Can you pay off a Chapter 13 to end it early?

For those of you who don’t know, a Chapter 13 requires you to make payments to your creditors, typically from 3 to 5 years. What most people don’t know is that there are two different payoff schemes in a Chapter 13, the Disposable Monthly Income (DMI) plan and the 100% plan. Which plan you get depends on the facts of the situation but it basically works as follows:

In a DMI plan, your monthly payment to the trustee for unsecured creditors is calculated based on your monthly income minus the established by the IRS reasonable and necessary living expenses allocated to your family size. The idea is that you get to keep enough money to live, which is important, but that any money you earn in excess of living must be paid to your creditors. This is the more difficult plan to succeed in, as it requires you to go a number of years living off of the IRS standard, which requires a strict budget. This plan cannot get paid off early unless it’s first transformed into a 100% plan, which would only happen if you had a significant increase in income.

In a 100% plan, your monthly payment to the trustee is calculated based on your total debt rather than your monthly income. We add all of your debts together, add 10% to pay the trustee (see how the bankruptcy trustee gets paid), and divide the total by the number of months you need to pay (typically 60 months/5 years). This payment is less than what your DMI payment would be. If the payment is higher, then you should be a DMI plan instead of a 100% plan. Since you’re paying 100% of your debts in this plan, you can pay off your bankruptcy early.

When in a Chapter 13 bankruptcy you have an ongoing obligation to report any increase or decrease in your gross income. You also must annually provide a copy of your tax return to the trustee. Changes in your income will require recalculation of your plan, which can increase or decrease your plan payment. Changes in your income can also mean the difference between your being a DMI plan and a 100% plan.

If you would like to schedule a free initial consultation to learn more about DMI and 100% plan payment schemes in Chapter 13 bankruptcies, please contact us at 904-685-1200 or email me.