Category Archives: Why File a Chapter 13 Bankruptcy Case

How Can 1,000 Percent Interest Be Legal?

By

Interest rates are capturing my attention more and more these days. One human being pays less than 3 percent interest to borrow money while another human being agrees to pay 1,000 percent interest. Loan sharking is perfectly legal again. Just look at payday loans, cash advances and the title loan lending industries. They are horribly expensive to borrow money from and I can tell you for a fact they will violate the Fair Debt Collections Practices Act when trying to collect for nonpayment. Our government is asleep at the wheel on this issue. Why are we allowing people to be charged unconscionably high interest rates to borrow money that were intended to be illegal? Society as a whole deemed charging such high interest rates bad for society and passed usury laws to limit how much interest can be charged. The theory is that those in financial stress need to be protected from themselves to a certain extent. They may not be thinking clearly given the stress they are under which makes them ripe to be taken advantage of. Unfortunately there are exceptions to exceptions in most states that allow this horrible interest rates.

What A 132 Percent Interest Loan Looks Like Other Than Just Horrible

The 132 percent interest loan was the result of a title loan. The borrower turns over to the lender their pink slip to their vehicle and the borrower is given a loan with the vehicle as collateral. This is a non-purchase money security interest loan for those keeping score out there that know what a PMSI loan is. If not, please Google “purchase money security interest” to find out why PMSI is a good thing for you and your finances, especially if you own real property (house or land) in California. Given the loan is secured by collateral you would think the loan is not a high risk loan and the interest rate would be reasonable. The 132 percent interest says otherwise though. So this 132 percent interest loan was for the principal balance of $18,000 and a term of three years or 36 months. The collateral was a vehicle worth good money still, a Toyota Sequoia. In addition to the 132 percent interest there was a prepaid finance charge to be paid upfront of $1,800. So this person actually only borrowed $16,200 since they had to pay $1,800 upfront. The kicker is they are paying interest on the full $18,000. Horrible.

The monthly loan payment is $2,046.19. What? That is a mortgage payment not a vehicle loan payment. Each year the borrower will pay $24,554.28 to the lender for the original borrowed $16,200. The total amount due on the loan if each payment were made during the three years is $73,662.84. I have no idea why the borrower needed $16,200 so bad they were willing to pay it back 4 times over and I did not ask. All I know is this loan should be illegal.

California Law And Title Loans

California is considered a loophole state. This borrower would end up paying back the original $16,200 borrowed 4 times over. This is criminal and illegal right? Wrong. There are limits or caps on interest for title loans in California for loans of $2,500 or less. So what do title loan lenders do in California? They only do title loans in amounts above $2,500 so that the California Usury Laws do not apply. Nice. So when the title loan company employee wants you to add $500 to your title loan to bring the amount borrowed over $2,500 it is to allow the title loan company to charge you a higher interest rate. They are not looking out for your best interest.

The 132 Percent Loan Is Not Much Different Than Carrying A Balance On A Credit Card

Almost every one of our clients expresses some sort of guilt at some point in the process of filing for bankruptcy protection. Most of the time there is absolutely no reason to feel guilty. There is actually no loss of money by those discharged in the bankruptcy case. How you can that be you ask? If someone is discharging $30,000 in debts then someone or a company out there lost money. Nope. Wrong. Not a true. Most of our clients have been making payments for years and years before there is a problem or seek bankruptcy protection to legally discharge their debts. All that interest accrues and gets paid. So the principal borrowed gets paid back and what is left to pay is the ongoing interest fees from carrying a balance on the card each month. For example let us say you purchased a TV at Costco, a 60’ Samsung for $2,500 on your Discover Card with an interest rate of 20%. To pay off the debt in 12 months you would have to make a minimum payment of $232 a month for 12 months, total payments of $2,784. The credit card company only gets $284 in profits. A more likely scenario is repayment will take three years or more. If the balance of $2,500 with 20% in paid off in 48 months or four years the monthly payment will be around $77 a month, total payments of $3,696. There is about $1,196 in interest profit to be made and the principal amount borrowed? It was paid off on month 32. So if this person retains a bankruptcy attorney and files for bankruptcy protection after 32 months or more of making payments Discover Card will only have lost gross profits from an interest rate that used to be illegal.

The Good News Is There Is Another Loophole To Help Title Loan Borrowers

This is kind of good news. That bad news is the loophole is in filing a Chapter 13 bankruptcy case. When reorganizing debts in Chapter 13 bankruptcy lawyers can have their clients only payback the fair market value of the vehicle collateral. Not what is owed according to the loan terms. So in the example above if the borrowers Toyota Sequoia is only worth $12,000 in the real world that is what the borrower will pay at around 4.75% interest. So not only can we reduce the principal amount owed, but we can reduce the percentage rate too. Filing Chapter 13 would allow the borrower in our example to pay back the loan and get the pink slip back at $210 a month for 60 months, the length of the Chapter 13 Plan. What a massive savings and the lender actually loses nothing. The lender just loses the gross profits resulting from what should be an illegal interest rate to begin with.

Why File a Chapter 13 Bankruptcy Case?

By

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.