How to Pay Off a Chapter 13 Bankruptcy Early

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 Chapter 13 Plan Early

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

• pay 100% of what you owe, or
• qualify for a hardship discharge

You can't simply pay off the amount left in the plan. Coming into a large amount of money suggests an income increase, and your creditors are entitled to receive your discretionary income for the length of your plan. In other words, you can expect your creditors to investigate whether you can pay more.

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 Chapter 13 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.

Learn more about how long your Chapter 13 plan will last.

Calculating Chapter 13 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" or approved by the court 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.

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

Your plan won't work if you don't make enough to cover the required payments and your monthly expenses. Learn about what you must pay in a Chapter 13 plan.

Your Disposable Income

If you have any income left over after paying the above debts, you have "disposable income." Your disposable income is the difference between your family income and your reasonable and necessary expenses.

Because your unsecured creditors are entitled to your disposable income for the life of the plan, the trustee will use it to pay some of what you owe.

Sometimes, you'll be required to pay 100% of what you owe, and it happens more than you might think. However, many people only make partial payments to unsecured creditors. Whatever balance remains at the end of the plan is eliminated or "discharged."

Some courts allow what's known as a "zero percent" plan if no disposable income exists. In such cases, unsecured creditors receive nothing at all. Learn how a zero percent plan can help you save your house or car.

The Value of Nonexempt Property

In Chapter 13 bankruptcy, you don't turn over nonexempt property (property you can't protect with a bankruptcy exemption) to the trustee like you would in a Chapter 7 case. Instead, you just have to ensure that your plan payments will be enough that your unsecured creditors get at least as much as they would in a Chapter 7 case.

In other words, you must pay at least the value of your nonexempt property. Because it's a bit more complicated than this simple explanation, read Keeping Property in Chapter 13 for more details about how this works.

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 everything you owe in full other than long-term obligations like mortgages, or you can prove a financial hardship.

Otherwise, you must make payments that include your disposable income for the required 36 or 60 months to pay your unsecured creditors 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.

Need More Bankruptcy Help?

Did you know Nolo has made the law easy for over fifty years? It's true, and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.