How to Pay Off a Chapter 13 Bankruptcy Early

You might be able to get out of Chapter 13 bankruptcy early if you can pay off your debt or you prove a financial hardship.

By , Attorney (Tulane University School of Law)

When you enter into a Chapter 13 case, you agree to pay all of your disposable income for either 36 or 60 months. Because of this arrangement, it isn't easy to get out early. Although it's possible, there aren't many available options.

Ending Your Plan Early

There are only two ways to pay off a Chapter 13 bankruptcy early:

  • pay 100% of the allowed claims filed in your case, or
  • qualify for a hardship discharge

To understand why your options for an early exit are limited, you need to know how this chapter works, including how your plan length and payment amounts get determined.

The Length of Your Plan

The length of your plan depends on how your family income compares to other families of the same size in your state. If your income exceeds the state median, your plan is 60 months. If your income is less than the median, your plan minimum is 36 months. In both cases, the plan can't last longer than 60 months.

Calculating Plan Payments

Three main variables go into calculating your plan payments: the total amount of debt that must be paid, the amount of your disposable income, and the amount of any nonexempt property you want to protect.

What You Must Pay With Your Plan Payment

Your plan won't get confirmed by the court (approved) unless these debts will be paid in full by the end of the case:

  • Administrative claims. These claims include the trustee's fee for administering the case and any amount of your attorneys' fee that you choose to pay through your plan.
  • Priority claims. For instance, you must pay all of your recent income taxes, as well as any outstanding domestic support obligation, such as child or spousal support.
  • Secured claims. You'll pay any past due mortgage or car payments (in addition to the monthly amount).

The debts that don't have to be paid in full in your Chapter 13 matter are unsecured debts, such as credit cards and medical bills, and loans that would ordinarily last longer than the plan, like a mortgage or student loans.

Your Disposable Income

Your disposable income is the difference between your family income and your reasonable and necessary expenses. Your plan won't work if you don't make enough to cover the required payments (administrative, priority, and secured claims) and your monthly expenses. If you have something left over (your disposable income), the trustee will use it to pay some of what you owe to your unsecured creditors.

Sometimes, you can pay 100% of the allowed claims, but that doesn't happen very often. More likely, there's only enough to make partial payments. If there's nothing left over, the unsecured creditors won't receive any payment at all.

The Value of Nonexempt Property

Your Chapter 13 payment must also include the value of any nonexempt property (property that you can't protect with a bankruptcy exemption) you want to keep. In Chapter 13 bankruptcy, instead of turning over nonexempt property to the trustee like you would in a Chapter 7 case, you just have to make sure that your plan payments will be enough that your unsecured creditors get at least as much as they would in a Chapter 7 case. To see how this works, visit Keeping Property in Chapter 13.

Two Ways to Complete Your Chapter 13 Case Early

Your Chapter 13 plan must represent your best effort to pay your debts. It's designed so you'll pay the amount you can afford. Therefore, the court will only let you complete your Chapter 13 bankruptcy early under two conditions: You can pay all of your claims, including unsecured debts, in full, or you can prove a financial hardship. Otherwise, you have to make payments for the required 36 or 60 months so that your unsecured creditors get paid as much as possible.

Pay 100% of the Allowed Claims

Once you pay 100% of the allowed claims, including unsecured claims (essentially, you pay everything that you owe), the court will grant your discharge even if you haven't reached the minimum number of payments. This can happen if you have enough disposable income during your plan term to allow you to do so, or you receive a windfall that will pay 100% of your allowed claims. The windfall can come from bonuses, lottery winnings, an insurance claim, a gift, a loan, or virtually any other source.

Request a Hardship Discharge

If you've suffered a financial hardship, you can ask the court to discharge your case early. To qualify, you must show the court that:

  • Your creditors have received at least as much as they would receive in a Chapter 7 case.
  • Your change in circumstances was out of your control, like a layoff or a medical issue.
  • Your financial situation probably will not improve.
  • Modifying your plan is not practical because you don't have enough disposable income.

To learn more, see Getting a Chapter 13 Hardship Discharge.

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