A Chapter 13 bankruptcy filing is a debt reorganization plan that offers a path to solvency for people in financial crisis and something else almost as appreciated – a respite from feeling constantly under siege by creditors.
Chapter 13 is sometimes called the Wage Earner’s Bankruptcy because it is for people who are making money but have fallen desperately behind trying to keep up with payments for things bought on credit.
While Chapter 13 doesn’t reduce the number of creditors demanding repayment, what it does is funnel the chorus of demands through a court-appointed bankruptcy trustee who administers the filing and disburses payments to those you owe.
A trustee is your connection to creditors and also represents the bankruptcy judge. If all goes according to form during the 3–5-year repayment plan approved in your Chapter 13 filing, it’s possible you will deal only with the trustee and never see the judge.
Your bankruptcy trustee is part administrator charged with managing your bankruptcy and part referee monitoring changes in your financial status until your debt is discharged.
“The number one thing a debtor must keep in mind is that the Chapter 13 trustee is not their friend,” Cleveland bankruptcy attorney Jon Ginter said. “Rather, the trustee is their adversary within the context of their case. This is simply because the two parties’ goals do not align.
“(An individual) should necessarily have the goal of paying their unsecured creditors the lowest percentage possible within their individual scenario. This is (opposed) to a trustee’s goal (which is) to secure the highest percentage possible for the pool of unsecured creditors.”
Does the Chapter 13 Trustee Monitor Income?
Trustees do not monitor your income during the course of your repayment. However, a trustee possesses what Ginter terms “broad powers” and responsibilities. They include:
- Determining if you qualify for Chapter 13 bankruptcy
- Making sure the forms you fill out mirror the required financial documents
- Presiding over your meeting with creditors
- Giving the OK to your repayment plan
The documents in your repayment plan include income information on monthly expenses, assets, and debts. The trustee confirms those figures by using your tax returns, paycheck stubs, bank statements, etc.
It’s not expressly the job of the trustee to keep checking your pay stubs or direct deposits for wage increases. The onus to report such increases is on the debtor, and stiff penalties apply for failing to report wage increases to bankruptcy trustees.
» Learn More: What Does a Bankruptcy Trustee Look For?
Does the Trustee Monitor Your Bank Account or Credit Report?
In assessing your initial Chapter 13 filing, the court-appointed trustee will make a request to authorize turnover of bank statements/transaction histories, and that request is commonly granted by a bankruptcy judge.
Since a trustee’s focus is to review your assets and administer the plan to repay your creditors, yes, he or she will need access to your bank accounts and other financial information.
“In practice, most trustees rely on review of yearly tax returns in order to monitor whether there have been any significant changes to a debtor’s income,” Ginter said.
The trustee’s job, after all, is to ensure you have the necessary funds to meet your repayment plan requirements and protect the interest of creditors.
The trustee will not monitor your credit report, though you should. That’s a good rule whether you’re in Chapter 13 bankruptcy or not.
“Once someone is in a Chapter 13 bankruptcy, this filing/case number is recorded on their credit report,” Ginter said. “All other reporting stops. Creditors are legally barred from making any reports to TransUnion, Equifax, and Experian, whether positive, neutral, or negative.”
Your Rights to Your Bank Account
Transparency is first and foremost in dealing with a Chapter 13 bankruptcy trustee, whether your contact is one-on-one or through your attorney.
So as long as you’re not hiding money or assets, if you’re meeting the requirements of your repayment plan, any extra money in your account at month’s end is yours to use as you see fit.
That applies to spending on luxuries such as an international vacation. Individuals in Chapter 13 bankruptcy can even use extra money to start a business provided they are making their scheduled loan payments on time.
What If My Income Increases During Chapter 13 Bankruptcy?
Big changes can happen in any 3–5-year period of someone’s life. Some of the reasons an individual’s household income could increase during a Chapter 13 repayment plan and subsequently affect the terms of a repayment plan:
- A significant pay raise
- A work bonus
- Extra money from a side hustle
- A spouse’s raise, bonus, or extra earnings.
A reported increase in income can lead to higher scheduled loan payments. But not always.
Whether you’re required to increase your repayment amount in a Chapter 13 repayment plan might depend on a number of factors including the size of the pay raise or bonus.
“The rule of thumb is 10%,” Ginter said. “Meaning that if someone were to be making $50k then get a three or four thousand dollar raise, that would not commonly necessitate a higher dividend payout.”
Increases in income and assets during the repayment plan point to another reason why bankruptcy attorneys are in demand in Chapter 13 cases. It’s a bankruptcy attorney’s job to distill the facts and law in a favorable light for each of their clients.
Experienced bankruptcy attorneys can leverage a number of factors that could offset an increase in income:
- High inflation
- The addition of a new family member
- Home or car repairs or maintenance costs
- Necessary medical procedures
- New household expenses
“There are a host of other ways to offer evidence to the Court that even though there is more income, this does not represent a zero-sum game where the debtor’s creditors should be able to access all of these newly available funds,” Ginter said.
How to Report Changes in Income to a Chapter 13 Trustee
A bankruptcy lawyer isn’t just part of the client’s team through the filing but also during the 3–5-year repayment plan. If an individual has legal representation, the attorney’s office will deal directly with the trustee and report any changes in income (both positive and negative.)
Minus legal representation, an individual in Chapter 13 bankruptcy must report changes in income directly to the trustee. Working with a credit counselor is another good way to keep on top of the financial ups and downs that routinely occur during a Chapter 13 repayment plan.
Either way, it’s always good to be upfront about bonuses and pay raises, primarily because there are consequences if you’re not.
Some individuals feeling the financial pinch of a repayment plan might not want to consider the cost of hiring a bankruptcy lawyer. Ginter estimates that the cost of a 3–5-year relationship with a bankruptcy attorney ranges from $2,500 to $6,500 nationwide.
In Ginter’s Northern Ohio jurisdiction, for instance, an attorney can choose a flat fee of $3,000 or an hourly fee with the bulk of attorney fees being paid to counsel through the debtor’s Chapter 13 repayment plan.
» Learn More: How to Find a Good Bankruptcy Lawyer
Consequences of Failing to Report Changes in Income
Hiding wage increases (or other assets) could result in the dismissal of a bankruptcy case, sabotaging your repayment plan and putting you right back where you started.
In cases of bankruptcy fraud, federal charges carry a maximum penalty of $250,000 and five years in prison.
Navigating Chapter 13 Bankruptcy
Anyone filing Chapter 13 bankruptcy is required by law to first undergo credit counseling. There’s good reason for that, beginning with the benefits that come from learning sound budgeting, smart money management and other basics of finance.
Nonprofit credit counseling can help individuals avoid Chapter 13 bankruptcy by adopting a debt management plan that restores financial order while providing a road map to rebuilding credit.
» Learn More: Credit Counseling vs. Bankruptcy
A nonprofit credit counselor will take into account your income, the size of your debt and your long-term financial goals before helping you decide whether a debt management plan or bankruptcy is right for your circumstances.
Both offer a road to financial health. Credit counseling can increase your chances of that road being accident free.
About The Author
Robert Shaw writes about finding ways to solve financial problems like keeping up with mortgage payments, paying off credit card debt and avoiding bankruptcy for Debt.org. During his 45-year career in journalism, Robert was a columnist for the Cleveland Plain Dealer before transitioning to television sports commentary at WKYC.
- N.A. (ND) Chapter 13 – Bankruptcy Basics. Retrieved from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
- White, B. (2018, April 25) Hiding Assets in Bankruptcy: What are the Consequences? Retrieved from https://www.brucewhitelaw.com/blog/2018/april/hiding-assets-in-bankruptcy-what-are-the-consequ
- Ginter, J. (2022, December 11) Do Trustees Monitor Income During a Chapter 13 Bankruptcy? Retrieved from https://www.clevelandsbankruptcyattorney.com/trustees-monitor-income-chapter-13/
- Waldner, W. (2020, October 29) What Courts Look For In Chapter 13 Bankruptcies. Retrieved from https://www.forbes.com/sites/forbesbusinesscouncil/2020/10/29/what-courts-look-for-in-chapter-13-bankruptcies/