Brooklyn bankruptcy debtors usually want to discharge their credit-card debts, but sometimes they are “solvent,” i.e. they own more than they owe. For these debtors bankruptcy might not be of much help.
Or will it?
Sometimes, but not always, a chapter 7 bankruptcy will not be useful to a solvent debtor, but a chapter 13 case might be. The concept here is a 100 percent repayment plan. Here, debtors determine that they would simply lose some of their assets in a chapter 7 case, so they hope to repay their debts out of their incomes instead. There are a handful of situations in which this is a good idea, namely when debtors are approaching retirement and need their savings for their futures.
Normally, in a chapter 13 Brooklyn bankruptcy case, debtors would be required to commit some percentage of their plan payments to their unsecured credit-card debts. In these scenarios, debtors wouldn’t pay any interest on the debts. If they commit to a 100 percent plan, however, then the rules changes, and they are legally required to pay interest on their credit-card debts.
But how much is the legal interest rate?
The answer is, thankfully, surprisingly low. Obviously, it wouldn’t make much sense to charge debtors the contract interest rates on their credit card debts or else a 100 percent chapter 13 plan would be worse than pointless. So what interest rate do these plans use and how are they determined?
The legal answer in the Southern District of New York is the federal post-judgment interest rate, which is the weekly average of interest rate of one-year Treasuries during the calendar week preceding the judgment. In the last full week of December it was about 2.61 percent. (Other jurisdictions might modify these rules.)
A few years ago it was much lower, but the Federal Reserve has been raising the effective federal funds rate over the last few years, so the interest-rate on one-year Treasuries has been rising as a result. It will be higher in the future.
Nevertheless, that’s still significant savings for debtors with large credit-card bills. Consider: A debtor who has $25,000 of credit card-debt at 17 percent APR will need to pay about $620 per month to pay it off in five years—and on top of the principal that’s more than $12,000 in interest.
By comparison, repaying that debt over five years at 2.61 percent leads to a $445 monthly payment and not even $1,750 in additional interest.
That’s huge savings.
What’s more, New York bankruptcy trustees rarely insist on charging interest to debtors, even in 100-percent repayment plans. That means the interest burden on credit-card debt in a chapter 13 plan could be, and often is, zero.
More information on how the post-judgment interest rate is calculated in Brooklyn is here.
There are more advantages to a 100 percent chapter 13 repayment plan, but if you are experiencing financial difficulties, then talking to an experienced New York bankruptcy lawyer can help you strategize your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.