How Do Post-Judgment Interest Rates Affect Your Bankruptcy?
When a creditor obtains a judgment against you in court, the amount you owe may not be limited to the initial judgment amount. Post-judgment interest can accrue on the debt, increasing the total you owe over time. This interest is set by law and is meant to compensate creditors for the time it takes to collect the debt. Consulting a Los Angeles bankruptcy attorney can help you understand how post-judgment interest works is crucial, especially if you’re considering bankruptcy as an option to manage your financial obligations.
What Is Post-Judgment Interest?
Post-judgment interest is the interest that accrues on the amount of a court judgment from the date the judgment is entered until the debt is paid in full. The rate of post-judgment interest varies by jurisdiction and the type of debt involved. In many states, the rate is set by state law, while federal judgments are subject to federal post-judgment interest rates.
The purpose of post-judgment interest is to ensure that creditors are compensated for delays in receiving payment. It can be a significant amount, especially for large judgments or if the judgment remains unpaid for an extended period.
How Does Post-Judgment Interest Affect Bankruptcy?
When you file for bankruptcy, the goal is often to discharge or restructure your debts. However, post-judgment interest complicates this process in several ways:
1. Accumulation of Interest Before Filing
If a judgment is entered against you and remains unpaid, post-judgment interest will continue to accumulate until you file for bankruptcy. This means that the total amount you owe at the time of filing may be higher than the original judgment amount. It’s important to understand that post-judgment interest is typically added to the total debt listed in your bankruptcy petition.
For example, if a creditor obtained a judgment against you for $10,000 and post-judgment interest accumulates at a rate of 6% per year, the debt could grow significantly before you file for bankruptcy. Delaying a bankruptcy filing may result in higher amounts owed due to this accrued interest.
2. Dischargeability of Post-Judgment Interest
In bankruptcy, the dischargeability of post-judgment interest depends on the type of debt. If the underlying debt is dischargeable, the post-judgment interest attached to that debt is typically discharged as well. For example, if the court judgment was for credit card debt or medical bills, filing for Chapter 7 bankruptcy may eliminate both the principal amount and any post-judgment interest that has accrued.
However, if the underlying debt is non-dischargeable, such as certain tax obligations, student loans, or debts arising from fraud or criminal activity, then the post-judgment interest on those debts is also non-dischargeable. This means you will remain liable for both the principal debt and any accrued interest, even after bankruptcy.
3. Post-Judgment Interest in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, post-judgment interest is treated differently. Chapter 13 allows debtors to restructure and repay their debts over three to five years. During this repayment period, the automatic stay halts most collection efforts, including the accrual of post-judgment interest on certain debts.
However, in some cases, the court may allow post-judgment interest to continue accruing on specific debts during the repayment period. Whether post-judgment interest is included in your Chapter 13 repayment plan depends on the type of debt and the specific circumstances of your case. It’s essential to work with a bankruptcy attorney to understand how your plan will be structured and whether interest will continue to accrue.
Key Factors to Consider with Post-Judgment Interest in Bankruptcy
1. Type of Debt
The dischargeability of both the principal debt and post-judgment interest largely depends on the nature of the debt. Unsecured debts, such as credit card bills, personal loans, and medical bills, are typically dischargeable in Chapter 7, along with any post-judgment interest. However, secured debts and priority debts, such as certain tax obligations or debts related to criminal fines, may not be fully dischargeable, meaning post-judgment interest may also remain.
2. State vs. Federal Judgments
Post-judgment interest rates can vary significantly depending on whether the judgment is governed by state law or federal law. It’s essential to understand which set of rules applies to your case, as federal judgments often have different interest rates and rules than state-level judgments. The specifics of your situation may impact the total amount you owe and your options in bankruptcy.
3. Impact on Repayment Plans
If you’re filing for Chapter 13 bankruptcy, the presence of post-judgment interest may affect the terms of your repayment plan. Your plan may need to account for the accrued interest on certain types of debts. This could result in higher monthly payments or a longer repayment period. It’s crucial to work with a bankruptcy attorney who can help structure a repayment plan that addresses post-judgment interest effectively.
Benefits of Addressing Post-Judgment Interest Through Bankruptcy
Bankruptcy provides several benefits for individuals struggling with debts that have grown due to post-judgment interest:
- Stopping Interest Accumulation: Filing for bankruptcy triggers an automatic stay that halts most collection activities, including the accrual of interest on eligible debts. This can provide immediate relief and prevent the debt from growing further.
- Discharging Eligible Debts: In Chapter 7 bankruptcy, if the underlying debt is dischargeable, you can eliminate not only the principal amount but also the post-judgment interest that has accrued.
- Reorganizing Debts: In Chapter 13 bankruptcy, you have the opportunity to reorganize your debts into a manageable repayment plan. While not all post-judgment interest may be eliminated, the structured plan can provide stability and a clear path to resolving your financial challenges.
Contact Wadhwani & Shanfeld
Post-judgment interest can significantly impact the total amount you owe, making it challenging to regain financial stability. Understanding how post-judgment interest affects bankruptcy is crucial for managing your debt effectively. Whether you’re considering Chapter 7 or Chapter 13 bankruptcy, working with an experienced bankruptcy attorney can help you assess your situation, stop the accumulation of interest, and find the best solution for your financial future.
If you’re dealing with mounting post-judgment interest and want to explore your options, contact Wadhwani & Shanfeld today. Our experienced attorneys can help you understand your rights and guide you through the bankruptcy process to achieve the financial relief you need. Reach out to us for a consultation and take the first step towards a fresh start.
Sources:
cacd.uscourts.gov/attorneys/post-judgment-interest-rates
uscourts.gov/services-forms/fees/post-judgment-interest-rate
