The sixtyish client sitting in my office had assets worth 10 times his credit card debt. What could bankruptcy possibly do for someone who was solvent?
His problem was liquidity and an income that was certain to decline.
The disability income would end at 65, leaving him with only Social Security and the income from the illiquid annuities to live on. Minimum payments on $50,000 of credit card debt took 40% of his current income. It would take 42 years to pay it off at contract terms.
Like so many clients, he wanted desperately to pay off the debt, yet the credit card interest rates made it impossible without selling off the assets on which he relied for a stable future.
Care to guess what saved the day? The recession!
The interest rate on federal funds is at .18%. Less than one percent.
It’s the federal funds rate that defines the interest rate on federal judgments, and therefore the interest a solvent debtor must pay creditors in Chapter 13.
In a Chapter 13 plan, he could keep his house, preserve the annuities he’d need for his support at 65, and pay the face amount of the debt plus interest. All that Chapter 13 requires is that creditors do at least as well under the Chapter 13 plan as they would in a Chapter 7 where the trustee would sell the assets of the trustee’s choice to pay creditors.
So,by reducing the interest rate from credit card rates to the federal judgment rate, my client’s $50,000 in credit card debt could be paid off in a 100% Chapter 13 plan, with less than $300 of interest paid on the debt over the entire 60 months of the plan.
Payments to the plan will be less than the current debt service and in five years, he’ll be debt free.
When we talk about saving, we talk about the power of compound interest. Savor the reverse, the power of a miniscule interest rate on debts paid through Chapter 13.
I’ve finally found the bright side of the Great Recesssion.
Image courtesy of Leo Reynolds.
