A debt is considered in default when the debtor has not made a payment on it in 270 days. This is a pretty high bar, and it’s surprising how many people fall into such dire financial circumstances that they can’t clear it. Undoubtedly, people should be talking to a bankruptcy lawyer long before the 270-day limit is reached. The time between the first missed or insufficient payment and default is called “delinquency.” Most people who are delinquent on debts should be talking to a bankruptcy lawyer too, but the real question is what’s an “insufficient payment” as far as creditors are concerned?
The answer is the “minimum payment,” which is usually a round, nominal figure like $20 or $50. Making these payments will keep you out of delinquency, but unless the debt is fairly small, it’s obvious that interest will rapidly start accruing onto the unpaid principal. Thus, the “term monthly payment,” which is the amount of money required to amortize the debt on time, differs from the “minimum payment,” often by a substantial amount.
Usually, the lender will tell you what the term monthly payment is, but it’s not a secret formula hidden in banks’ vaults. For fixed interest rate loans, here’s the equation:
P = Principal
I = Interest rate (This usually needs to be converted to a monthly rate, so 6.8% = 0.068/12 = .0056~)
T = Time (number of payments, e.g. 10 years = 12 months times ten = 120 payments)
(I / (1 – ((1 + I) ^ -T))) * P = Monthly Payment
This might seem complicated, but it’s easily broken up, here’s what the monthly payment for a $100,000 loan at a fixed rate of 3.5% over 30 years would be.
P = $100,000
I = 3.5% = 0.035/12 = 0.002916~)
T = 30 x 12 = 360 payments
(.002916~ / (1 – ((1 + .002916~) ^ -360))) * 100,000 = $449.04
Note that if the debtor in this example only paid a minimum $50 every month, problems would arise pretty quickly.
Most calculator programs and all spreadsheet programs have a special function for calculating monthly loan repayment rates, which should be easier than doing the math manually, but it might not be as rewarding. The benefit of understanding this formula is that debtors can figure out how much more they would need to pay to amortize the loan more quickly.
If you’re delinquent on a debt, or worse, in default, then you probably need to speak to a bankruptcy lawyer more than you need to learn how to use a loan repayment calculator.
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 bankruptcy lawyers near me Bruce Weiner for a free initial consultation.
