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Louisiana Legal Blog

How bankruptcy impacts a person's ability to borrow

There were more than 700,000 personal bankruptcies filed in 2017 according to a study done by LendingTree. Medical and credit card debt were among the most common reasons why Louisiana residents filed for protection from creditors. Although bankruptcy can help a person overcome a debt, it can also cause credit problems in the short-term. For instance, someone who is a year removed from bankruptcy will be charged an interest rate of 10.8 percent.

A borrower who has no bankruptcy on his or her credit report would be charged a rate of just 7.8 percent. This translates to an extra $2,171 in interest on a $15,000 loan paid over 60 months. Those who take out a personal loan within a year of filing for bankruptcy will pay $1,427 more in interest on a $10,000 balance paid off over three years.

The reason credit card rates are increasing

For Louisiana residents and others with credit card debt, an increase in the federal funds rate can lead to higher bills. This is because the fed funds rate and credit card interest rates are linked together. In March 2018, the Federal Reserve increased this rate to 1.75 percent. While other debts can be impacted by changes to this rate, credit card balances are the most likely to be subject to variable rates.

As of February 2018, the average interest rate for a credit card issued by a bank increased to 15.32 percent from 14.99 percent in November 2017. The reason why the funds rate rises periodically is that the Fed wants to contain inflation. Inflation tends to be more of a concern during good economic times when job creation is strong and wages increase.

Should I work with a debt consolidation company?

You may have seen their ads on TV or in your social media feeds. Debt consolidation companies often promise to do many of the same things bankruptcy does: help you manage overwhelming debt, simplify your monthly payments, and put you on the road to financial recovery.

This may sound just like the solution you need. But what’s the catch? Is debt consolidation really a good idea?

Bankruptcy might discharge some tax debts under narrow conditions

Bankruptcy might offer relief to people overwhelmed by multiple debts in Louisiana, but tax debts often do not qualify for discharge. Bankruptcy laws, however, contain numerous exceptions to general rules, and certain circumstances could make the discharge of a tax debt possible.

Timing matters a great deal. People cannot toss current tax bills into their bankruptcy filings. In general, a tax debt needs to be documented on tax returns that are at least two or three years old. A tax bill assessed a minimum of 240 days before a bankruptcy filing might also qualify for discharge. Any taxes that arose from the filing of fraudulent or frivolous tax returns will not meet requirements for discharge.

Charity care from hospitals could help people avoid medical debt

People in Louisiana confronted by high medical bills should investigate whether their hospitals offer assistance to people unable to pay. Some hospitals that accept government funding have an obligation to set up charity care funds. They usually do not promote the programs, but hospitals have billions of dollars available nationwide to help people challenged by high medical costs. According to the American Hospital Association, U.S. hospitals offered $38 billion in financial assistance to patients in 2016.

To qualify for assistance, people should ask about charity care funds as soon as possible and definitely before a medical bill goes into collections. Once collection agencies acquire medical bills, the debtors have likely missed the chance to take advantage of charity care, if available.

Interest rate increase could mean more debt for some

According to at least one nonprofit credit counseling service, the number of people seeking help with debt has increased. Some Louisiana consumers could be among those who have mounting debt. Unfortunately, Americans have a pattern of feeling good when the economy is strong and loading up on debt that they then struggle to pay off during leaner times.

In 2017, spending on credit cards increased more than 9 percent to reach a total of $3.5 trillion. In the last quarter of 2017, household debt climbed at the highest rate in a decade.

Rate hikes may make debts harder to pay

In 2017, people throughout the country added $92 billion in credit card debt. That is twice the annual average since the end of the Great Recession. For Louisiana cardholders, recent rate hike increases may have be harder to take even if the raises are only .25 point each. According to WalletHub, there have been four years in the past 30 that saw credit card debt increase by that much.

In each of those years, the charge-off rate increased. Lenders base their willingness to extend credit in part because of this rate. However, as debt levels and interest rates rise, it may make it harder for individuals to handle their payments. The average household has $8,600 in debt, which is about $138 more than WalletHub says is sustainable. According to Bankrate, the average credit card interest rate is 16.8 percent.

What debt collectors can and cannot do

Most people do not fall into debt on purpose - despite what debt collectors would have you believe. When you are dealing with overwhelming debt, the constant calls and letters from creditors do not help. Instead, they just pile on the stress you already feel.

Believe it or not, there is a silver lining to this situation. Debt collection agencies are bound by specific rules that govern how they attempt to collect on overdue payments. If they don't follow these rules, they can be held legally and financially responsible for harassment.

Bankruptcy's impact on credit is not permanent

Many people in Louisiana find it impossible to make ends meet due to the overwhelming impact of substantial debt. As fees and interest charges mount, it can seem impossible to escape the burden of debt. However, filing for bankruptcy can be an option that allows people to find debt relief, pay off their debts and make their way toward a better financial future. However, a number of widely held beliefs about bankruptcy may inhibit some people from making the decision to file.

Filing for bankruptcy is a serious action that can cause someone's credit score to drop by 200 points. However, the impact on a person's credit score does not last forever. 

Credit card debt creeps near 2007 levels

Residents throughout Louisiana and the rest of the United States have racked up a cumulative credit card debt of more than $1 trillion. In 2017, Americans accrued $92.2 billion in additional debt, which was the most since 2007. It also represents an increase in debt from $43 billion in 2015 and $87 billion in 2016. This surge may be attributed to the fact that banks have loosened their guidelines since the Great Recession as charge-off rates have declined.

As a result, delinquency rates have increased to 7.5 percent. This may be a sign that debtors should make paying their balances off a priority. One of the major reasons why Americans have made greater use of their credit cards is because of medical debt. In 2015, they paid $338 billion in the form of copays, deductibles and other out-of-pocket costs. Of those surveyed by WalletHub, 62.3 percent said that their debt was related at least in part to medical spending.