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City of Stockton Bankruptcy: Opposition to the Chapter 9 Bankruptcy Filing

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The City of Stockton bankruptcy case has now officially become a complete mess.  Bankruptcy lawyers everywhere should keep an eye on this one.  On or around August 9, 2012, multiple creditors or interested parties filed opposition to the City of Stockton’s eligibility to be a debtor under the bankruptcy code.  It also appears that Stockton’s choice to try the Neutral Evaluation Process under California law, rather than declare a fiscal emergency, will add thousands and thousands of dollars to their goal of reorganizing their debts.  Going through the Neutral Evaluation Process also appears to have given those owed money a better argument for Stockton not being eligible to be a debtor under the Bankruptcy Code.  California passed AB506 and created California Government Code Section 53760 to help make filing bankruptcy a last resort for municipalities.

The party that really calls out Stockton is a company called National Public Finance Guarantee Corporation (“National”).  They filed their opposition to Stockton’s bankruptcy petition on August 8, 2012.  National insures the repayment of over at least $90 million in bonds Stockton has issued for various projects.  National would have to pay all principal and interest on these bonds in the event Stockton defaults completely or is not required to pay the bonds.  National’s main argument is that Stockton does not meet the requirements under bankruptcy code section 109(c) to file bankruptcy.  This section requires a municipality to have negotiated in good faith with creditors and failed to obtain agreement from creditors holding at least a majority in amount of the claims of each class that such entity intends to impair (change) under a plan in a bankruptcy case under Chapter 9.

A question you may be asking yourself is why did the California legislature pass a law under California state law requiring a municipality conduct the Neutral Evaluation Process (negotiating with creditors) or declare a fiscal emergency before filing for bankruptcy if this provision of the bankruptcy code already existed?  Who knows?  The California legislature added another layer of costs for a California municipality to file bankruptcy to the detriment of those who are owed money.

So what does Stockton do during the Neutral Evaluation Process?  It allegedly failed to negotiate with the California Public Employees’ Retirement System (CALPERS).  The entity that is the single largest unsecured creditor for the city and the biggest issue that needs to be addressed if Stockton is ever going to be financially healthy again.  The National opposition discloses that the plan Stockton proposed during the Neutral Evaluation Process unbelievable said the city would have deficits due to CALPERS of $5 million in 2013-2014 growing to over $17 million a year by 2020-2021, with a total deficit over the projection period of $100 million.  What!  Are you telling me that Stockton submitted a plan to reorganize its debts that ignored CALPERS ongoing deficits and asked other people they owed money to reduce interest rates or take less money?  Sure sounds like it.  Why is that?  Stockton lists CALPERS as its single largest creditor with an estimated claim of $147 million.  According National’s opposition: “The City(Stockton) does not even list CalPERS in its Outcome of AB 506 Mediation Sessions.  Moreover, the City explicitly states in the Ask ( the Neutral Evaluation Process reorganization plan) that it is going to attempt to ‘preserve funding for current retirees and current employees who will retire under the CalPERS system.”  Really?  So that is why Stockton ignored CALPERS.  So you are telling me the same people who benefit from the unsustainable benefits Stockton has been handing out did not want to cut their own benefits to save the City of Stockton from bankruptcy?

To make matters worse, Stockton issued $125 million in Pension Obligation Bonds to pay CALPERS money it did not have to fund the retirement of its employees.  That $125 million dollars given to CALPERS, and invested by CALPERS, is now only $82.5 million because the financial crisis decreased the value of CALPERS’ investments.  What a mess.  Stockton allegedly submitted a plan of reorganization during the Neutral Evaluation Process that did not even allow Stockton to become financially sound again because of continued deficits owed to CALPERS.  If you were owed money from Stockton would you have agreed to take less under these circumstances?  As a bankruptcy attorney it will be interesting to see how the bankruptcy court rules regarding National’s opposition.

If My Income Changes Can I Modify or Change My Chapter 13 Bankruptcy Plan?

By Kitty J. Lin, Attorney at Law

One of the biggest fears that people have when filing for a Chapter 13 bankruptcy case is that they will be permanently stuck in the plan for the duration of the Chapter 13 case.  Chapter 13 bankruptcy cases last between three to five years.  You are required to pay all of your disposable income into the Chapter 13 plan of reorganization.  The Chapter 13 trustee disburses the funds in the plan to your creditors as provided for in your Chapter 13 plan. The good news is that the plan or reorganization can be flexible for the most part.  The plan can be modified if your circumstances change.

Loss or Decrease in Income

The economy can be fickle at times.  A lot can happen between three to five years.  If you lose your job or have your hours decreased it can severely impact your finances.  If you are currently in a Chapter 13 bankruptcy case and have already committed all your disposable income to the Chapter 13 plan you can modify your plan to decrease your plan payments to reflect your current financial situation.  Your bankruptcy lawyer will need to file a motion to modify the approved plan for court approval.  One example: your hours were cut and your monthly income decreased by $200.  You can request modification of your plan to decrease your monthly Chapter 13 plan payments by $200.  If you were laid off or fired and now have no income to support your Chapter 13 plan, one option would be to convert your Chapter 13 bankruptcy case to a Chapter 7 bankruptcy case if you qualify to be a debtor under Chapter 7.  Your ability to modify the bankruptcy plan or to convert to a Chapter 7 would depend on your circumstances.  You will need to consult your bankruptcy lawyer regarding your specific circumstances.  If you are stripping your second mortgage in a Chapter 13 and you convert to a Chapter 7, your second mortgage may no longer be stripped and the lien may still be recorded against your property as the lien strip was dependent on the successful completion of your Chapter 13 plan.

Can I Pay Off My Plan Early?

This is a question that is asked a lot.  The answer is: it depends.  If you have the funds to pay off 100% of your creditors after the filing of your bankruptcy case then you can pay off your plan at any time.  You would need to file a motion with the court to obtain approval to do so.  If you do not have the funds to pay off 100% of your creditors then the answer is more complicated.  You are expected to remain in a Chapter 13 plan for at least three to five years depending on your circumstances at the time you filed your case.  The ability to pay off your plan early depends on the jurisdiction where you have filed your bankruptcy case and the how the trustee’s office chooses to administer the cases.

If you need to modify your Chapter 13 bankruptcy plan it is advisable to seek the advice of an experienced bankruptcy attorney to help you through the process.

Why You Should Choose a Local Bankruptcy Lawyer to Represent You

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We have client after client come in and tell us horror stories about using lawyers from hundreds of miles away for loan modifications and bankruptcy services.  We have found that the fees charged are usually more than what is reasonable and the services provided our less than satisfactory.  That is why they are now in my office to get rid of their debts.  It is much less likely that you will be part of a scam when you are looking across a desk at the person you are doing business with.

It is also illegal for anyone in California to take upfront fees for to provide loan modification services.  Do not fall for the “pre-litigation fees” or “forensic accounting” scams.  These people are just skirting the ban on upfront fees for loan modifications.  We have had countless clients give thousands of dollars to loan modification companies in Southern California.  Please only go to HUD approved companies that do not require upfront fees or provide help for free.

The first and most important reason is the practice of law is still a very localized even though bankruptcy law is federal law.  For chapter 7 bankruptcy cases there is a panel of trustees that are assigned cases each month.  One trustee may require that you provide post-petition pay statements or bank account statements prior to the meeting of the creditors.  Another trustee may require mortgage loan statements if you own a home or car loan statements if you have a car loan.  For the case to go smoothly it is good to hire any bankruptcy attorney that is familiar with these things.  Judges in different jurisdictions also have opinions on various issues that local bankruptcy lawyers could be aware of too.  It is not possible to ever know for certain how a judge will rule, but knowing if a judge is debtor friendly or creditor friendly is helpful.

If you are filing a chapter 13 bankruptcy case it is very important to know what the standing chapter 13 trustee requires and how they want the bankruptcy petition filled out.  While the bankruptcy petition is a form document trustees have much different opinions on how debts, assets and expenses are listed by bankruptcy lawyers.  What is fine to list as an expense for one trustee may not be allowed by another trustee.  Another localized issue is the chapter 13 plan.  Most jurisdictions have a model plan that is used.  Some jurisdictions allow for any plan to be used to reorganize debts.  Knowing how the trustee wants certain debts listed and what the trustee will allow as special language in a plan is very important.

How Can I Pay My Student Loans?

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Are you having trouble paying your student loans each month?  Are you about to graduate and will then have to start making student loan payments shortly?  If so, the IBR can help.  The what?  The IBR is the Income-Based Repayment Plan for student loans.  Many of our potential clients have student loans that they would like to discharge when filing bankruptcy.  Most bankruptcy lawyers know that the discharge of student loans is generally not possible.  Due to the 2005 bankruptcy code changes both private and government student loans are not generally dischargeable.  An adversary proceeding could be filed to argue that the student loan borrower does not have the ability to pay the loans back and will not have the ability for a long time.  Litigation is tricky though and it is an uphill battle to discharge a student loan in full or partially when filing bankruptcy.

So what other options are there?  The IBR allows for the repayment of student loans based upon the number of people you have in your household and the amount of your yearly gross income.  You will need to prove that you have a partial financial hardship to qualify though.  According to the Consumer Financial Protection Bureau you have a partial financial hardship if the monthly amount you would be required to pay on your IBR-eligible loans under a 10-year standard repayment plan is higher than the monthly amount you would be required to repay under IBR.

Most student loans are eligible for repayment pursuant to the IBR, but private student loans, PLUS loans made to parents, FFEL consolidated loans that include PLUS loans made to parents are not eligible.  There are some bad possible consequences to participating in the IBR, like ending up paying more interest and you have to provide documentation every year of your income and family size.

A couple of the most advantageous parts of the IBR are the cancellation provisions.  Once you have participated in the income based repayment plan for twenty-five years and satisfy all the requirements you can have the remaining balance of your student loans cancelled in full.  Also, if you have worked in public service your payments pursuant to the income based repayment plan will count towards the Public Service Loan Forgiveness Program.  For more information about student loan repayment when filing bankruptcy, please consult bankruptcy lawyers in your jurisdiction.

Jose Canseco Seeks Bankruptcy Protection in Nevada Under Chapter 7

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On July 31, 2012, former baseball star and controversial author filed for bankruptcy protection under Chapter 7 of the bankrupt code in Nevada, case number 12-18916.  Like many Americans faced with financial difficulty it is tough to choose bankruptcy as the answer.  It is particularly troubling when someone who has earned millions of dollars has to make that choice too.  I still have baseball cards from when Mr. Canseco was part of the bash brothers and the Oakland A’s.

According to court documents most of Mr. Canseco’s financial woes are primarily tax and judgment related.  Schedules E and F list a tax debts owed to the Internal Revenue Service, the State of California, the State of Florida and the State of New York.  It appears most of the tax debt owed is dischargeable in the bankruptcy.

Jose lists his current monthly income as $7,500 a month and expenses totaling $4,450 including $3,100 per month in food.  I think that is the highest amount I have ever seen as a bankruptcy lawyer listed in a bankruptcy petition for food.  I used to work for a Chapter 13 trustee and have reviewed many petitions prepared by other bankruptcy attorneys and have filed bankruptcy for many people.  It is possible, but usually high food expenses are related to eating disorders or diabetes.

Tri-Tech Restoration Co., Inc. of Burbank, California holds a judgment totaling approximately $77,859.  Another judgment owed to Christopher Amirault appears to be the result of an eviction back in 2008.  Canseco allegedly dumped a lot of sand in the backyard left the house a mess according to court records.  Another judgment owed to Christian Presley totaling $785,344 allegedly resulted from a fight in Florida years ago that involved Ozzie Canseco too.

Hopefully Mr. Canseco can weather the financial storm with unpaid taxes and move on with life without burdensome debt like everyone else that seeks bankruptcy protection.  His baseball career seems to be wrapped up for the most part, but that does not mean he cannot leverage his notoriety in some other way in the future and make some good money again.  That goes for anyone that files bankruptcy.  Just because you hit a rough patch does not mean the whole rest of your life is ruined.  Bankruptcy will help you get a fresh start and help you to rebuild your finances.  It takes time, hard decisions and work to rebuild your credit score.  At the end of the day we are just talking about money.  There are more important things in life.

What is Chapter 15 of the Bankruptcy Code?

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Have you ever heard Chapter 15 of the bankruptcy code?  Most likely you have not and most bankruptcy attorneys do not file these types of cases.  Most people did not know about Chapter 9 of the bankruptcy code until the recent high profile bankruptcy cases of various municipalities throughout the United States.  Chapter 15 was created in 2005 when the bankruptcy code was amended.  So why did another chapter need to be created.  You can already liquidate of assets and there are two chapters to reorganize debts.  Family farmers and fisherman have their own special chapters along with municipalities.

So what is Chapter 15 for?  Rules already exist for insolvency proceedings for companies that do business in multiple countries.  The United Nations Commission on International Trade Law governs insolvency internationally.  Prior to the creation of Chapter 15 there was section 304 of the bankruptcy code and involves debtors, assets claimants and parties with interests that include countries other than the United States.  The idea is to help cooperation between courts of the United States and courts of foreign countries.  If you are doing business overseas you already know that there is uncertainty when dealing with other countries and their laws.  If things go bad there is now more certainty, or at least that is the idea, when dealing with a cross-border insolvency situation.  Like the others chapters of the bankruptcy code the point is to treat all parties involved fairly and maximize assets for the benefit of those who are owed money.  Another goal is to help these troubled businesses to hopefully save jobs and protect the investments that have already been made.  Normally a chapter 15 case is part of some other proceeding in another foreign jurisdiction.  That does not mean a chapter 7 or reorganization under chapter 11 will not take place too.  There could be a number of parties that have assets in the United States or debts owed to parties that require administration under the bankruptcy code’s other chapters.

When a chapter 15 is initiated by a foreign representative is allows the foreign entity to obtain an automatic stay and continue to operate.  Another goal is to provide the foreign debtors and creditors protection from discrimination.  This is a very complicated area of the bankruptcy law and this article just scratches the surface of what is possible and how.  Consult an experienced bankruptcy lawyer in your jurisdiction if you believe you have foreign debts issues that need to be resolved.  As business outside of the United States continue to operate within the Unites States this chapter of the bankruptcy code will become used more often.  Hopefully more cooperation will result with foreign courts for the benefit of employees and those who are owed money.

Why File a Chapter 13 Bankruptcy Case?

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There are many reasons why filing a chapter 13 bankruptcy case may be the best course of action.  Lately the most common reason is because of the mortgage crisis.  Too many homeowners are still struggling with their mortgage payments.  Filing a chapter 13 bankruptcy case will allow a homeowner to catch up on missed mortgage payments by spreading the missed mortgage payments out over the life of the plan of reorganization.  Most plans last sixty months.  Another result of the mortgage crisis was the steep decrease in home values.  The flip side of this unfortunate circumstance is that underwater second mortgages or equity lines of credit can be removed when filing a chapter 13 bankruptcy under the right circumstances.  Make sure you retain a bankruptcy attorney that is familiar with filing a motion to avoid the underwater liens.

Unpaid taxes are another reason to choose to reorganize your debts is to discharge taxes and pay the portion of the taxes that are not dischargeable in the plan.  Whether taxes are dischargeable or not depends upon time.  How much time has passed since the taxes were due, when they were assessed and whether or not you filed the tax return on time.  There are a number factors in determining whether taxes are dischargeable or not that this article does not mention.  Taxes can also be discharged when filing a chapter 7 bankruptcy case too.

Another reason to reorganize your debts is to reduce your car payment.  Chapter 13 can cramdown the amount to pay for the vehicle to its fair market value.  Not the amount you owe at the time the case is filed.  The plan of reorganization can also reduce the percentage rate.  Your vehicle must be purchased at least 910 days prior to the bankruptcy case being filed.  Many car loan companies will object to approval of the plan and try and argues the vehicle is worth more than the vehicle actually is.  If you cramdown a vehicle loan to the fair market value expect to hear from the car loan company.

In 2005 the bankruptcy code was amended to create what is called the Means Test.  The Means Test was designed to determine if you have disposable income available to unsecured creditors.  It is far from perfect and uses local standards for some expenses and national standards for other expenses.  This is an attempt to create a cookie cutter approach to push high income bankruptcy filers into repaying some of their debt in the plan of reorganization.  The Means Test has made filing bankruptcy more complicated and retaining an experienced bankruptcy lawyer that is very familiar with what is allowed in your jurisdiction and not allowed by the chapter 13 trustee’s office is very important.  All chapter 13 trustee’s administer chapter 13 bankruptcy cases differently.

There are many other reasons to file a chapter 13 bankruptcy that are not mentioned in this article.  It all depends upon your income, expenses and assets.

Did the City of San Bernardino, California File Bankruptcy Under Chapter 9?

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As of today, Friday, July 27, 2012, the City of San Bernardino has not filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code.  The San Bernardino City Council is still complying with AB 506 and Government Code Section 53760.  California recently passed this law, AB 506, or Government Code Section 53760, which provides two possible ways a municipality in California can file bankruptcy.  One path is the neutral evaluation process (NEP).  The other path is declaring a fiscal emergency and adopting a resolution by a majority vote of the governing board pursuant to Government Code Section 53760.5.  San Bernardino recently voted to declare a fiscal emergency.

It is noteworthy that they chose not to try the NEP pursuant to Government Code Section 53760.  The NEP is started by the request of the public entity and giving notice by certified mail to all interested parties.  Stockton, California tried to negotiate with its creditors prior to filing bankruptcy to no avail.  The NEP can only last 60 days from the date an evaluator is selected unless the parties agree otherwise.  Stockton and its creditors chose to extend the NEP for an additional 30 days to try and work things out.  The problem is that you must negotiate a better deal with large number of those you owe money to or even all of them to avoid filing bankruptcy.  Our clients who file consumer bankruptcy cases no this all too well.  If you settle with just one of your creditors you have most likely just wasted time and valuable money.

A public entity may also file for bankruptcy protection under Chapter 9 in California if the public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board at public hearing.  At the public hearing, a finding that the financial state of the local public entity jeopardizes the health, safety or well-being of the residents of the public entity. See California Government Code Section 53760.5.  This is what San Bernardino has chosen to do.  Now that San Bernardino has declared a fiscal emergency their bankruptcy attorneys will most likely file their case shortly.  If will be interesting how San Bernardino’s bankruptcy lawyers prove it is eligible to be a debtor under Chapter 9 of the Bankruptcy Code given it declared a fiscal emergency.  Stockton by contract chose the NEP and also must prove it is eligible to be a debtor under Chapter 9 of the Bankruptcy Code.  Will their arguments be substantially the same even though they chose different paths in complying with California law prior to filing their bankruptcy cases?  Stockton will be up first, and then eventually San Bernardino will go through the same process once it files its Chapter 9 bankruptcy petition.

Retired Employees of Stockton Sue the City of Stockton in their Chapter 9 Bankruptcy

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On July 10, 2012, the Association of Retired Employees of the City of Stockton filed an adversary complaint suing the City of Stockton in their Chapter 9 bankruptcy case for impairment of contract under the United States Constitution, impairment of contract under the California Constitution, denial of due process, breach of contract, promissory estoppel and declaratory relief.

The retired employees of Stockton hired bankruptcy attorneys to sue Stockton because they believe most of them were promised as part of their compensation package the payment of health insurance premiums during retirement.  As part of bankruptcy Stockton plans to stop payment of health insurance premiums for many of the retired employees.  There are approximately 500 retired employees.  The retired employees are requesting a temporary restraining order to stop Stockton from eliminating payments for their health insurance premiums.  The lawsuit alleges that if the payment of the health insurance premiums is stopped it could endanger the lives of the elderly and ill retirees.

According to court records Stockton started paying the entire health insurance premium for police officers around 1980, then to more of their retired employees as the 1980’s continued, and by 1991 Stockton paid for all retired employees, plus one dependent or spouse’s, health insurance premiums until age 65.  The lawsuit alleges that many of Stockton’s unions made wage concessions to maintain the benefits.  It would appear that these city employees still received pay increases as high as 4% per year or between 2.5% and not to exceed 6% per year.  I know many employees at private companies would be more than happy with a wage increase of 4% per year each year in the real world.  Most private employers make employees pay for all or most of health insurance premiums these days too.  Most employees of private employers rarely see pay increases each year at a set percentage too.

All that aside, when Stockton consulted bankruptcy lawyers and filed bankruptcy they announced they would stop making health insurance premium payments for all retirees who had been employed with the city for less than ten years and provide a lesser stipend to the long term retirees.  They also announced that all health insurance premiums would no longer be paid in their entirety as of July 1, 2013.

This situation is really unfortunate no matter what the outcome is.  The Bankruptcy Court will ultimately make a choice that truly could greatly affect the health and welfare of the retired employees of Stockton.  At the same time it will set a precedent for future municipal bankruptcy cases regarding the treatment of deferred compensation and retirement benefits.  Stockton needs to become financially viable again by cutting costs.  Retired employees and other creditors were unwilling to make deep enough cuts outside of bankruptcy, so now they find themselves at the expensive process of dealing with it in bankruptcy court.

How Can Credit Card Companies Charge High Interest Rates?

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You may never have heard about state usury laws.  Each state in the United States has usury laws limiting the amount in interest that can be charged in various financial transactions.  Every state can control by law the amount of interest that can be charged when money or credit is extended.  The California Code and a number of subsections govern the interest rates that can be charged in California.  Personal loans and consumer loans in California have a usury interest rate attached to these loans of 10%.  The interest rate established for non-consumer loans is 5% greater than the interest rate duly established by the Federal Reserve Bank of San Francisco.

So How Can Credit Card Companies Charge Such High Interest Rates?

Again, so how can credit card companies charge such high interest rates?  The answer is the need for jobs, the Supremacy Clause, capitalism, and Marquette National Bank v. First of Omaha Corporation, 439 U.S. 299 (1978).  This is a 1978 Supreme Court of the United States (SCOTUS) case that led to the change in how much you pay for interest on credit card debt.  SCOTUS more or less ruled that First Omaha Corporation could charge citizens of other states the allowed interest rates for the state where First Omaha was located in, not the state interest rate where the customer resides.  12 U.S.C. 85 authorizes a national banking association “to charge on any loan” interest at the rate allowed by the laws of the State “where the bank is located. Not where the customer is located.  This means that First Omaha Corporation, located in the state of Nebraska, could charge customers in other states the higher interest rate Nebraska state law allowed, and not be limited to the interest rate in the state the customers lived.  This probably created millions of bankruptcy cases for bankruptcy attorneys to file since 1978.  How many less bankruptcy cases would there be if interest rates were capped at 10%?

Okay, so how did this lead to 29% interest rates when most state usury laws protect us from such high interest rates?  Well, this is where the need for jobs and capitalism took over.  Guess what happened next?  Certain states really needed jobs for their residents.  The state legislatures of these certain states basically did away with their state usury laws to entice banks that issue loans and credit cards to set up shop there and give their residents jobs.  It worked really well.  South Dakota is home to thousands of jobs as of a result because banks flocked there to set up shop and charge higher interest rates to customers in other states now that South Dakota had favorable usury laws.  South Dakota is not the only state that did this.  A few other states repealed their state usury laws limiting interest rates to attract banks too.  To be blunt about it a few thousands jobs were created resulting in millions of citizens of the United States legally being charged interest rates of 20% or more on their credit cards.  Was it worth creating millions in indebtedness for the many for a few states to generate a mere few thousand jobs for their residents?  No, usury laws exist for a reason and usury laws exist to protect the poor and vulnerable from lenders with unfair bargaining power.

Fun With Numbers

Do you really know what 28% interest on a revolving credit account looks like or how the interest accrues?  We shall no play with some numbers to get a better idea. 

Example No. 1:  The credit card has a credit limit of $10,000 and the interest rate is only 7%.  The balance is $7,500 and more or less the minimum payment is made each month and seek to payoff the total in 36 months or three years.  $7,500 paid over 36 months at 7% interest creates $835 in total interest paid (11% of total borrowed).  $7,500 paid over 36 months at 14% interest creates $1,731 in total interest paid (23% of total borrowed).  $7,500 paid over 36 months at 28% interest creates $3,673 in total interest paid (49% of  total borrowed).  The difference between 7% and 28% over the long-term is nigh and day.  People spend hours and hours shopping to find the best deal then make the purchase with their 28% interest credit card thinking they got a good deal.  If you payoff the balance each month yes.  If you carry a balance for years you are paying 23% – 49% more for your purchases that you bought on sale.  

The fake news is that most bankruptcy cases are caused by medical debts or other circumstances outside of a persons control.  That is not true.  While there are plenty of bankruptcy filings due to uncontrollable horrible circumstances the majority are due to credit card debt and consumer spending.  Credit card debts and the high  interest rates are the most common reason our bankruptcy clients speak of when explaining their reasons for choosing to file for bankruptcy protection.