Post-judgment interest rates can affect bankruptcy, as they can increase the total amount that a creditor is owed. This can affect a debtor's ability to discharge debts owed in bankruptcy. Post-judgment interest rates can also affect the terms of the bankruptcy plan. You can discharge the principal debt when you file for bankruptcy. However, the post-judgment interest rate can continue to accrue. This interest can make the total amount owed bigger than the initial judgment amount. 

Understanding Post Judgment Interest Rate

The post-judgment interest rate is the additional interest rate that accrues on the amount agreed upon during the court judgment. This amount runs from the time of the court judgment up to when the debt is cleared in full. The post-judgment interest rate can vary depending on the type of debt owed and the jurisdiction. In most cases, the state law sets the post-judgment interest rate.

A federal judgment can be subject to the federal law post-judgment interest rate. The primary purpose of a post-judgment interest rate is to ensure that creditors receive adequate compensation for the delays in receiving outstanding payments. Post-judgment interest can be substantial, especially for a significant judgment or if the outstanding amount remains unpaid for an extended period.

Post Judgment Interest Rate And Bankruptcy

When a debtor files for bankruptcy, the primary goal is to restructure or discharge the outstanding debts. However, post-judgment interest rates can make the bankruptcy process complicated in the following ways:

Interest Accumulation Before Bankruptcy Filing

If a creditor obtains a judgment against you and the debt remains unpaid, post-judgment interest will continue to accrue on the loan until you file for bankruptcy. The total debt outstanding when filing for bankruptcy might be higher than the initial judgment amount. Understanding that the post-judgment interest will be added to the debt outlined in your bankruptcy petition is crucial.

For example, when a creditor obtained a judgment against you, your debt could have been outstanding at $10,000. If the post-judgment interest rate accrues at a rate of 6.5% per annum, your debt can grow significantly before you even file for bankruptcy. If you delay the bankruptcy filing, it can result in higher debt amounts because of the accrued interest.

Post-judgment Interest Dischargeability

Whether or not you can discharge the post-judgment interest rate in bankruptcy depends on the type of debt. The post-judgment interest rate is dischargeable if the underlying debt it is attached to is also dischargeable. For example, if you have a court judgment against you for outstanding medical bills or credit card debt, applying for Chapter 7 bankruptcy can eliminate the principal amount and the post-judgment interest rate.

If the underlying debt is not dischargeable, the outstanding post-judgment interest rate will also not be discharged in bankruptcy. Some non-dischargeable debts include student loans, certain tax obligations, and debts arising from criminal activities or fraud. The outstanding post-judgment interest rates on these debts cannot be discharged. You will be liable for the debt and the accrued interest even after filing for bankruptcy.

Post-judgment Interest Rates Under Chapter 13 Bankruptcy

Under Chapter 13 bankruptcy, post-judgment interest rates are treated differently from Chapter 7. Under Chapter 13 bankruptcy, you can restructure and repay your debts over three to five years. During this period, an automatic stay is in place, which halts most creditors' collection actions. The automatic stay may halt the accrual of post-judgment interest on certain debts.

However, the court can allow post-judgment interest rates to continue accruing on certain debts even during the repayment period. Whether or not the post-judgment interest rate will apply to your case will depend on the type of debt and the circumstances of your bankruptcy case. You should work with an experienced bankruptcy attorney to understand how you will repay your outstanding debts and whether post-judgment interest will accrue.

Key Considerations With Post-Judgment Interest Rates

Here are some of the essential considerations under the post-judgment interest rates:

Type Of Debt

Whether or not the principal and the post-judgment interest are dischargeable in bankruptcy depends on the type and nature of the debt. Some debts, especially unsecured debts like personal loans, credit card debts, and medical bills, are dischargeable under Chapter 7 bankruptcy. The debts are discharged along with any outstanding post-judgment interest. However, priority and secured debts, like debts resulting from criminal activities and certain tax obligations, cannot be discharged. Also, if a debt is nondischargeable, the post-judgment interest remains.

State Versus Federal Judgments

The applicable post-judgment interest rates will depend on whether the judgment was made by a federal or state court. You should strive to understand the rules that apply to your case. State judgments usually have varying interest rates and rules from the --level judgments. The facts of your case will determine the total amount you owe and how bankruptcy can benefit you.

Impact Of Post-judgment Interest Rates On Repayment Plans

The terms of your repayment plan can vary if you are applying for Chapter 13 bankruptcy, and post-judgment interest rates apply. You might have to alter your repayment plan to accommodate the accrued post-judgment interest on some loans. This can lead to a more extended repayment period and higher monthly installments. Working with a skilled bankruptcy attorney helps you to address post-judgment interest appropriately.

Impact Of Higher Post-Judgment Interest Rates On Unclaimed Debt

Here is how post-judgment interest rates can affect unclaimed debt:

An Increase In The Claim Amount

When post-judgment interest is calculated, it is added to the judgment amount. This increases the total debt amount that a creditor can claim during bankruptcy.

Higher Debt Priority

A secured creditor, with liens on the debtor's property, can claim interest on the secured debt. This will increase the total amount a creditor can receive from the bankruptcy estate.

Difficulty With Reorganization

A debtor could try to restructure their debts by filing for bankruptcy. Higher post-judgment interest rates can make it harder for a debtor to create a feasible debt repayment plan to which all creditors will agree.

Greater Burden On The Debtor

An increase in post-judgment interest rates can strain a debtor's finances and make it challenging for them to maintain their lifestyle. This can further result in intricate financial problems post-bankruptcy.

Incentive To File For Bankruptcy

Higher post-judgment interest rates can make it more financially attractive for debtors to file for bankruptcy instead of trying to repay their debts outside bankruptcy. The rates on judgments in bankruptcy are usually lower than those on the original debt. Therefore, higher post-judgment interest rates can lead to debtors filing for bankruptcy to enjoy the lower interest rates.

Impacts Of Lower Post-Judgment Interest Rates

The effects of lower post-judgment interest rates can include the following:

Easier Debt Repayment

With lower interest rates, creditors will receive less compensation. This can make it easier for a debtor to repay their outstanding debt.

Reduced Financial Strain

Lower post-judgment interest rates will alleviate some of the financial strain or burden from the debtor. This can make it easier for a debtor to recover financially and maintain their lifestyle post-bankruptcy.

Improved Reorganization Plan

With lower post-judgment interest rates, it can be easier for a debtor to create a reasonable repayment plan that all creditors agree to.

Other Important Considerations

Here are some crucial considerations regarding post-judgment interest rates:

Federal Judgment Rate

Most post-judgment interest rates in bankruptcy are based on the federal judgment rate. This rate can fluctuate depending on the prevailing conditions.

State-Specific Interest Rates

The state also has a state-specific post-judgment interest rate.

Accrual Timing

The total amount owed will depend on when the post-judgment interest rate begins to accrue. In most cases, this interest begins to accrue from the judgment date.

The Till Approach

The court can use the "Till Approach" in some bankruptcy cases. This approach comes in handy in determining the applicable interest rate by considering factors like the debtor's risk profile.

Contractual Interest Rates

Sometimes, the applicable interest rate is determined by the initial contract and not the post-judgment interest rates. If the original contract quotes higher interest rates, the debtor will owe more, even in bankruptcy.

Secured Vs. Unsecured Debts

Post-judgment interest rates will have different effects on the secured and unsecured creditors. Secured creditors have a lien on specific property as collateral for the outstanding debt. On the other hand, the unsecured creditors rely solely on the debtor's assets.

Why You Should Address Post-judgment Interest Through Bankruptcy

Bankruptcy offers several benefits for people struggling with debts, especially debts that have increased due to post-judgment interest:

Stoppage Of Interest Accumulation

When you file for bankruptcy, an automatic stay takes effect immediately. An automatic stay halts all the collection activities from creditors. It also stops the accumulation of interest, including post-judgment interest on qualifying debts. This can give you immediate relief and prevent your debts from escalating.

Reorganizing Debts

You have an opportunity to reorganize your debts into a reasonable and manageable repayment plan under Chapter 13 bankruptcy. This bankruptcy plan might not eliminate all post-judgment interest. However, it will provide stability and a clear path to handling your financial challenges.

Discharging Eligible Debts

If an underlying debt is dischargeable, you will not only discharge the debt in bankruptcy under Chapter 7 but also the accompanying post-judgment interest.

Which Interest Rates Apply In Bankruptcy?

At first glance, the question of what interest rate applies to a bankruptcy claim might seem straightforward, but it is not. Depending on the circumstances, a creditor could be entitled to:

  • No interest at all

  • Interest in the low federal post-judgment interest rate

  • A post-judgment interest rate set under the state laws

  • A case-specific interest rate, usually set by the bankruptcy court

The Federal Reserve has adopted a loose monetary policy over the last two decades. The Federal interest rates are at a historic low. The question of which interest rates to apply to bankruptcy claims is relevant, given the divergence between the low federal rates and state statutory judgment interest rates.

As a general rule, according to the Bankruptcy Code, Sec. 502, creditors have no right to post-judgment interest rates. However, you should note that there are some exceptions. One exception is outlined under Sec 506(b). The exception outlines that if a creditor has a security interest in a figure bigger than his or her claim, the creditor is entitled to interest on the claim and the payment of the principal.

However, the bankruptcy code does not identify the interest rate applicable under Sec 506(b). While some courts use the federal interest rates, others adopt the state interest rate. Other courts apply a formula similar to the one used by the United States Supreme Court in 2004 in the case of Till v. SCS Credit Corp. This formula involves taking the prime interest rate and adding to it to compensate for the debtor-associated risks.

In California, the consensus of the United States Ninth Circuit of Appeals opinion is applied. It involves using a variant of the state-rate approach but further complicates it. In cases involving Chapter 11 and Chapter 13 reorganization, the applicable rate and who bears the burden of determining the rate to apply vary. The applicable interest rate may vary depending on whether it is applied before or after the confirmation of the debt reorganization plan.

Applicable Interest Rate During The Pendency Period

The pendency period is from when you file a bankruptcy petition to when the reorganization plan is confirmed. In the pendency period, the applicable interest rate is the contract rate. However, the contract rate is only applicable up to the point where it becomes sufficient to compensate a creditor for the time value of money. The creditor is also compensated for the risk posed by a repayment stream rather than immediate full payment. The debtor has a right to challenge applying a specific interest rate. In addition, the debtor can submit evidence showing that a lower interest rate than the contract rate is sufficient to accord the creditor the full present value of the claim.

Post-Confirmation Period

The Ninth Circuit sustained that the applicability of Sec 506(b) ends when the reorganization plan is confirmed. After confirmation of the debt reorganization plan, the primary requirement is a basic standard of Sec 1129, which requires a creditor to receive the value of the allowed claim before the junior classes of creditors can receive anything. The Supreme Court's Till approach also applies.

Applying The Till Approach

Under the Till approach, the court assigns a stream of payment a "prime-plus" interest rate. The rate is based on the federal prime rate. An adjustment is made to account for the risk that a bankrupt borrower poses compared to a prime commercial borrower. The creditors have a burden to prove the appropriate risk adjustment. Factors considered when adjusting include the nature of the security, the estate's circumstances, and the plan's feasibility and duration.

Section 502 does not apply if a claim is unsecured. However, this does not mean that an unsecured creditor has no right to recover post-judgment interest.

Calculation Of Post-judgment Interest Rate

When calculating the post-judgment interest rate, multiply the judgment amount by the applicable interest. You can calculate the daily rate depending on the days the judgment amount remains unpaid. A contract, law, or the court can determine the rate.

In most jurisdictions, the post-judgment interest rate is outlined by a law or statute. If the judgment is based on a contract, the contract specifies the post-judgment interest rate. The court can also set the interest rate in a judgment or order. A default interest rate can apply if no specific rate is mentioned. The default rate will depend on the government bond rate or another benchmark.

Calculating The Daily Interest Rate

When calculating the daily post-judgment interest rate, you first calculate the yearly rate. You obtain the yearly amount by multiplying the judgment amount by the interest rate. To obtain the daily interest rate, divide the yearly interest by 365 days or 366 for leap years.

Calculating The Total Interest Rate

You should first determine the applicable period. This is the period between when the judgment was entered and the date the judgment was paid. Multiply the daily interest rate with the number of days for which the judgment was outstanding. Typically, the interest begins to accrue on the date a judgment is made. The interest will cease to accrue when the judgment is paid in full or when the court makes a ruling regarding the post-judgment interest.

Find A Reliable Bankruptcy Attorney Near Me

Post-judgment interest rates could significantly impact the amount of debt outstanding, making it challenging to reorganize your finances. Understanding how post-judgment interest rates could affect bankruptcy is crucial to enable you to assess your situation, stop interest accumulation, and find the ideal solution for your financial well-being. Whether you plan to file for Chapter 7 or Chapter 13 bankruptcy, a bankruptcy attorney can help you examine your situation.

If you are faced with accruing post-judgment interest and you would like to weigh your options, contact the San Diego Bankruptcy Attorney. Our attorneys will examine your situation, guide you through bankruptcy, and help you achieve financial relief. Contact us at 619-488-6168 to speak to one of our attorneys.