Plan Payments by Payroll Deduction

Plan payments in the EDKY must be made by payroll deduction unless otherwise ordered by the court or agreed to by the trustee.  Many debtors’ attorneys are inadvertently causing their clients to get behind in plan payments because the attorneys and their staff don’t know the rules.  Download this detailed Attorney Info Sheet on Mandatory PDO’s 08252017, and keep reading for important reminders for debtors’ attorneys and their staff regarding payroll deduction orders and plan payments.

If the debtor’s income is from employment, the debtor’s attorney must submit a completed payroll deduction order (“PDO”) at the same time the plan is filed.  Tender the payroll deduction order to the court promptly.  Expect that it will take 4 to 6 weeks for the employer to get the payroll deduction set up, and advise your clients accordingly.

A debtor’s first full monthly plan payment is due 30 days after the petition is filed.  Make sure you and your clients understand this.  Their plan payment due date is not contingent on when the plan is filed, when you tender the PDO, when the employer receives the PDO, or when the employer begins to send payments to my office.

Carefully explain to your clients that they need to make partial payments to the trustee’s office until they see that the employer has started to withhold the payment amount from their paycheck.

Click here to get a very simple Excel calculator that converts monthly payments into weekly, bi-weekly, and semi-monthly amounts.  Use this calculator to tell your clients how much they need to pay each pay period until the payment starts coming out of their paycheck.  Just type in the monthly payment amount and the rest is done by math magic.  Add the name and case number if you want to print out the form and give it to your clients.

It is critical that debtors do not get behind in plan payments just because they think payments will be made automatically by payroll deduction.  They need to start making partial payments when they receive their first paycheck after the petition is filed.  Once the employer begins to deduct the plan payment from the debtor’s paycheck, they no longer need to make the partial payment.  This ensures that the debtor doesn’t get behind in plan payments but does not overpay either.

Understand (and explain to your clients) that I cannot recommend confirmation of a plan if the debtor is more than a month behind in plan payments.  If they miss their first payment while they are waiting for the PDO to take effect, it will delay confirmation.

Also be aware that I have to file a motion to dismiss if the debtor is two months’ delinquent.  “It was supposed to come out of my paycheck” is not a valid defense.  Once I file a motion to dismiss, the debtor is going to have to get current, usually within 30 days.  It would be much easier for the debtor to make partial payments early in the case before the PDO is effective and avoid the motion to dismiss.

If the debtor has valid grounds for not having plan payments deducted from his/her wages, you can request the trustee to agree to waive the PDO requirement.  Examples of valid reasons are listed in the detailed Attorney Info Sheet on Mandatory PDO’s 08252017.

The trustee will take over the administration of payroll deduction orders after you file the initial PDO, EXCEPT if plan payments are “suspended.”

“Suspension” of Plan Payments.  If the debtor files a motion to suspend plan payments for a brief period of time at any time during the case, the debtor is responsible for getting the employer to stop and restart payroll deductions.

Certain payments will not be captured by payroll deduction.

  • Periodic Lump-Sum Payments From Bonuses, Tax Refunds, Etc.  If the debtor is required to submit periodic lump-sum payments from bonuses, tax refunds, etc., those payments will NOT be captured by the payroll deduction order.  The debtor is responsible for making those payments to the trustee.
  • Payments to Catch-Up Delinquencies.  If the trustee files a motion to dismiss for failure to make plan payments and the debtor is allowed time to become current, the “cure” or “catch-up” payment will NOT be made via payroll deduction.  The debtor is responsible for making those payments to the trustee.

Change in Employment.  When a debtor changes employment, the debtor must notify the trustee of the new payroll address.  The debtor is responsible for making plan payments until those payments are deducted by the new employer.

These are just a few points worth remembering.  Make sure you download the detailed “Attorney Info Sheet on Mandatory PDO’s 08252017” and share with your staff.

One comment

  1. Reblogged this on Kentucky Bankruptcy Law and commented:
    This blog post about monthly plan payments is a crucial one. Many of the persons that I assist in a Chapter 13 do NOT want their employer to know they filed bankruptcy. However, I have never seen an employer have a problem with it and the payroll deduction is the best way to prevent problems with the plan later down the road.


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