I have occasionally used credit cards to come up with a down payment for my real estate purchases. Because I have good credit, I often have promotional offers for 0% interest and very low APRs. But I always have a plan for how to pay back this debt. This is key if you are using credit cards to finance some of your investments. This guest blog is designed for consumers who have not been able to pay back their credit cards, with interest:
Consumers often sing this lament; “I want to pay off my credit cards, but the damned interest rate makes it impossible.” They could pay back what they’ve charged if it wasn’t for the sky high interest rate. They want to pay, but can’t get a break on the interest rate.
Credit card interest, despite our national allegiance to unregulated business guided by market forces, still remains hugely more than the cost to borrow elsewhere.
I’ve got good news for you: Chapter 13 bankruptcy lets you pay the balance on your credit card without interest and owe nothing more. The card’s interest rate no longer applies when you file Chapter 13.
How Chapter 13 Works
Unsecured debts in Chapter 13 stop accruing interest when the case is filed.
The card issuer’s claim consists of whatever the balance is when the bankruptcy case is filed.
Credit card debt is almost always unsecured debt. The card issuer has only your promise to repay. There is no collateral for the debt, like there is with a car loan or a home mortgage.
So, with a stroke of the pen, or really the click of a mouse (bankruptcy cases are filed electronically), your credit card debt is frozen in amount by filing Chapter 13.
You Write the Repayment Plan
The debtor, the person who filed Chapter 13, proposes the plan which can run from as little as 3 years to a maximum of 5 years.
Full repayment is not required in Chapter 13. How much you have to pay creditors depends on your income and your assets.
How to Calculate the Smallest Possible Repayment
We’re assuming here that you want to pay the credit cards in full, just without interest.
Take the card balances, add about 6% of that total for trustee commission and divide by 60, the maximum number of months in a Chapter 13 plan.
There you have the monthly Chapter 13 payment to pay all of your credit cards in full, without any interest.
At the end of the plan, the debt, including unpaid interest, late charges, add-ons and penalties are discharged, gone, and unenforceable.
But, but, but…
Note that this works regardless of how much money you make or how valuable your assets are.
Creditors are never entitled to more than 100% of their claim.
The exception is that if your non-exempt assets would pay creditors in full in a hypothetical Chapter 7 liquidation, you have to pay interest to creditors at the federal judgment rate.
That interest rate these days hovers close to zero. It’s one fifth of one percent per year: .22%
So if you are ready, willing and able to pay your credit cards in full, without interest, check out Chapter 13.
If paying in full isn’t really possible, talk with an experienced bankruptcy lawyer about a plan that pays creditors only what bankruptcy law requires.
Put the interest money that you save to work to provide for emergencies and old age.
Guest blog by Richard J. Welt, McFerran Law, PS.