At Velazquez Consumer Law, we get it: bankruptcy is a scary process. It can feel like an absolute last resort to all of your biggest financial nightmares, but it’s important to know bankruptcy court exists as an outlet when you’ve run out of options. At the end of the day, there are benefits to the process, as well. In this case, we’re talking specifically about how filing for bankruptcy could help you save on high-interest loans.
To understand the benefit, let’s say you have a credit card with interest at 15%. If you owe $10,000 and make minimum payments, it would take you 10 years to pay it off. If you’re able to get that forgiven or the interest rate dropped in bankruptcy it makes your debt more palatable.
Let’s look at how the different types of bankruptcy filings could impact your interest.
Understanding the Different Types of Bankruptcy
For the most part, private citizens will file either Chapter 7 or Chapter 13 bankruptcy. We previously covered the differences and which chapter might be right for you.
For the sake of this article:
- Chapter 7 is when your non-exempt assets are sold off to pay off as much debt as possible before the remaining debt is discharged. The process takes about five months. However, most people don’t have non-exempt assets that the trustee can sell.
- Chapter 13 is when you work with the court to come up with a payment plan based on your income level and takes between three and five years to complete.
Interest in Chapter 7 Bankruptcy Filings
Some loans and debts are not able to be discharged in the Chapter 7 bankruptcy process. Student loans, for instance, are rarely forgiven through bankruptcy unless you can prove paying them off would cause undue hardship. Other examples include recent federal, state, and local taxes, child support, alimony, court fees, fines, debts from legal proceedings like personal injury cases if you were driving under the influence of alcohol or drugs, and certain other debts.
For loans that are able to be discharged, you can expect them to be eliminated completely, thus absolving you of any additional interest.
Interest in Chapter 13 Bankruptcy Filings
In most cases, unsecured debt is paid at zero interest in a Chapter 13 bankruptcy. Debts secured by personal property, such as automobiles, require that interest be paid, but the interest rate can be reduced. However, interest rates on mortgages cannot be reduced. .
Debt and Interest Is Returning to Normal
This is a key factor to know when you’re considering bankruptcy and your debts. Many government loans have been paused or interest rates have been temporarily dropped because of the pandemic. Now, many of those programs are back to their “pre-COVID” standard. Don’t bank on the government getting you out of trouble by kicking your debt down the road any longer.
If you are considering bankruptcy as a solution to your financial issues, you don’t have to make any decisions by yourself. Contact Velazquez Consumer Law, LLC today to discuss your situation with someone who can help you decide what move to make next. We believe in dealing with your debt constructively and effectively. We have real legal solutions for real people!
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