Entering into a Chapter 13 bankruptcy repayment plan is an excellent way to restructure your debt and add order to your life while you are getting back on your feet.
During your repayment plan, you will make monthly payments to your creditors for a period of 36 to 60 months (3 to 5 years). Since this is a long period of time, people’s financial situations often change for the better.
When someone receives an unexpected windfall, their first thoughts are often about how they can pay off their Chapter 13 bankruptcy plan early. Unfortunately, this may be easier said than done. While bankruptcy filings can provide breathing room and help you get back on your feet, they must balance your rights with the rights of your creditors.
Repaying Your Creditors
Under your Chapter 13 plan, your creditors receive all of your disposable income. Disposable income is any monetary excess excluding what you need to live, eat, and care for your family. If you receive a raise, then your monthly disposable income may increase as well.
Payments under your Chapter 13 Plan will go towards paying three types of debt:
- Priority debts, such as taxes and spousal or child support payments, must be paid in full.
- Secured debts, such as your mortgage or car loans, must be paid at least the value of the property if the debtor wishes to keep the secured item.
- Finally, unsecured, nonpriority debts, such as credit cards, personal and “payday” loans, utilities, gym memberships, or medical bills, receive any disposable income that is left over.
Depending on the amount of your disposable income, you may pay some your unsecured, nonpriority debts, or you may not pay anything towards them at all. At the end of your Chapter 13 repayment plan, any portion of these unsecured, nonpriority debts will be discharged.
Because of this, creditors have an interest in ensuring that you make all monthly payments in hopes that your disposable income will grow large enough to cover some of your nonpriority debts. If your disposable income increases, the amount you pay towards unsecured, nonpriority debt will also increase.
For example, Nancy has a five-year repayment plan. She earns $3,000 each month, and requires $1,000 each month for necessary expenses, such as food, utilities, and health insurance. The remainder of her income is considered disposable and goes towards paying her tax debt, her mortgage, and medical bills. Her disposable income is sufficient to pay past taxes and her mortgage, but only a small portion of medical bills.
Nancy receives a raise that increases her disposable income to $3,500 each month. Even though she may want to increase the amount that goes towards her tax debt, or pay her mortgage off early, the bankruptcy court will likely deny this request. Instead, Nancy’s payments towards the tax debt and her mortgage remain the same, but payments to her medical debt will increase.
Paying Debts in Full
As mentioned earlier, unsecured nonpriority debts may only receive a small portion of a debtor’s monthly income under a Chapter 13 bankruptcy plan. Typically, creditors of these debts will argue against a debtor being able to pay off a Chapter 13 plan early. However, if the debtor is able to pay 100% of the amount claimed by creditors, including the unsecured, nonpriority debts, there will be no argument. There will be no need for a Chapter 13 plan, and nothing will be discharged.
In our example above, if Nancy receives an inheritance that is large enough to pay off her remaining debts in full two years into her five-year plan, she may do so. Since all of her debts can be paid in full, she can end her repayment plan early.
Early Discharge Due to Hardship
On the other hand, if you are not able to pay off your debts in full during your Chapter 13 repayment plan, you may be able to end it early due to a hardship.
There are four conditions that must be met:
- Your creditors must have received at least as much as they would have received under a Chapter 7 plan.
- The change of circumstances is due to no fault of your own.
- It is highly unlikely your financial situation will improve.
- You do not have enough discretionary income to support a payment modification to your plan.
This article does not provide legal advice, nor does it form an attorney-client relationship. If you are interested in learning more about Chapter 13 bankruptcy, are interested in ending your repayment plan early, or have questions about early discharges due to hardship, contact our experienced attorneys today.