§ 125.4 — Changing Employers or Source of Income
Revised: June 8, 2004
The typical Chapter 13 debtor changes jobs during the life of a three- to five-year plan. It is the debtor’s responsibility to keep counsel and the trustee informed so that an income deduction order follows the debtor from employer to employer.
To avoid breaks in the stream of payments into the plan, the name and address of a new employer must be supplied as soon as known and, when possible, in advance of the change. Obviously, this is not possible if the debtor is fired, quits or otherwise leaves a job suddenly. At the beginning of the Chapter 13 case counsel has to impress upon the debtor the importance of continuity in the income deduction so that the debtor will inform counsel immediately of an employment change.1
In some jurisdictions, the income deduction order instructs the employer to inform the Chapter 13 trustee of any change in the debtor’s employment status. Employers do not always read income deduction orders carefully, but a notice requirement often at least gets a notation on the last check to the trustee that “the debtor is no longer with us.” This information does not ensure continuity of funding for the plan, but it prompts the trustee to inquire where the debtor is working and to whom a new income deduction order could be sent.
The failure to inform the court and the Chapter 13 trustee of a change in employment got one debtor and debtor’s counsel into deep yogurt. Discussed in more detail elsewhere,2 in Handeen v. LeMaire,3 a creditor alleged in a civil RICO action that the debtor’s attorneys conspired with the debtor and the debtor’s parents to minimize recovery in a Chapter 13 case by misleading the court and the trustee with respect to the source and amount of the debtor’s income. The complaint claimed that after confirmation, the debtor found a higher-paying job that required the debtor to relocate from Minneapolis to Houston. After moving, the debtor avoided revealing the higher-paying job to the Chapter 13 trustee:
Specifically, the ruse called for [the debtor] to mail his father a parcel every month. Within that package would be an envelope addressed to the bankruptcy trustee and containing a check representing [the debtor’s] monthly payment under the plan. [The debtor’s] father would, in turn, place the enclosed envelope in the mails, and the trustee would thus receive a letter postmarked from Minneapolis rather than Houston.4
The Eighth Circuit found this subterfuge could constitute a “pattern of racketeering activity” for purposes of civil RICO. The court remanded the creditor’s complaint for trial.
Many districts have expedited procedures for the issuance of new income deduction orders. Typically, no motion is required, but counsel sends a written notice or request to the trustee or to the clerk’s office, and a new income deduction order is issued. Sometimes the whole process can be accomplished with a phone call. In some districts, debtor’s counsel must submit a proposed order to the new employer.
When the debtor is between employers, the plan temporarily becomes a direct-pay plan:5 the debtor is obligated to make the plan payments directly to the trustee even though the debtor may be unemployed or just beginning a new job. In the gap, the debtor must do whatever is possible to keep the plan current. And the direct payments must continue until the new employer begins making deductions from the debtor’s paycheck.
Most debtors don’t understand this. They swear in court that “my lawyer told me I didn’t have to make payments” because the (new) employer would do it. Debtors have to be convinced at the beginning of the case that bad news like the loss of a job is only made worse by hiding. Changing jobs can be managed without expense or complication if the debtor promptly tells counsel what is going on so that a new deduction order can be entered before a default is discovered by the trustee or creditors.
Some trustees are sophisticated enough to detect when payments change from income deduction by an employer to direct pay based on the recorded source of the funds. When payments aren’t regular and aren’t in the correct amounts, this information is the support for the trustee’s motion to dismiss.
1 See § 25.1 [ Explaining Chapter 13 to a Debtor ] § 27.1 Explaining Chapter 13 to a Debtor.
2 See § 91.3 Reasonably Necessary for Maintenance or Support. See also discussion beginning at § 92.1 In General, § 93.1 Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income and § 94.1 Big Picture: Too Many Issues for projectable disposable income after BAPCPA.
3 112 F.3d 1339 (8th Cir. 1997).
4 112 F.3d at 1344.
5 See § 250.1 [ Direct-Pay Orders ] § 125.3 Direct-Pay Orders.