Do penalties and interest keep accruing during a bankruptcy while wating for it to be finalized?
Bankruptcy is a powerful financial tool that can help people get out of a difficult financial situation where they simply cannot afford to make even minimum monthly payments on their home, cars, credit cards, and other debt. While bankruptcy can help you reduce or eliminate your debt, there are certain expenses and fees associated with bankruptcy that you still must pay.
This article provides an overview of the expenses and fees you should consider before declaring bankruptcy. Note that the actual amount of expenses and fees you have to pay will vary depending on your situation and the state where you live.
Expenses and Fees Before and During Bankruptcy
There are several types of expenses and fees that you will incur between when you declare bankruptcy and when your bankruptcy case is finalized by the court.
Attorney fees – It is typically wise to use a bankruptcy attorney when making a decision to declare bankruptcy and to carry out the process if bankruptcy is the route you choose to utilize. A bankruptcy attorney will charge you a fee to represent you in the bankruptcy. However, this fee is generally reasonable as compared to the time and expense of handling a bankruptcy yourself, especially in the event your bankruptcy case is dismissed because of an error made in the filing process.
Credit counseling costs – Before you can declare Chapter 7 or Chapter 13 bankruptcy, you must meet with a credit counseling organization to determine if there is a way to address your financial situation without resorting to bankruptcy. These credit counseling organization charge a fee for the use of their services.
Conversion costs – There are two primary types of bankruptcy used by individuals. Chapter 7 bankruptcy allows individuals to receive a total discharge or elimination of many types of debt. Chapter 13 bankruptcy allows individuals to restructure their debt into a payment plan that stretches over three to five years.
In the event you declare one type of bankruptcy and then choose to change to the other type of bankruptcy, you must pay a conversion fee in order to make the change. Conversion typically arises when an individual declares Chapter 13 bankruptcy originally and then experiences additional financial hardship that requires them to use Chapter 7 bankruptcy.
Penalties and Interest – The ability for a creditor to accrue interest and assess penalties to you after you declare bankruptcy is dependent on the type of debt the creditor holds. If the creditor holds unsecured debt—that is, debt that is not tied to a specific piece of property—the creditor may not charge you penalties and interest while your bankruptcy case is finalized. A common type of unsecured debt is credit card debt.
If the creditor holds secured debt—that is, debt that is tied to a specific piece of property—the creditor may be able to charge you penalties and interest during the bankruptcy depending on the value of the asset as compared to the amount of debt owed. If the value of the asset is more than the amount of the debt owed plus the amount of interest being charged by the creditor, the creditor may charge the interest. If the value of the asset is more than the amount of the debt owed plus any interest and penalty, and assuming the creditor has a reasonable basis for charging the additional penalty, the creditor may charge the penalty.
However, depending on your situation, you may not have to pay the additional interest and fees assessed by the creditor. Typically, the interest and fees are ultimately included in the bankruptcy, and the creditor will receive payment on them only when your assets are liquidated in order to distribute monies to the creditors.
Costs After Declaring Bankruptcy
The costs you must pay after you declare bankruptcy will depend largely on the type of bankruptcy you use.
For Chapter 7 bankruptcy, you will not have to make any further principle or interest payments on any debts included in the bankruptcy. However, for debts that are not included in the bankruptcy, such as school loans, which cannot be discharged through bankruptcy, you must continue to make your regular scheduled payments.
For Chapter 13 bankruptcy, you must make scheduled payments to the bankruptcy trustee for the three to five year term agreed upon in your bankruptcy. The bankruptcy trustee will distribute that money to the appropriate creditors per the bankruptcy plan.
The creditors included in the bankruptcy are not permitted to charge you penalties or interest on the remaining balance owed under the Chapter 13 bankruptcy plan. As with a Chapter 7 bankruptcy, for any debts that were not included in the bankruptcy, you must also continue to make your regular payments.
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Bankruptcy is not wrong for those who have made an honest effort to pay creditors.