What is the long term cost of a Chapter 7?

[JackBondLove]

I was wondering about this. It seems that if one were to try and figure out a net cost of the Chapter 7 filing - mainly the attorney's fee and any present discounted cost of not being able to secure loans in the future (or securing them, but at a higher cost that would be without have a Chapter 7 on the credit report, etc.) - what would that cost be. It is pretty easy to calculate the benefit of Chapter 7 - i.e., present unsecured debts discharged. Obviously, it is in one's best interest to file Chapter 7 if the benefit is higher than the cost. Of course, this analysis is only an option if someone has access to funding or income to actually pay off the debt.

For myself, I have tried to calculate what the discounted cost of having to pay extra interest for a house note years down the line. Using the figure of 1/2% extra interest for a home mortgage of $150K and an opportunity cost (i.e., expected gain of investments) of 8%, I come up with a figure of about $10K max. Perhaps a little more should be added if considering car of other consumer loans. Thus, if it seems that a Chapter 7 filing would wipe out $15K in debt (i.e., over and above any loss incurred form the trustee confiscating any assets), then it would be worth it. Otherwise, it would be worth it just to find a way to pay off the debt and not do a Chapter 7.

[blessed]

That makes enough sense.

But what about the risk of NOT filing? If you're living paycheck to paycheck making the minimum payments on time each month you risk an emergency or other life event that needs access to a savings account. A lot of us just don't have enough income to save 6 months worth of living expenses (if we could we most likely wouldn't be in this spot!). So you use a CC to bail yourself out, deepening the debt and lengthening the time to make those high interest payments.

Also, if you've got high revolving balances your credit score will eventually stay the same or even go down a little, so you still risk less than optimum interest rates on new lines of credit (mortgage or auto).

[nerves]

I could be off the mark on this but my understanding is that after two years, a mortgage has to treat you the same as they treat someone without a bk on file when it comes to interest rate. If you have a low score, you pay higher interest rate and vise versa. I see of the posts with others that have received cc and their interest rates are lower than what I was paying pre bk. Again, I think it has to do with your credit score. As for an auto loan, I was treated the same at my new bank as someone who didn't have a bk - the rate was based on my credit score. To show a comparison, I got a approved for a loan at a credit union for a lower interest rate than my mother who has a higher credit score and no bk. Hers is with a different credit union. How old the vehicle is and terms also play into the interest rate. I guess some of it is who you decide to do business with. In this world, you have to be a smart consumer and read all the fine print, etc.

Now, insurance is another issue. Depending on the state and company, some will guage you after a bk just because you have a bk regardless of your score. I am just waiting to see what happens to my insurance rates.....home and vehicles.

I am sure there are other things that I will pay the price for due to bk, but I always have the right to say thanks but no thanks.

[msm859]

Good question. I have thought the same thing. Especially when compared to a debt management plan supported by the cc companies. My guess is if you have any serious amount of debt BK is better for you from an economic standpoint.

[researchmode]

Possible job discrimination if you work with money or for the government is another that I've heard.

We figured out that if some miracle happened and we could pay both our debt and our student loans (both of which will be due later this year) we'd end up paying off our consumer unsecured debt in just over 10 years. Then we'd pay off his student loan by the time he's almost 60. (He's currently 39.)

If I file, we discharge about $26k in debt. We'd pay off both of our SLs in 2011. We'd pay off our mortgage within the following ten years.

We are saving a TON of interest by doing it that way. 10 years of interest on 60,000 of student loans and 10 years of interest in the remainder of a 130k mortgage. That's a LOT of money.

If I need a new car in the future I'll buy a $500 beater if that's all I can afford until I have enough saved for the $2000 car and so forth and so on. Maybe that's not the way it will play out, but we're going to try not to take out any credit that can't be paid off immediately.


Best,
ResearchMode
A mom on the Gulf Coast of FL in the process of filing CH7 and blogging about it. (link removed)