changes to interest rates in bankruptcyIn many cases, you can use the power of your bankruptcy to change or eliminate the interest rate on outstanding debt.  Here is an overview:

Chapter 7 and Interest Rates

Chapter 7 and unsecured debt interest rates

Generally when you file Chapter 7, you will be discharging (wiping out) credit card debt and other personal loans.  As such, the question of interest rates is moot because both principal and interest on unsecured debt will be eliminated.

If you have a co-debtor, your Chapter 7 filing will eliminate the debt and interest as to you but not as to your co-debtor.

Chapter 7 and secured debt interest rates

Chapter 7 does not modify the interest rate you pay on your car note, mortgage or other secured debt.  However, there is no reason why you should not try to negotiate a lower balance and interest rate on your secured debts.  This is especially true for secured items such as appliances, computers, furniture and electronics that often have little value once used.  Before you reaffirm a debt, make sure to ask your lawyer to inquire about better terms than your original contract – you may be able to keep the collateral and save hundreds or thousands of dollars.

You will probably not have much success negotiating better terms on your vehicle or your home.   There is obviously a large and established market for used vehicles and mortgage companies are rarely cooperative.  Again, however, there is no harm in asking for more favorable terms.

Chapter 13 and Interest Rates

Chapter 13 and unsecured debt

When you file Chapter 13, your creditors will receive a form to set out their claims.  In the Northern District of Georgia, unsecured creditors can claim the outstanding balance owed as of the date of filing but they are not entitled to on-going interest.   Thus, one of the lesser known benefits of Chapter 13 has to do with its power to stop the accrual of interest on unsecured debt.  If you owe thousands of dollars to credit card companies, for example, your Chapter 13 plan may eliminate a significant percentage of your unsecured debt and it will eliminate the on-going interest on whatever unsecured debt that you do end up paying in your plan.

Chapter 13 and secured debt

The rules regarding interest rates and secured debts get a little more complicated when you are in Chapter 13:

    • Mortgages – interest rates do not change
    • Vehicles – if you took out a vehicle loan less than 910 days prior to filing your Chapter 13, the vehicle lender is entitled to full contract interest rate.  If you took out your vehicle loan more than 910 days from the date you filed your Chapter 13, you can bifurcate the lender’s claim.  This means that the claim will be paid as secured debt to the extent of the value of the vehicle, with the remaining balance treated as unsecured debt.  The interest rate on a 910+ day loan can be reduced by you to a “reasonable” interest rate – we usually choose 5% or 6% without any push back.
    • Furniture, jewelry, other secured debts – we can bifurcate the claim and reduce the interest rate from the contract rate to a “reasonable” rate.
    • Judgments – judgment liens are secured debts that will be treated as filed unless we take action.  Often we are able to remove the lien and eliminate the secured status by filing a Motion to Avoid the lien.  The claim would then be treated as an unsecured claim that accrues no ongoing interest.

As you can see, the benefit you derive from Chapter 13 will depend on the timing of your case (the 910 day rule), knowledge about the fair market value of your property and your attorney’s skill in designing a plan that maximizes the benefits of Chapter 13 to you.

About 

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need bankruptcy protection. Call him at 770-393-4985 for a confidential discussion.

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