Many people find themselves owing high balances on multiple credit cards. The Covid pandemic shutdowns caused many people to accumulate debt they otherwise would not have, and now they are trying to figure out how to climb out of the debt. Many times, if you use your credit cards, the bank will arbitrarily raise your interest or lower your credit line to the current balance or just a little above. Once this happen, your credit score takes a hit because the balances are close to or at the limits. Some people try to obtain a consolidation loan, but if your credit score already took a hit, you may not qualify or be offered a high interest rate. Many “debt consolidation” programs advertised on television are not really consolidations. Some companies merely negotiate lower payments and interest, and you pay a monthly payment to them, and they send out the lower payments to the creditors and charge you a fee to do so. Others collect a monthly payment for you and save the funds until there is enough to offer a settlement on one of the debts. During this process, no payments are being made and many people get sued.
A chapter 13 bankruptcy may be a good option for people in this situation. A chapter 13 bankruptcy is called adjustment of debt. There is a formula used to determine how much of your unsecured debt you will pay back over the life of the plan. For some it is ten percent and for some it is one hundred percent of the unsecured debt. I am often asked, “what is the point of filing bankruptcy if I have to pay back all the debt anyway?”. My answer is simple, you will pay it off faster and with much lower interest. A chapter 13 plan is limited to 5 years or 60 months. Only some people are required to pay interest on unsecured debt in chapter 13, but even if you do, the interest rate is almost always much lower than what the credit cards are charging you. The interest rate in a chapter 13 is determined by taking the prime interest rate and adding 2. Today, the prime interest rate is 3.25 percent, resulting in a chapter 13 interest rate of 5.25 percent. If you are sued and you are subject to garnishment, the creditor can garnish 25 percent of your after-tax income. This could result in a much higher payment than a chapter 13 plan payment.
There are other fees in a chapter 13 plan to consider in determining if it is a good option for you. The chapter 13 trustee charges a flat ten percent on all funds paid through the plan. If you are paying back $30,000 to creditors in the plan, the trustee fee is $3000.00, which is calculated in the monthly payment. The current approved attorney fees for representation in a chapter 13 is $4500.00. Most people include a portion of that fee in the chapter 13 plan, so it does not have to be paid all at once. Consideration of these fees and possible interest is necessary in determining whether a chapter 13 is a good option for your circumstance.
The experienced bankruptcy attorneys here at the Holland Law Group can analyze your situation and help you decide if chapter 13 is the best option. If it is not the best option, we can recommend other options such as debt settlement and /or negotiation. It is important to seek the advice of an experienced bankruptcy attorney before deciding how to deal with debt. Call or email us today to schedule a free consultation with one of our experienced bankruptcy attorneys.
Laurie Blanton, Esq.