I’ve got news for you:
There’s a government program that lets you pay the balance on your credit card without interest and owe nothing more.
Sound like one of those snarky radio ads?
This one’s legit.
Meet Chapter 13.
Credit card interest is the killer
Here’s the refrain I hear from clients, over and over.
I want to pay off my credit cards, but the damned interest rate makes it impossible
They could pay back what they’ve charged if it wasn’t for the sky high interest rate. They want to pay what they owe.
Credit card interest, despite our national allegiance to unregulated business guided by market forces, still remains hugely more than the cost to borrow elsewhere.
But the card’s interest rate no longer applies when you file Chapter 13.
How Chapter 13 works
Unsecured debts in Chapter 13 stop accruing interest when the case is filed.
The card issuer’s claim consists of whatever the balance is when the bankruptcy case is filed.
Credit card debt is almost always unsecured debt. The card issuer has only your promise to repay. There is no collateral for the debt, like there is with a car loan or a home mortgage.
So, with a stroke of the pen, or really the clank of the file stamp, your credit card debt is frozen in amount by filing Chapter 13.
You write the repayment plan
The debtor, the person who filed Chapter 13, proposes the plan which can run from as little as 3 years to a maximum of 5 years.
Full repayment is not required in Chapter 13. How much you have to pay creditors depends on your income and your assets.
How to calculate the smallest possible repayment
We’re assuming here that you want to pay the credit cards in full, just without interest.
Take the card balances, add 5-10% of that total for trustee commission and divide by 60, the maximum number of months in a Chapter 13 plan.
There you have the rough monthly Chapter 13 payment to pay all of your credit cards in full, without any interest.
At the end of the plan, the debt, including unpaid interest, late charges, add ons and penalties are discharged, gone, unenforceable.
But, but, but…
Note that this works regardless of how much money you make or how valuable your assets are.
Creditors are never entitled to more than 100% of their claim.
The exception is that if your non exempt assets would pay creditors in full in a hypothetical Chapter 7 liquidation, you have to pay interest to creditors at the federal judgment rate.
That interest rate these days is far less than credit card interest. In October, 2022, it’s 4.3%.
So if you are ready, willing and able to pay your credit cards in full, without interest, check out Chapter 13.
If paying in full isn’t really possible, talk with an experienced bankruptcy lawyer about a plan that pays creditors only what bankruptcy law requires.
Put that interest money that you save to work to provide for emergencies and your old age.
How to interview a bankruptcy lawyer