CH13 versus debt settlement

[airahcaz]

Sorry for this basic question, assuming not qualifying for a CH7, how does one go about deciding if CH13 is worth it versus attempting debt settlement?

For instance, one can get offers directly from creditors to settle for 25% or less - will a CH13 significantly reduce the amount owed to potentially less than 25% per creditor?

By debt settlement, one can avoid BK, so it is a worthwhile exercise.

I also suppose that some debts may never need to be settled, especially if they hit the SOL, but all debts get paid something in a CH13?

[buffetbuster]

Hello! Our lawyer told us that if we would have had to file a 13, not all of our debts would get payment out of the 13 payment plan. First, your lawyer gets his fees, then priority debts and then what's left over (if anything) is divided to pay your debts. So, if there isn't anything left over...your debts get nothing.

[HHM]

No difference in credit hit, DS and bankruptcy equally bad

Although 25% offers occur, they are actually more the exception than the rule. Debt settlement is too unpredictable, therefore, it is difficult to budget.

DS, you have no control, you are counting on your creditors saying yes. In chapter 13, you have total control, you TELL your creditors what you can afford to pay back.

The goal of a chapter 13 is not necessarily to pay the debt in full, you do chapter 13 because you cannot afford to pay your creditors what they "want", but you have some money left over at the end of the month.

DS = you need come up with the money, lump sum cash. DS is NOT about reducing the balance and then getting 3 years to pay it back. This aspect of DS is really what makes it a difficult option. Chapter 13 is actually like a forced settlement with your creditors AND you can pay the amount over time.

Waiting out SOL NEVER WORKS, I have yet to see anyone actually achieve it and be in a BETTER position vs having had filed BK when things started going bad, and even if you did, that can be 3-6 years of crappy credit while you wait, and then a another 3-6 years after the SOL expires before things begin to drop off. Most peoples credit recovers within 2-3 years after BK.

The only time you DS is if (1) the combined payments in chapter 13 would be significantly more (not just a little bit more) than realistic settlements (think about 35-40%), AND (2) you can actually come up with the money to settle in 12 months or less from UNPROTECTED assets. I.e. if you would liquidate a retirement account to settle, don't, do chapter 13 instead.

[airahcaz]

No difference in credit hit, DS and bankruptcy equally bad

Although 25% offers occur, they are actually more the exception than the rule. Debt settlement is too unpredictable, therefore, it is difficult to budget.

DS, you have no control, you are counting on your creditors saying yes. In chapter 13, you have total control, you TELL your creditors what you can afford to pay back.

The goal of a chapter 13 is not necessarily to pay the debt in full, you do chapter 13 because you cannot afford to pay your creditors what they "want", but you have some money left over at the end of the month.

DS = you need come up with the money, lump sum cash. DS is NOT about reducing the balance and then getting 3 years to pay it back. This aspect of DS is really what makes it a difficult option. Chapter 13 is actually like a forced settlement with your creditors AND you can pay the amount over time.

Waiting out SOL NEVER WORKS, I have yet to see anyone actually achieve it and be in a BETTER position vs having had filed BK when things started going bad, and even if you did, that can be 3-6 years of crappy credit while you wait, and then a another 3-6 years after the SOL expires before things begin to drop off. Most peoples credit recovers within 2-3 years after BK.

The only time you DS is if (1) the combined payments in chapter 13 would be significantly more (not just a little bit more) than realistic settlements (think about 35-40%), AND (2) you can actually come up with the money to settle in 12 months or less from UNPROTECTED assets. I.e. if you would liquidate a retirement account to settle, don't, do chapter 13 instead.

Very excellent points, thanks for taking the time to write this out.

We would accumulate cash on the side, such to offer lump sum payments, should we get to settlement. We could also plan for settlement waiting for when the creditors actually file suit.

CH13 seems more and more appealing, with underwater houses and mortgages in arrears. Besides CC debt, this is the sticking point that is making it that much more worthwhile.

I suppose these points make fearing BK a little unjustified; however, there are many other varying opinions that BK is the last resort.

[HHM]

however, there are many other varying opinions that BK is the last resort.

Yep, those people are idiots

[IamOld]

Yep, those people are idiots

HHM, you literally made me feel better - I am a PACER addict - (I'm still looking for the PACER-holics forum here!! :-)

Just saw a few more claims come in for my spouse's 13...for some reason it really made me feel very melancholy...so thank you thank you and thank you.

And by the way - even the giant masters of the universe finance co's OUTSOURCE their bk collections...doesn't anyone do anything for themselves???

[walkthaplank]

Don't forget about taxes on forgiven debts. Anything you settle would count as income for you. You would be turning dischargeable unsecured debt into tax debt which can not be discharged in BK. There are ways around the tax liability if you are able to prove insolvency, but BK doesn't have tax consequences.

[airahcaz]

HHM, you literally made me feel better - I am a PACER addict - (I'm still looking for the PACER-holics forum here!! :-)

Just saw a few more claims come in for my spouse's 13...for some reason it really made me feel very melancholy...so thank you thank you and thank you.

And by the way - even the giant masters of the universe finance co's OUTSOURCE their bk collections...doesn't anyone do anything for themselves???

few more claims, meaning?

[airahcaz]

Don't forget about taxes on forgiven debts. Anything you settle would count as income for you. You would be turning dischargeable unsecured debt into tax debt which can not be discharged in BK. There are ways around the tax liability if you are able to prove insolvency, but BK doesn't have tax consequences.

so after settlement, the creditor issues a 1099 or similar for the balance of the debt that was forgiven? Prove insolvency is in an IRS worksheet or otherwise?

[IamOld]

few more claims, meaning?

Just watching the claims trickle in... So far four total...but they have until around August...

[airahcaz]

Just watching the claims trickle in... So far four total...but they have until around August...

I suppose it is my unfamiliarity. I would have thought that all the creditors were to come to the table at the time the BK settles their balances.
You're implying that the BK is fined, and then all creditors need to file claim in a certain period of time thereafter?

[IamOld]

You know that's what I thought too - but in theory spouse's 13 COULD be approved as early as early July, BUT creditors have another month or so to put in claims - gov't creditors until October...honestly, I would have thought that the creditors would be quicker, but on the other hand I'm also surprised that a credit card with "only" $500 or so owed would file a claim...I mean I figure it's not much cost to them for doing so...so in other words, if a creditor does NOT put in a claim beyond the "bar" date, they're (in general) out of luck.

I suppose it is my unfamiliarity. I would have thought that all the creditors were to come to the table at the time the BK settles their balances.
You're implying that the BK is fined, and then all creditors need to file claim in a certain period of time thereafter?

[kornellred]

Forget about which creditor claims what and when. It does not matter. You list all of your debts. You have a confirmed Chapter 13 plan. You make your payments. When you have completed your plan, the Court will issue a discharge of all remaining debt, if the debts are eligible for discharge. The Chapter 13 trustee takes care of everything; all you do as a debtor is make the payments.

[walkthaplank]

so after settlement, the creditor issues a 1099 or similar for the balance of the debt that was forgiven? Prove insolvency is in an IRS worksheet or otherwise?

1099-C surprise: IRS tax follows canceled debt

You would want to speak to an accountant to figure out how to limit your tax liability. IRS Form 982 (PDF) is the form you would use, IRS Pub 4681 (PDF) explains how the IRS treats cancelled debt.

[frogger]

Forget about which creditor claims what and when. It does not matter. You list all of your debts. You have a confirmed Chapter 13 plan. You make your payments. When you have completed your plan, the Court will issue a discharge of all remaining debt, if the debts are eligible for discharge. The Chapter 13 trustee takes care of everything; all you do as a debtor is make the payments.

That was a good answer.