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Can I pay off my chapter 13 early?

Paying off a Chapter 13 bankruptcy early needs careful consideration

A debtor who has been approved by the U.S. Bankruptcy Court to enter a Chapter 13 bankruptcy may find themselves in a better financial condition down the road and want to pay off the court-ordered payments that go with this form of bankruptcy.

While they are allowed to do that, there are limits imposed by the court on how it might be accomplished. "There's a right way and a wrong way to do it," writes South Carolina attorney Dana Wilkinson on BankruptcyLawNetwork.com. "If you want to make an extra payment [or a partial payment] from time to time, that's fine. If you plan to make a large, lump sum payment, the first question your attorney will ask you is where the money is coming from to pay off the Chapter 13."

In a Chapter 13 bankruptcy, a debtor agrees to pay creditors through a court-approved repayment plan over three to five years. Often, the creditors are taking considerably less than the amount of the debt.

When debtors choose to pay off a Chapter 13 case early, the court will have to approve any loan they take out for the payoff and will question any lump sum payments they've received that may make a payoff possible.

"The source of the funds is also important to determine whether the amount you proposed to pay to your creditors in the first place is still fair," Wilkinson writes.

According to TotalBankruptcy.com, debtors who want to pay off their Chapter 13 bankruptcy are often required to pay their creditors 100 percent of what they owe them. "If a debtor has entered into a plan that provides for payment of only a portion of outstanding debts, the debtor generally can't pay just that portion early and accelerate the case," states the website. "Instead, 100 percent payment would usually be required to terminate the case prematurely."

For this reason, Texas attorney Pamela Stewart said she usually argues against her clients paying off a Chapter 13 case. Not only would they be faced with paying the full amount they owe, but an early payment could cause the court to revise the debtor's income.

"Depending on the source of the funds to pay the plan off early, the court trustee could claim the funds are 'income' and the debtor would have to increase the plan base - the amount the debtor needs to pay to obtain a discharge," she writes on BankruptcyLawNetwork.com.

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