Chapter 13 vs Credit Counseling / Debt Settlement???

[seanp951]

Hopefully some of you can give me some quick advice.

First off, I have been to see a lawyer, and I do NOT qualify for a Ch 7. I make too much money.

I am in a LOT of credit card debt and have a big student loan. I am at the point where just making the monthly minimums on my credit cards, house payment, student loan, etc.. and there is not even enough left for basic necessities.. so I have to do something.. either a Chapter 13 OR a debt counseling program.. i'm not sure which would be better.. i have NOT researched the debt counseling much yet.. thought some of you who looked into BK and/or Ch 13 could give me your thoughts.

Income = 140k / year gross. My wife does not work, so the 140k is our sole income. We have 3 small kids.. so I am a 5 person household.d

Secured debts:

House: We owe about 380k. 305 first, 75k second. Values have dropped a LOT in our area.. house is now worth about 220-230k at most. so even the first is underwater. we could stop paying the second (and have) and they can't' do anything about it.

Payments on house = 1500 First Mortgage Taxes INCLUDED. 650 second mortgage.

Cars. We have 2 of them.
Car #1: Pay 450/month. 33 payments to go. worth 18k, owe 14k.
Car #2: Pay 550/month. 36 payments to go. worth 25k, owe 20k.


Student loan - payment is about $1000/month, consolidated loans, have to pay over next 20-25 years. total debt = 120,000. yes.. 120k.

credit card debt is about $80,000. this is spread among several cards.

my lawyer said that if I do a chapter 13, my monthly payment will be roughly 2200-2300/month. we estimate that I would be paying roughly 50% of my total debt.

The pros I see of a Ch 13 are that we get a set amount to live on, and the creditors only get what is left over. at the end of the payment plan, we would had paid back a lot of money. about 120k.. but at the end of it, our 2nd is GONE and the credit cards are GONE. each of those creditors would have received about 50% of their money.

my student loan of course would still be there.. BUT.. given that our jurisdiction will let me put the student loan into the plan.. and given the large balance of the student loan, it will get a sizable portion of the plan payment. almost 40%.. so my student loan will get almost a full monthly payment.. about 900.. so while my student loan will always be there as it's not dischargeable.. it will at least be getting close to a full payment and in 5 years it will not have ballooned or anything.. i'll essentially be at the status quo not eh stu dent loan if we do a Ch 13.

I was planning to strip my 2nd. I would still be upside down on my house..but it would wipe out a 75k debt and 650/month. Our goal is to keep this house long term and be able to rent it at some point and move to another house. rents on this house would be about 1800;month. if we strip the second, our payment would be less than that and we could rent it, make money, and use the rent to pay down the mortgage. it wouldn't make a lot of money, but as long as rents stayed where they are - it would be a good long term investment. if we don't strip the 2nd, renting is not really a viable option.


here is my big question - if I do a debt settlement program - is it really better for my credit? and if it is better - how much less/ more would I probably be repaying?

over the life of a ch 13, i pay about 140k. here is how that money gets broken down
56,000 student loan
42,000 Credit Cards
42,000 2nd mortgage

the student loan never goes away, so i'm not taking it into consideration when calculating what % i pay back.. since over the life of the BK i'd just be servicing it as if I wasn't in a BK.. and when the BK is over, I just keep paying..

what wil go way will be the 2nd and CC.. of those, I will pay about 50% on the dollar.

can I do better with a credit counseling agency / negotiating for me?

from what I have read, they can't get rid of interest, only get it reduced. or is that not true?


one thing I am also reading, is that the credit counseling programs are ONLY for unsecured debt.. meaning that my 2nd mortgage would not be in the program. (i know the theory to get it stripped it to classify it as unsecured..but technically it's a secured debt and the repayment program might not incorporate it.)

if I went the credit counseling route, they would essentially ONLY deal with the 80k in credit cards.

if My second mortgage is NOT on the table for them - I'd have the option to just quit paying on my second? and let them file a lien. it would be worthless. that would not assist me in the long term goal of renting the house.. but one thought was.. if that debt just sits there over time.. I get out of debt.. and then when I'm back on my feet.. and that 2nd mortgage is old and stale - I could settle it.. and for all I know I might be able to settle it for far less than 50%?

if I ONLY pay back 80k in credit cards, via the repayment programs.. what would I be paying? i'd have the 650/month that I"m NOT paying the 2nd to apply to debt as well.

basically, i'm trying to figure out what is a better route.

hoenstly, the lien strip or renting my house out - that's a long term goal.. not that high priority. my main priority is getting out of the hole i'm in with the credit cards. if I can not pay on my second, that's great too. it sounds lie no matter what I do, file BK or not.. i can just quit paying it and there is really nothing the bank can do given the value of my house is so underwater.

any advice or input????

thanks.

[JessMN]

Also, if you do debt settlement you would most likely have to pay taxes on the forgiven amount

[keepsmiling]

I didn't even finish reading your whole post because I think you already answered your own question.
Most here have found counseling and settlement a waste of time and money and wound up filing anyway.

Remember that if you settle, you may have some tax penalties, depending on your solvency; retirement funds probably count towards the determination. At your income, I don't know how quickly anyone will settle and I doubt you will do a whole lot better than 50%.

Stripping the lien and being allowed to keep paying your student loans are huge pluses. In a 13, you will also have the option of later surrendering the house if you continue to lose value and decide that is the wisest course.

I'm sure others will be along with similar advice.

[Mayo]

Understand if you file 13 you will live on cash for the next 3-5 years. If you have to get credit for something like a car you have to have the court's permission. Your credit report takes a hit with BK, but when you get used to living on a cash lifestyle credit seems to be something less important. After BK I'd recommend rebuilding your credit but be careful to remember where you came from. As far as the credit counseling I'd suggest using one that isn't a fly by night one on TV.

[HHM]

Understand if you file 13 you will live on cash for the next 3-5 years. If you have to get credit for something like a car you have to have the court's permission. Your credit report takes a hit with BK, but when you get used to living on a cash lifestyle credit seems to be something less important. After BK I'd recommend rebuilding your credit but be careful to remember where you came from. As far as the credit counseling I'd suggest using one that isn't a fly by night one on TV.

That is true of debt settlement as well, debt settlement trashes your credit (because you must default), it is actually easier to get credit IN CHAPTER 13 than it is in debt settlement.

[SMinGA2]

Debt settlement doesn't have good outcomes for most people. You would need all your unsecured to agree to a reduced payout, and you'd need to prepare for the possibility of owing taxes on the forgiven debt. If only some of your accounts settle, it means you're right back to where you are now.

Credit counseling, in my opinion, can be useful for some people. Let's say you had a temporary setback and missed a couple of payments - so your accounts went to default APRs. Credit counseling, when you can manage your minimum payments (of 2-4% of the balance), can put the rates back to the 6-12% range and and allow you to pay them off over ~5 years. It sounds like your current payment level is a stretch, however. And you'd still need to keep paying your student loans.

Ch. 13 puts you in control. My tips to start on a good path: 1) interview several attorneys & ask lots of questions. Find one who is experienced with ch. 13s and takes the time to answer your questions. 2) analyze your budget. Think about where you money goes, and what you need to buy on a daily, weekly, monthly, yearly basis. You want your budget to be accurate going into a 13, so that you'll have money to handle the things you need.

Once you are certain that you are going to file - stop using the cards & start living a cash only lifestyle. This will probably mean that you stop paying on the cards as well. (Might be useful to get in the attorney consults first, especially if there have been any cash advances or large purchases on credit recently. An attorney might advise you to continue making payments on those.)

[momofthree]

If you plan on keeping the house long-term, then getting rid of the second is a good idea. The 2nd already has a lien on you--on your home. If you ever hope to sell that house down the line (say 20 years from now), you'll have to pay off the 2nd before you get any profit. Also, once the first mortgage is paid down low enough that the home has equity again (and this will happen if you plan to keep the house long-term), then as soon as the 2nd has equity, it still has the right to foreclose. I know you said you're really just looking at the short-term right now, but filing ch.13 will probably cost you less than settlement, and definitely less than credit counseling, and it takes care of that 2nd mortgage right away too. Ch.13 is really your best bet.

[seanp951]

I called MMI, ,a debt settlement / consolidation company. I spent almost 2 hours on teh phone with them today.

IN the end, I can't say that it would be better than a Chapter 13. Given my approx 80k in credit card debt, i would have to pay abotu $1750/month, for about 5 years to get out of CC debt. This would not deal at all with my second mortage, which has a 70k balance, a 650/month payment.

my lawyer gave me a projected ch 13 plan payment of 2300. that covers all credit cards, a student loan, and my second. I take home about 7500/month net. so under a chap 13, I have about 5200/month to live on.

under the debt plan i have to pay 1750 to the credit cards. then i pay another 1000 to the student loan, and another 650 to my second. so i'd pay 3400 for the same expenses. so i have 4100/month to live on.

so in the end... if I could actualy live on the leftover 4100...I'd wind up with no BK on my credit rreport, but I'd still havea second mortage with another ten years to pay on it...

i think the BK is better.... will hurt my credit longer.. but i think i'll have more money to live on.

i calculated that ythe BK costs me 140k and discharges 80k in credit cards and 70k in a second mortgage. My student loan is about 120k balance now... but it won't discharge.. my attorney said the student loan woudl go into the plan for payment, just wont discharge. due to how much I owe the student loan, it will get a large chunk of my plan payment.. so essentially, I woudl get to make a student loan payment that is essentially what I pay now pre-BK, and the rest of the money gets split between the CC and the 2nd. so of the 140k that I pay over the life of the plan, about 85,000 of tha tmoney woudl go to the CC and 2nd. 55,000 of the 140k would actually go toward my student loan.. whcih I have to pay whether I file BK or not..

so basically a Ch 13 will cost me 85000 to discharge about 150-160k in debt. so 50 cents on the dollar.

if I do a debt program through MMI - I pay 1750/month over 60 months and all of it goes to credit cards. that doesn't do squat for my 2nd mortgage. i'd have to try and just quit paying the 2nd and work out a settlement on myown... so I"d pay 105,000 over the life of the repayment plan and it would wipe out a balance of 80,000 now.. sucks. even though they reduce the interest rates, they don't reduce them to nothing.. which is what a BK does.

i think I need to do the BK

[knitty]

I think you've done a great job in analyzing your situation. We did debt settlement as a last ditch effort but 2 of the creditors (Chase & BoA) didn't agree and sued us eventually; other creditors were willing to settle for cash up front which we did not have. The BK13 was the best choice we made, and I wish we had done it sooner. But we're a little over a year from the end and are so much better off! Good luck to you

[alice789]

I am answering to this thread because I went through a debt settlement program. They were very informative and spent a lot of time with me covering how the program will affect my credit in bad way. But the company that I went with regularly came to me with settlement offers from my creditors. Check out more information at http://www.vantageacceptance.com/deb...on-debt-relief.

[hadeeh]

Debt settlement companies rarely ever come through with positive results. You are better off negotiating with your creditors rather than paying someone else with their interest in mind, not yours. With your unique situation, it maybe be better to BK and start fresh.