Negotiating with creditors BEFORE filing chapter 7 -- GOOD or Bad Idea?

[delray]

I'm new to this, so please explain. I am completely busted. My story is posted here in a different topic. I am current (nothing 30 days past due yet). Should I call my credit card companies and ask them to take 50 cents on the dollar and consolidate the debt for me so that I can start paying once I find a job or is that a bad idea? By calling them, would I inadvertently cause them to get nervous and file some type of action against me? Has anyone else done this? I was trying to see if there was a way to avoid chapter 7 and just renegotiate the debt and then find some type of job and start paying and use Chapter 7 only if I am unsuccessful .... What are your thoughts? I have 100k credit card debt. Thanks

[shipo]

The big negative to a negotiated debt reduction is the dreaded 1099-C you will get for the difference. When you negotiate debt like that down from say, $100,000 to $50,000, the IRS considers it income, and you will suddenly owe taxes on that $50,000 of "forgiven" debt. If you file for bankruptcy, you will wipe out virtually all of your debt, and there will be no tax consequences.

[nellie228]

Hmm... My BK attorney didn't mention that. I have about 75K and I have one loan suing me for 31K of it. My attorney said she could try and negotiate it all down or do a Ch. 7. I didn't know that if she negotiated the amounts lower with each of the creditors I owe, that there would be a 1099 showing up in my mailbox. Bummer.

[shipo]

Hmm... My BK attorney didn't mention that. I have about 75K and I have one loan suing me for 31K of it. My attorney said she could try and negotiate it all down or do a Ch. 7. I didn't know that if she negotiated the amounts lower with each of the creditors I owe, that there would be a 1099 showing up in my mailbox. Bummer.

Yup, that was one big reason why I didn't even bother to negotiate with my creditors.

[nellie228]

The only sad part is that I had planned on purchasing a home next year and had been saving for it. If I do the BK then I will need to wait 2 years. That's the minimum amount of time with an FHA loan. Conventional is 4. So, what you're saying is that if I end up negotiating it all down to only 10K, then I will receive a 1099 for approx. 65K, 24% tax bracket so another $15,600 due. Hmmm... I guess it comes down to how bad I would like to purchase a home...

[shipo]

Yup, but that's better than some of us. We sold our house in 2013 for a significant loss (even though we'd owned it for 11 years and put a quarter of a million in upgrades into to it), and then I had to file for Chapter 13 in 2015; given the two year waiting window, that means I'll need to wait until 2022 before I can qualify for an FHA mortgage; basically nine years of renting.

[flashoflight]

Yup, but that's better than some of us. We sold our house in 2013 for a significant loss (even though we'd owned it for 11 years and put a quarter of a million in upgrades into to it), and then I had to file for Chapter 13 in 2015; given the two year waiting window, that means I'll need to wait until 2022 before I can qualify for an FHA mortgage; basically nine years of renting.

With a 13, you can already qualify for a FHA with manual underwrite at the 12 month mark of the chapter 13 (years ago in your case) as long as you're less than 30 days late on plan payments and credit payments during the last 24 months. You will need a lender that specializes in FHA manual underwrite so you can't just call any lender that advertises on the radio and expect a loan.

[shipo]

With a 13, you can already qualify for a FHA with manual underwrite at the 12 month mark of the chapter 13 (years ago in your case) as long as you're less than 30 days late on plan payments and credit payments during the last 24 months. You will need a lender that specializes in FHA manual underwrite so you can't just call any lender that advertises on the radio and expect a loan.

Yeah, I meant to go back and edit my post to say, "...2022 before I can qualify for an FHA automated underwrite mortgage...", I just forgot to do that before the "Edit" time limit expired.

As for what to do next, I'm torn; my wife and I are doing low level house hunting and have seen several both in our price range and which "rock our boat", but I do not have time to deal with the hassle of applying for even an automated underwrite these days, much less what I imagine to be a significantly more complicated process for a manual underwrite.

The other decision point is, I came out of my Chapter 13 back in March with only a few thousand saved. By pretending to be in the Chapter 13 since my last payment in February, but paying my savings accounts instead of the Trustee, I've gotten a nice chunk saved up for a downstroke for a house, but not enough yet to get to the 10% mark, much less the 20% mark for a down payment. I've been "told" I can borrow from my 401K for use as the down payment, I'm just not sure I want to go that route.

[flashoflight]

shipo I feel you on the hassle factor for a mortgage. Keep the 401k intact. The 401k is useful for reserves and I think it counts as 60% of balance, which makes sense because it is pre-tax. As reserve, it costs no taxes to use and you might need a lot of it. You might want to look at the rate sheets for some normal FHA lenders as well as manual underwrite folks (Carrington Mortgage has a publicly available rate sheet with overlays). It may actually be easier to do manual than automated if you can accept the increased pricing vs automated. At least you don't have to deal with the trustee anymore like I do.

[shipo]

I figure, worst case, if I do take a loan from the 401K, I'd have the full amount paid back within 24 months; possibly in as little as 12 months.

[justbroke]

Like flashoflight wrote, a lender that will do manual underwriting can be difficult for those coming out from a Chapter 13. They are out there, but it typically requires shopping. I read a lot of the "wholesale" (broker) sheets and see many that state "automated underwriting only." They'll only accept an Approve/Eligible from FHA. When they find the bankruptcy, they have to manually downgrade the application to "manual" even though it (even mine) comes back Approve/Eligible. Unfortunately, that's when many (former) Chapter 13 borrowers find out the hard way. You'll be far into the loan process, already have a purchase contract, and then someone catches that the loan needs to be downgraded to comply with the FHA rules. That's when it could derail a purchase contract and/or the closing.

If you are less than 2 years from a Chapter 13 discharge, make sure that you shop around. Make sure you ask whether they'll do manual underwriting for an FHA. I don't expect that many mainstream banks will do the manual downgrade. You may need to shop through a broker. There are so many brokers out there it's quite amazing. They have so many different products and non-standard options that it's like trying to find the perfect pair of socks. Sure, everyone sells socks, but are they the socks you need. (Okay, bad comparison.)

[shipo]

Thanks justbroke, I'm still undecided on what to do next, and the specter of a new job on the horizon, which may or may not require a geographic move, isn't making the decision any easier. What I do know is our current living arrangement, a small "care-taker" apartment on a working horse farm, is getting tighter and tighter; I've been designated a permanent work from home employee by my current company, this coupled with the fact my wife is starting her own business, from our home, means we are constantly getting in each other's way, either because we're both on conference calls at the same time and trying not to talk over each other, or because our relatively small kitchen table has two computers and five HD monitors on it.

I know the whole manual underwriting process is going to be a challenge, something which I certainly don't have time to mess with, is going to be the single largest deal breaker for me, or, said another way, March of 2022, my two year anniversary of discharge, is going to be when the home buying process will go into high-gear.

Circling back to the to the comment about a new job on the horizon; one of the two financial service companies courting me right now is a very large provider of mortgages, and from what I've been able to determine, they may be the single largest mortgage provider in the world with the ability to manually underwrite a mortgage. Do they have preferential treatment for employees? Unknown.