Chapter 13 vs Debt Settlement

[bobcat10101]

Hello. I owe $45,000 in unsecured debt which results in $1600 in monthly minimum payments. I'm considering Chap 13 vs Debt Settlement. Freedom Debt Relief is telling me they can negotiate $45000 down to $39000 which results in a $770 monthly payment for 51 months. My accounts are current. I'm reading a lot posts stating that settlement is bad because some creditors won't negotiate and will sue. And you can negotiate yourself with the creditors and not pay the fees. I'm comfortable with a $750 monthly payment. Is it better to do it with Settlement or Chapter 13?

[justbroke]

Welcome to BKForum. Feel free to ask a question.

[Carmella]

bobcat10101 you can negotiate yourself with the creditors. The first attorney wanted us to do debt settlement and he was going to call all the creditors and told us to save up the money instead of paying the current payments because when the creditor offers a settlement you have to pay it right away. We had so many credit cards all I could see was the hourly attorney time going higher and higher as he was calling, negotiating and on hold!

It is true some creditors won't settle and then you will be expected to pay the late fees, etc. It takes a while for them to actually sue you. In our case creditors sold our stuff to the collection agencies before it went to court and even when it went to court we were able to delay and they wanted to make a deal with us to settle on an amount less than we owed.

The other thing to consider if the creditor accepts a lesser amount, the amount you didn't pay is considered income. I don't know if I am saying this correctly, but you will have to pay taxes on it as it was income. Someone correct me or explain this better!

Back to your comment on the lesser payment. I don't know how many creditors you have. I can tell you that Discovercard was very helpful when I made a payment plan with them. They cut the interest rate and the payment amount and if I remember correctly I could no longer use the card at that point. Shortly after than we decided to do BK13. It was awkward, but I guess didn't matter since when I made the payment plan I told them I had no plans for BK and I really did not it wasn't even on my radar until a friend suggested it. She had gone through BK.

We didn't want to do the settlement because we had too much debt and I was worried that not every creditor would settle or we wouldn't have enough cash to pay the settlement ASAP. BK13 can be a struggle, but at least we knew what was expected. And the creditors had to stop calling us and the court proceedings stopped.

[bobcat10101]

Thank you Carmella. I really appreciate your insight. The rep at the Debt Settlement company made it seem like it would be no problem getting quick settlements from the creditors. And with the settlement company, you don't have to make large payouts since you pay the monthly amount. I've read nothing but negative comments about the Debt Settlement companies so I'm weary to do it. I'm nervous about Chap 13 about having to pay out all of my disposable income. I have a fairly high overhead with restaurants/tech buys and stuff like that. I saw that you're allowed somelike $750 for food/entertainment/clothes. Can you educate me on how they determine your payments in Chap 13.

[justbroke]

Not so fun fact... many people who try Debt Settlement end up wasting money and resorting to bankruptcy when it doesn't work. Bankruptcy is the only definitive solution to "settling" debts. Whether that's through a Chapter 13 or through a Chapter 7. Don't make my mistake and sacrifice your future to try to stay afloat. (My future was my retirement savings that I 100% wasted.) I could have just filed a Chapter 13 and paid what I could afford over 5 years and then discharge all the rest.

[bobcat10101]

If I owe $45,0000 and have a 60 month payment plan does that equate to a $750 / month payment. I don't want to get stuck with a $2000/month payment if that's what my disposable income shows. If you can pay 100% back in 60 months, do they still use disposable income?

[justbroke]

No. It does not. It is based on your DMI. If you only have a DMI of $200/month then you will pay $200 towards them. If your income is below-the-median then you'll pay only for 36 months; if over, then you'll pay over 60 months.

There's no easy way for you to calculate your DMI unless your filing Pro Se and do all the work required on the forms. Not only complete all the forms, but complete them correctly to come up with a proper and defensible calculation of your DMI.

If your DMI could pay back 100%, then you'd pay -- despite pressure from the Trustee -- just pay what is necessary to repay the debt over your applicable commitment period.

[bobcat10101]

If my DMI is $2000 but I could pay off my debt by paying 60 months at $750, will I pay the $2000 or $750?

[justbroke]

As I wrote above, you may get pushback from the Trustee and even your attorney. They may say that you have to pay your DMI in a 100% plan. There's nothing in the bankruptcy code that says that a person paying back 100% must pay their DMI. The code, for Chapter 13 in 1325(b)(1), reads that you must propose a plan that pays back the value of the creditor claims or commit all of your disposable income to the plan. Yes, that's an "or" in that part of the code that some conveniently overlook. The pressure you would get is that you could "pay this off earlier" and that you must commit all of your DMI. As I wrote, there's nothing that says you need to commit to anything other than paying all the value of the claims over the commitment period when you're in a 100% plan.

Just work with your attorney. Ask the same questions. I would caution you to first see the total of your disposable monthly income. Then, if it would easily pay the plan 100%, ask if you need to commit all of your DMI to the plan. Then, if they say "yes," ask them why.

[bobcat10101]

Thank you justbroke. Great comments. I'm planning to meet with BK lawyers next week. Any suggestions for negotiating with credit card companies. I'd like to pay them off minus the exorbitant interest rates. Since I'm current, I doubt I'll have much leverage if I call them and ask for that.

[justbroke]

Most creditors would want you to provide a Financial Statement so they can see if you can really afford to pay. So, as you wrote, you probably won't have much leverage. Besides, the damage from settling with a credit card company is probably about as damaging as a bankruptcy. It could also be a waste of money if you could have just filed bankruptcy. You must also consider that if you do settle with creditors that you will need to pay the tax on the amount forgiven.

If you want to pay them off, less the interest, and with a payment plan and finality, just file bankruptcy. You will have nothing else that is as final and surprise-free as a bankruptcy. It's a total reset.

[Carmella]

Thank you justbroke. Great comments. I'm planning to meet with BK lawyers next week. Any suggestions for negotiating with credit card companies. I'd like to pay them off minus the exorbitant interest rates. Since I'm current, I doubt I'll have much leverage if I call them and ask for that.

bobcat10101 It's great you are seeing BK lawyers don't be afraid to see more than one. They might suggest settlement like the first guy we went to, but I do really think it was for his benefit to charge us more. Anyway if there's BK lawyers that have been in business a while in your area that might be a good sign. I know it's hard to get a referral from people you know since it's a taboo topic. We never told anyone we filed except for my friend who actually suggested BK to me and I then went to the firm she used and they were excellent.

If you are going to file BK you can stop paying the creditors, but I wouldn't do that until you talk to an attorney and make a decision. I wouldn't try to make a deal with the creditors or pay more on than what's required if you are seriously considering BK.

I am biased, but I really wish my husband and I took the BK plunge sooner because we dragged our feet after meeting with the attorney to the point the attorney, not a paralegal, got on the phone with me and read me the riot act. I mean she so so direct and blunt, I felt like a child with my parent scolding me and telling me all the facts and since we had stopped paying the creditors and had a few court summons it was all bad news. It wasn't going to get better and I basically needed to be told bluntly.

Also all the creditors might not file a claim which is really great and surprising. We still had to pay the payment that was put into the plan, but that just meant BK was FINISHED about a year earlier than scheduled!

I didn't find this forum until after the fact and I think that was because I was so overwhelmed and just never thought of searching for it. I wish I knew more before hand. This forum definitely helped me get through BK 13 especially when life happened and I knew what to expect or what questions to ask.

[Kimbergrl]

I tried debt settlement for 2 years. They negotiated and paid off a few accounts. I had a few they couldn't negotiate with and those are the ones I needed the most. I finally decided on bankruptcy in Oct 2023. I closed my account with debt settlement and they were holding over $3000 that wasn't being paid to anyone. It took some time but I finally got them to send me back my money. I filed Chapter 13 and several accounts didn't even file a claim. I ended up with about $25k to pay back instead of about $45k -all because they didn't file claims. I'm paying back 100% and will be finished in Fall of 2025. I will have spent about 2 years in the repayment plan. All in all it hasn't been horrible. The phone calls stopped and so did the stress. I just got approved for two credit cards in the last several months. It's allowed in my plan as long as the credit limit total is below $1500. Not a huge limit but enough to rebuild my credit. My credit score went up 37 points last month. I created a budget which has been life saving and a must of you're going to be successful in the plan. I got to keep my recent increase and bonus at work because I'm already paying 100%. I wasted too much time with the debt consolidation company. They promise a lot because they want your money. They don't deliver on that though.

[bobcat10101]

Thanks for the great response Kimbergrl. Can you tell me about the process of determining what your monthly payment will be in chapter 13? How much did you owe your lawyer/court costs/trustee through the payouts?

[shipo]

bobcat10101, determining how much you pay varies; do you think you are anywhere near being in a 100% plan?