Houston bankruptcy court: Chapter 13 debtors can pay off plan early with lump sum payment and receive discharge of debts

Sometimes we are asked by chapter 13 clients if they can pay off their plans early, if they come into the money to do so. Up to now, we had to tell them no, only if you are able to pay all of your unsecured debt in full. And that has been the official position of at least one of our chapter 13 trustees here in Houston.

Now, there has been a bankruptcy court decision that holds that yes, you can pay off early. In this case, the debtors had a $10,000 court settlement and paid it to the trustee, paying off their chapter 13 plan "base" just 3.5 months earlier than the 60 months that the plan provided. The trustee objected to their getting a discharge until they had paid in foro 60 months, and filed a Motion to Modify Plan to provide for that.

The Bankruptcy Court, Chief Judge Jeff Bohm, ruled for the debtors. The trustee has appealed to the 5th Circuit Court of Appeals, so this story is far from over. But this is an important issue, and we will be keeping a close eye on it. The case is In re Ruth, Case No. 09-30563, in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division.