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What are the limits on paying off a Chapter 13 bankruptcy?

Court imposes limits on efforts to pay off Chapter 13 cases early

Debtors may choose to pay off creditors early in a Chapter 13 bankruptcy, but their actions will be subject to conditions set by the U.S. Bankruptcy Court.

Chapter 13 cases require people to pay creditors through a court-approved repayment plan over three to five years. The creditors will often take considerably less than the amount they are owed.

However, debtors aren't allowed to end their cases early by paying off the debts at the reduced rate. Instead, they will typically be required to pay their creditors 100 percent of what they owe if their financial circumstances have improved enough to end the Chapter 13 prematurely, according to Total Bankruptcy.

In addition, the court must approve any loan taken out by debtors for the payoff, and will question lump sum windfalls they've received that may make a payoff possible.

"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," writes South Carolina bankruptcy attorney Dana Wilkinson on Bankruptcy Law Network. "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."

Advantages and disadvantages

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 lead the court to revise the debtor's income considered for bankruptcy relief, she writes on Bankruptcy Law Network.

The court trustee overseeing the case could claim that the funds are 'income' and the debtor would have to increase the plan base, which is the amount the debtor needs to pay to obtain a discharge.

Other bankruptcy lawyers advise debtors to check on the number of creditor claims that were filed against them in the bankruptcy case before they decide to pay them early. Some creditors may not have participated in the case because they decided not to wait several years to have their bills paid. If that's the case, debtors may owe less than they believed.

"That means the total balance owed might be less than what you originally owed when you filed your case," California attorney Justin Harelik writes on Bankrate. "And that also means you might have less to pay in order to exit sooner."

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