Both Child Support #1 and #2 have been simplified in order to correct a problem which includes the prepayment of support. This results in the payer earning the stated interest rate on the positive balance prepaid, which is typically much higher than market rates, and may not be allowed in some jurisdictions.
Although there are many examples of loans that might calculate interest based on simple interest (consumer loans, auto loans, commercial loans, even some mortgage loans), that is not what this post and spreadsheet are about. This post is about legal judgments, although the examples could be modified for loans.
Let me start with some disclaimers. First, I am not an attorney. On each example sheet I include the statement:
Hopefully that covers my rear end.
In most cases, the difference between a loan and a legal judgment is that a loan will charge interest whether you make your payment on time or not. Simple interest on a legal judgment is charged only if the judgment or a scheduled judgment (such as child support) is not paid on time. If the payment or payments are made on time, there is no interest charged.
Simple interest is required by law in many states, which would mean no interest on interest, as in compound interest. Don’t think the judge is giving anyone a break however, because the interest is meant as a punitive measure and the rate can be as high as 10% or more. In the current low interest rate environment, that might seem extreme, however many of these rates were put on the books years ago and remain the law today. If a payment is missed, the interest is set aside and accrued. The next payment is applied first to the accrued interest and the balance (if any) applied to principal. In all three examples the purpose is to calculate a final payoff.
There are three sheets in the workbook and three examples. All media shots on this post are cut off before the final payoff. You will have to download the workbook “Simple” to see the whole calculation. The first example below shows a child support judgment of $1,200 on the 1st of each month. The cash flow (payments) are all in one column with payments as positive numbers and scheduled judgment payments as negatives (red). Note that one of the yellow input cells is for a base year. Interest is calculated by dividing the interest rate by the number of days in the base year and multiplied that times the number of days since the last payment or scheduled payment. Typically, the base years has 365 days, but in some cases, it could be 360. The final payment due on the day of the final payment is shown along with the amount of interest charged:
The second sheet is the same child support judgment, but in this case there are separate columns for scheduled payments and payments actually made. The final payment is the same as the first example, but there is more information on this example.
The last example is for a large judgment that the person that lost the case cannot pay all at one time, and pays smaller amounts over a few years. The judgment of $500,000 starts accruing interest the day after the $500,000 payment is missed. When the payer wants to make the final payment, a date is set (in this case 2/21/2015) and the payoff is calculated.
Download workbook “Simple“