Legal Definitions - income-based plan

An income-based plan is a repayment arrangement where the amount an individual is required to pay towards a debt or obligation is directly determined by their current income and financial capacity, rather than a fixed, pre-set amount. These plans are designed to make payments more manageable for individuals whose income may fluctuate or who have limited disposable income, ensuring that their essential living expenses are met before debt repayment.

• Example 1: Student Loan Repayment

  A recent college graduate, Sarah, has significant student loan debt but is currently working an entry-level job with a modest salary. Instead of struggling with a high fixed monthly payment, she enrolls in an income-based repayment program for her federal student loans. Under this plan, her monthly payment is calculated as a percentage of her discretionary income, meaning the amount she pays each month adjusts if her income changes. If she gets a raise, her payment might increase; if she loses her job, her payment could temporarily drop to zero. This illustrates an income-based plan because her payment obligation is directly tied to her current earnings.

• Example 2: Court-Ordered Debt Repayment in Bankruptcy

  After experiencing a period of unemployment and accumulating substantial credit card debt, Mark files for bankruptcy. The court approves a repayment plan where Mark agrees to make monthly payments to his creditors over several years. The amount of these payments is not a fixed sum based solely on the total debt, but rather is determined by his "disposable income"—the money he has left after paying for necessary living expenses like housing, food, and transportation. This ensures that the repayment plan is feasible for Mark while still providing some recovery for his creditors, demonstrating an income-based approach to debt resolution.

• Example 3: Child Support Modification

  David was ordered to pay a certain amount in child support based on his income at the time of his divorce. Several years later, he experiences a significant pay cut due to a change in his job. He petitions the court to modify his child support payments. The court reviews his new income and financial circumstances and adjusts his monthly child support obligation downwards to a more manageable amount. This adjustment, based on his current ability to pay rather than the original fixed amount, exemplifies an income-based plan for ongoing financial obligations.