Should I pay off my Chapter Plan early?

13 Jul Should I pay off my Chapter Plan early?

It depends. While listening to a national talk show about debt, a Chapter 13 debtor called in and asked if she should pay off her chapter 13 plan early. The talk show host advised her to do so despite her bankruptcy attorney and the Chapter 13 Trustee advising her not to. I disagree. In most cases, it is not advisable to pay your plan off early. For expample, a debtor is in a 60 month plan which provides that the unsecured creditors (such as Discover, MasterCard, Visa, and medical bills) will receive pennies on the dollar instead of the full amount of the debt. But if the debtor decides to pay his plan off early, say in month six or month fifteen or month twenty-four, etc., paying off the plan early would cause the debtor to pay all of the unsecured creditors the full amount owed (which changes and increases the amount the debtor has to pay in order to obtain a discharge). Also, depending on the source of the funds to pay the plan off early, the 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.

Of course, the debtor could request the case be dismissed. But, in my opinion, if a debtor has taken the bankruptcy “hit” penalty on his or her credit report, why would he or she want to get a dismissal if he/she could obtain a discharge of the same debts.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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