If you are in the middle of a Chapter 13 bankruptcy and want to pay off your Chapter 13 plan early, it may not be as easy as you think. There are some situations where the court will allow you to pay off your plan early so that you can end the case early. But in many other situations, the court won't allow you to make all of your Chapter 13 plan payments early. Most courts that have considered early payoffs have ruled that unless you are paying creditors 100% of their claims, you must continue to make payments for the entire term of your plan.
Repaying Debts Under Chapter 13
In Chapter 13 bankruptcy, you generally keep your property and repay your debts over a period of three to five years through a repayment plan that has been approved, or confirmed, by the bankruptcy court. You must use the income you earn after you file for Chapter 13 to fund your repayment plan. (Learn about the Chapter 13 repayment plan.)
The minimum amount of income that you must contribute to your plan is called “disposable income” and is determined by a formula which uses your income and expenses (some expense amounts will be your actual expenditures, others are set by IRS figures). If your income increases during your Chapter 13 plan period, but your expenses stay the same, your disposable income will increase. This could in turn increase your plan payments. (Learn more about calculating your disposable income.
The Applicable Commitment Period
Your income determines the minimum length of time you must make payments under your plan. This time period is called the applicable commitment period.
Below median income. If your income is less than the median income in your state and you want to file Chapter 13 instead of Chapter 7, your plan is required to last at least three years.
Above median income. If your income is above the median in your state, the applicable commitment period is five years. Throughout this time period, you must pay into your plan the greater of your disposable income or the amount that creditors would have received if you filed for Chapter 7 and your non-exempt property was liquidated and used to pay creditors.
Post-Petition Income and Property Belong to the Bankruptcy Estate
In a Chapter 13, all of the income you earn and any property you acquire after you file but before you complete your plan payments is considered property of your bankruptcy estate. If you have increases in income after you file for Chapter 13, or if you acquire additional property through gifts or inheritance, the bankruptcy trustee or your creditors can request that the court order you to increase your payments under the plan to include these amounts.
Potential Objections to Early Payoff
If you want to pay off your plan early, you must notify your creditors and get court approval. Creditors and the bankruptcy trustee will have the opportunity to object to your early payoff.
In most instances, the argument against early payoff is that creditors will lose the benefit of any potential increase in your disposable income over the life of your Chapter 13 plan. In other words, if you are allowed to complete the plan early, your creditors might lose the benefit of an increased plan payment if you have received a pay raise, bonus, inheritance, or decrease in expenses.
If you are planning to use an employment bonus or inheritance, for example, to pay off your plan early, creditors or the trustee may argue that these funds are property of your bankruptcy estate which should be used to increase your payment to creditors and not to shorten the duration of your Chapter 13. If the court agrees, the court may not only deny your plan modification for early payoff but may require you to modify your plan to increase your payments to creditors to include your additional income.
When Early Payoff May Be Allowed
There is one situation where the court will allow you to pay off your plan early -- when your plan will pay creditors 100% of their claimed amounts.
Most plans, however, pay less than the full amount of creditor claims. If your plan pays less than 100%, you might be able to pay off your plan early if there is reason to believe that you will not be in a position to continue making Chapter 13 plan payments and
- you use outside sources, such as a loan or a payment from a third party, or
- you are liquidating exempt property to fund the early payoff.