How Much Does it Cost to NOT File Bankruptcy?

“How much will it cost to file bankruptcy?” is one of the first questions we hear from many people who are struggling with debt in the Los Angeles area, and a popular search query and question in online forums. It’s understandable that people already worried about money are concerned about costs. But, this common question ignores other, potentially much larger costs.

Juggling Debt is Expensive

If you’re running behind on bills, you’ve probably noticed that every time you push back the credit card payment to keep the utilities on, you rack up a late fee. Most people notice those fees and feel anxious about them, but still need to prioritize the utility bill or rent payment or buying groceries.

Too few do the math. That means not only adding up what those late fees are costing on a monthly basis and over time, but also considering costs like increased interest on credit card debt. Late fees increase the balance you’re paying interest on, meaning more interest. Accumulated interest also increases the balance you’re paying interest on, meaning even more interest. And, your credit card company may raise your interest rate for future purchases if you fall behind on your payments…or even on your payments to someone else.

Debt Costs, Even When You’re Current

Imagine that at the start of 2023, you had just three debts:

• A credit card with an interest rate of 18% and a balance of $5,000
• A credit card with an interest rate of 23% and a balance of $3,500
• A car loan with a remaining balance of $18,000, an interest rate of 6%, and 48 remaining monthly payments

Your total outstanding debt is $26,500.

Now, imagine that you make the scheduled payment on your car loan each month, along with the minimum payment on each credit card, and don’t add any new charges.

If you make all of your payments on time and don’t incur any late fees or extra interest:

• You’ll pay $20,291 on your car loan across four years, including $2,291 in interest
• You’ll pay $11,923.09 on your first credit card across 273 months (more than 22 years), including $6,923.09 in interest
• You’ll pay $9554.12 on your second credit cards across 248 months (more than 20 years), including $6,054.12 in interest

If you continue making minimum payments, the total cost of your $26,500 in debt will be $41,768.21, and it will take more than two decades to pay off. More than 30% of the total amount you pay will be interest on credit card debt. Unless you make higher monthly payments, that’s the best case scenario. When you miss payments–even one or two here and there–debt can get a lot more expensive.

Just How Much Does Struggling with Debt Cost?

When you start to miss or make late payments, the cost of debt can escalate quickly. Imagine, for example, that you make your $102.08 minimum payment on credit card # 2 a week late. If it’s your first time being late, the maximum late fee your credit card company can charge you is $30. But just $35 of that payment went to principal. That means after the late fee is added, that $102.08 payment lowers your balance by just $5.

Late Fees Can Drive Balances in the Wrong Direction

If you’re late again the next month, the situation is even worse. Your minimum payment is very similar to last month’s, since your balance barely changed. But this time (depending on the terms of your credit card agreement), the company can charge you a $41 late fee. A payment of just over $100 will again reduce your balance by about $35. With a $41 late applied, your balance will go UP. If you continue to make only the minimum payment and make those payments late, that balance can just keep edging upward. Over time, you’re out hundreds or thousands of dollars in payments while your balance barely changes–or changes in the wrong direction.

Credit card late fees present such a problem for consumers that the federal Consumer Financial Protection Bureau is engaged in rulemaking that aims to significantly lower those fees.

Penalty Rates Can Increase Costs

Many credit card agreements include a provision that allows the company to raise your interest rate for various reasons, such as if you don’t make a payment for 60 days or if your bank returns your payment. There’s no legal limit on how high that penalty rate can be. 29.9% is a common cap in credit card agreements, but some may allow for higher rates.

That can make a big difference. For instance, jumping the credit card with the $3,500 balance in the example above from 23% to 29% would add more than $1,000 in interest and extend the payoff time by 10 months.

Whether, when, and how much the credit card issuer can raise your rate in these circumstances depends on a combination of your credit card agreement and federal law. For example, credit card companies must provide at least 45 days notice before a penalty rate applies, and generally can’t change your interest rate during the first 12 months after the account is opened.

Juggling Debt Rarely Works

The example above shows how even a relatively small amount of debt can be very expensive for those struggling to make timely payments or pay more than the minimum required. What’s worse is that picking and choosing which bills to pay each month, waiting for the annual tax refund to play catch-up, and making sure nothing gets “too far behind” doesn’t help most people in the long run.

Instead, what often happens is that people spend two years–or even five years–suffering through financial stress, using a credit card to pay the utility bill so there’s cash available for the credit card bill, and racking up late fees only to discover that they just can’t make it work. At that point, they’ve lived through years of stress and likely spent a huge amount of money making payments on debt they ultimately realize they’ll never pay off.

Real Solutions for People in Debt

By the time many people decide to consider bankruptcy, they’ve thrown away a lot of money. The hypothetical Californian in the example above isn’t carrying a huge amount of debt. Still, if they’re only able to make minimum payments on their credit card debt and are making late payments, two years of that struggle will cost more than $3,000 in interest. If half of those payments are late at the $41 late fee level, that bumps the cost up over $4,000. That doesn’t even include the portion of those credit card payments that went to principal.

Credit card debt is generally wiped out in a Chapter 7 bankruptcy case. So, if they decide to file bankruptcy after two years, those thousands of dollars are just down the drain. And that doesn’t take into account other costs, such as:

• The impact of financial stress on health
• Strain on relationships
• Missed opportunities to put those funds to better work for you

Playing the dangerous game of juggling debt for too long can even mean auto repossession, eviction, or foreclosure.

If you have been struggling with debt for months or years and your situation is not improving, you owe it to yourself to learn more about your options, including whether bankruptcy might be the solution you’re looking for. At Borowitz & Clark, we’ve helped tens of thousands of people in and around Los Angeles get out of debt so they can build a stronger financial foundation.

We offer free consultations to make sure you have the information you need to make good decisions for your future. To schedule yours, call 877-439-9717 right now, or fill out the contact form on this page.