A Chapter 13 bankruptcy petition has a fairly strict set of rules covering how the bankruptcy proceeds. One of the main aims of a Chapter 13 petition is to restructure the petitioner’s finances in such a way that as much money is returned to creditors as possible. The court-appointed trustee will work with the petitioner to ensure that every dollar of disposable income is made available to creditors.

Disposable income is worked through a rather complicated set of steps. The petitioner’s income is averaged over the preceding six months. Amounts are set aside for secure debts such as a mortgage; for any contractual debts such as a lease on residential property if renting; non-dischargeable debts such as alimony and child support; and general living expenses. Depending on your state, there may be other expenses such as those related to health that can be included. The balance is known as disposable income and is shared between creditors.

All income has to be reported to the trustee within a reasonable period of time. The term “income” is very broad and includes wages, monetary gifts, lottery, or gambling wins, and in some states, payouts from insurance companies, lawsuits, and bequeaths. Any increases or windfalls automatically get assessed as disposable income and will be distributed to creditors. A trustee may take into account any extra costs to acquire this income (for example, extra travel expenses because of a new job) and increase the amount set aside for general living.

On the flip side, if your income decreases for any reason, such as reduced hours in your employment, then the trustee will reduce the amount paid to creditors. If your income falls to below the state threshold, then your petition may be transferred to a Chapter 7, and the remaining debts discharged.

It is an offense not to report changes to your income and the punishment can be quite severe. It may also see your bankruptcy petition terminated; this will return you to full obligation when it comes to repaying these debts. While it may be tempting, it is generally not worth the risk so declare everything promptly.