What Are the Effects of A Salary Increase on A Wage-Earner Plan Under Chapter 13?

When a Chapter 13 debtor enters into a wage-earner plan, he or she commits the next three to five years’ disposable income — that portion of the debtor’s income not required to meet the necessary needs of the debtor and his or her dependents — to the repayment of debt. Often, a debtor’s income will increase after the plan is in place, and the question arises as to what becomes of this increase in income.

It seems only fair that if the payment plan does not project paying debts in full and more income than was planned for is actually realized that the extra money should go to the creditors, and not be retained by the debtor. In fact, courts often subscribe to this view that the debtor should not be unjustly enriched to the detriment of creditors. However, the debtor may be allowed to retain the increase in income unless the increase is significant and there are no offsetting increases in expenses.

Plan modifications may be requested in a court motion by the trustee, by an unsecured creditor or by the debtor him or herself. All interested parties are notified and if there are objections to the proposed modification, the court will hold a hearing. Whether changes in salary will prompt the court to change the payment plan depends on a complete consideration of all of the relevant circumstances.

During the plan a debtor may receive more income than planned because he or she changes jobs, gets a raise or starts a second job. However, it may not always be necessary to make corresponding changes to the payment plan, usually by increasing the amount of payments or decreasing the time period in which payments are to be made.

The Bankruptcy Code does not literally provide much guidance about what standard should be applied to a request for modification under these circumstances. However, some courts look at whether the increase in the debtor’s income is significant or if the increase was unexpected, and may be more apt to adjust payments under those circumstances.

The court will likely consider not only the salary increase, but also whether there has been a corresponding increase in disposable income on which the payments are based. Disposable income is the amount of the debtor’s salary that is left after deducting all reasonable living expenses. If the debtor’s expenses increase along with his or her salary, the debtor’s disposable income may not change and the payment plan will not need to change either. It could be disheartening to a debtor to receive a raise and have to turn it all over to the trustee for debt repayment, but that is not always the effect of a salary increase.

A bankruptcy lawyer at our firm can answer these and other Chapter 13 questions as they arise, providing information, reassurance and competent and zealous advocacy throughout the bankruptcy process.

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