In this article, we’ll discuss the important topic of: “Do Chapter 13 Payments Have to Be Payroll Deducted?”
What is a payment deduction order? Is it mandatory in chapter 13? What are the alternatives to payroll deduction? There have been multiple questions surrounding the payment method in Chapter 13 bankruptcy, and it seems to be essential to know the appropriate method.
In chapter 13, the debtors make repayment of debts for 3-5 years in monthly installments. Ideally, the debtors make a monthly payment to the trustees, who then forward the amount to the creditors. There can be two ways of sending the amount to the trustees. One is by directly submitting a cheque to the trustees. Another method is applicable only for employable debtors who have a regular income source, and the amount to be paid is directly debited from the payroll.
In this article, we are going to discuss the modes of debt repayment and the procedure involved.
Do Chapter 13 Payments Have to Be Payroll Deducted?
To better understand this, we must realize how payment deduction order works. However, it is mandatory that in chapter 13, the method of repayment of debts is by payroll deduction, if not ordered by the court or agreed upon by trustees. It must be effective once the court gives orders. There is no need for any motion in payroll deduction.
The debtors’ lawyer must submit a completed payroll deduction order (Local Form 3070- 1(a)) at the time of submission of the plan of overcoming bankruptcy if the debtor received regular payments from employment. If there are joint debtors and wish to have partial payment reduction from each account, the attorney needs to submit that different payroll deduction plans for individual debtors.
However, this is not the only way of repayment if there are legitimate reasons for not paying through payroll deductions. Let us discuss the exceptions.
Exceptions to Payroll Order Requirements
There can be a few circumstances when the payroll deduction can be omitted.
No Fixed Wages or Optional Payment
When the debtor’s income is from an employer that is not permanent, for instance, income from self-employment, rent, and retirement, the lawyer does not need to submit the payroll deduction order. However, the attorney has to mention this in court in the first hearing itself.
Rotational Job Change and Seasonal Payment
When the debtor has a valid point for not opting to payroll deductions, the debtor’s lawyers must get approval from trustees. If the trustees disagree, you will have to approach the court to excuse yourself from the payment. The trustees may agree that there is no fixed and sufficient wage to be included in the payment plan. If the debtor only depends on tips from the job to meet the need or the employer is small and has a hand-written cheque still, the debtor can be excused from the payroll deduction plan.
If the debtor jumps from one job to another and the payment fluctuates. Or the job is mostly seasonal, and depending on the periods the wage changes every week, in such scenarios, the debtor can request the court to opt-out of the payroll deduction order.
This can be further discussed with the trustees at the 341 meetings with creditors and debtors and decide whether or not to apologize. If the trustees approve that the debtor can be excused, but will need to make an alternate payment through automatic bank draft. And if the trustees disagree with the debtors, the debtor attorney can file a motion in court and request a waiver.
What Happens After Chapter 13 Is Paid Off?
After you have completed the repayment of all debts within the period, you will likely get a discharge from bankruptcy. In the discharge document, all the balance of the remaining debts will be wiped out. In most chapter 13 bankruptcy case, most nonpriority, unsecured debts are likely to get discharged.
In chapter 13 bankruptcy, you can safely keep your assets and properties by paying a monthly amount. Student loans are, however, an exception, which you will have to bear responsibility. Some very common types of nonpriority yet unsecured debts are medical bills, credit card loans, old unsettled taxes, etc. After all the debts have been cleared out, you will no longer be receiving any notification from either the court or the creditors.
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It is not a mandate that you will have to make the payment under the payroll deduct plan in a nutshell. The court does consider exceptional circumstances and the debtor’s income statement before making the decision. But if you meet all the requirements of a regular paid employee, you cannot opt-out of the plan as per the Federal law.