BK or Collection (Credit Cards)?

[Quandary]

My wife and I have about $65k in credit card debt, some of which is now going into collections. Already, the collection agencies are offering 40%-55% discounts on the debt. Nevertheless, the debt is large and I'm not sure how much we can pay.

The question is whether I should negotiate with the collection agencies or simply proceed with bankruptcy. (If Ch.7, not sure how the means test in California applies as our combined income is approx. $160k).

Any responses are much appreciated.

[HHM]

If its just you and your wife, you are quite in excess of the median income and there is very little chance you would qualify for a chapter 7.

Just realize, if you settle the accounts, the amount of the debt that is forgiven, will be counted as income on your tax return.

I am not judging you, but if your making $160K per year, how are you not able to make at least the minimum payments on credit cards (even in CA). I would think that a lifestyle adjustment would be more in order instead of filing BK.

[Quandary]

Certainly, we are attempting to adjust our lifestyle, but it's still not clear we will be able to make the full payments, with 29.99% interest, late charges, etc.

I didn't hold out much hope for a Ch.7, but can you offer an idea how likely a wage garnishment or judgment might be?

[CATCHMEIFYOUCAN]

I would seek a lawyer, the first intial consultation is free - keep your options open. With Bk you have a lot of protection, from judgements/garnishments/collection calls etc. How long will it take you to pay off your debt vs going into a Chapter 13 (for maximum 5 years) and be done with it!

Good Luck, Catchmeifyoucan

[HHM]

I would seek a lawyer, the first initial consultation is free - keep your options open. With Bk you have a lot of protection, from judgements/garnishments/collection calls etc. How long will it take you to pay off your debt vs going into a Chapter 13 (for maximum 5 years) and be done with it!

Good Luck, Catchmeifyoucan

I agree, I wouldn't let the accounts go too deep into collection. However, specifically regarding garnishment and such...the creditor or their collection agency would have to sue you first, and get a judgment. Typically, the creditors will not even start thinking about a lawsuit until 9 months after first default, and typically it will be more than a year before a lawsuit gets filed (however, the timeline can be shorter or longer depending on the circumstances).

It might be better to be proactive about this...if, after determining what adjustments you can make in your lifestyle and where you can cut expenses, sell items you don't need etc, and devoting that excess income to paying down your credit cards, and you could not pay them off in five years, then you should consider a chapter 13 BK. At least in a Chapter 13, all interest and penalties are frozen and stop accruing (so long as you stay with the plan)

[SinkingFast]

CA allows for wage garnishment of 25% of Net Pay. Also, since CA is a community property state, the non-debtor spouse's pay can be garnished as well. The garnishment will remain in place until the Creditor is paid in full.

How likely Creditors are to come after you in what time frame really depends on what they think you have. The wages you earn. Any other info they can learn about you. If you're working good jobs (which it sounds like you are), drive nice, newer cars, and own a home, Creditors are much more likely to come after you more quickly.

As HHM and CMIYC suggested, it's much better to be proactive in your situation. Make some sort of decision and move on it.

[GoingDown]

CA allows for wage garnishment of 25% of Net Pay. Also, since CA is a community property state, the non-debtor spouse's pay can be garnished as well. The garnishment will remain in place until the Creditor is paid in full.

How likely Creditors are to come after you in what time frame really depends on what they think you have. The wages you earn. Any other info they can learn about you. If you're working good jobs (which it sounds like you are), drive nice, newer cars, and own a home, Creditors are much more likely to come after you more quickly.

As HHM and CMIYC suggested, it's much better to be proactive in your situation. Make some sort of decision and move on it.

Yep, exactly. It sounds like you would be a prime target for a lawsuit, so in this case, I would suggest Chapter 13 BK, too. If you can stick with it for 5 years, it will all be over, and you'll be debt free. I think it would be your best option. In this case, I would definitely get a lawyer to file it for you, because it sounds like it's going to be complicated.

[FoolAndHisMoney]

What's the value of your assets? If you have little or none then the IRS will look at you as being "insolvent" and will not tax the unpaid portion of your settled debts.

http://www.buzzle.com/editorials/1-13-2006-86278.asp

With your income I would stop paying all unsecured credtors and use the savings to settle with them 10 to 20 cents on the dollar. I doubt you will qualify for a chapter 7 and settlement is better then a chapter 13 unless you are trying to save non exempt assets.

[HHM]

However, you need to realize, it is now very rare to settle debts for 10 to 20 cents on the dollar. Such low settlements, if you can even get them anymore, are typically only available on debts over four years old that are in the hands of a secondary or tertiary junk debt buyer.

In today's debt settlement market, 40 cents on the dollar (i.e. 40%) is a pretty good deal. Generally, because of the new BK law, most collection agencies and creditors I see are demanding 50% to 75%.

[FoolAndHisMoney]

However, you need to realize, it is now very rare to settle debts for 10 to 20 cents on the dollar. Such low settlements, if you can even get them anymore, are typically only available on debts over four years old that are in the hands of a secondary or tertiary junk debt buyer.

In today's debt settlement market, 40 cents on the dollar (i.e. 40%) is a pretty good deal. Generally, because of the new BK law, most collection agencies and creditors I see are demanding 50% to 75%.

I told a collection lady at Citi I will give her $1100 to settle $11000 in debt. She told me $2200 and I took it. This was a month ago on debt incurred about 2 years ago. I guess they are all different. Something is better then nothing. 40 cents on the dollar is still pretty good and the poster can probably afford this with a lifestyle adjustment.

[GoingDown]

I told a collection lady at Citi I will give her $1100 to settle $11000 in debt. She told me $2200 and I took it. This was a month ago on debt incurred about 2 years ago. I guess they are all different. Something is better then nothing. 40 cents on the dollar is still pretty good and the poster can probably afford this with a lifestyle adjustment.

If you do go this route, make sure you get a letter from the creditor stating that they are agreeing to this settlement offer, and make sure you keep that letter in a safe place.

Otherwise, they can cash your check, and keep on billing you for the rest.

Or, they can sell the remainder of the debt to someone else and then the new creditor will try to collect it from you.

Since the original poster has a decent income, they would do fine on a chapter 13 bankruptcy and then they would have all of the protections of bankruptcy on their side. Otherwise, they are on their own in dealing with some rather corrupt creditors and collection agencies.

[HHM]

Also too, if you settle, you might have to pay income tax on the debt that was forgiven, and given your income (and you probably own a house), I don't know if you can fall into the IRS "insolvency" exception for paying income tax on forgiven debt.

Just something to keep in mind.

[Quandary]

Thanks for the responses. (Sorry I have been incommunicado, but I really appreciate the advice.) I have decided to attempt to settle these credit card debts prior to charge-off. So far, I may be able to settle with the internal debt departments for 20% of the debt on most cards. Based on some of the replies, that sounds like a decent deal. Thanks again for all your responses.

BTW, does anyone know the effect of a charge-off? If the debt is submitted to a collection agency, is negotiation still possible? For a lower percentage? How does any sort of settlement affect my credit report? (Not a huge concern given my status, but just curious.) Thanks.

[HHM]

Thanks for the responses. (Sorry I have been incommunicado, but I really appreciate the advice.) I have decided to attempt to settle these credit card debts prior to charge-off. So far, I may be able to settle with the internal debt departments for 20% of the debt on most cards. Based on some of the replies, that sounds like a decent deal. Thanks again for all your responses.

BTW, does anyone know the effect of a charge-off? If the debt is submitted to a collection agency, is negotiation still possible? For a lower percentage? How does any sort of settlement affect my credit report? (Not a huge concern given my status, but just curious.) Thanks.

Have you contacted the internal departments yet, and is the 20% number something they gave you, or are you just hoping. Given what a credit card company can sell the debt for, I'd be a little surprised if you were able to get 20% from mainstream credit cards. In any event, good luck. Come back and let us know how it goes.

[Quandary]

Deal is not closed yet, but three cards have offered 20%: $8k vs. $42k. They have even offered to go down to 15% if I can pay sooner. I will let you know once I get the paperwork. Thanks.