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 know how to pay off a Chapter 13 early—but don't count on being let out of your plan. 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 when your finances improve.

How to Get Out of Chapter 13 Early

There aren't many ways to end a Chapter 13 case early. The simplest is to request a dismissal or to stop making payments and wait for the court to dismiss the case. You won't receive a debt discharge, and you'll likely have to pay any interest that would have accrued had you not filed for bankruptcy, but you will receive the benefit of your Chapter 13 payments (they'll reduce the balance owed).

Of course, most people don't want to exit Chapter 13 this way, and there are other options. You could ask for an early hardship discharge, which, as we explain below, isn't necessarily easy to come by. You could convert from Chapter 13 to Chapter 7, but you might lose property, so this wouldn't be a good idea if you filed for Chapter 13 to prevent losing property in Chapter 7.

Finally, you could pay your debts fully. But fully doesn't mean the amount owed under the Chapter 13 plan. It's the amount you owed before filing for Chapter 13, plus interest and other allowed fees, minus your bankruptcy payments.

How Chapter 13 Bankruptcy Works

Many people file for Chapter 13 because they're allowed to keep all of their property and repay their debt over a period of three to five years through a court-approved Chapter 13 repayment plan. Filers also pay a small amount toward many unsecured obligations, like credit card balances, medical bills, and personal loans, and discharge the remaining balance after completing the plan.

Your Creditors Get Your Disposable Income

The unsecured creditors that receive a fractional portion of what's owed share your "disposable income," or the amount remaining after paying allowed monthly expenses and required obligations like house and car payments and arrearages, back taxes, and support obligations.

Why You Can't Pay Off Chapter 13 Early

Your creditors are entitled to whatever disposable income you have during the life of the plan. If your income increases, your disposable income will also increase.

In a nutshell, if you suddenly earn extra money, your disposable income will rise, and your unsecured creditors will be entitled to receive more money under the plan.

Learn more about calculating your disposable income.

You Must Complete Your Repayment Plan

So why can't you complete the plan early if you make more money? In Chapter 13 bankruptcy, you don't agree to pay the plan amount. You agree to pay your disposable income to the bankruptcy trustee appointed to administer your case for three to five years. The initial plan amount is a calculation based on your earnings when you drafted the plan. If you earn more later, you must pay more.

When Your Chapter 13 Plan Will Typically End

Once you pay your disposable income for the plan length, the court will erase any remaining balance on nonpriority unsecured debt (credit card balances, personal loans, medical bills, and the like, but not student loans) and get discharged (wiped out).

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

You can ask the court to let you pay what you owe on the plan and give you a discharge. However, unless you can prove a hardship (discussed below), don't expect the court to 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.

You don't receive a discharge if you don't fulfill all the terms.

Your Creditors (and Trustee) Would Object to Chapter 13 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 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

In one situation, the court will allow you to exit your plan early—you pay creditors 100% of their claimed amounts. If you pay all that you owe, a payment plan won't be needed. 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 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.