Is It True You Can't Pay Off A Chapter 13 Bankruptcy Plan Early?
Posted on: 21 September 2018
It can take up to 5 years to complete a chapter 13 payment plan, and anything can happen to your finances in that time period. For some people, this means receiving temporary or permanent increases to their income. However, if you're hoping to use the extra money to pay off your chapter 13 plan and end your case early, here's why that may not be possible.
More Income Equals Increased Payments
Under bankruptcy law, creditors are entitled to receive an amount of their verified claims. However, they will only receive as much money as you can afford based on pay, which may be significantly less than what they're actually owed. For instance, although your creditor claims you owe $1,000, they will only receive $500 because that's the maximum you can pay based on your income. Any balance left over at the end of your chapter 13 payment plan will be discharged, depending on the type of debt it is.
Thus, if your income increases during your repayment period, the court will simply raise your payments to maximize the amount of money your creditors receive. So for example, a $1,200 per year pay raise may mean a corresponding $100 per month increase in your plan payments if your household expenses remain the same.
Only One Exception to the Rule
The only time the court lets bankruptcy petitioners pay off their chapter 13 plans early is if all creditors will receive 100 percent of their verified claims. For instance, you get a new job or promotion that triples your salary. If the plan payment adjustment accounting for the increase results in all your debts being paid off, the court will end the case as soon as your last payment is processed regardless of whether it's a year or two earlier than expected. Since all debts will be paid, nothing has to be discharged when your case ends, negating the need for additional court protection for you or the creditors.
In all other cases where creditors will be paid less than 100 percent, the court will simply require you to pay more into your plan. Thus, you need to handle reporting increased income to the court carefully, particularly if your household expenses have gone up as well. You could end up being required to pay more money when you can't actually afford to, which can result in you not being able to make your payments as required.
For more information about this issue or help figuring out how to hand a windfall or income increase while you have an active bankruptcy, contact a law firm like Lifeline Legal LLP.
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