Chapter 13 is a different legal animal. It is a powerful tool that can help you reorganize your debts and help you break free of overwhelming debt. But it also very complex, with several factors that determine how much you’ll have to pay your unsecured creditors and how long you’ll have to make payments to the Chapter 13 trustee. It is likely the most complicated legal process that an individual will ever go through.
While some people in Chapter 13 will pay 100% of their unsecured debt, most will pay less than that. How much someone has to pay will be determined by how much their household income is and what sort of assets they have.
One of the most common questions from my Chapter 13 clients, especially those whose unsecured creditors are getting a small percentage of what they’re owed, is whether or not they can pay their Chapter 13 bankruptcy off early.
The answer is a classic lawyer’s response: yes, but.
Yes, you can pay off your Chapter 13 bankruptcy early, but you’re going to have to pay them 100% of what you owe.
Let’s say your Chapter 13 plan requires you to pay $5,000 in unsecured debt over the course of your five year plan. Let’s also assume that you have $75,000 in unsecured debt, so your plan requires you to pay about 7% of what you owe.
Can you pay extra every month to finish your plan early? No. If the Chapter 13 trustee sees that you have the ability to make a larger monthly payment, he will ask the court to increase your monthly plan payment and overall percentage that is being paid to unsecured creditors.
Can you pay off that $5,000 early if you come in to a chunk of money? No. You have to pay 100% of all claims that have been filed in your case.
So, there is a significant pre-payment penalty.
In limited circumstances, you might be able to persuade the court to end your plan early if you have encountered a hardship. But that situation will arise if you are unable to continue making chapter 13 payments, not if you have extra income.
If you are thinking about bankruptcy, you should talk with an experienced bankruptcy lawyer who can help you through the complex process. If you’d like to schedule a consultation with one of our attorneys, you can go here.