Bankruptcy is a form of debt relief. When you file for Chapter 13 bankruptcy, you and your council will have to devise a repayment plan with your creditors. But what if you want to pay those debts early? You technically may be able to; however, paying off a chapter 13 bankruptcy early can be highly complicated for several reasons. Continue reading to learn more about what happens if you pay your bankruptcy early, along with an alternative to an early payoff.
The Difference Between Chapter 7 and Chapter 13 Bankruptcy
If you aren’t familiar with the different types of bankruptcy, you may be confused about the mention of only Chapter 13 when referring to early payments.
With Chapter 7, you’ll have to liquidate your assets to pay off as many secured and unsecured debt balances as possible, and most of the remaining debt (except student loans) will be discharged. And so, with Chapter 7 bankruptcy, you won’t have to worry about negotiating payment plans with your lenders/creditors.
While with Chapter 13 bankruptcy, you will have to negotiate with your creditors and finalize a court-approved repayment plan. An experienced bankruptcy attorney and your bankruptcy court-appointed trustee will help you with this part. This repayment plan will look at all of your income and consider what payments you can afford for the next five years/the entire commitment period.
What Kinds of Debts Will I Have To Negotiate With Chapter 13 Bankruptcy?
Your specific negotiations will depend on the types of loans you have; here are some of the common loans/credit accounts that most people have that will be a part of the Chapter 13 negotiation process:
- Auto loans/car loans/car payments.
- Mortgages.
- Car title loans.
- Medical bills.
- Credit cards.
- Personal loans.
- Online payday loans.
- Utility bills.
More Details on What Happens if You Pay Off Your Bankruptcy Early
If you do end up having enough discretionary income and decide that you want to go down that route of paying off a bankruptcy early, you should know that, in general, it isn’t considered the best idea. On the other hand, there are some reasons it can be beneficial if you can overlook the negatives.
Here are some things—positive and negative—that will happen if you do decide to pay off your bankruptcy early:
You Will Have To Pay Your Creditors in Full Rather Than a Partial Amount
If you do decide you want to pay off your bankruptcy early, instead of the agreed-upon amount, you will have to pay back your debts in full. If you aren’t aware, during Chapter 13 bankruptcy, your debt will be reduced to fit your income. Sometimes this reduction can be huge, which can be a great advantage. However, if you decide after filing for bankruptcy that you want to repay your debts early, that balance will go back to the original amount. And depending on the amount of debt you had, it could be a massive amount.
You’ll Alter the Agreed Upon Terms of the Bankruptcy, Which Can Come With Resistance From Your Creditors and Bankruptcy Trustee
When you negotiate with your creditors for Chapter 13, it is essentially a contract that includes an applicable commitment period of 5 years. Some lenders may be reluctant to change those terms. And any council on your end (your bankruptcy attorney and trustee) will likely advise against it. Even if creditors allow for early repayment, they may ask for higher monthly payments rather than a lump sum payment, which can significantly increase the amount of money you have due each month.
Paying off a Bankruptcy Plan Early With Not Improve Your Credit
Another thing to consider before paying off your chapter 13 bankruptcy early is that it will not improve your credit score, as that bankruptcy will still remain on your credit reports for up to seven years.
You Will Be Debt, Free Which Can Mean Less Monthly Expenses and More Usable Income
One advantage of lump sum payments to your creditors, if they do end up accepting them, it can mean being debt free. With all your debt paid off, not only will it mean fewer bills to worry about, but it will increase the amount of disposable income you have.
It Can Help You Rebuild Your Credit Faster
Once you have paid off your bankruptcy, it can really be an excellent jumping-off point to rebuild your credit. Instead of focusing on the amount of debt you may have, you can focus instead on taking action to improve your credit score. The earlier you start repairing your credit, the better. Once that bankruptcy eventually falls off your credit reports, you can expect a boost to your credit with Chapter 13 discharge. And if you have already worked on your credit score, chances are it will be in the fair or even good range by this point.
Requesting a Hardship Discharge With Chapter 13 Bankruptcy
In some cases, while you are under Chapter 13 bankruptcy, you may be able to request and be granted a hardship discharge. A discharge will wipe out the remaining balances on your payment plan. It can definitely be helpful and a convenient alternative to paying off your debt early. However, if you are in a position to pay off all your debts right away, chances are that you will not qualify for a discharge. The qualifications for a discharge include the following:
- You have paid your creditors as much as they would receive in Chapter 7 bankruptcy.
- Your financial situation has changed without any fault of your own.
- There is no indication of an improvement in your financial circumstances.
- If your income is extremely low, even a lowering of monthly payments will not be helpful.
Remember that your student loans will not be discharged, and sometimes certain priority debts.
What Happens if I Decide Not To Pay Off My Bankruptcy Early
If you decide to follow through with your original court-appointed payment plan, you can expect to make the monthly payment agreed upon. As long as you make those payments on time, you should have paid off all your debts by the end of five years. From here, you can start working on your credit, saving, or using the extra income for whatever you like.
How Can I Avoid Bankruptcy?
Bankruptcy can definitely be avoided in some cases, and the last thing you will want to do is go through a second bankruptcy after paying off your first one. Here are some things you can do to help protect yourself:
Build an Emergency Fund
Building an emergency fund is crucial for stability and is one of many good financial habits that should be a part of your financial repertoire. Having at minimum three months of expenses saved will help when something unexpected happens and your financial situation changes. With a rainy day fund you can borrow from, you won’t have to look at loan options that come with interest which could mean falling even deeper into financial chaos.
Talk to Your Creditors When Facing Financial Difficulties
If your financial situation changes, you should let your creditors know immediately. Negotiating with your creditors as soon as possible can help you avoid bankruptcy. Most creditors are flexible and may allow for things like an extension, a lower monthly payment, refinancing, and more. Communicate before things get out of hand; you’ll thank yourself after difficult conversations.
Never Borrow More Money Than You Can Afford Comfortably
Even before the age of 18, most Americans are bombarded with credit offers. And it can be tempting to go above your means. That can quickly get out of control and lead to too much debt that becomes unmanageable. And so, as soon as you can, really sit down and figure out how much you make, how much you owe, and how much extra you can afford. It will help you understand exactly what you can afford. Although a $50 credit card payment may not seem like a lot each month, adding even a second credit card can change affordability.
Keep Track of Debt When Sharing Finances
Sharing your money with someone else can be complicated, especially when it comes to debt. The best thing you can do to protect yourself and your significant other is to be open and honest about debt. That way, there are no surprises and escalations with your monthly bills and payments.
Save Overtime for Large Expenses Rather Than Financing
Whether it is a trip, car, home, clothing, or furniture, consider saving for it over time rather than financing it. Even if you have to finance some of the purchase, a larger down payment will mean less debt—which means fewer bills to juggle.
Get Insurance Coverage
Life insurance for yourself or a loved one, medical insurance, car insurance, and home or renter’s insurance are going to be your lifelines if anything unexpected happens to you, a loved one, or your valuable assets.
Be Weary of Predatory Loans
There are all kinds of predatory loans out there, and it is crucial to educate yourself to make informed decisions about your borrowing choices. Do some basic research to sharpen your financial literacy, and think about your loan options before signing up for debt. An excellent example of this is student loans; federally funded loans are usually always the better option than private student loan funding. And if you knew that going into things, you would have picked the federally funding option.
References:
Can I Pay Off My Chapter 13 Bankruptcy Plan Early? | Nolo