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Is paying off Chapter 13 early a good idea?

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Making payments toward your Chapter 13 bankruptcy plan can feel like a long journey — repayment plans under this type of bankruptcy can take three to five years to complete.

If you got a windfall such as an inheritance, lottery winnings or large bonus at work, you might be thinking about paying off Chapter 13 early. Before making a lump sum payment to get out of Chapter 13 bankruptcy, be aware of the repercussions of an early payoff.

Should I pay off my Chapter 13 plan early?

In most cases, paying off Chapter 13 early isn’t a good idea. By paying off Chapter 13 early, you’re required to repay 100 percent of the debt you owe to your creditors instead of the reduced amount.

When you file your Chapter 13 case, your bankruptcy trustee and you or your attorney decide on a reasonable amount of debt — generally, less than what you actually owe — that you could manage to pay back to your creditors.

For example, instead of repaying 100 percent of the debt that’s included in your bankruptcy claim, the court might only require payment for 70 percent under the plan. This amount is based on your assets, monthly income and monthly expenses. Once you finish your Chapter 13 repayment plan, the remaining 30 percent of your debt is discharged, meaning you won’t have to repay that remaining debt.

If you pay your Chapter 13 plan off early, you alter the agreed upon terms of your bankruptcy case. Now, you’ll be responsible for paying your creditors all of your original outstanding debt, including the amount that would’ve been discharged.

The rationale is simple: If you have the means to make a lump-sum payment on the plan, then you should be able to continue making monthly payments until the remaining balances are also paid.

How to pay your Chapter 13 plan off early in 4 steps

If paying off Chapter 13 early is still your goal, here are four steps to take.

1. Confirm your finances are secure

It can be tempting to put your entire windfall toward your bankruptcy repayment plan to finally rid yourself of the debt. Although it might be possible to put a large sum of money toward an early Chapter 13 payoff, use caution.

Make sure that other areas of your finances are stable. This includes having enough money for essential expenses such as housing, food and utility bills.

2. Request an early payoff from creditors

Paying Chapter 13 bankruptcy off early doesn’t involve simply giving your bankruptcy trustee a lump sum to close out your case. First, you’ll need to formally request an early payoff from all of your creditors and get the court to approve the request.

From there, creditors can either accept or reject your request. In most situations, creditors will object to your paying Chapter 13 bankruptcy off early because it goes against the repayment plan.

3. Wait for the court’s decision

If the court rules in favor of your creditors to deny an early payoff — which is common — your monthly plan payment can be affected. Your monthly Chapter 13 payment amount is partially determined by your discretionary income.

An increase in income, along with unchanged costs for approved essentials, means your extra funds are viewed as discretionary income. In this situation, the court can increase your monthly payments under the plan.

4. Pay your entire original debt

If your request to pay off Chapter 13 early is approved by a court, you’ll be required to pay 100 percent of the debt claims on your bankruptcy case. This includes unsecured debt, such as credit cards, which would’ve been discharged if you’d kept making Chapter 13 plan payments on the original schedule.

Final considerations when paying your Chapter 13 plan off

As you’re considering whether paying Chapter 13 off early is right for you, remember that a bankruptcy case still remains on your credit history for seven years from the date you file. An early payoff won’t clean your credit slate earlier.

There are only a few exceptions when paying Chapter 13 off early won’t result in a higher debt amount, but your attorney or the trustee assigned to your case would have to research whether one exists in your bankruptcy district. But more likely than not, you must stay the course and continue to make payments for the remainder of your plan if you don’t want to risk increasing your monthly Chapter 13 payment amounts.

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Written by
Jennifer Calonia
Contributing writer
Jennifer Calonia is an L.A.-based writer and editor. She's covered topics like debt, saving money and credit cards. You can find her work on Business Insider, Forbes and more.
Edited by
Associate loans editor