Do You Pay Interest to Creditors After Filing Chapter 13 Bankruptcy?

For most people who file a chapter 13 or debt consolidation bankruptcy, one of the huge benefits is the ability to discharge certain interest and penalties on certain debts. In just about all chapter 13 cases, particularly those filed by debtors that are below the state median income, interest on all unsecured debt is dischargeable.

This can be a huge savings for a debtor, particularly if one is struggling with the high interest rates of credit cards and payday loans. It can definitely give some light at the end of the tunnel as far as getting these debts taken care of in a reasonable time.  In some cases, if you are an above median income debtor, the court may require you to pay a small percentage of interest on your unsecured debt. This is almost still always a great saving from contract or judgment rate of interest, usually no more than a few percent.

For most secured debts paid through a chapter 13, you are required to pay interest at the current chapter 13 plan rate. This rate will vary across the Federal court districts but is loosely determined by the current prime rate plus a few points for various risk factors. However, the plan rate is almost always substantially lower than the contract rate of interest.

Other Times Interest May Be Discharged

A Chapter 13 Debtor is also eligible to discharge future interest and penalty on most Federal tax debt and state tax debt. In many circumstances, tax debt is not dischargeable in bankruptcy, however, by including your tax debt in a chapter 13 payment plan, a debtor can reap the benefit of discharging future interest and penalties that would accrue outside of a chapter 13 plan. This applies to taxes that have come due prior to the filing of a chapter 13 case. This benefit can be very helpful to someone who may be facing tax debt where it would be difficult to pay the amount owed along with the added interest and penalty that would normally accrue.

If you are currently struggling with any type of debt and need some relief, please contact our office nearest to you and schedule a free consultation with an experienced attorney who can help guide you through these issues.