Bankruptcy / Chapter 13 / Extra Income

How Does Extra Income Work in a Chapter 13 Bankruptcy?

Written by Ben Tejes
Updated Oct 11th, 2023
This article is for informational purposes only. Ascend does not provide legal advice, and are not attorneys. If you'd like to speak with a bankruptcy attorney that serves your city, you can speak with one in a free consultation.

Your household income is a significant factor used to calculate your Chapter 13 plan payment. For many individuals, their sole source of income is employment. Therefore, their Chapter 13 plan payments are based on their income, expenses, debts, and other factors. However, if you have income from other sources, that income could impact the amount of your Chapter 13 bankruptcy payment. That said, you don't want to be in a position like other Chapter 13 horror stories because you didn't foresee Chapter 13 payment plan increases before filing.

Let’s discuss some of the most common questions about extra income in a Chapter 13 bankruptcy. Also, have you understood your Chapter 13 plan payment in comparison to alternative options? You can take our Chapter 13 calculator below to estimate your Chapter 13 plan payment and compare it to alternatives to Chapter 13.

What Happens to My Tax Refunds in a Chapter 13 Bankruptcy Plan?

A tax refund is an asset in a bankruptcy case. Therefore, it must be considered when calculating your Chapter 13 plan payment. 

Because tax refunds are considered disposable income, the funds can be used to pay unsecured creditors. Therefore, your Chapter 13 plan may require you to turn over your tax refunds to the Chapter 13 trustee each year. The trustee uses the funds to pay toward your unsecured debts. 

However, depending on where you live, you may be able to exempt your tax refunds as liquid assets. It depends on the bankruptcy exemptions you may take and your other assets. Debtors may be required to submit copies of their tax returns to their Chapter 13 trustees each year.

What Should I Do If I Receive a Bonus During My Chapter 13 Case?

Notify your bankruptcy attorney immediately. If the bonus is small, you may be able to keep the bonus. However, large bonuses could impact your Chapter 13 plan. The Chapter 13 trustee may take part or all of your bonus.

Tell your Chapter 13 bankruptcy lawyer about periodic and yearly bonuses that you regularly receive from your employer. Your attorney factors these amounts into your Chapter 13 plan payment. If your account for bonuses is in your monthly Chapter 13 payment, you should be able to keep your bonuses throughout the year.

What Happens If I Get a Raise During Chapter 13?

You are required to report income changes to the Chapter 13 trustee. However, before you do that, call your Chapter 13 lawyer.

Your attorney calculates how your raise may impact your Chapter 13 case. Debtors paying 100 percent of their unsecured debts should not see an increase in their payments. However, they may choose to pay off their Chapter 13 bankruptcy case earlier. 

If you obtain a significant raise, your Chapter 13 payments may increase. Your attorney may try to limit the increase by reviewing your current monthly expenses to determine if your expenses have increased with your income. 

What About “Side Hustle” Income or Part-time Income?

Income from all sources must be included when calculating a Chapter 13 plan payment. Therefore, if you have a part-time job of any type, you are required to report that income to the Chapter 13 trustee. That includes income from a side job that you begin after your Chapter 13 case is filed.

If you intend to take a part-time job for a few months to earn an extra month for Christmas or to purchase school clothes for your children, talk with your bankruptcy attorney. Your Chapter 13 plan may not need to be amended unless you earn significant income or continue the job more than a few months.

Does My Spouse’s Income Count Toward My Chapter 13 Plan Payment?

Chapter 13 plan payments are based on household income. Therefore, household income includes a spouse’s income, even if the spouse does not file for bankruptcy relief. However, you can count your spouse’s expenses when you calculate your budget. You can think of creating a budget and ways to prevent incurring new debt as tips and tricks to Chapter 13 bankruptcy.

If your spouse has allowable deductions that apply directly to your spouse, you may use those deductions to decrease disposable income. Also, your spouse increases the amount you may deduct for living expenses, such as food, utilities, clothing, etc. 

Even though your spouse’s income is included in your Chapter 13 plan, your spouse’s debts are not included in the plan. Therefore, if your spouse wants to eliminate debts through bankruptcy, your spouse would need to file for bankruptcy relief with you or through a separate bankruptcy filing. Most couples who have debts to eliminate file a joint bankruptcy petition because it is easier and saves money.

Does the Chapter 13 Trustee Monitor My Income?

Typically, debtors are not required to submit copies of their pay-stubs to the Chapter 13 trustee regularly. They are not required to submit quarterly or annual income reports. For self-employed individuals or receive income that fluctuates, such as commission-based income, the trustee may require period income statements to verify income. 

The Chapter 13 trustee may request evidence of current income at any time during the Chapter 13 bankruptcy case. Some debtors are required to submit copies of their tax returns each year to the trustee. Debtors have a continuing duty to report any changes in income to the Chapter 13 trustee immediately. 

How Do I Report Income Changes in a Chapter 13 Bankruptcy Case?

You may contact your Chapter 13 trustee directly to report income changes. However, it is best to consult with your Chapter 13 bankruptcy lawyer before contacting the Chapter 13 trustee. Your attorney may suggest options for limiting the negative impact of a pay increase. Decreases in income could result in a lower bankruptcy plan payment.

NOTE: It is important to remember that it is your responsibility to notify Chapter 13 and the court of any changes in your income during bankruptcy. If you choose not to discuss the matter with a bankruptcy lawyer, it is up to you to take the steps necessary to notify the court and trustee.

What's the best option for you?

Is Chapter 13 bankruptcy right for you? Are you in a position where you won't experience a Chapter 13 bankruptcy horror story? See if Chapter 13 bankruptcy is beneficial by using our free Chapter 13 bankruptcy calculator to estimate a Chapter 13 plan payment If you want to avoid bankruptcy altogether, you may also want to check out our Savvy Debt Payoff Planner, which is our easy-to-use app that helps you eliminate your debt without filing bankruptcy. 

Call or text our office at (833) 272-3631 or contact us online. Let’s discuss how we can help you on your road to a debt-free life.