When you file for Chapter 13 bankruptcy, you propose a plan to repay a portion of your debts over a three- to five-year period. Because a Chapter 13 bankruptcy can last up to five years, many things can happen during the life of your bankruptcy. If you receive a large cash gift during Chapter 13 bankruptcy, your bankruptcy trustee may argue that you should pay more to your creditors.
In general, whether the cash gift you receive will affect your Chapter 13 plan depends on:
- whether you received the gift before or after your plan is confirmed (approved) by the court, and
- the rules in your jurisdiction.
To learn more about how your property is treated in Chapter 13 bankruptcy, see our topic area on Your Property in Chapter 13 Bankruptcy.
How Much Do You Have to Pay Unsecured Creditors in Chapter 13 Bankruptcy?
In general, the amount you must pay unsecured creditors in Chapter 13 bankruptcy depends on the amount of nonexempt property and disposable income you have.
For more information on how to calculate your Chapter 13 plan payment, see our Chapter 13 Repayment Plantopic.
Best Interest of Creditors Test
In Chapter 7 bankruptcy, the trustee has the power to sell your nonexempt assets to repay your creditors. But Chapter 13 bankruptcy allows you to keep all of your property in exchange for paying off a portion of your debts in your repayment plan. To make sure that your creditors are treated fairly, the best interest of creditors test states that your Chapter 13 plan must pay your unsecured creditors at least as much as they would have received in Chapter 7 bankruptcy (this is essentially an amount equal to the value of your nonexempt assets at the time of filing your case).
Best Efforts Test
In Chapter 13 bankruptcy, you must contribute all of your disposable income into your repayment plan to pay back your unsecured creditors. This is commonly referred to as the best efforts requirement. To determine your disposable income, you must complete a form called Form 22C – Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income.
When calculating your disposable income, Form 22C takes into account your average monthly income during the six calendar months prior to filing your bankruptcy. But according to a recent Supreme Court decision, bankruptcy courts can also consider changes in your circumstances at the time of plan confirmation.
For more information on the best efforts test, see “Best Effort” Requirement in Chapter 13 Bankruptcy.
What Happens If You Receive a Cash Gift During Your Chapter 13 Bankruptcy?
If you receive a cash gift during your Chapter 13 bankruptcy, it can be considered both an asset and income in your case. Whether the bankruptcy trustee can successfully argue that you should use the cash gift to repay your creditors depends on when you received it and the rules in your jurisdiction.
Cash Gifts Received Prior to Plan Confirmation
After your Chapter 13 bankruptcy is filed, it can be several months before the court actually confirms your repayment plan. If you receive a cash gift after filing your case but before your plan is confirmed, the trustee typically can’t use the best interest of creditors test to increase your payment because a Chapter 7 trustee could not have taken a cash gift received after your filing date to pay your creditors (assuming that you were not otherwise entitled to it prior to filing your case).
But the trustee may be able to argue that the cash gift gives you additional disposable income that should go to your unsecured creditors. While the court looks at your disposable income on Form 22C as the primary determining factor, it can also consider the cash gift and other changes in your circumstances when deciding whether or not to confirm your plan. This means that if you receive a cash gift before your plan is confirmed, you may have to pay all or a portion of it to your creditors in your Chapter 13 plan if you want the court to approve your case.
Cash Gifts Received After Your Plan Is Confirmed
If you receive a cash gift after your plan is confirmed, the trustee may still ask the court to modify your plan and increase the amount you are paying to your unsecured creditors. But the trustee may have a harder time convincing the court to increase your payment. In a recent case, the United States Bankruptcy Court for the Central District of Illinois denied the trustee’s motion to modify the debtors’ repayment plan after confirmation to increase the dividend going to unsecured creditors because of an increase in income. In re Coay, 2012 WL 2319100 (Bankr. C.D. Ill. (2012)).
In reaching its conclusion, the court determined that the best efforts test is not applicable to plan modifications after a plan has already been confirmed. This means that if you receive a cash gift after your plan is confirmed, the trustee likely can’t increase the amount you are paying to your unsecured creditors, at least in Illinois.
Talk to a Bankruptcy Attorney
Despite the ruling in the above-referenced case, keep in mind that property you acquire during Chapter 13 bankruptcy is still considered property of your bankruptcy estate. Whether a bankruptcy court may increase your plan payment because of a cash gift can still depend on the rules in your particular jurisdiction. As a result, consider talking to a knowledgeable attorney in your area if you expect to receive a cash gift during your Chapter 13 bankruptcy.