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Why File for NJ Bankruptcy When Interest Rates are High?

When interest rates rise and inflation trends upward, it is actually an excellent time to file for Chapter 13 bankruptcy if you are struggling with your monthly bills.

On Behalf of Veitengruber Law | Apr 24,2023

When interest rates rise and inflation trends upward, it is actually an excellent time to file for Chapter 13 bankruptcy. Chapter 13 bankruptcy is the reorganization of your debts into a more realistic repayment plan over a period of three to five years. This restructuring will simplify your debts and organize payments into one monthly plan under a fixed interest rate. Often under Chapter 13 bankruptcy, you will not be obligated to pay back all of your debts. Some unpaid debts will often be forgiven or discharged. Here are three reasons why now is a great time to file for Chapter 13 bankruptcy.

1. Lock in a Lower Interest Rate

A Chapter 13 repayment plan will allow you to lock in a fixed rate that is significantly lower than the interest rate on the original loan. An in-plan fixed rate will not change with inflation or interest-rate increases. Even if your previous loans had very high-interest rates, any debt in your bankruptcy repayment plan would fall under your new, lower rate. For example, if your car loan interest rate is 18%, but your bankruptcy repayment plan rate is 8%, you can ignore the 18% interest rate on the original loan. This can help you save money since you will not have to spend so much of your income on paying down high interest.

2.   Pay Less Back

When you pay back debts under high-interest rates, it can feel like you are running in place. You keep paying, but your debt doesn't seem to decrease—and maybe it even increases. Throwing the minimum monthly payment at high-interest debt means you will pay much more over time than you otherwise would. With Chapter 13, you almost always pay less on your debts than you would if you tried to pay off the debt without bankruptcy. Not only will you benefit from the lower interest rate, but your debts will be discharged at the end of the three or five-year repayment plan. The amount of debt you have to pay back in bankruptcy will depend on your income level, the value of your assets, and how much debt you have.

3.   Protect Your Home

Chapter 13 can help you protect and keep your home if you are facing a home foreclosure due to non-payment. Inflation and rising interest rates may make it more challenging to make your monthly mortgage payments. Especially if you have a variable interest rate on your mortgage, these high rates could effectively price you out of being able to own your home. If you get into the red on your mortgage payments, Chapter 13 will allow you to enter the automatic stay period. You can set up a repayment plan for your past-due mortgage payments during this time. You can keep your home as long as you can prove you can make the (new) monthly payments. Chapter 13 can also protect you from higher interest rates typically seen with refinancing or HOA loans. In fact, many homeowners utilize Chapter 13 bankruptcy to dig themselves out of second or third mortgages and the high-interest rates that go with them.

Advice for Dealing with High-Interest Rates After Chapter 13 Bankruptcy

While Chapter 13 bankruptcy is an excellent option for those facing a financial crisis during times of high interest, there are some drawbacks you need to be aware of. Filing Chapter 13 will negatively affect your credit score, which can make it more challenging to get approved for loans with desirable low-interest rates. Your bankruptcy will be listed on your credit report for seven years. During that time, it may be difficult to secure a loan at all, much less a loan with a good interest rate.

It is not impossible, however, to receive approval for a loan with an attractive interest rate even a few years after you file for bankruptcy. You can increase your opportunity of securing a desirable loan by focusing on repairing your credit score after bankruptcy. Here are a few recommendations to improve your score after you have filed for bankruptcy:

1.   Keep Your DTI-Ratio Low

Your debt-to-income (DTI) ratio is the percent of available credit you currently use. Most experts suggest keeping your DTI under 32%. After bankruptcy, keeping your DTI ratio as low as possible is wise. You should avoid adding any debts in the years immediately following a Chapter 13 bankruptcy. This will go a long way to increasing your credit score.

2.   Check Your Credit Score Regularly

It is important to consistently check your credit score and your credit report to ensure your report is accurate. Your report should reflect your bankruptcy, and you will see how the bankruptcy affects your credit. Once you have finished the repayment plan and your remaining debt is discharged, your credit report should no longer include those debts. If those debts remain on your credit report after discharge, you will need to follow up with the credit reporting agencies until they are removed. Otherwise, they can continue to negatively affect your credit rating.

3.   Make On-Time Payments Every Time

Your DTI ratio is the biggest factor impacting your credit score, but on-time payments are a very close second. Even one missed payment can negatively impact your credit score. Regularly making on-time and in-full payments will show a streak of good financial health and open the door for more financial opportunities—like better interest rates.

4. Get a Secured Credit Card

Credit card debt is a big reason folks end up getting into financial trouble and filing for bankruptcy in the first place. So it can seem counterintuitive to ask those same people to work on repairing their credit by using more credit cards. However, a secured credit card is a great, low-risk way to rebuild your credit and strengthen your score. You give the credit card company a specific amount of money, and then you can borrow it when needed. This way, you are borrowing against yourself. If you continue making on-time payments while using this card, your credit score will increase over time.

Many Americans are currently facing extreme financial stress as interest rates increase and inflation pushes prices higher. Veitengruber Law understands how hopeless it can feel when you cannot afford to pay your bills. We can help. George Veitengruber is an experienced bankruptcy attorney with years of practice helping New Jersey residents file for bankruptcy and become debt-free. Call Veitengruber Law today for a free legal consultation if you are considering bankruptcy. We are ready to offer compassionate, seasoned support to get you on the path to financial health.



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