Settlements and bankruptcy

[njguy1972]

Are there any negative effects of settling a portion of what is owed to your unsecured creditors? Please read my scenario and let me know if I am missing something with my logic?

My lawyer has been receiving phone calls from collection agencies and is trying to negotiate out the owed money for me, if it makes sense.

Is it possible that if we negotiate with 1 card that the others can file an objection and that settlement will be voided? How would they even know?

For my case it may make sense because the means test says I will be in a 100% payback plan but my schedule 22C and I/J say I can only pay back about 30%.

I am trying to include things like:
-student loan payments so interest will not accrue (29k owed that will grow to 35k in 5 years)
-continued 401k contributions up to the company match amount (6%)

This is approximately what I owe:
card 1 - 5300
card 2 - 20000
card 3 - 25000
card 4 - 4800
card 5- 8600
Total - around 64k

Furniture - 1700 (am looking to pay off before May when the 0% interest expires)
student loan - 29k
mortgage - 164k (ARm resets in July 2011)
HELOC - 105k
car - 8500 (23 payments left of $444 a month)

Based on my income the Trustee will probably go after 100% and around $1100 a month. (that is what the 1st lawyer mentioned to me and my lawyer said after he did his means test without the I,J, and 22C.

If eliminating the 401k I have an extra $360 a month
If defer the student loan I have an extra $230 a month
total $590 which is doable but prefer not to because of the long run negative affects.

Student loan will accrue from 29k to 35k over the 5 years if interest is not halted. I am 36 and have 18 years left on the payment plan. In 5 years I will be 41 and basically started all over again. I will be 61 by the time it is paid off if forced to defer.

With my 2008 tax refund I think I can settle away some of the amount owed.
card 1 - 5300 can settle for $1650 (they have offered already)
card 4 - 4800 can settle for $2000 (they have offered already but my lawyer thinks we can get them below $1500)
card 3 - 25000 want to settle for about $6500
Total to be paid in settlements: Just under 10k

With these settlements my balance owed will drop from 64k to 29k (around $500 a month)
I understand that i will need to pay taxes on this amount next year but that is ok since my tax refund should cover it.

[Trixie007]

Check with your CPA too, you may not have to pay taxes on the forgiven debt if you can prove insolvency at the time of debt forgiveness.

[njguy1972]

thanks Trixie

I have a feeling I am not insolvent. The whole reason I am here is because:
- I was living beyond my means
- in October the cards more than doubled my interest rates making it impossible for me to pay the minimums
-no raise and reduced bonus this year that would have helped me pay down my cards

basically I would have been able to pay down about 10-15k of the debt if the economy did not go bad and then I would have had a chance to pay off my debts in a few years. Bankruptcy may have been inevitable though.

This is just very scary in general.

[catleg]

It sounds like you'd be better off settling rather than being "involved" with the courts for 5 years. The accounts will show as "settled" or something like that on your credit, a negative but time heals those wounds. Just curious if you would mind mentioning the creditors and how far past due you are with them for the settlements?

[njguy1972]

I stopped paying the cards in November so only 60 days.

Boa, Citi, Amex, and Discover.

[PoorGrammyinBK7]

To me, it looks like you are just throwing money away to settle a few of them if you are going to file BK - unless you have the means to settle ALL of them and stay out of BK altogether (or wait a while to file). And yes, I would think paying off one or two, without paying the others could be seen as preferential in a BK. (I am not a lawyer - just thinking out loud here).

[StartingOver08]

Yes - if you settle and then file BK, the settlements can be voided. The Trustee looks at those funds as preferencial payments.

One creditor can ruin the entire settlement process.
Have you checked with several BK attorney's to see if you can not be in a 100% repayment plan?

Also, I believe you can include the student loan payment in your CH 13 plan payment. See the below link:

Consolidating Your Loans Under Chapter 13
Although you may not totally eliminate student loans in bankruptcy, you can consolidate them, with your other bills, in a Chapter 13 proceeding. Under this chapter, you can propose a repayment plan in which to pay your creditors over three to five years. For a Chapter 13 bankruptcy, you'll need a stable income with disposable income and must have no more than $1,010,650 in secured debt (debt involving property that your creditor might take if you don't make your payments) and $336,900 in unsecured debt. These amounts are adjusted periodically to reflect changes in the consumer price index. Chapter 13 will also stop collection action against you.
If you include your student loans in a Chapter 13 repayment plan, depending on certain factors such as the size of the loan, the number and amount of your other debts, and the amount of your disposable income, you might be able to make a dent in the loan balance over the life of your plan. However, you will still owe whatever student loan debt remains when you complete your plan.

Challenging the Loan Balance
Often, a student loan has been transferred between lenders many times, and it's not clear just how much is owed or whether any charges in addition to the principal amount of the loan are in accordance with law.

In a Chapter 13 bankruptcy, you can use an objection to the claim of the holder of a student loan to get a court's determination of your rights. Once a judge decides what is properly owed, the bankruptcy court decision is binding on the lender even if the repayment period on the loan stretches beyond the end of the bankruptcy plan

For more information: http://bankruptcy.lawyers.com/Studen...ankruptcy.html

[njguy1972]

My lawyer said settling should be fine because after settlement I will be able to go into a 100% payback with the remaining creditors and I know I would be able to afford that without an issue.

He actually suggested it to me as an option and is helping with the negotiations.

Legally I think I would need to wait 60 days after the settlements before filing.

My current lawyer is willing to go to war with me in a ch 13 but we believe if we can lower the amount owed on our own it is better than being forced to negotiate with the trustee.

Part of my issue is I got a bonus in Feb 2008 and Feb 2009. Even though I did not get one the 3 years prior, it would need to be part of my income on the plan. There is a strong chance I will get no bonus next year but that is a tough argument with the trustee since he will say, you received it 2 years in a row, including the current year.

Here again would be the sticking points in a ch 13 that may cause issues:
-1 time bonus as part of income
-asking not to defer student loans and deduct the payment from disposable income
-continue to contribute to my 401k at 6% (company match level)

These 3 items can accommodate about $990 a month on average that the trustee may want to go after. My 1st lawyer that I had a free meeting with told me that is how it is (he is a former trustee). The current lawyer thinks he can negotiate some of this but feels the bonus and 401k may be sticking points.

[StartingOver08]

I would not use a former Trustee as an attorney - JMO. (Also HHM has made the same point). When you get into something that is a borderline issue...the former (or even current) Trustee's lean toward conservatism (read that as 'pro creditor').

The bonus is an issue. You may have to modify the plan downward when you get your 'no bonus' years.

As to keeping the 401k payments, I believe you have a chance to keep making those payments and not have them used as DI. It appears to be a discretionary item.

See this link: . Cases Illustrative of Pension Plan/401(k) Contributions and Pension Plan/401(k) Loan Repayments

The following case summaries illustrate some of cases that have adjudicated the issue of pension plan/401(k) contributions, or pension plan/401 (k) loan repayments, or both:

In re Taylor, 243 F.3d 124 (2d Cir. 2001) Recently, the Court of Appeals for the Second Circuit rejected a proposed strict rule disallowing pension funding in Chapter 13 cases, opting for a more flexible solution that allows a bankruptcy judge to consider all the facts and circumstances when determining whether the pension contributions and loan repayments qualify as reasonable and necessary expenses in a Chapter 13 plan. A discretionary rule adopted by the court allows bankruptcy judges to consider numerous factors that facilitate the court's arrival at an equitable solution.

under (sec)707(b) of the Code, the court refused to adopt a per se rule prohibiting 401(k) contributions and repayment of 401(k) loans. Instead, the court adopted a flexible case-bycase analysis. The court allowed the debtor to apply $302 per month, or 10% of his salary, considering the contribution reasonably necessary because the debtor was fifty-six years old, possessed only a modest balance in the plan, and had no other retirement savings. The 401(k) loan repayment of $146, however, was deemed not reasonably necessary based on the facts and circumstances because the debtor gave half the money away and failed to substantiate reasons why such payment was necessary for his support and maintenance.

Link:http://findarticles.com/p/articles/m...n9096597/pg_13

Isn't the lookback period for preferencial payments 1 year? But then, it might be a different issue if you are in a 100% payback, IDK. Maybe that is the reason your attorney wants to file with 100% payback.

[njguy1972]

I believe with a 100% payback plan everyone is happy.

The creditors that settled, go their money up front and avoided the courts.

The creditors that did not receive 100% of what is owed.

It is a win / win

If I settle a couple and then try to do less than a 100% payback, then it may be an issue.

[njguy1972]

Here is an update.

My lawyer is checking into the 90 day look back period since the trustee will ask if I made any recent payments.

His thoughts are that if we settle than we can wait 3 months and then file.

[njguy1972]

This is what I found on preference that also may help in my decision making:

A "Preference" occurs when a debtor treats one creditor more favorably than another. For example, a debtor may choose to use all of its assets to pay off the entire debt owed to one creditor, leaving a second unable to collect any money at all. A Court will disallow a preference if payment is made for the benefit of a creditor, for a debt owed prior to the intitiation of bankruptcy, the payment is made while the debtor is insolvent, and the transfer is made within 90 days of the debtor's filing the bankruptcy petition (or 1 year, if the payment was made to an "insider" such as a relative or corporate director). A creditor receiving a "preference" may be forced to restore it to the debtor's estate.