When you enter into Chapter 13 bankruptcy (also referred to as a wage earner’s plan), a repayment plan is developed and approved by the court. Under Chapter 13 bankruptcy, an individual with regular income can propose and set up a repayment plan to make installments to all creditors over a period between three to five years. Oftentimes, the creditor will forgive a portion of the individual’s debt in order to recuperate the most they can from the repayment plan. The purpose of this period is to provide the debtor time to pay the creditors back, under a fixed payment plan and prohibits creditors by law from continuing collection actions (See 11 U.S.C. § 1322(d)).
So, you might be wondering: What if I am under Chapter 13 bankruptcy with my court-approved repayment plan, and my financial situation has improved? Can I pay off my debts early?
It is understandable why someone in Chapter 13 bankruptcy would want to speed through the repayment plan–if they can–and move past this experience. However, it is important to consider that once you are in a repayment plan, if your financial situation improves and you show that you can pay more faster, then your creditors might rescind their debt forgiveness and increase the debt owed to them, thus increasing your monthly payments.
HOW WILL YOUR CREDITORS RESPOND TO EARLY PAYMENT?
While everyone’s payment plan is different, in most cases creditors will agree to forgive a portion of the debt owed to them by the individual. However, if the debtor’s financial situation starts to improve, why would the creditor be willing to settle for less than the full amount of the debt? That’s right–they wouldn’t. Thus, if an individual wants to get out of bankruptcy early and accelerate the payments of the bankruptcy plan, it is likely that the monthly payments will increase because their creditors are entitled to all of the individual’s discretionary income for the duration of the repayment period (three to five years).
When an individual is in Chapter 13 Bankruptcy, they have a legal right to keep all their property while repaying the creditors under the terms of the repayment program, without the threat that the creditors will come after them. During the three to five-year period, creditors have a right to the debtor’s disposable income. While in bankruptcy the debtor is afforded a right to a reasonable lifestyle, which is not necessarily the standard of which they are actually living, so they won’t be able to actually use all their disposable income in a way which they please while in the court-approved repayment period.
Further, as courts understand that an individual’s disposable income is not static, the amount that a debtor is expected to pay while under the supervision of the court can change from time to time based on the debtor’s ability to pay. So, as the creditor would have the right to increase your monthly payments under the payment plan, it may not be in your best interest to accelerate payments under the Chapter 13 bankruptcy plan.
For this reason, a court will likely not allow you to be discharged from Chapter 13 bankruptcy if you don’t pay your disposable income for the entire payment period. This essentially operates as a contract, and you must complete the terms of the contract to be discharged from bankruptcy.
ONE EXCEPTION: WHEN YOU MIGHT BE ABLE TO PAY IT OFF EARLY
If you really want to move past bankruptcy and have the financial means to, there is one situation where the court will allow you to pay off your plan early. That is when the debtor pays off their creditors the full amount of the debt owed; meaning, 100% of the loan amount. When you pay all that was owed, there is no need for a payment plan as the creditors have been made whole again.
If you or someone you know has any questions regarding their Chapter 13 payment plan, we encourage you to fill out our free evaluation form to be contacted by a local experienced attorney to discuss the best options for you.