Can I Payoff a Chapter 13 Bankruptcy Early?
A Chapter 13 bankruptcy allows debtors to pay creditors through a repayment plan approved by a bankruptcy court. Chapter 13 is an alternative for debtors who are not qualified for liquidation under Chapter 7. A debtor commits to making payments in the plan for three or five years. While a debtor can pay off a Chapter 13 bankruptcy early, the type of debt determines the consequences of doing so.
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Priority Debts
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Priority debts are unsecured debts are given highest priority for repayment. Common priority debts include back taxes and child support. A debtor who is unable to pay priority debts in full over the life of the plan will not qualify for Chapter 13 bankruptcy.
Secured Debts
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Secured debt is debt that is secured by collateral. A car or a home is the most commonly used collateral for a loan. Under a repayment plan, secured debts that extend beyond the life of the loan must be kept current. Other secured debts, such as tax liens on real property, promissory notes on personal property and judgment liens, must be paid in full.
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Unsecured Debts
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Unsecured debts are without priority and unsecured by collateral. Under Chapter 13, a repayment plan must include payments to unsecured creditors, such as credit card companies and medical providers, in an amount over the life of the plan that is at least equal to the value of the property that is not qualified for exemption. Each state has a list of exempt property, but typically nonexempt property includes business assets, artwork, interest in real property and expensive clothing and jewelry. Most unsecured creditors will be paid less than 100 percent of what is owed in a repayment plan.
The Repayment Plan
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An acceptable repayment plan is an arrangement whereby the debtor has enough income to pay priority debts and secured debts in full, and is able to pay unsecured debts equal in value to nonexempt property. Depending on a debtor's income, payment plans are for three or five years. A debtor with income less than the state's median may choose to enter into a three-year plan, while a debtor with income above the median must opt for a five-year plan.
Paying Off a Plan Early Outside of Bankruptcy
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If a debtor decides to have the case dismissed in order to pay off the debt outside of bankruptcy, interest and penalties that stopped accruing on a debt while in the repayment plan may be added onto the amount owed. The debtor would be responsible for paying the debt as well as any interest and penalties.
Paying Off a Plan Early in Bankruptcy
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Conversely, a debtor who remains in the plan but pays off the debt early may trigger an investigation into the debtor's income. When a debtor's income increases, a trustee or an unsecured creditor may file a motion with the court to have the plan amended in order to increase the payment to unsecured creditors for the remainder of the plan. Consequently, the debtor would continue to pay unsecured creditors in the plan regardless of paying off priority and secured debts.
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