settle during bankruptcy process?

[Wilco]

I filed for Ch7 on 2/9. By now, all my creditors know about it. I have 6 creditors, all unsecured except for best buy and my car.

I was thinking, and like everyone else, I didn't really want to BK. I was left with basically no choice after Discover's CA sued me while I was trying to settle everything.

If it's even legal, is there any chance I could make one final offer now that I've filed Ch7 to settle these for 5-10% of the balances and then annul the BK? That would be much better, obviously, for my future credit/backgroundcheck to just have some late payments and a bunch of settlements rather than a full blown BK. Now that they know it's filed and paid for, I see no reason they wouldn't take whatever they can get and call it done.

I don't, however, even know if this is legal since I have already filed. Has anyone done or tried this already?

[Dst1]

I think your presumption is all wrong. Settling now is not going to make any difference in your credit rating at this stage of the game not unless you play your hand perfectly. And I mean perfectly. And even then it probably won't help much.

[Wilco]

It would depend on all 5 creditors settling for pennies rather than nothing. And in the long term, 5 accounts settled with late payments is undeniably better than a bk. Don't forget, many places ask if you EVER filed and the judgement record never goes away even when the CRAs drop off after the decade. It's never going to really go away so if it's legal and someone could explain it a bit to me how to make it happen I'd appreciate it. I just don't want to feel I left any option unexplored with such a life changing event.

[AngelinaCat]

Wilco, once you filed, that is IT. You cannot approach any of these creditors, or entertain any kind of communication/deal with them. Our attorney warned us VERY sternly that if we were to make any kind of side deals with any creditor(s) outside of the BK, that we would run the very real risk of having our BK dismissed and then not EVER being able to file BK against that list of creditors ever again.

Further, the trustee can go after whatever you might be paying on the side, and have that voided out. You will have accomplished nothing except causing yourself a world of hurt.

Sorry to burst your hopes, but please don't do it.

Good luck to you!

[helpmeout]

Since you already filed, it will be on your public record for around 10 years. Even if the Trustee lets you dismiss it.

The damage is already done.

[DebtHater]

If you really feel compelled to pay something toward the creditors I would wait until your case is closed.

Like Angelina said, you filed, period! You can't take it back. If you attempt to work out deals with the devil during the BK process there is a very good chance your case will be dismissed. Then you are back where you started and no guarantees that any creditors with work with you. In fact they can all start to sue you knowing you can not file again.

If it makes you feel any better a bunch of settlements on your credit report isn't that much better than a BK on it. The biggest difference between the two is a chapter 7 hangs on it for 10 years. Settlements only stick around for seven.

[meateater]

You can't undo the past - since you've filed, the answer to a question as to whether you filed bankruptcy will always be "yes", regardless of what efforts you might make with creditors. As pointed out above, you run the risk of getting the entire case dismissed if you start talking to creditors. And its likely that the creditors won't talk to you because of the automatic stay. In terms of a future background check, it might be easier to explain why you filed rather than trying to explain filing and then trying to settle.

Since you've alrady filed, you should take full advantage of the fresh start that bankruptcy offers.

[HHM]

This article seems appropriate for this thread.
Bankruptcy Stirs the Emotions

Bankruptcy is about "facing your fear", it is about being "courageous" and doing the right thing for your financial health,

Lose the guilt, if you qualify for chapter 7 bankruptcy, then settlement is a waste of money in the first place. Lose the guilt, bankruptcy is how you keep yourself from being a burden on everyone else and how you take care of your family.

[flyinbroke]

Like everyone said, you can't undo the "nuke" button once you push it. The credit is decimated, for now, but this is not the end of the world...most people were getting credit before they were even closed again. Take advantage of the fact that you will owe nothing and don't worry about settling.

If you really feel compelled to pay back, wait till it is all over. Otherwise, you can destroy yourself far worse that a BK alone can do.

[HHM]

As for BK and credit, realize that it is NOT a 10 year death sentence. Bankruptcy only meaningfully impacts your credit for two years. Meaning, that the FICO score and other models only discount your score for about 2 years after the BK. After that 2 year window, most peoples credit will fully recover 700+.

[thereshope]

Bankruptcy is a fresh start. I pulled my credit report and was pleasantly surprised at my score and while it is lower than it was before I got into my financial melt down, it looks promising. Look forward to moving ahead and getting the debt behind you.

[sadbutinneed]

Not only can you not dismiss and therefore annul the bk filing, but if you settle you will be held liable for taxes on all these "forgiven" debt amounts. So paying them the 5-10% is a waste of money if you qualify for Chapter 7, and if you did settle, the tax issues next year could be enough to put you back into debt.

HHM has it right here.

[Mensa1]

Not only can you not dismiss and therefore annul the bk filing, but if you settle you will be held liable for taxes on all these "forgiven" debt amounts. So paying them the 5-10% is a waste of money if you qualify for Chapter 7, and if you did settle, the tax issues next year could be enough to put you back into debt.

Actually sad, there is GREAT misconception here on this issue of debt forgiveness and taxation. To sum it up in a nutshell if a person is "insolvent" (debts exceed their assets) prior to the debt being forgiven, then the forgiven debt is not taxable. It doesn't matter how many 1009a's or c's you get from creditors, if you owed more than you are worth before debt was foregiven. If so, then there are NO taxes owed. NO Bk is required either, but if you do file for Ch 7, then the discharge is a slam-dunk of no taxation due; but not required.

A review of IRS Form 982 and its instructions will give you some insight into the subject.

[HHM]

That is slightly inaccurate, it is the assets minus debts the day after the debt is forgiven. For example, if you owe $25,000 and settle it for $12,000; you don't get to deduct that $25K from your asset value.

But you are correct, there are exceptions to paying income tax on forgiven debt. Generally, when the tax issue is brought up, it is merely to point out that there IS A TAX ISSUE.

The IRS treats forgiven debt as income, there is no question about that. However, there are certain exceptions to actually paying it. (i.e. insolvency, bankruptcy etc.). Here is the problem, if your credit debt is what is making you insolvent and you settle that debt, you are no longer insolvent and will have a tax liability.

[Mensa1]

That is slightly inaccurate, it is the assets minus debts the day after the debt is forgiven. For example, if you owe $25,000 and settle it for $12,000; you don't get to deduct that $25K from your asset value.

Actually, I don't think that the above description does it justice either. I agree that I didn't elaborate enough to explain the calculations done both before and after debt forgiveness, so I'll try it again below.

Insolvency is calculated the day before the debt is forgiven. The extent of insolvency is calculated after the debt is forgiven. You do deduct the 25K along with all your other debt, from your net assets, and if a negative number then you are deemed insolvent. Then the calculation begins as to how insolvent, or IF a portion of the forgiven debt becomes taxable, or not. The example in IRS 982 instructions below:

Example. You were released from your obligation to pay
your credit card debt in the amount of $5,000. The FMV of
your total assets immediately before the discharge was
$7,000 and your liabilities were $10,000. You were insolvent
to the extent of $3,000 ($10,000 of total liabilities minus
$7,000 of total assets). Check the box on line 1b and include
$3,000 on line 2.

If in the IRS example above the assets were 5K, then there still would be NO taxable income derived from the debt settlement because the taxpayer still has zero net worth, after debt forgiveness.

So in your example if the debt settled for 12K and the debtor still has a 0 or negative net worth after settlement, there is still NO taxable income on the 13K of forgiven debt. Of course if the settlement creates a positive net worth for the debtor of say 3K, then the debt is taxable ONLY to the extent and by the amount that produces a positive net worth. Confusing; Yes, but debt forgiveness creating taxes owed for a party with serious financial issues is hardly a given. I have always advised folks incurring debt forgiveness of any kind to use a CPA for tax prep in the tax yr that forgiven debt occurs.