Can a Chapter 13 Plan Be Paid Off Early?

Chapter 13 bankruptcy provides individuals with regular income a structured path to repay debts under court protection. While these repayment plans typically span a set duration, it is possible to pay off a Chapter 13 plan earlier than its scheduled completion. However, achieving an early payoff involves meeting specific legal conditions and navigating a formal court process.

Understanding Chapter 13 Plan Duration

A Chapter 13 plan’s duration is set by the U.S. Bankruptcy Code. These plans typically extend for either three or five years, or 36 to 60 months. The length of a debtor’s plan depends on their current monthly income relative to the median income for a household of similar size in their state.

Debtors whose current monthly income falls below the state’s median generally propose a three-year plan. Individuals with an income exceeding the state median usually propose a five-year plan. This structure, outlined in U.S. Bankruptcy Code Section 1325, establishes the repayment period over which debts are systematically addressed.

Conditions for Early Payoff

For a bankruptcy court to approve an early payoff of a Chapter 13 plan, specific requirements must be satisfied. A primary condition involves meeting the “best interests of creditors” test, as stipulated in Section 1325. This test ensures that unsecured non-priority creditors receive at least as much through the Chapter 13 plan as they would have in a Chapter 7 liquidation. This often means the plan must pay creditors an amount equivalent to the value of any non-exempt assets that would have been liquidated in a Chapter 7 case.

A significant increase in a debtor’s income or the receipt of a “windfall” often creates the opportunity for an early payoff. Such windfalls can include inheritances, lottery winnings, personal injury settlements, or proceeds from the sale of non-exempt assets. If a debtor’s financial situation improves substantially, the court may require that the additional funds be used to pay creditors more than initially proposed, potentially leading to an early plan completion.

All priority claims must be paid in full through the plan. These include certain types of taxes and domestic support obligations, such as child support and alimony, as specified in U.S. Bankruptcy Code Section 1322. For secured debts, such as mortgages or car loans, the debtor must bring any arrearages current or pay the debts according to their terms if they wish to retain the associated assets. An early payoff typically requires that all allowed claims, including unsecured and secured, are paid in full.

The Process for Proposing Early Payoff

To request an early payoff from the bankruptcy court, a debtor must follow a specific procedural path. Typically, the debtor, often with legal counsel, files a formal motion to modify the confirmed Chapter 13 plan with the bankruptcy court. This action is governed by U.S. Bankruptcy Code Section 1329, which permits plan modification after confirmation but before the completion of payments.

The motion must detail the reasons for the proposed modification, including the source of funds for the payoff if a windfall is involved. It should also provide a comprehensive accounting of all debts and a proposed schedule for distributing the payoff amount to each creditor. Proper service of this motion is essential, requiring it to be delivered to the Chapter 13 trustee and all creditors, allowing them an opportunity to object to the proposed early payoff.

The court typically schedules a hearing to consider the motion, where the Chapter 13 trustee and creditors can present their positions. The Chapter 13 trustee plays a significant role by reviewing the proposed modification and providing a recommendation to the court. Court approval is a mandatory step for any early payoff, as the modified plan becomes the official plan only after approval.

Outcomes of Early Payoff

Once the bankruptcy court approves an early payoff and the debtor completes the required payments, the debtor will typically receive a discharge of remaining dischargeable debts. This discharge, outlined in U.S. Bankruptcy Code Section 1328, officially releases the debtor from personal liability for most of the debts included in the plan.

Secured debts, such as mortgages or car loans, that were not fully paid through the plan will continue to be owed. These ongoing payments must be made directly by the debtor outside of the bankruptcy process. After the final distribution, the Chapter 13 trustee files a final report and accounting with the court, confirming the completion of the plan.

The entry of the bankruptcy discharge order formally concludes the bankruptcy case. However, certain types of debts are generally not dischargeable, even after an early completion. These commonly include most student loans, certain types of taxes, and domestic support obligations like child support and alimony. The debtor remains responsible for these non-dischargeable debts.