Bankruptcy as an option (last option)

[walkin]

Due to some financial issues, we spoke with a BK attorney a few weeks back. It was a free 90 minutes or so, so the Q&A was limited. Pretty much, he was ready for us to file Ch 13 with him (CH 7 would be impossible, since we are above the median income, or whatever it was). He did a quick/rough calculation, and said our monthly payment would be around $250 a month. I was like "where do I sign up!!!" (of course he wanted to get his cut).


I'm keeping the BK option in my back pocket, as I try to wipe all this debt out on my own. Credit is already screwed, can't get much worse from rock bottom.

Here's my question. As I understand it, once you file, all the creditors get their chance to jump in line, to get what they can. I think I remember him saying that properties with liens get the most amount, or first choice, or something. But, how much? Are mortgage loans and HELOC's with liens and such guaranteed a certain percentage? If so, I would imagine that pulling the BK card would be an empty threat, if say, they know they will get 20 percent or something?

Just trying to get an idea of what percentage all these creditors "think they know" they will get if I pull the BK trigger. It should be able to help me plan my negotiating later on.


Also, I am planning on avoiding the BK at all costs, but I know it is an option. We have no assets that aren't covered by debt (car payments). Only thing we have is 401k. Pretty much, we are negative net worth, big time, but we both have jobs...

I will most likely pull the card out only if I get sued.

 

[TomEason]

walkin

Thanks for your post.

I agree with you that filing BK should be the last option, to be used only after all other options fail and the consumer really needs the protection of the BK court.

As you probably know, most BK lawyers try to steer their prospective clients toward filing. Why? No BK, no fee, as most BK lawyers limit their practices to BKs only.

 

[troubleinriverside]

in a ch-13 the secured creditors get paid first and the unsecured last. if you must do a ch-13 make sure your delinquent to your secured creditors so the money you pay into the plan goes to pay back delinquent secured loans and not the Credit cards etc. Also Ch-13 's are 5 year plans and 5 years can seem like along long time

 

[loansafe91745]

I agree with you that filing BK should be the last option.

Thanks. I've arrived at the same conclusion (that BK is the worst option).

After thinking/researching/hoping/attempting various options, I'm finally settling into a strategy. I will try settling my CC debts in the next 6 months, and if that fails, do Chapter 13. I surmise that having a BK on your record is worse than having settled debts... although I'm not sure exactly how it's worse. I think there are some loan forms or even employment forms that ask if you've done BK's, so I wouldn't have to admit to doing a BK.

 

[chrissty]

it all depends on how deep things get -- if you get sued -- then you would want to pull the bankruptcy card --
remember on settling debts you get 1099 for the remaining balance -- which is added as income -- you might want to see if you can be considered insolvent or the volume of how much you need to settle --
I am looking at both options right now personally -

 

[walkin]

Thanks for all of your replies. I will try to state a few things that I think I have learned over the last few weeks, please feel free to chime in and correct me, or add on:

1-The time to actually file a BK would be after a lawsuit has been started? Or, after the judgement has been made? I think I've read that you can try to settle the debt up until the day of judgement? Once the judgement is made, I guess it takes some time before the wage garnishments kick in, so I assume that gives you a little more time to file?

2- From what I've read here, I may be looking at between 5 and 25percent; settlements on the CC's?

I have $30k in CC's that I want to settle, 6+ months from now, which means anywhere from $1500-$7,500...neither of which I have right now. Maybe in 6 months I'll have something to play with.

I expect the heloc to sue me. I'm into them for $70k, 100% underwater. There's no way in the world I could settle with them, even for 10percent; right now.

I assume that the heloc will wait until the 1st FC is complete (hasn't started yet). Or, should I expect them to launch a lawsuit immediately? (6 months delinquent, charging off at end of month). I assume they will wait to see what the 1st does, but I'm going to be trying to work with the first, over the next few months, and see what kind of alternatives we can come up with to get us back on track. I understand there is absolutely no reason to try to settle with the 2nd, until/unless the 1st can be worked out first.

So, if I'm doing my math correct here, if I get lucky and can settle the heloc for $7,000, and all CC's for $7,500, that means I'm into this for $14,500, and that's not even taking into consideration what the 1st might do, after they FC me. I don't have access to $14,500 right now, and even if I did, is it worth it to spend $14,500 to avoid a BK, when my credit will be just as black marked anyway?

As far as the 1099's from CC settlements, as long as I still have the house debt, insolvency shouldn't be hard to show. As for the 1099's on the house, I should be able to exempt them, as primary residence (if done by end of year), otherwise, I don't think insolvency will be hard to show with them either.

So I guess really, the bottom line is do I want to hit up my retirement to avoid BK? Probably not. After all these things crash and burn, my credit is ruined for a very long time anyway. I guess the only difference would be if I want to be able to possibly buy a house in 4-6 years, vs. 7+ years. Seems that multiple charge-off's, combined with 120+ days late on mortgage, combined with "settled for less", etc., would look just about as bad as BK. A BK will not affect my employment. I haven't used my VA home loan yet, and I'm not sure if they might be more lenient than other banks in a few years, or not...haven't really looked into it.

I'm nowhere near as smart, or as experienced as many people on this board are, but I'm starting my strategy, and I continue to read this board daily, to help me along with it. I'm sure I'll fumble some, but hopefully as I continue to read these boards I will get wiser, it will all work itself out in the end.

Ideas?



I don't really understand this statement. I am delinquent to my secured creditors, but why does it really matter who gets paid? I assume some of the monthly BK payments would go towards the CC's? Just not real sure what you mean here. Obviously if I file BK, I have reached rock bottom, and I don't care who gets paid, one way or the other. Not challenging your statement, just trying to understand it. This whole BK thing is very new to me...

in a ch-13 the secured creditors get paid first and the unsecured last. if you must do a ch-13 make sure your delinquent to your secured creditors so the money you pay into the plan goes to pay back delinquent secured loans and not the Credit cards etc.

 

[TomEason]

chrissty

Thanks for your post.

I disagree with you. Being sued isn't a reason to file BK. If sued the defendant should answer the complaint. The litigation could take quite a while. Should the plaintiff eventually be awarded a judgment, that judgment creditor must try to enforce the judgment.

If the judgment debtor has attachable assets to include garnishable wages, that judgment debtor should wait until the very last moment (i.e. just before the judgment creditor attempts to enforce the judgment).

 

[loansafe91745]

2- From what I've read here, I may be looking at between 5 and 25percent; settlements on the CC's?

I think the percentage varies a lot by the bank, by how long you hold out, by how you conduct your negotiations, by the year (banks' strategies can change over the years), and -- probably -- just by luck alone, i.e., who's on the other end of the phone.

Is it worth it to spend $14,500 to avoid a BK, when my credit will be just as black marked anyway? So I guess really, the bottom line is do I want to hit up my retirement to avoid BK? Probably not.

What is really at stake is your ability & cost to borrow money. How important is that to you? If you have little need to borrow money in the future (for a house or car, etc), then do a BK. If it were me, given my income, if I had $70k+ debt, I'd do Chap 7 and get it over with. But before doing it, take care of as much borrowing as possible: buy a car, etc. After the BK, even if you're paying a higher interest rate for something ... I doubt it would cost me a $14,500 more than if I didn't have the BK on my credit history.

In any case, I recommend getting a consultation w/ a BK attorney. Most give free initial consultations. I'd go w/ a list of your debts & assets, plus a list of questions, so that you can squeeze in a lot of content in the initial consultation (mine was 30-minutes). BK attorneys will in general point you towards a BK, because that's how they make they money. But you can at least have them sketch out what it'll look like, and ask some tough questions.

Why does it really matter who gets paid? [in a chap 13 BK].

There are probably other reasons, but one reason that I know of is this: if you have someone else (say, a spouse) as an authorized user on a credit card who signed for purchases, the bank can go after them (assuming they weren't included in your BK). So, you prioritize that bank to get paid off first, so they won't go after your spouse.

Maybe another reason depends on which lender is likely to send you a 1099-C or not? Not sure.

 

[loansafe91745]

1-The time to actually file a BK would be after a lawsuit has been started?

You'll want to confirm this w/ a lawyer but IMHO you can file a BK at any point along the process, even after the judgment has been awarded to the plaintiff.

It seems to me that when exactly to file depends on many issues, including:

• how responsive the lender is to your threat to do a BK,
• how much legal hassle you want to go through,
• how public you want your information to become (civil lawsuits are public information),
• how much of this you can stomach, and
• how soon you want it to be all over so you can start fresh.

Again, if I were in $70k+ debt and earned a median income or less, I'd do Chapter 7 and just be done with it, because I hate this whole process.

 

[TomEason]

loansafe91745

Thanks for your post.

Not unlike many bankruptees, you would apparently choose BK because you're tired of dealing with your creditors, aren't willing to do so any longer, and just want someone else to handle it for you.

Hence your statement

I'd do Chapter 7 and just be done with it, because I hate this whole process

 

[loansafe91745]

You would apparently choose BK because you're tired of dealing with your creditors...

Tom, I have only begun to deal with creditors myself, and the repercussions have been very light so far. I've missed 3 Chase CC payments, and, because they don't have my correct phone number, I've only been getting letters from them. I missed 1 US Bank CC payment, last week, and the phone is starting to ring several times a day. I hate being in debt and I hate the process of trying to get out. But, I am determined to do my utmost to settle several credit card debts in the next 6 months or so, and then, if it doesn't work I'm OK with doing a Chapter 13 BK.

My response to the original poster tried to weigh all the factors. S/he was more than $70k in debt with several banks, indicated difficulty in coming up with settlement money, and was contemplating digging into her/his retirement funds. Given those factors, it seemed like this was going to be a very steep uphill battle for her/him. Really, I think the scale was already clearly tipped by the combination of those 3 factors, and my distaste for the process was just a cherry on top (to mix and mangle my metaphors).

I think if the original poster had some means to come up with settlement money and the debt wasn't so much, I might not have so readily suggested Chapter 7 BK.

 

[TomEason]

loansafe91745

Thanks for your explanation.

It doesn't seem to agree with the opinions you espoused in your post # 4.

If it were me, I would consider filing BK only as a very last resort, after all other options have been exhausted.

IMHO, failure to satisfactorily settle one's CC accounts is certainly no reason to file BK. I've completely stiffed banks with CC accounts and open lines of credit for amounts in excess of $200K, and haven't been sued. The SOL clock keeps ticking away and will expire late 2012 and early 2013.

 

[loansafe91745]

If it were me, I would consider filing BK only as a very last resort, after all other options have been exhausted.

Tom:

I think I'd agree with that, except that I would not dig into my retirement savings to settle debts. Furthermore, if I knew with fair amount of certainty that I couldn't come up with money to settle the debts (say, 15-20 percent of my debt), then I'd contemplate going right into a BK. That is, if a BK looks inevitable, I'd do it as soon as possible so that I can recover sooner, and start rebuilding my assets and my credit score. -- assuming you'd like to borrow money at a good rate again soon.

I guess how risk-averse you are matters. If you can sleep OK knowing that creditors could sue you for the assets you are building up... that suggests one strategy over another. I recognize that a bank might not sue you for a $15k credit card debt but ... one with a $70k debt might?

I've completely stiffed banks with CC accounts and open lines of credit for amounts in excess of $200K.

That's an amazing credit limit...! Wow. But what's the interest rate on it?

Regardless, your nerves & optimism gives me hope!

 

[TomEason]

Hi loansafe91745

Thanks for your post. My CC and open line accounts consisted of seven or eight different accounts. The applicable interest rates are immaterial (plus I can't recall what they were).

While your statement

then I'd contemplate going right into a BK. That is, if a BK looks inevitable, I'd do it as soon as possible so that I can recover sooner, and start rebuilding my assets and my credit score. -- assuming you'd like to borrow money at a good rate again soon

might make sense except for this.

There's a distinct possibility that the debtor won't need to file BK. If a BK is needlessly filed, the consumer's credit file will be tarnished for at least 7 years for a 13 (10 years for a 7).

Once that tool is used, the debtor cannot file again for 8 years, during which time the consumer might really need the protection of the BK court. A BK filing should be kept in the vest pocket and used only as a last resort.

Again your statement belies the statement you made in post #4, to wit

I've arrived at the same conclusion (that BK is the worst option)

 

[RyanJP]

One other factor to consider when filing a 13 is that during this 3-5 year plan, ALL of your disposable income (in theory) is supposed to go to paying creditors. A very high percentage of 13 plans fail.

Tom's suggestion of challenging the lawsuits is a good one. Its a little time consuming, but its cheap, and it can buy you several months, and in the case of credit cards, its even possible you can ding THEM for money when the violate the FDCPA. There are other websites out there that give advice on how to challenge lawsuits based on legal procedural errors they make while attempting to collect.

But again, if you know that you are simply unable to settle any time in the next year, then it might be a good idea to file now so that you can begin recovering that much sooner.

 

[walkin]

Thanks for all the replies and discussion. It helps me to come up with a plan when I can see opinions from both sides.

CH 7 is definitely out of the question, because of what we make. We don't make a heck of a lot, especially after about 20 percent of our income goes to daycare, but we make more than the median. Also, there are things that we value that we don't want to lose, in case of total liquidation, forced trustee sale, etc. If anything, CH 13 would be the only thing we would consider.

We have reliable, newish transportation that will be good for 7+ years, so car loans won't be needed for quite some time.

I will try to play the settlement game for a year or two. At that point, I may think real hard about the 13, unless something happens sooner which forces my hand. (job loss, lawsuit, etc.) Our 2 kids are young, and if we get this out of the way, they should still be young enough in 7 years or so, and not really know that their parents are financial failures, renters, etc. Sure, we'd like to be able to get a home loan again sometime, and would like to maybe get a car loan, college loans, etc.

We talked with a BK attorney a few weeks back, and had some Q&A. I asked some questions, and got some answers. However, after finding this forum and learning a little more, I think I may have some more "hard" questions that I need answers to, so I may try to find another free consult and ask these hard questions. From that meeting, I asked him if I should stop paying my CC's and try to settle with them at a lower cost. He pretty much said no, because that would be wasting money...of course he wanted us to write him a check so we could file the 13, so I think I get where he was coming from. One of my neighbors actually used that attorney to file her BK, so I've been asking her a lot of questions and getting tidbits of information here and there. Their income situation is a little different than ours, and the weird thing is that she is the only one who filed, hubby did not. That sparked an idea in my head, maybe I can file alone, since I carry all of the CC debt, and keep my wife's credit "recoverable". She's on the mortgage with me, and the heloc, but all the cc's are on me ($30k). Sure, her credit will be dinged for a while, because of the late mortgage payments, but we may be able to avoid giving her a blackmark on her credit. She carries a pretty big student loan too, which seems like that can't be wiped out in BK, so to me it seems like there is no real reason to include her in the BK if I file....depending on what mortgage and heloc decide to do.

 

[RyanJP]

If you were thinking of filing in the next 6 months, that lawyer would have been correct in saying that you would be wasting money by settling any accounts.

I'm not sure exactly how filing individually on a joint-debt would work in practice. My question would be with how to deal with the house... Is there a reaffirmation document that you would have to sign, even though the loan is in both names?

 

[TomEason]

walkin

Thanks for your post.

FYI, if you do end up eventually filing, a smart move is often for the husband and wife to both file in their own names only, but to file serially, i.e., not simultaneously. This is a savvy move often espoused by BK lawyers.

 

[chrissty]

interesting tom on the point of waiting till the last minute -- I am in the exact situation right now with citibank -- in state attorney has it, got served this week -- will answer complaint and ask for original documents on opening acct and transactions -- they want us to call in -- probably to settle -- but have only been offering 50 percent which we don't have -- I agree -- when u pull that card it should be at the absolute last minute -- I called the bankruptcy attorney and he said why wait, but of course he gets his fee then

 

[TomEason]

Hi chrissty

Thanks for your post. Sorry to hear you've been served by Citibank. Glad to hear you intend to file an answer and to demand production of documents via discovery.

What you say about that BK lawyer's motivation is undoubtedly true.