Completing a Chapter 13 plan early

On Behalf of | May 11, 2022 | Chapter 13 |

Persons suffering from crushing debt may find their financial situation intolerable. When appropriate, filing for Chapter 13 bankruptcy protection could provide a solution. Unlike Chapter 7, Chapter 13 bankruptcy does not center on a liquidation approach. Chapter 13 involves some discharging of debt, but it focuses primarily on the debtor making reasonable, structured payments to creditors. Those hoping to end their financial turmoil may plan on paying their plan ahead of the final payment date. Some may wonder if that strategy is advisable.

Paying the Chapter 13 obligations

A Chapter 13 plan involves making monthly payments for three to five years. Failing to make payments would lead to a default and the resuming of collection actions. However, paying off the payment plan ahead of schedule may create another problem: the debtor may have to pay creditors in full.

When someone faces overwhelming debt but still earns a decent living, the bankruptcy court may reduce creditor obligations significantly. The court could drop the amounts paid to creditors to 60% of the original balance. The debtor then has the previously noted three to five years to pay the balance.

Thanks to the gig economy, the debtor might start to make more money by working a second job. The debtor could put all that second income towards the payment plan and end up having to pay the 40% of previously forgiven debt. Imagine losing the gig economy job soon after. Financial troubles could worsen.

The means to pay

Those who come into a significant amount of money might not care about the reinstatement of past debt amounts. A person inheriting hundreds of thousands of dollars might prefer Chapter 13, and its shadow disappears. Paying off the balance and accepting the added debt may be worth it to that person.

Be aware the creditors may request the court deny the early payoff. Yes, early payoffs require court approval. So, even someone with the means to pay might find the court chooses to decide for the creditors. If the court approves, expect to pay all debt owed to every creditor.