How to Pay Off a Chapter 13 Bankruptcy

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A Chapter 13 bankruptcy, also known as a wage earner's plan or a reorganization plan, allows you to repay most debts rather than cancel them. In return, you get to keep your property. Debtors pay creditors according to a court-approved repayment plan over three to five years. Under a Chapter 13 bankruptcy, you must make all your payments in full and on time in order to complete your plan successfully and receive a discharge of any remaining unsecured debts.

Payment Guidelines

A priority system determines which creditors receive payment in full and which may only receive a portion of the total debt you owe. According to the priority system, you pay:

  • All filing, trustee and attorney fees directly related to
    the Chapter 13 bankruptcy
  • All past due child and spousal support and most income tax debts

  • All past due amounts on secured property that you want to
    keep, as well as making on-time payments going forward
  • A percentage ranging from zero to 100 percent of all
    unsecured debts, depending on how much income you have with which to fund your plan

Payment Basics

Payments must usually begin within 30 days of the date you file your Chapter 13 petition. The trustee won’t begin distributing money to your creditors, however, until the court approves your repayment plan. Until then, the trustee holds your payments in a reserve account.

The terms of your plan determine how much creditors receive of each of your payments and how often they get paid. Most courts allow only monthly payments, but some may allow bi-weekly payments. In either case, you send the trustee one check to cover all your unsecured debt payments. As for secured debts like your mortgage or vehicle loan, the court may require that you include these payments in the check you send the trustee or continue paying each secured creditor directly.

Tip

  • If you default on a secured debt during a Chapter 13 repayment period, the lender can file a motion to lift an order called the [automatic stay](http://www.nolo.com/legal-encyclopedia/creditor-lift-remove-bankruptcy-automatic-stay.html). The stay prevents creditors from engaging in collection efforts during the repayment period. If the court grants the motion, the creditor is free to resume collection activities, including repossession or foreclosure.

Payment Options

The court specifies who you should make your payments to and what additional information you must include. In most cases, the payee is the bankruptcy trustee. You must include your full legal name and your case number on each payment.

Payment options depend on the bankruptcy court, but they commonly include payments by mail, electronic payments and payroll deductions. Each payment must reach the trustee on or before the scheduled due date, regardless of which option you choose.

  • Payment by mail. Many courts only accept secure
    payment forms such as money orders, cashier’s checks or  certified bank
    checks. You can't send cash or a personal check.
  • Electronic payments. Most courts only accept electronic
    payments from a single authorized source. For example, you
    most likely won’t have the option to use your bank’s bill pay feature or send
    payments via an online bill payment site.

Tip

  • It may take up to three business days for the payment to reach the trustee, so plan ahead if you choose to make electronic payments. Make sure you have enough funds to cover the payment. You'll most likely lose the option to send electronic payments in the future if even one payment is rejected.

  • Payroll deductions. Making payments through payroll deductions generally requires a court order. With this option, your employer will deduct the money and mail the
    payment directly to the trustee. You remain responsible for making sure this is done and each payment arrives in full and on time. It often takes a
    few pay periods for a payroll deduction to take effect so you’ll
    need to make the payments yourself during this time.

Tip

  • Ask about less common options such as whether you can make payments in person, over the telephone or send a payment via overnight mail.

Warning

  • **Send only the exact payment required.** You can’t pay ahead or try to pay off a Chapter 13 bankruptcy early without the court’s permission.

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