When filing for a Chapter 13 bankruptcy, a debtor will typically include a repayment plan for a minimum of three years. Depending on the debtors income, that repayment plan could be extended to five years. One interesting question that was recently raised in a forum was whether or not a debtor could be discharged prior to that three year period.
The answer is yes although only in specific circumstances. An obvious situation is where the debtor converts from Chapter 13 to Chapter 7, however, that then is not an early discharge from a Chapter 13.
Some debtors file for bankruptcy with a low debt amount. Their reason for doing so is varied, however, the most common reason is the imminent foreclosure on their home, or pressure from creditors even though the amounts owed are relatively small.
A repayment plan under a Chapter 13 uses all of a debtor’s disposable income (income after living expenses) to pay off debt. Occasionally, that disposable income is sufficient to pay off all outstanding debts inside the three year period. The debtor is effectively using the bankruptcy process to extend payment times. For the creditors, they receive all that is owed – just a little later than originally planned.
Under those circumstances, with all debts repaid and any outstanding exempt debts (such as a mortgage) now up to date, the debtor can be discharged from their Chapter 13 bankruptcy. As far as their credit history is concerned, no debt has been discharged through the bankruptcy process so the effect is not as great as a normal bankruptcy. Prospective petitioners do need to note that the bankruptcy process will still appear on their credit history. In some respects, this is a win-win situation – creditors receive all that is owed while the debtor gains some relief from the pressure that creditors can apply.