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In many Chapter 13 cases, it is difficult to pay off your Chapter 13 early. There are two possibilities though 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. 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 as your household, 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 that debtors (the individuals filing for bankruptcy relief) pay the maximum 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. In other words, you pay the full balance owed to your unsecured creditors who filed allowed claims instead of a portion 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.

2.  Request a hardship discharge.

The other option is to file a petition for a hardship discharge. Hardship discharges are only granted under certain circumstances. To receive a hardship discharge, you must prove to the court that:

  • Creditors in your Chapter 13 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.

A hardship withdrawal may be granted in cases in which the debtor becomes disabled or impaired because of 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. As long as you remain in a Chapter 13 case, 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 with a fresh start sooner so that you can begin rebuilding your finances to achieve your long-term goals.

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 or 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. If a debtor receives an inheritance, wins the lottery, or is gifted a large sum of money, the court could increase the bankruptcy plan payment. Paying off the plan may be the better option.

Also, if a debtor’s income increases, the debtor may want to pay that increase in income toward back taxes, past-due mortgage payments, or pay off a car loan faster. However, the court is likely to increase the plan payment and give the extra money to general unsecured creditors. The debtor must continue with the plan payment for 36 to 60 months, and the extra money goes to medical bills, credit card debt, and other unsecured debts. In those instances, it may be better to pay off the Chapter 13 plan so that you can move on with your life after bankruptcy.

Are You Interested in Filing for Bankruptcy Relief?

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 free Chapter 13 payment calculator. You can also check to see if you qualify for a Chapter 7 bankruptcy by using our free 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.

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

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