Early Chapter 13 Payoffs and “100 Percent” Bankruptcies: Benefits and Risks

Millions of Americans live paycheck to paycheck, which means that a temporary setback can have longstanding negative consequences. Under the right circumstances, Chapter 13 bankruptcy can serve as a financial lifeline for people who cannot catch up with their debt obligations despite the fact that they’re earning a steady income. In this type of bankruptcy, a repayment plan lasting three or five years is established based on the filer’s particular situation and expenses. 

Of course, financial circumstances can change and someone living under a Chapter 13 repayment plan might find themselves able to pay off everything that is owed ahead of schedule. This is sometimes referred to as a “100 percent plan.” While it might seem like a great thing to end monthly payments to the trustee handling your bankruptcy, an early payoff could have potential negative consequences. 

An experienced Chapter 13 bankruptcy attorney can outline the possible benefits and drawbacks of repayment prior to the slated end date, such as: 

• Accelerating your financial freedom — Once your plan is complete, you are no longer under the oversight of the bankruptcy trustee, which can provide a sense of relief and autonomy.
• Rebuilding credit — Though the bankruptcy will remain on your credit report for several years, completing the plan early may demonstrate financial responsibility to future lenders.

Despite these advantages, there are also potential disadvantages to consider, including the following:

• Loss of bankruptcy protection — During your Chapter 13 plan, you are protected from creditor actions such as wage garnishments and lawsuits. Completing the plan early would remove these protections sooner than anticipated.
• Full repayment required — Generally, when a repayment schedule is complete and the filing party has abided by its terms, any remaining debts are discharged. Finishing the process early likely would require you to pay 100 percent of your unsecured debts, even if your original plan allowed for partial discharge.
• Strain on disposable income — The sense of relief you might get when you emerge from Chapter 13 might quickly be replaced by worry if the amount you used to pay off the plan leaves little funding for other needs, or emergencies. 

If you’re thinking about completing your Chapter 13 plan early, Jeff Field & Associates can help you evaluate your financial situation, understand the implications of cutting the repayment schedule short and determine whether it aligns with your long-term goals. Our firm advises Georgians on all types of Chapter 13 issues from offices in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Scottdale. Please call 404-381-1278 or contact us online for a consultation.