alternatives to BK13

[olegbro]

After talking to couple BK attorneys, looks like I am not passing means test for chapter 7 due to high income. The only option is chapter 13.

I have $80K in CC debt (accumulated due to failed RE venture) and a house in Illinois (we live in CA for last 3 years). House is worth about $500K with 1st mortgage of $600K and HELOC $100K. It was our primary residence and it is rented now.

Apparently, CCs are ready to settle for 50-60%. So filing CH13 to get rid of CC debts does not make sense, since Chapter 13 preliminary calculation showing the repayment plan with similar percentage (plus $4-5K in attorney fees).

The only reason to go BK13 route is to include HELOC in CH13 repayment plan and thus repay only 20-30% of the total debts. However, there is an alternative - short sale the house while negotiating with lenders on forgiving the deficiency.

My tendency is to avoid BK13, in favor of settling with CC and short sale the house. There is no 100% guaranty in later, but BK option will be there in case it fails.

Your advise. Thanks

[HHM]

First, the obvious practical question...

Where are you going to get $38,000 to $42,000, cash, to settle with your creditors? If you cannot get those funds in 12 month or less, your supposed chapter 13 avoidance plan is dead in the water.

Why take the risk of a non-BK option. It is JUST AS DAMAGING, if not more so, on your credit (settle and short sell). Also, I think you are WAY overestimating your ability to actually short sell the home. 9 out 10 proposed short sales never close because the bank puts too many conditions on you, the seller, that you cannot satisfy. And, you will still need to address the deficiency issue on the short sale/foreclosure, that simply becomes another debt to you (or taxable income).

[olegbro]

- One of the big creditors offered 3.5 year repayment plan with 0% interest, no late fees, etc and 60c on a dollar. I plan to get similar arrangements with others. I will ask in writting to confirm on deficiency forgiveness.

- few months ago I've had a short sale for my last investment property, where attorney negotiated with lender on deficiency (it worked). I plan to work with him again since his practice dealing with short sales on massive scale. True, the property value and liability were less than our primary residence.

- If the plan fails, I can come back to BK13

- Does BK13 treat deficiency as IRS income? Can it be negotiated with CCs as well, or it is a federal law?

OB

[HHM]

No, chapter 13 discharges deficiency with no tax consequences. Deficiencies are treated as general unsecured creditors.

[jwmc1]

I have looked into all of these as well, and I even did some of them. I am very sorry that I did, and I wish I had filed two years ago. I am much worse off now.

[olegbro]

@jwmc1, what went wrong with your plan?

I have looked into all of these as well, and I even did some of them. I am very sorry that I did, and I wish I had filed two years ago. I am much worse off now.

[jwmc1]

I ended up with taxes as well as doing everything I could to pay back unsecured creditors, including being late on property taxes. If you accept the 40 or 50% reduction you are simply exchanging a bank as a creditor for the IRS. And, your credit report is fried during the repayment as well...I think it does more harm to your credit than does the actual BK

[olegbro]

First, thanks to all on this forum for great advise and general knowledge!

So, I am going ahead with settlement on CC's debt. I've reached agreement with 5 out of 6 CCs. 4 out of 5 are CC company, and 1 is a legal firm that represents Advanta.

I got written documents from most of them. What should I look for to ensure that settlement done right, and there is no surprises later?

Thanks

OB

[jwmc1]

were you able to get the deal done through payments or did you have the cash? What original creditors were they? What were the amounts you owed vs. what you settled for on each? This would be good info for us. Thanks

[klandsb]

I am pretty sure that any amount that the creditors write off is considered income for that year & you will receive 1099 forms for your taxes...
I was involved with a debt settlement company and really wasnt aware of this until later on down the road... Surprise, Surprise

[jwmc1]

They may never send you anything and you may be able to get out from under the taxes if you can prove you are insolvent at the time you receive the 1099.

[UNDERMICH]

Just remember the credit card companies have the final say. Just like them making the rules to change your interest rates, fees, etc.... they can change them again at any time.. they hold the cards. Plus you have to pay taxes on the difference you right off.You are still rolling the dice.

[olegbro]

were you able to get the deal done through payments or did you have the cash? What original creditors were they? What were the amounts you owed vs. what you settled for on each? This would be good info for us. Thanks

All creditors offer 93 day to pay the settlement amount. It does not have to be equal payments, you can split it as you like.

Most of them have longer payment plans, as alternative for settlement. Usually, payment plan has 0-1% interest rate, in addition they are willing to waive recent charges and fees, and bring your account to current. In my case, the forgiveness amount in payment plan was never larger than $1500. Always, multiply payment and total number of payment to make sure it is less or equal your current balance. Some of them offered payment plans with 0%, but at the end I would overpay my current balance by couple thousand (Discover Card).

Get everything in writing or recorded on your phone. And make sure before you hang up, the settlement is in place and ready to be executed (for instance, withdraw money from bank account). Settlement offers and repayment plans might change from one phone call to another. I was unable to take advantage of very good repayment terms with Citi Card. After calling back, they refused to confirm the agreement or said "this terms are not available anymore". So if you are sure the offer is good - execute it and seal it before hanging up.

BofA CC (business): balance $15000, settled for $3500. They were easier to deal with.

Advanta CC (business): balance $2400, settled for $1300. Settled with their legal firm. The same firm screwed up on my initial settlement ($800), since they failed to withdraw money from the account.

Citi CC(personal): balance $24000, settled for $13000. Got offer for settlement in the mail.

Chase CC(personal): balance $12500, settled for $6200.

Discover and AmEx are still in progress.

OB

[HHM]

So, let's break this down
Total owed, $53,900
Settled, $24,000
Settlement percentage, 44.5%
Taxable Deficiency $29,900, assume 20% in taxes, $5,980
And you still have 2 cards to go.
Total cost to settle, (so far), $29,980
You never really gave any information about what your chapter 13 would look like (disposable income, etc), so we don't have anything to compare it too. And you did just as much damage to your credit as if you filed BK. Unless you would have paid back more in the chapter 13, I don't really think you came out ahead on this. The chapter 13 could have rid yourself of the HELOC. You mentioned your intent to short sell, so let's say you short sell for $475,000, leaving a deficiency of $125,000.

[olegbro]

@HHM

- BK 13 estimates showed about $1000 disposable monthly income to cover settlement cost; plus $5000 in legal fees.

- I am in CA, while property in IL. Local BK attorney was not confident enough about HELOC, she just mentioned that it is a possibility. Talked to IL BK attorney, and he doubt that HELOC could be detached.

- My accountant figured the insolvency after looking into our finance couple months ago. Plus, I have large business loss to offset our income at least for this year.

- Going BK13 route I would have to deal with ex-business partner, partial ownership in out-of-state property, my wife, and potentially some other complications.

- yes, my credit is !@#$ pretty good. But besides impact on my future employment, I don't plan taking on more debt or even carrying CCs. As you can see - I can not be trusted with them. This financial lesson costs me a lot, so at least I will learn something. I was loan officer in the past (not a good one, carried to much for the borrowers instead of my pocket). I am familiar with cynicism of US financial system: it can be abused, and it can abuse you.

Thank you again for sharing the wisdom. After all, the only powerful thing is a knowledge.

OB