Chapter 13 - Strategy Question - Commission Income and Future Inflation

[gman]

As a high income earner - it is unlikely I will qualify for Chapter 7 and am considering Chapter 13 even though I have no assets to protect anymore. (Note: My other option is to do nothing and fight lawsuits as they come in on my unsecured debts. I am not in default on any secured debts at this point.)

So - here is my scenario and questions:

* Let's assume I qualify for Chapter 13 and have to pay back 35 cents on the dollar GIVEN MY CURRENT INCOME AND EXPENSES OVER THE LAST 6 MONTHS.

* Let's then assume that since I earn commissions - after the BK is active - I get a large commission check.

* Let's also assume that my monthly expenses rise (food, gas, utilities, etc.) due to inflation which is likely to happen at some point over the next 60 months.

Strategy questions:

1. Will the trustee "see" my commission check when it occurs?

2. Will I have to forfeit the commission (above my past 6 month income as stated when I filed)? Please elaborate if I forfeit none, some or all and why.

3. With all allowable disposable income going to the creditors (see the 35 cents on the dollar above), what protection do I have is inflation arises and I literally can't pay rent, utilities, food, etc?

4. What happens if I try to pay any or all of the money due PRIOR to the 60 months completing? In a weird way, does that raise a red flag with the trustee?
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I truly appreciate any and all comments!!!

[justbroke]

1. Will the trustee "see" my commission check when it occurs?

No. In a Chapter 13, things are generally "fixed". That means you have a fixed payments over a fixed duration of time. While many attorneys use a "step" payment plan, the payments are pretty much known well in advance.

2. Will I have to forfeit the commission (above my past 6 month income as stated when I filed)? Please elaborate if I forfeit none, some or all and why.

Technically, the Trustee wouldn't know about it unless and until they see your Tax Return for the prior year. In many District, Trustees require to see all tax returns so that they can see if your income changed. Trustees also use this tax return review in order to "take" any income tax refund for the benefit of the unsecured creditors. So, if tax returns are required, the Trustee will eventually find out your change in income. Very generally speaking, if the difference from when you filed is less than 10%, the Trustee's usually don't do anything (chalk it up to fluctuation and inflation). However, if it's over 10% the Trustee may force modification of your confirmed plan to account for the increase. (From what I read, less than 10% of confirmed plans ever receive a modification for this reason.)

3. With all allowable disposable income going to the creditors (see the 35 cents on the dollar above), what protection do I have is inflation arises and I literally can't pay rent, utilities, food, etc?

You don't. The only thing you can do is hope that your income adjusts appropriately. This is why the 10% fluctuation in your annual income is generally ignored by the Trustee... to account for inflation. If inflation gets soooo bad that it's affecting your payment, then you can propose a modification of your confirmed plan.

4. What happens if I try to pay any or all of the money due PRIOR to the 60 months completing? In a weird way, does that raise a red flag with the trustee?

You can't do this. As of the BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) of 2005, you can't "buy" out your plan unless you pay 100%.

[gman]

Technically, the Trustee wouldn't know about it unless and until they see your Tax Return for the prior year. In many District, Trustees require to see all tax returns so that they can see if your income changed. Trustees also use this tax return review in order to "take" any income tax refund for the benefit of the unsecured creditors. So, if tax returns are required, the Trustee will eventually find out your change in income. Very generally speaking, if the difference from when you filed is less than 10%, the Trustee's usually don't do anything (chalk it up to fluctuation and inflation). However, if it's over 10% the Trustee may force modification of your confirmed plan to account for the increase. (From what I read, less than 10% of confirmed plans ever receive a modification for this reason.)

Being in the business that I am - my income (or lack of income) can fluctuate wildly over time.

Question: So if I have a single large commission check that makes my "current" income spike - not only could the trustee simply take it away to pay off creditors, he could REORGANIZE THE PLAN AND ASSUME THAT ONE TIME COMMISSION IS THE NEW NORMAL FOR ME GOING FORWARD???

[justbroke]

Question: So if I have a single large commission check that makes my "current" income spike - not only could the trustee simply take it away to pay off creditors, he could REORGANIZE THE PLAN AND ASSUME THAT ONE TIME COMMISSION IS THE NEW NORMAL FOR ME GOING FORWARD???

No. It wouldn't happen like that. First, your plan should be based on your average income. So, there are some months in which you receive less income, but your payment would be the same.

For example, say that you make $120K a year or $10K/month. However, you make $5K/month from Jan-June, but $15K/month from July-Dec. That would make it difficult to propose a confirmable plan, if you ask me. That's why a Chapter 13 requires "regular" income. So, the Trustee may require that you file quarterly reports so that s/he can keep up on your income. The problem with the upkeep, is that the Trustee really doesn't want to be monitoring your business income every month. Hence why regular income is a requirement.

If your income is too irregular, you probably won't be allowed to confirm your plan. You may have to go into a Chapter 11 or just a straight liquidation under Chapter 7.