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Can I put money in my savings account while I'm in Chapter 13?

Repayment plans for Chapter 13 bankruptcy leave little left for savings

Legal experts have called Chapter 13 bankruptcy, in which individuals pay back some of their debt through a repayment plan, the "wage earner's" bankruptcy.

For as long as they make the payments ordered by the U.S. Bankruptcy Court, those in Chapter 13 may keep their assets. But while it is not illegal to save money in the course of a Chapter 13 case, it's very difficult to put it aside for savings. The payments are expected to take up all of an individual's disposable income after allowances are made for normal household and family care expenses.

Since the repayments are set at a given amount each month, any improvement in earnings through a promotion, pay raise or better paying job could help the debtor to set aside some money in a savings account, but only up to a certain amount. If a person's income goes up by 10 percent or more, they are required to inform the court of the change in financial circumstances. The bankruptcy trustee is then likely to renegotiate the amount paid each month, leaving less opportunity for the debtor to save money.

Illinois attorney Gary Shilts writes on his law firm's website that there is rarely enough leeway in a repayment plan that allows a debtor to save money for a better financial footing in the future.

"The plan does not allow for emergency funds, sick days or a leak in the hot water heater. Anyone who has seriously tried to make a budget knows that some surplus funds or wiggle room in the budget is essential," he writes. "Creditors are quick to object to inflated miscellaneous expenses and protest that filers are not paying 'all disposable income' into their plans."

Massachusetts attorney Douglas Beaton agrees with Shilts that Chapter 13 debtors are penalized if they are able to get ahead financially in the course of their repayment plan. He writes on his website that a strict reading of the bankruptcy laws suggests that saving is prohibited if all disposable income is expected to be put into the repayment plan.

"Disposable income is what's left over after the basic household bills are paid - in other words, the money that could otherwise fund a modest savings account or mutual fund," he states. "It might be time to consider re-writing the law to permit people to start at least building little nest eggs while their bankruptcy case is in progress."

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