Grace Periods Bankrupt You!

25 Oct Grace Periods Bankrupt You!

Photo Credit: Flickr/Tax Credits

Do you know when your mortgage or car payments are due? If your answer is “the last day of the grace period on my loan” then you are on your way to bankruptcy.

I often ask my clients how many payments are they behind on their house or car. I rarely get an exact answer, usually something like “2-3 payments…” with a sheepish look. Experienced bankruptcy lawyers know this means three and likely more payments are late right now.

It’s human nature – why pay until the last minute, right? Leave more in your pocket for longer. Who pays bills early?

A “grace period” sounds good. It sounds almost holy but it just means one thing — you are late but we aren’t charging you more …not just yet. A “grace period” is really a trap designed to increase your effective interest rate — and gamble your house or car in the process.

I know plenty of folks who will refinance their mortgages to save 1% on their rates but think nothing of waiting until the very last “grace period” day to pay. And often pay $10-20 to make a telephone payment. And sometimes run even later and owe a late fee.

Most of these extra charges, and the late fee, are pure profit for your lender. So rather than paying, say, 6% for your mortgage, you end up actually paying closer to 8-10% in the long run.

Worse, if you are running late certain things tend to happen. Mortgage lenders often begin the foreclosure process if you are 90-days behind. (They can start earlier if you are behind of course.) Not “90-days from the end of the grace period.” And car lenders often work the same way – 90-days behind (or less) gets the repo man sent looking for your car. So you could end up losing your stuff or having to pay a lot more to stop these actions just because you forget that the due date is the due date.

If you haven’t already thought about bankruptcy by that point, you should be. And if you aren’t there yet: Remember to pay the most important debts first, even if it leaves other smaller bills unpaid. I call that feeding the bear so he doesn’t eat you!

And if you are already in bankruptcy, like a Chapter 13 case, then you probably should not even think about the grace period — your account is likely to be monitored more closely and lateness is punished faster.

Financially, sure, the late fee doesn’t seem like a big deal. It may be under $100 in many cases. But think about how it really begins to count against you if things are tight. If you pay $600 in late fees each year, that alone probably would cover a car payment. (Or at least your growing cell phone bill!)

Getting to the point where the check is in the mail before the due date — not just before the grace period deadline — can be a small but crucial step in getting back into control of your life.

 

Photo Credit: Flickr/Tax Credits

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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