Can You Pay A Chapter 13 Repayment Plan Off Early? Should You?
You may be aware that if you file for a Chapter 13 bankruptcy, you will have to make payments over a period of time, between 3-5 years, three years being if your income falls below your state’s median income, and 5 if your income is above the median amount.
Although this may initially seem like a drawback, there are a lot of advantages to a Chapter 13. But one thing that many people ask when considering Chapter 13, is whether they can pay off their plan early.
In other words, if they have the money, or if their finances improve, and they can do it, can they just pay a little extra, and be done with payments before the end of the 3-5 years? It sounds like a great idea, and an honorable one—after all, what creditor wouldn’t want to get paid quicker?
Problems When Paying Early
There are, however, a number of problems with paying for a plan before it is supposed to end. The first problem is that you’ll need court permission to do that.
But the second—and more serious problem—is that if you do get that permission, you’ll have to pay off your creditors everything they are owed—not the reduced amount that creditors would be paid, if you were paying through the payment plan.
Normally, when you are done with your plan, you will not have paid off most of your creditors at 100%. Whatever amount is not paid at the end of the plan, will be discharged. This can be a huge savings to you. You lose that advantage when you try to pay a plan early, as you will now have to pay all creditors at 100%.
That even includes unsecured creditors, many of whom may be getting pennies on the dollar—or nothing at all—in your already-approved payment plan.
Creditors on Alert
Another problem is that in the event that your request from the court is denied, you have just told all your creditors and the trustee that you now have more money than you did when your initial plan was approved.
Your creditors could ask the court to amend your plan, to increase your plan payments, or the total amount that you will pay over the life of the plan. From a creditor’s standpoint, why let you pay off your plan early, when you could just pay more over the same period of time, resulting in a larger total payment for the creditors?
The bankruptcy does not come off your credit any earlier for paying the plan off—it will still remain on your credit report for 7 years.
The best decision, if you do find yourself with more money or more income, is to use that money to save for a rainy day, and for your fresh start when your plan is over.
Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 today to help if you need a Chapter 13 bankruptcy filed.