Should You Pay Off Your Chapter 13 Repayment Plan Early?
Many people who enter into a Chapter 13 repayment plan have a common concern: What happens if I can’t pay off the payment amounts for the duration of the plan? In other words, what happens if my income decreases, I’m laid off from work, I get sick, or something else happens where I can’t afford the payments anymore?
Making More Money
But others have an opposite concern: They come into money, or their income increases, and they want to pay off their debt early. They want to be unburdened by continuing Chapter 13 payments, take advantage of their current bettered financial position, and end the case early.
Can you pay off your creditors early in a Chapter 13 bankruptcy? You can—but it may not be a good idea.
Consequences of Payoff
If you pay off your creditors early, you will need court permission. Assuming that permission is given, you’ll have another problem: By paying your creditors early, you will have to pay off the creditors everything that they are owed—not just the reduced amount that you would have paid them, had you continued with the Chapter 13 plan.
That includes unsecured creditors who may not have had to have been paid at all, through the course of the Chapter 13 plan.
Adjusting Payments & Objections
Other problems can arise as well. If the judge denies your request to pay off creditors early, the creditors—and the court—now know you have more money. That money could be used to adjust your Chapter 13 payment plan (assuming the assets are not otherwise exempt under a specific bankruptcy exemption).
Your creditors, and the trustee will also likely object to your request to pay the plan off early. From their perspective, your extra income should go towards paying the creditors more, instead of being used to pay off the plan early, a plan that was originally based on you having less income or fewer assets.
Creditors are also concerned that if your income is going up, it could go up even more in the future, and creditors want to have a shot at getting to that income.
No Credit Benefits
Additionally, paying off your Chapter 13 plan earlier doesn’t take the bankruptcy off your credit any earlier. It will still take 7 years from the date of the filing for the bankruptcy to be removed. You get no credit benefit from paying your plan early.
Unless there is some other overriding reason there simply is no good reason legally to pay off a Chapter 13 plan early. You would be better off investing the money, saving it, or using it to buy essentials or things that you need in your day to day life.
Still, if paying the plan early is for some reason absolutely necessary for you, your bankruptcy attorney can help you weigh the pros and cons of your decision.