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Negative amortization, and how it effects people and businesses

Have you ever heard of "negative amortization?" The term refers to debt that increases faster than you can pay it off. Usually negative amortization occurs because the interest on a loan or some credit exceeds the minimum payment that the in-debt person is making. But ever since 2003 -- when financial rules were changed to force lenders to make their minimum payments at a level that would pay off the debt "over a reasonable period of time" -- negative amortization has become increasingly rare.

It may appear that your principal simply isn't changing from month to month, even if you are making payments. There are a couple of possibilities if this is true. I could be that your minimum payment simply is too low and that you should increase your payments; or it could be that your lender has run afoul of the rules, and your debt could be challenged.

However, let's assume everything is legally compliant: what can an individual or business do to overcome this apparent negative amortization?

A Chapter 13 filing could be very beneficial for an individual. The repayment plan that you agree to under this bankruptcy could dramatically reduce the total amount of debt you owe; or it could lower your monthly payments; or both.

For a business, apparent negative amortization can occur after you have closed your company and are trying to clear out old debts -- some of which can exceed the value you obtained from liquidating your defunct company's assets. You should consult a bankruptcy attorney to get detailed and accurate advice for your situation.

Source:, "Repayment, Settlement, Bankruptcy: Facing Debt from Failed Business," Elaine Pofeldt, Aug. 7, 2013

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