Can I Pay Off My Chapter 13 Bankruptcy Payment Plan Early?
The core feature which separates Chapter 13 from Chapter 7 bankruptcy is the Chapter 13 “reorganization” or repayment plan. This repayment plan is designed to help debtors keep their property in exchange for gradually repaying a certain portion their debts, typically over the course of three to five years. But what if you don’t want to wait that long, and prefer to get your payments out of the way up front? Is it possible to complete the repayment plan ahead of schedule? In this entry, our bankruptcy lawyers will explain some of the potential obstacles to early Chapter 13 repayment, and explore alternative methods of modifying your payment plan.
Reasons to Not to Pay Your Chapter 13 Creditors in Advance
Most people would logically assume the sooner they can pay off their Chapter 13 debts, the better. The creditors get their money, the debtor is released from their obligations, and the case concludes that much sooner: a win-win situation for all parties involved.
Or at least, that’s what one would think. While early repayment is not necessarily impossible, there are some potential stumbling blocks which debtors should be aware of.
To begin with, it’s important to understand that you cannot simply proceed with an expedited repayment plan at your own discretion. On the contrary, it is absolutely critical that you confirm your financial intentions with your creditors and obtain approval from the bankruptcy court overseeing your case. The court must grant its approval before you can alter your repayment plan.
This is because debtors must normally adhere to the provisions of the “applicable commitment period,” or the minimum duration of the repayment plan, which is determined by the debtor’s income. If you earn more than the state median for a household of equivalent size, your applicable commitment period will be set at five years. If you earn less, your commitment period will be shortened to three years. Applicable commitment periods are set by federal law in accordance with 11 U.S.C. §1325 (Confirmation of Plan).
But why is adherence to the applicable commitment period so important? Why would the court reject your request to finish your plan ahead of time?
One of the answers stems from potential flux in your future disposable income. Your creditors are generally entitled to 100% of your disposable income, or income which remains after basic, necessary expenses have been paid. Hypothetically speaking, if you were to receive a raise, inheritance, or another type of financial benefit after terminating your plan due to early repayment, your creditors could sustain a financial loss.
Rather than shorten your payment plan, in most cases, your creditors (and the trustee handling your case) will instead attempt to increase your payments. In other words, requesting a shortened plan could actually work against you by making your payments higher — without changing other variables.
Despite these potential hurdles, it may be possible to successfully shorten the duration of your plan by negotiating carefully with your creditors. Seeking legal representation can help increase the likelihood that your request for a plan modification will be accepted by the court handling your case.
Modifying Your Bankruptcy Repayment Plan in Pennsylvania
Seeking approval for a shortened repayment schedule can work against you financially, and for many debtors, is not a favorable course of action. However, you may be able to modify your plan more advantageously through other means.
For example, if you’re interested in lowering your monthly payments to your creditors, your bankruptcy attorney may be able to help you obtain a Chapter 13 moratorium. This moratorium will give you a temporary break from your repayment schedule, typically limited to a period of 90 days. A moratorium can be helpful if you’ve suffered from a short-term injury, short-term job loss, or other temporary change in your financial circumstances. The moratorium will not change other aspects of your plan, including the original termination date.
If you’ve suffered a long-term setback, such as an extremely serious injury, you may be able to permanently modify your plan instead. However, even if the court approves your permanent Chapter 13 modification request, you will still be obligated to repay your priority debts (such as alimony and child support), as well as your secured debts (such as auto loans and mortgage payments). Depending on the debtor’s unique financial circumstances, such modifications may be permissible in accordance with 11 U.S. Code §1329 (Modification of Plan after Confirmation), which provides the following with certain qualifications:
At any time after confirmation of the plan… the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to: increase or reduce the amount of payments on claims of a particular class… extend or reduce the time for such payments; alter the amount of the distribution to a creditor… [or] reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase health insurance for the debtor.
Additionally, you may be able to qualify for a hardship discharge if an emergency should arise.
Our Pennsylvania Bankruptcy Attorneys Can Help You
If you’re thinking about filing for bankruptcy in Pennsylvania or New Jersey, or if you need help modifying your Chapter 13 repayment plan, the experienced bankruptcy attorneys of Young, Marr & Associates may be able to assist. To set up a free and confidential case evaluation, call our law offices today at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania.