The notion of credit and the notion of interest are seemingly inextricably linked. Something given or advanced to a borrower on credit carries a price with it. This price is the interest rate on the asset advanced. Interest rates function as price tags on funds and money, letting investors know where their money will make the most profit. A higher interest rate indicates low liquidity, and consequently the chance of increased profits results in the high interest rate bringing in money.
For consumer borrowers, credit can become a nightmare. Credit card debt is very bad in the United States, over $700 billion at the end of 2009. If borrowers are saddled with additional types of debt, such as mortgage debt, the debt burden can quickly become very significant. If the borrower files for bankruptcy, two things can happen depending on the type of bankruptcy filed.
In chapter 7, the borrowers debts are discharged after all non-exempt assets are liquidated in order to repay creditors. In chapter 13, the borrower agrees to stick to a repayment plan, which can last as long as five years.
After bankruptcy, the borrower's credit rating will be wrecked. Since lenders use credit rating to determine the interest rate at which they will advance money, this means that the borrower will be faced with very high interest rates until their credit is repaired.
In any case, the borrower will have to slim their financial life down considerably in order to get their credit back on track. Cutting costs and expenses from their budget will help maintain some extra cash reserves, which can increase the borrower's ability to repair their credit rating. If they held onto their house through chapter 13, keeping up the mortgage payments is a surefire way to improve their credit rating over time.
The trick to dealing with high interest rates is for the debtor to make sure they qualify for lower rates. If they are looking for a mortgage, for instance, and interest rates are too high, their best options is simply to wait. How long they must wait is determined by how long they have to wait in order to save enough money to make a down payment of at least ten percent, preferably twenty.
A down payment this large will help lenders feel comfortable in lowering the borrower's interest rate. This lets the borrower take advantage of a lower rate even if they are dealing with post-bankruptcy finance blues. From the lender's perspective, this is a situation that is beneficial to both parties. The lender gets twenty percent of the loan back before they have even advanced it, and the borrower gets a lower interest rate.
Since interest rates represent the price of money at a given bank or financial institution, lower interest rates mean more money and higher interest rates mean less money. For borrowers who have been through a bankruptcy, higher interest rates mean less credit for them. They can make up for this unfavorable circumstance by saving enough money to assure the lender of credit without actually having a good credit rating.
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If you live in Alabama, Florida, Missouri, New York or Wyoming, please click here for additional information.
By an Act of Congress and the President of the United States, we are a federal Debt Relief Agency. Attorneys and/or law firms promoted through this Web site are also federally designated Debt Relief Agencies. They help people file for relief under the U.S. Bankruptcy Code. Disclosures Required Under the U.S. Bankruptcy Code.