Paying off Chapter 13 Debts Earlier

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Paying off Chapter 13 Debts Earlier

The financial situation sometimes can get better with time and it so can happen that you have been halfway through your Chapter 13 repayment plan duration only to realize that your financial situation is a lot better now. In such circumstances, it is very tempting to pay off all pending Chapter 13 payments in advance and get rid of the cycle. However, it is not one of the most beneficial attempts as you might end up owing more to the lenders as creditors are entitled to all or most of the disposable income. As the disposable income increases, you might have to pay off all debts in full to end the Chapter 13 payment plan earlier. The discharged debt or released debt might be reversed in such a scenario. To know more about Chapter 13 and its alternatives, log on to Recovery Law Group to get a greater insight on all bankruptcy-related topics.

Disposable income needs to be channelized to lenders

The whole concept of Chapter 13 is to channelize disposable income to the lenders over a specific period of months in order to repay as much debt as possible. This period is usually between 3-5 years. The disposable income might well be way higher than actual disposable income as some standard expenses cap is used to calculate disposable income rather than actuals. Since disposal income can change over the Chapter 13 repayment tenure, it will directly impact the payment installments. Since the expenses remain constant irrespective of the income, it is likely to see a direct proportionality between income and monthly payment.

How is the tenure decided and what debts can be released?

The tenure of the Chapter 13 payment plan is decided based on your income. There is a state median with respect to the income. Some states might also use Federal median. Your income has to be compared with the state median to determine the tenure of the Chapter 13 payment plan. If your income is below the median, the tenure is usually 3 years. If it is above it can last up to 5 years. The debts which can be released are largely unsecured debts. These include credit card, medical, utility bills as well as payday loans and other types of debts.

What are the challenges of paying off debt earlier in Chapter 13?

The common misunderstanding with respect to Chapter 13 payment’s plan is that the filer is only liable for the monthly payment for the specified tenure. However, depending on the debts and tenure, the filer is usually liable for the whole of his/her disposable income until he/she is in the Chapter 13 payment schedule. What this means is no debt shall be wiped out or released if you are planning to end the Chapter 13 payment plan earlier. You should ideally pay off the whole of your disposable income for the specified period until and unless you have settled all your debts in full.

The procedure for paying off debt earlier is a formal one. All lenders need to be notified and court approval is needed for such an act. The general tendency of the lenders and the bankruptcy trustee is to object the paying off debt in advance. The basic suspicion is that it is the attempt of the filer to protect his/her higher income in the near future from being diverted to Chapter 13 payment’s plan. Most employees attempt this when they receive a bonus or variable pay which is usually a larger sum offered once in a year. However, the lenders shall argue to leverage that as an additional payment to overcome their debt and not a payment that should allow the filer to reduce the length of the Chapter 13 payment program.

How about ending Chapter 13 due to a drop in income?

Just how the increase in income adds extra leverage to the lenders, a decrease in income also holds them accountable to compromise. If there is a financial setback and your payment plan has already been designed to pay less than the total debts you are liable too, you might just end up getting all your remaining debts discharged. This happens only if there is a lot of hardship and there is a huge probability of the scenario not bettering in the near future or for the duration of the Chapter 13 payment plan. This process is referred to as ‘hardship discharge’. There are some terms and conditions to avail hardship discharge those can be listed as follows-

  • Your lenders have received as much as they would if you had filed for Chapter 7
  • The change in financial situation or setback is a natural event and does not involve mismanagement or intentional action or basically, there is no fault of the filer
  • The financial condition of the filer does not seem to have a bright future
  • A change in Chapter 13 payment arrangement is also not viable due to lower disposable income

The above points need to be proven and evaluated by the court to make any judgment with respect to a hardship discharge. A student loan might still not be released though however, most of the other debts can be wiped off. For a deeper analysis of your situation and to help you out of it, contact the best attorneys in town at 888-297-6203.