Can I Pay Off My Chapter 13 Bankruptcy Plan Early?

If you're in the middle of a Chapter 13 bankruptcy, and your financial picture starts looking rosy, it's understandable that you'd want to pay off your repayment plan early—but don't count on being let out of your plan. In fact, it's more likely that your monthly payment will increase because your creditors are entitled to all of your discretionary income for the duration of your three- to five-year repayment period. In this article, you will learn why it's easier to end your Chapter 13 plan early if you have a financial setback than it is when your finances improve.

Your Creditors Get Your Disposable Income

In Chapter 13 bankruptcy, you're allowed to keep all of your property and repay your debt over a period of three to five years through a court-approved repayment plan. (Learn about the Chapter 13 repayment plan.)

You fund your plan with your "disposable income," or the amount remaining after paying allowed monthly expenses. Because bankruptcy law assumes a reasonable lifestyle, not the filer's actual lifestyle, you won't be able to use all of your actual expenses. For instance, reasonable rent, food, and utility payments are predetermined according to your area. So most people must live frugally under a Chapter 13 plan.

Also, your disposable income is not static. The amount you're expected to pay can change throughout your repayment period. For instance, if your income increases but your expenses stay the same, your disposable income—and your plan payment—will increase. (Learn more about calculating your disposable income.)

You Must Complete Your Repayment Plan

In Chapter 13 bankruptcy, you agree to pay your disposable income to the bankruptcy trustee appointed to administer your case for three to five years. On successful completion of the plan, any remaining balance on nonpriority unsecured debt (credit card balances, personal loans, medical bills, and the like, but not student loans), gets discharged (wiped out).

Your income determines the minimum length of time you must make payments, called the applicable commitment period. Here's how it works.

• Below your state's median income. If your income is less than the median income in your state and you want to file Chapter 13 bankruptcy instead of Chapter 7 bankruptcy, you must pay all of your disposable income into the plan for at least three years. However, your disposable income is figured differently. The court will consider your actual expenses.
• Above your state's median income. If your income is above the median in your state, the applicable commitment period is five years. Throughout this period, you must pay either your disposable income or the value of the property the Chapter 7 trustee would have sold for the benefit your creditors (your nonexempt property), whichever amount is greater.

Why You (Usually) Can't Pay Off Your Plan Early

It's unlikely that the court will grant you a discharge wiping out a debt balance if you don't pay your disposable income for your entire commitment period. Much like a contract, you must do certain things before you're entitled to the discharge. Here are the terms you agreed to:

• to pay all of your disposable income to your creditors (or the value of your nonexempt property, whichever is greater)
• for three to five years, and
• in exchange, at the completion of the three- to five-year period, your nonpriority, unsecured debt balances would be wiped out.

If you don't fulfill all the terms, you don't receive a discharge.

Your Creditors (and Trustee) Will Likely Object to an 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—and you should expect them to do so.

Because it's no secret that a Chapter 13 bankruptcy filer must live frugally, your creditors will suspect that you're trying to avoid paying more into the plan due to an income increase. Your creditors will argue that the funds you intend to use to pay off the plan (employment bonus, inheritance) should be used to increase your payment to creditors, not to shorten the duration of your Chapter 13 bankruptcy.

They'll further argue that if you're allowed to pay off your debt early, they'll lose the benefit of any future increase in your disposable income from a pay raise, bonus, inheritance, and the like, or a decrease in expenses over the life of your Chapter 13 plan. If the court agrees, the court will deny the early payoff and likely require you to increase your payments to reflect your additional income.

Exception: You Can End a Plan Early After Paying Debts In Full

There is one situation where the court will allow you to pay off your plan early—and that's when you pay creditors 100% of their claimed amounts. If you pay all that you owe, there won't be a need for a payment plan. You won't need a discharge, and your creditors will be made whole.

Requesting an Early Discharge Due to Hardship

If you suffer a financial setback, and your plan pays less than 100% of what you owe, the court might end your plan early if your situation doesn't look like it will improve. Here are the requirements for a hardship discharge:

• You've paid your creditors at least as much as they would have received in a Chapter 7 bankruptcy.
• You've suffered a change of circumstances due to no fault of your own.
• There's no reason to believe your financial condition will improve.
• A payment modification isn't practical because you don't have enough discretionary income to support a plan.

If you successfully prove these criteria, the court will end your plan early, grant you a hardship discharge, and wipe out your nonpriority, unsecured debt (except student loans).

Learn more by reading Debts Discharged at the End of Chapter 13 Bankruptcy.