Early payoff - student loans

[shell8661]

I've been in my plan since 12/10 originally set to pay 18% of my unsecured. I will be receiving a huge bonus, enough to pay my unsecured at 100%, not including student loans. I have 29,000 unsecured and 27,000 in student loans that would continue after discharge. I asked my attorney if I could use the bonus to pay the 29,000 unsecured to go the early pay off route and he said I would still need to contribute to my student loans through the plan. said the trustee would see it as unfair to the student loans and they would need to receive a pro rata amount in the payoff. Has anyone else had to include student loans in a payoff? I have to turn over the full bonus regardless.

[justbroke]

For purposes of a Chapter 13, the student loan is no different than other general unsecured creditors. You must treat them equally and they are entitled to a pro rata share of your disposable income (DMI). Since student loans represent 50% of your total unsecured creditors (rounded up), then they'd get 1/2 of the $29K. I'm still not sure that a judge would allow an early payoff without paying 100% of all unsecured debt.

Are you in a 3 year plan?

[shell8661]

I'm in a 5 year plan.

[justbroke]

Well, it appears that your plan will now be 68% or maybe more based on the rest of you plan.

[woeisme]

If you do the math, you'll see that you actually come out ahead if they put money towards the student loans. The way I figure it, if you have been in your plan for about 15 months now of a 60 month plan, and were paying 18% to unsecureds, that means your payment to unsecureds is about $115/month. (took 29000 X 0.18 then divided by the 45 months left in your plan). You didn't say how big your bonus was, or whether you had secured debt in the mix too, but while the #'s will differ, the overall scenario still plays out in your favor.

Let's say that your bonus is 30K and you only owe the 29K to unsecured and 27K to student loans. Let's say that your monthly student loan payment is $250/month. If the trustee applies the whole bonus to the unsecured, lets you out of CH 13 early, and you apply the extra 1K to the student loan, pay $250/month on the student loans, in 45 months when your BK would have ended you still owe 27K - 1K -$11.25K(monthly payments) or $14,750. This ignores interest charges, but you will have paid 41.25K and still owe 14.75K.

If the trustee pro-rates the 30K between unsecured and student loans, 15.6K go to unsecured and 14.4K gets knocked off your student loans. You continue paying in $115/month for unsecured CH 13 payment and $250/month for student loans. At the end of the 45 months when the BK is over, you have paid in 30K + 5.175K(monthly payments) + 11.25K (student loan payments) for a total of $46,425, but only owe $1350 to student loans. So that extra $5000 or so paid into the plan as monthly payments saves you over $13,000 in student loan payments, for a total savings of +$8000. Yes, you have to stick it out for the whole 60 months, but tell me another sure-fire way to turn $5000 doled out in 45 monthly payments into $13,000 at the end of the 45 month period?

[SMinGA2]

Before the bonus is paid - you may want to see if you can have extra $ withheld from it for taxes? I get a bonus in July & December, and we have the option of holding out more/less/regular rate. If you're getting a large bonus, that could impact your year end tax situation.

[justbroke]

In a Chapter 13, you are generally precluded from manipulating the rate of withholding on your pay (or bonuses). This is primarily that many District require tax returns to be copied tot he Trustee and any overpayment (refund) surrendered as "DMI".

Even with me saying that, SMinGA is correct that the tax implications of a large bonus need to be investigated. If your company is only taking a 20-25% withholding for Federal taxes, then you may want to think of increasing the withholding.