trustee will find out about the increase and may say, “Hey, fellow, you need to increase your plan payments!”

If the increase was a one-time event, you might need to negotiate with the Trustee.  For example, you could agree to pay an additional couple of payments on top of your regular payments in order to give the creditors the dividend.  If it’s a relatively small amount, the Trustee may conclude that it’s not worth the effort. On the other hand, if it’s a large amount, then the Trustee may demand at least some sort of dividend that goes to the creditors, possibly through a couple of extra payments.

In contrast, performance-based raises are not necessarily for a short time. If your raise is performance-based and you’re a real go-getter, the raise may continue throughout the life of the plan. In which case, you now have a raise, period. Unless you become lethargic and you’re no longer a “rah rah” employee who’s getting all that extra money because of your high performance.

If your performance-based raise is going to persist through the life of the plan, you may face a motion to modify the plan to increase plan payments.

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, 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, and that’s a crime.

So, while I’m delighted that people around 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 raises in Orange County, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.