It’s essential to understand that if you borrow money from a lender, you must repay it with interest. It becomes easy to fall behind payments if the debt is substantial, and the interest rates are high. If you are in such a position, filing for bankruptcy can help reduce your interest rate but will not entirely remove payment of interest. The San Diego Bankruptcy Attorney is here to help you reorganize your debt and get to keep your property.
Overview of Bankruptcy
If you have experienced financial hardship, then you understand how difficult it is to deal with debt. Luckily, for many debtors, filing for bankruptcy can help remove you from the financial crisis by clearing most or all your debts. You can do it either under Chapter 7 or Chapter 13. Chapter 7 usually applies to individuals who are unable to repay their debts because of a lack of assets or an inability to repay. Under the section, a mediator sells or liquidates all your nonexempt assets to repay the debtor.
Chapter 13, on the other hand, is for the debtors who have the assets and ability to repay the debt, but because of the immediate demands of creditors, they are unable to keep up with the payments. Here, your liability is reorganized to ensure you pay the debt in full or some of it according to the repayment plan. The advantage of this form of bankruptcy is that you get to keep your house, car, career, and business. The repayment plan for this chapter is set, keeping in mind the debtor’s needs so that you can keep up with the payments. Chapter 13 is also known as the wage earner’s plan because it is often for regular income earners. You are required to pay a particular amount of money monthly to your trustee, who then pays the creditors. Creditors shouldn’t contact you during this period of bankruptcy. The monthly payments happen for a period of between three to five years.
Overview of Chapter 13 Bankruptcy Interest Rates
Any debt under Chapter 13 continues to accrue interest. However, under the chapter, the amount of interest to be paid to the creditor is lower. The reason being Chapter 13 allows you to consolidate or assemble all your debts, including credit cards and income taxes into one and make monthly payments. Because the law comes up with the interest rate for repayment, it means that if some of your debts had high-interest rates, you would end up saving when the interest rates reduce. For unsecured debts like medical bills, the loan will not accrue any interest. You will only pay part of the mortgage, and for the rest, the chapter will establish an interest rate.
You might also enjoy reduced interest rates for secured debts if the debt is what you will repay during the period of bankruptcy. The current prime interest rate is 5.5% for car loans, and the creditor is allowed to charge 1 to 3% on top of the prime interest rate. It means that if you had borrowed an auto loan with an interest rate of 15%, paying as much as 8.5% interest rate for the same loan under Chapter 13 will help you save.
Usually, debtors will try to argue against the reduced interest, but per Chapter 13, a petitioner should pay a reduced interest rate on the debt. Note that once the bankruptcy period is over, you will have to negotiate new interest rates for repaying the remaining amount. To reduce your interest rates, you will need a San Diego bankruptcy attorney.
Chapter 13 Bankruptcy and your Properties
Besides reducing your interest rates, it is possible to reduce the principal amount of the loan. When filing for bankruptcy under Chapter 13, the court will check your investment property to decide if it is positive. If the property is making profits, you get to keep it, but where the property is deemed detrimental, the creditor will sell it off.
It means lowering the value of the credit you owe to the current value of the property. It happens where the amount of credit is more than the value of your property. After the amount of loan to be paid is reduced, you are supposed to repay the debt in full within the duration of the bankruptcy. If the interest rates for the loan are very high, you can negotiate with the court to reduce your interest rates to the current market rates or more standard rates. To ensure that you don’t commit your funds to an investment property that might end up with your lender, the court requires that you have an external source of income that can pay off the creditors during bankruptcy.
After a cram-down, the difference between the value of the loan and the present value of the property is considered an unsecured loan. It becomes part of your repayment plan.
- Lien Stripping
If you attach the first or second mortgage to your home, the creditor will place a lien on the property to secure the loan. It means that your bankruptcy cannot discharge your mortgage. But in cases where the credit is more than the value of your property, the lien will be stripped. The primary mortgage becomes the priority, and once the bankruptcy period is over, you can begin repaying the second mortgage.
Generally, if you own an investment property, Chapter 13 is the best form of bankruptcy to file. If you own rental apartments that generate income, your bankruptcy attorney can suggest a repayment plan that will see you continue keeping the condo while you repay the due amounts. The court must, however, approve the strategy first before you proceed. Where the investment is highly profitable, you can decide to pay the disposable amount together with the profits to clear the debt faster.
In cases where the investment doesn’t generate any income, the court will not allow you to continue holding a money-losing venture. The trustees, on the other hand, will not be ready to take up a property that will not fully pay the lender. If you are the sole owner of the property, you might be allowed by the court to keep it, but you won’t be allowed to perform any repairs or maintenance. The decision on whether you remain with the unprofitable property or not depends on the court. But it is up to your bankruptcy attorney to convince the court how the property will benefit the lenders if you continue keeping it.
Chapter 13 Process
If you are about to lose your vehicle, facing removal, facing a collection suit, behind on your mortgage repayment, tired of debt collectors, or want to resolve your debt situation, filing for bankruptcy under this chapter is the way out. It allows you to put together your debt so that you can come up with a better repayment strategy.
Before beginning the process of filing, you should:
- Pay a filing and miscellaneous administrative fee
- Provide a list of all your lenders and the amount you owe
- Provide a list of your properties
- Provide tax information
A petitioner under this chapter must demonstrate to the court that he or she hasn’t had any bankruptcy petition dismissed within the last six months due to failure to show up in court. Within six months of filing for bankruptcy, you must also undergo credit counseling.
After filing the petition, your attorney must create a repayment plan that will go before a judge or court for approval. The lender will have the chance to protest the appeal, but the decision remains with the court. If the petition is approved, you will have to work with a mediator who will be the link between you and the creditors.
When a repayment plan is agreed upon by all the parties, there should be no late payments. The only thing you can do is increase the amounts of monthly payments so that you can be discharged from the contract early. If something happens that stops you from honoring your payments, your mediator can help you come up with another modified plan. But if you are entirely unable to service the debt using the revised program, your bankruptcy case will be dismissed.
Note that even if you under Chapter 13 bankruptcy, you must pay some of your debts like:
- Child support
- DUI liabilities
- Education loans
Reducing your Car Interest Rates Under Chapter 7 Bankruptcy
It is possible to reduce the interest rates on your car loan by filing for Chapter 7 bankruptcy. It will be the case if you make monthly payments for the car. After submitting this type of bankruptcy, all other contracts will be paying will be canceled. Although under this chapter, your assets are sold to clear the credit, it is possible to keep your car while you repay the loan. You will have to enter into a new agreement for you to do so. During the negotiation with the creditor about the original terms of the deal, you can be sure to negotiate the terms to reduce your interest rates and get other favorable conditions for the contract. The new agreement that you will be entering into so that you can keep the vehicle is known as a reaffirmation agreement.
At times the money you owe on loan can be more than the value of the car. You will need to think about how you will protect your car equity. If you can’t protect the total investment, the trustee handling your case will have to sell the vehicle, then if there will be any exempt equity, you will get it back. The remaining amount will then be paid to your lender or creditor.
Note that even when the equity is safe, you must inform the lender you are planning on renegotiating the loan. You must fill the Statement for Individual Filing, which you will find on your Chapter 7 bankruptcy. On the statement, you have to indicate your choice if:
- It is to surrender the car to the creditor
- Pay the full real value of the vehicle in a lump sum
The form is then sent to the court, where your lender will learn about the choice you have made. You will later receive a reaffirmation contract from the lender, allowing you to keep the vehicle and enter into a new agreement. In most cases, you will find the reaffirmation contract, but the creditor will use the original terms of the deal.
The moment you file for bankruptcy, all the loans you have from lenders are overturned, including the terms and conditions. When this happens, both you and the lender will lose certain protections.
If the vehicle gets into an accident getting destroyed, you pursue a personal injury claim, and if the amount of compensation fails to cover the remaining loan on the car, you will have to pay out of your pockets to bridge or close the gap. But if you continue keeping the vehicle and keep making payments, the lender won’t be able to sue you for the deficiency or difference between the outstanding loan and amount of compensation if the car is destroyed in a crash.
Note that a reaffirmation is a new contract, but the terms and conditions might not be different from the original contract. It is up to you to negotiate the new amount you will be paying for the loan and new interest rates. As such, you need a bankruptcy attorney to negotiate the interest rates so that they can be reduced.
A reaffirmation agreement will protect the lender by enabling them to sue you for a deficiency judgment. On the other hand, it protects you by making sure the lender cannot take back their property unless you are unable to finance your debt.
The challenge with this agreement is that your car can be taken back at any time, even if you are not behind your payments. The other problem is that despite making timely loan payments, they might not improve your credit score after the bankruptcy period if the lender fails to report your payment record to credit bureaus.
Immediately after a bankruptcy petition, you should reach out to the lender and try to negotiate to see if the interest rates for the new agreement can reduce. According to the law, the terms of the original deal shouldn’t change, but still, you can renegotiate. The lender will agree to new conditions if they realize that repossessing the car will result in loss of money. During such situations, lenders might:
- Reduce your interest rate
- Waive late fees
- Forgive missed payments
- Change other terms and conditions of the agreement
Once you have entered into a new deal, you will need a bankruptcy attorney to certify that you are comfortable and can afford the monthly payments agreed in this contract.
Effects of Bankruptcy on your Interest Rates
Your credit score determines the interest rates for your home loan. After bankruptcy, if you come out with a bad credit score, it will be tough to get a loan. One of the things that will affect the interest rates is your current debt levels. If your debt to income ratio is too high, you might only qualify for loans with high-interest rates. If it is a mortgage, the loan program you are eligible for will also have a great impact on the interest rates.
Enhancing Chances of Reduced Interest Rates after Bankruptcy
Filing for bankruptcy is not the beginning of your financial ruin. Instead, it can be a great way to start again and put your finances in order. If you want to reduce your interest rates after coming out of bankruptcy, you should do the following:
Make Timely Monthly Payments
Whether you had filed for Chapter 7 or 13 bankruptcy, making loan payments on time will reduce your loan interest rates, especially for the mortgage. The lender will need proof that you are starting to re-establish yourself financially, and timely monthly payments are the best way to prove this. Demonstrating that you are back on your feet financially means you can qualify for a home loan and at lower interest rates.
Use of a Secured Credit Card to Rebuild your Credit Score
It is possible to make cash deposits to a card issuer so that they can provide you with a secured credit card for daily use. The issuer of the card will increase the amount you can spend based on your deposits. The more cash deposits you make, the more you can pay from your card, which eventually improves your credit score. With an improved credit score, you get to qualify for loans at low-interest rates.
Note that errors in your credit file after your discharge can negatively affect your credit. You will need to monitor these files to make sure they are free of faults that might affect your credit adversely.
Find a Bankruptcy Attorney Near Me
Many things can happen, pushing you to file for bankruptcy. If you take advantage of bankruptcy law during this time and contact the San Diego Bankruptcy Attorney at 619-488-6168, you have a better chance to reduce your interest rate for loans during and after bankruptcy.