People often ask me, what happens after bankruptcy if I . . .
Get a big raise…
Start a business…
Get a big tax refund in future years…
Become a reality star…
Win the lottery…
How does that affect my bankruptcy?
I tell them the purpose of bankruptcy is so that you CAN do those things. (I like to joke that if you do win American Idol, you have to buy your bankruptcy lawyer a beer.)
The purpose of bankruptcy is your new start.
That means: Money you earn after the date of your bankruptcy belongs to you.
It belongs to you “free and clear from the claims of all creditors.” (Except things like child support and most taxes, which survive the bankruptcy.)
Going back to 1913, the Supreme Court has emphasized that getting you a “fresh start” is one of the main purposes of the bankruptcy law.
“The power of the individual to earn a living…is of the utmost importance not only because it is a fundamental private necessity, but because it is a matter of great public concern.”
“The new opportunity in life and the clear field for future efforts … is the purpose of the Bankruptcy Act.” That’s what the Court said in 1934.
The court repeated it in 2007. “The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.””
If you qualify for a Chapter 7 bankruptcy, that purpose applies to you. For you and your family, and for the public, it’s important that you are allowed to keep the fruit of your labor after bankruptcy.
In Chapter 13 bankruptcy, a different rule applies.
Chapter 13 is a payment plan. You work out with the court a payment plan for the benefit of your creditors. The court approves that payment. The bankruptcy law says that the court’s approval is the final word, for you and the creditors.
Except, that it’s not really final. In Chapter 13, the payment approved by the court can be increased if there’s a big change in your financial picture. (The legal term for big change is a substantial and unanticipated. )
So how much is “substantial”? And what’s “unanticipated”? The Fourth Circuit–the big guys between Virginia and the Supreme Court–are the people who laid down this big change rule.
They said a fellow named Arnold had a big change. Arnold’s income increased from $80,000 a year to $200,000 a year. I agree that was a big change. (That was back in 1989–when $200,000 was really a lot of money.)
They also said a guy named Murphy had a big change. Murphy valued his condo in December 2003 at $155,000 and then sold it next November for $235,000. I agree with them on that, too.
Recently, I’m seeing smaller changes now count as substantial and unanticipated. One reason is the 2005 bankruptcy law.
Before 2005, most people in chapter 13 were in it for three years. In 2005, Congress required five year Chapter 13s for most people in Northern Virginia. (Both parties supported the 2005 bankruptcy law, but it was mostly strongly supported by the political party that likes to claim they are the party of “incentive” and “individual initiative.” )
That extra two years can really make a difference on what’s “substantial” and “unanticipated.” Recently, one judge here raised a couple’s payments by $1750 a month in the final year of their five year plan. Both the husband and wife are Federal employees. In four years, he had two step increases and she moved up one GS Grade. Is that an unanticipated change? I didn’t think so, but the judge did.
I’m in a fight right now with the chapter 13 trustee–because one of my client’s did win the lottery–he won $20,000. The Chapter 13 trustee wants that $20,000. And not just this year–and he wants the extra $20,000 for the next three years!!! (Apparently the trustee thinks my client will keep winning. My client says the $20,000 all went back into lottery tickets and none of it is left.)
What’s the lesson? One lesson is small improvements over three or four years can be enough that the judges here count it as a big change. Then you get hit for a lot bigger bankruptcy payment.
The big lesson: If you think you are going to … get a big raise … start a business … get a big refund … become a reality star … win the lottery … you need to avoid Chapter 13 bankruptcy!
If you can get approved for a Chapter 7 bankruptcy, you get a new start in life and a clear field for the future. You are unhampered by the pressure and discouragement of pre-existing debt. If you get stuck in a Chapter 13, you don’t have incetive to better yourself. A small raise is ok. But if you get a big raise, or several small ones, the bankruptcy trustee will try to take it from you.
In Chapter 13, don’t labor too much. If fruit of your labor is too “substantial,” it’s grabbed by the bankruptcy court. At least here in Alexandria, Virginia.