The Surprise Chapter 13 Bankruptcy Debtors Rarely See Coming: The Plan Payment is Not Permanent

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

What Your Chapter 13 Bankruptcy Lawyer May Not Emphasize

As a professor and bankruptcy attorney, I’ve seen this scenario countless times: A client diligently pays their Chapter 13 plan, then receives a raise at work, and is then blindsided when the Bankruptcy Trustee demands a payment increase.

Most Chapter 13 bankruptcy lawyers focus on confirming the plan, but fail to clearly communicate the legal reality of an ongoing, 3-to-5-year plan: Your plan payment is not fixed. Your disposable income, and thus your payment obligation, is subject to periodic review and mandatory adjustment during the life of the plan.

If your financial situation changes, for better or for worse, the Bankruptcy Trustee or a creditor has the right to compel a change to your confirmed plan.

Scenario 1: The Obligation When Your Income Increases

A Chapter 13 plan is governed by the “disposable income” test under 11 U.S.C. §1325(b). This means your plan includes all sources of income not reasonably necessary for the support of you and your dependents.

Trigger Event	Legal Obligation	Consequence of Failure
Significant Raise or Bonus	The debtor has an ongoing legal duty to report all changes in income to the Trustee.	The Trustee can file a Motion to Modify the Plan §1329 to increase your monthly payment. Failure to agree to the increase could result in the case being dismissed.
New Job with Higher Pay	You must file updated financial schedules (I & J) with the Court and report the new disposable income.	The increase is used to pay unsecured creditors more or pay the plan off faster. Your payments will increase.

The Bankruptcy Lawyer’s Silence:

Attorneys often omit this detail because the focus is on plan confirmation. The standing trustee generally orders proof of updated pay stubs and tax returns each year, resulting in the possible increase. If there has been a change in income, communicate this immediately to your bankruptcy attorney.

Scenario 2: The Consequences of Decreased Income

When a Chapter 13 debtor loses a job, has hours cut, or faces a new medical crisis, the plan payments immediately become unmanageable. This is where the lack of prior guidance can lead to a conversion or dismissal.

Option A: Seek Modification (The Safe Route)

The debtor must immediately file a Motion to Modify the Plan under §1329 to reduce payments, citing a change in circumstances. The Trustee must agree that the plan is still feasible, even with lower payments.

Option B: Voluntary Conversion to Chapter 7

The debtor has the right to convert the case to Chapter 7 at any time under §1307. This is a strong option if the debtor can now pass the Means Test with their new, lower income and if they have few non-exempt assets to protect.

The Bankruptcy Trustee Forces Conversion or Dismissal

The most dangerous situation is when a debtor stops paying without talking to their attorney. The Bankruptcy Trustee will then file a Motion to Dismiss the case for failure to comply with the plan.

• If the case is dismissed, you lose all bankruptcy protection from the automatic stay, and creditors can immediately resume collection efforts, foreclosure, or wage garnishment.
• If the debtor is not making the payments but passes the Chapter 7 Means Test, the Trustee may seek a forced conversion to Chapter 7 under §1307.

The Professor’s Takeaway

A Chapter 13 bankruptcy is a long-term commitment since the plan could last up to five years. During that time, changes in your finances are likely. Don’t wait for the Trustee’s annual review or a Motion to Compel.

• Be Proactive: Immediately inform your bankruptcy attorney of any permanent change in income, whether an increase or a decrease.
• Be Prepared: Understand that an increase in income is not money for you to keep. The disposable income will go towards your plan. If there is a decrease in income, immediate action must be taken to confirm that you still comply with the plan requirements.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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