01 May Interest Paid on Credit Card Debt in Chapter 13? Not in the 11th Circuit
Next to emergency threats like foreclosure or repossession, unmanageable high interest credit card debt functions as perhaps the most common problem that drives people into bankruptcy, especially in the Atlanta area (Atlanta cases are subject to 11th Circuit law case law). Credit card payment calculators will quickly reveal that if you make minimum payments (1% of balance) on a $10,000 credit card balance that is subject to a 25% finance charge, you will need almost 30 years to pay off your debt and your total payments will exceed $30,000.
If you have multiple credit cards, or if any of your credit cards are accruing interest at “penalty” rates, escape from credit card purgatory is unlikely unless you are able to throw substantial lump sum payments towards your account, or unless you are able to negotiate significant concessions with your lenders.
Chapter 7 bankruptcy can discharge (wipe out) your credit card debt, but what if you do not qualify for a Chapter 7 liquidation. Perhaps your income is too high for the means test, or perhaps you possess non-exempt equity that would be at risk in a Ch. 7.
In most cases, Chapter 13 does not offer complete discharge of credit card debt but it can offer:
- anywhere from a 1% to a 100% payout of unsecured debt like credit cards
- payment of unsecured debt without accruing interest
Note that I can only speak to the law as I understand it in the 11th Circuit – courts where you file may have different interpretations which is why you should contact a lawyer for advice about your specific situation and never rely on websites or blogs for legal advice.
A recent decision by a Bankruptcy Judge in the Northern District of Georgia offers a clear and thorough analysis of the rules regarding credit card finance charges in 11th Circuit Chapter 13 cases. In the case of In re Stewart-Harrell, Judge Wendy Hagenau denied the Chapter 13 trustee’s objection to confirmation of a 100% Chapter 13 plan that did not include payment of interest to unsecured creditors, even when the debtor had sufficient disposable income to pay finance charges and time left in her proposed plan to pay such additions.
Judge Hagenau concluded that in the 11th Circuit, Section 1325(b)(1) required the Court to make a determination about the value of claims as of the date of filing. Including interest in these calculations, reasoned the judge, would be akin to asking the court to make a present value calculation of the value of the credit card claims, and would result in unsecured creditors receiving more than they would in a Chapter 7 liquidation.
I suspect that the judge recognized that allowing interest on unsecured claims like credit card debt would make many Chapter 13 case non-feasible and would put bankruptcy judges in the undesirable business of ruling on APR rates and monthly payments.
So, at least in the Northern District of Georgia, I feel comfortable advising prospective Chapter 13 client that irrespective of other issues inherent to a bankruptcy reorganization, one significant benefit to Chapter 13 is the elimination of accruing finance charges to credit card debt.
by Jonathan Ginsberg, Atlanta bankruptcy lawyer
Jonathan Ginsberg, Esq.
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