So many people come into my office wanting to file a Chapter 7 bankruptcy. That’s all well and good and we love to get people into 7s when we can, but the reality is, even a Chapter 13 can save you money in the long run, even if you’re paying back 100% of your debt.
Clients with tons of equity in their home or with another asset or assets that can’t be protected in a Chapter 7 often are faced with a choice and usually, that choice is, do a 7 and risk my asset or do a 13 and pay everyone back. Clients often struggle with finding the benefit of using Chapter 13 to manage their debt.
An example I like to use stems from a client I helped a couple of years ago. This client came in with a substantial amount of equity in their home and couldn’t understand why she needed to file a Chapter 13. She didn’t want to file a Chapter 13 and was adamant about that. However, they also didn’t want to lose their home. I explained to this client that even though they technically could pay back their creditors due to their income, filing bankruptcy would ultimately save this person a great deal of money AND it would mean that creditors had to abide by the protections provided by the law. Once I crunched the numbers to explain why a Chapter 13 would be good for this person, I gave them the answer. In this client’s case, the answer was $40,000.
Chapter 13 saved $40,000 over the course of their case when compared to paying all the creditors what they were owed outside of bankruptcy.
It’s the interest rate
The $40,000 savings for this client originated from the difference between the interest rate that is forced on creditors during the bankruptcy as opposed to the rates on taxes and credit cards outside the bankruptcy.
When creditors are entitled to get interest on their claims in bankruptcy, the interest rate that applies is usually much lower than the rates claimed by the IRS and the credit card companies. When credit card companies charge interest up to 30%, the 4-6% you’ll pay in a bankruptcy is a huge deal.
Chapter 13s crush credit cards
If my client had paid his credit cards over 5 years (the same duration as the Chapter 13 plan) according to contract terms netted the credit card issuers $37,000 in interest! The total cost to pay off those cards was roughly $90,000.
The cost to pay off the same amount of debt in Chapter 13 was $4250 in interest and just a small amount in Chapter 13 trustee commission. In the end, it was a major win for my client. They saved over $30,000 in interest on credit cards alone.
Non economic benefits
In this post we’ve largely looked at the economic benefits of a Chapter 13, however, there are other benefits that come up as well. You also have to look at your physical and mental wellbeing. Honestly, the stress of debt and constantly having to shuffle everything around just to make the bare minimum is quite taxing. Financial distress is one of the leading causes of the following bad things in life:
- Divorce- Finances are a leading cause of divorce.
- Depression- Debt can lead to a vicious downward spiral and many people who are suffering from financial problems also suffer from depression.
- Stress– Debt causes stress, there’s no doubt about that. Stress causes significant health problems including heart disease, stomach problems and reproductive issues.
If you’re someone who needs help with your debt contact the attorneys at Harmon and Gorove. We have decades of experience helping people who are in debt, get out. We might even be able to save you several thousand dollars by consolidating your debts into a Chapter 13 bankruptcy.