If you have a high rate of interest on loans, a Chapter 13 Bankruptcy can reduce the interest rate resulting in a much lower monthly payment. This is called a “cramdown.” The interest rate unsecured creditors such as credit cards, finance company loans, Payday loans, check advance loans and signature or personal loans is 0% interest. Further, many times in a Chapter 13 you pay back a fraction of what you owe.
The interest rate for secured creditors such as vehicle loans, furniture loans or any other type of loan where collateral secures the loan is reduced to 1-3% over the Wall Street Journal Prime Interest Rate according to the U.S. Supreme Court in the case of Till v. SCS Credit Corp. 541 U.S. 465 (2004). Currently the Prime Rate of interest is 3.25%, therefore your high interest can be reduced to between 4.25% and 6.25% interest in a Chapter 13.
As an example of the impact the Till decision has on high interest loans, if a debtor has a vehicle loan where the debtor owes $15,000.00 but is paying an interest rate of 15% over 5 years, the debtor will actually pay back to the creditor $21,410.94. If the same loan of $15,000.00 were included in a Chapter 13 Bankruptcy with a “cramdown” interest rate of 6.25% over 5 years, the debtor would only pay back $17,504.34. That is a $3,906.60 savings. It is not unusual for me to see interest rates on vehicles and furniture as high as 30% in today’s market.
Chapter 13 can also allow you to catch up your vehicle payments and in some states such as Tennessee get your vehicle back after it has been repossessed as long as the creditor has not already sold the vehicle.
Cynthia T. Lawson is the Managing Partner of the Bond & Botes Law Offices location in Knoxville, Tennessee. She holds a Bachelor of Science from East Tennessee State University, and a Juris Doctorate from University of Memphis, Cecil C. Humphreys School of Law. She currently serves as a Mentor for the Moment in bankruptcy.Read her full bio here.