Bankruptcy / Chapter 13 / Paying Off Early

Can I Pay Off My Chapter 13 Early? 2 Things You Need to Know

Written by Ben Tejes
Updated Oct 11th, 2023
This article is for informational purposes only. Ascend does not provide legal advice, and are not attorneys. If you'd like to speak with a bankruptcy attorney that serves your city, you can speak with one in a free consultation.

In many Chapter 13 bankruptcy cases, it is difficult to pay off your Chapter 13 early. There are two possibilities to get an early discharge by paying the claims in full or requesting a hardship discharge.

When you file a Chapter 13 bankruptcy case, you must complete a Means Test. The Means Test determines your median income. The median income is calculated based on your average monthly income for the six months before filing bankruptcy. If your median income is above the state median income for a household with the same number of people, you must propose a 60-month plan. If your median income is below the state median income, the minimum number of months for your Chapter 13 plan is 36 months.

Chapter 13 bankruptcy cases are designed so debtors (the individuals filing for bankruptcy relief) pay the amount they can afford toward their unsecured debts. However, a debtor rarely pays the unsecured creditors in full. In most cases, a debtor pays a small percentage of the debts owed to unsecured creditors. For that reason, paying off a Chapter 13 case early is complicated.

Can Chapter 13 Be Discharged Early?

You have two options for paying off your Chapter 13 bankruptcy plan early.

1.  Pay all allowed claims in full.

The first option for paying off your Chapter 13 plan early is to pay all allowed claims in full. To expand, you pay the full balance owed to your unsecured creditors who filed allowed claims instead of those debts being discharged (forgiven) when you complete the Chapter 13 plan. Unsecured creditors who have not filed a proof of claim do not need to be paid. Those debts are discharged when you pay the allowed claims in full and exit Chapter 13.

If you are able to pay the allowed claims in full, you may also want to look at the cost and length of time of other debt-relief options. You can use the calculator below to understand.

2.  Request a hardship discharge.

The other option is to file a petition for a hardship discharge. You may receive a hardship discharge under certain circumstances. To receive a hardship discharge, you must prove to the court that:

  • Creditors in your Chapter 13 bankruptcy case received payments that total at least the same amount as the amount they would have received in a Chapter 7 proceeding;
  • The change in your circumstances which make it impossible for you to continue in Chapter 13 was not within your control;
  • Your current financial situation is not likely to change; and,
  • Modifying your plan to lower your Chapter 13 payments is not practical because you do not have sufficient disposable income to meet your standard living expenses.

You may receive a hardship withdrawal if you become impaired due to an illness or accidental injury.

Are There Benefits To Paying Off My Chapter 13 Plan Early?

The benefit of paying off a Chapter 13 plan early is that you exit bankruptcy sooner. You cannot incur debt or sell assets of substantial value without court approval. You must report increases in income to the Chapter 13 trustee. Substantial increases in income could result in a modified plan to increase your Chapter 13 plan payment.

Completing your Chapter 13 case early allows you to move forward sooner, allowing you to rebuild your finances.

Are There Any Potential Disadvantages of Paying Off My Chapter 13 Plan Early?

In addition to paying the allowed claims of unsecured creditors in full, you must also pay priority unsecured debts in full. For instance, if you owed back taxes, you would need to pay the back taxes in full. However, if some of that tax debt qualified as general unsecured debt, you are only paying a portion of the tax debt. Paying off the Chapter 13 plan early would result in full payment of the tax debt.

There could be other disadvantages based on your specific Chapter 13 plan. You should always consult with a bankruptcy lawyer before you file a motion with the bankruptcy court. The same goes if you send a lump sum to the Chapter 13 trustee to pay off a Chapter 13 plan early.

What Reasons Would Someone Have For Paying Off Their Chapter 13 Case Early?

The most common reason for paying off a Chapter 13 plan is a windfall. For example, you may be liable for an increased plan payment if you receive an inheritance, lottery, or a large sum of money. Paying off the plan may be the better option.

Also, if your income increases, you may want to pay that increase in income toward back taxes, past-due mortgage payments, or pay off a car loan faster. The court may increase your plan payment and provide additional money to unsecured creditors.

The debtor continues the plan payment for 36 to 60 months, and the extra money goes to medical bills, credit card debt, and unsecured debts.

We Can Help

If you have debts you cannot pay, a bankruptcy case may give you the debt relief you need. A Chapter 7 or Chapter 13 case can get rid of your debts and stop creditor harassment and debt collections. For more information about bankruptcy, check out our blog. Also, try our Chapter 13 payment calculatorYou can also check to see if you qualify for a Chapter 7 bankruptcy by using our Chapter 7 means calculator. If you need additional information, call or text us at 833-272-3631 to speak with one of our knowledgeable professionals.