1099's,Debt Settlement,Retirement Funds, and Insolvency :(

[keepsmiling]

I had this hope of settling my debts-- we are self-employed, health insurance issues, upcoming college student, house valuation issues, making for a complicated, possibly dragged-out 7 and no way to fund a 13- -but this info has just pushed me further away from that hope.

Fortunately I found this forum before liquidating my 401K to pay my cc's. Although it's not counted as an asset in BK, I just learned that it is counted for tax purposes when faced with 1099c's.I'd wind up having to hit up my retirement to pay the taxes, which would be significant, in the 10's of thousands I'd guess.

I know most folks here are anti-settlement, but for those of us still considering it as an option, I thought they should have this bit of info- if they are lucky enough to still have untouched retirement funds.

Still trying to figure out if I could make a stab at this by separating out dh's and my debt, each at about 50k...will have more questions on this I am sure.

[HHM]

There is a reason we are anti settlement...it rarely works, is ungodly expensive, and there is ABSOLUTELY NO benefit to you in ANY REGARD doing Debt Settlement as Opposed to BK.

Debt Settlement is a last resort...you only do debt settlement when you can't do a BK for some reason or a BK is somehow not as cost effective (too many assets at risk).

I think you should start down the BK path...until a lawyer really gets into a case, it is hard to judge which chapter of BK would really work. Yes, you will probably need to invest some money in attorneys fees to get a full analysis and case preparation to make an informed decision about whether a BK is feasible and if Debt Settlement is really the best option.

[keepsmiling]

We have started-- got my binder full of papers, have an attorney on retainer (who has kinda screwed me up already), trying to come up with more $ to pay her or someone else, trying to figure out health ins and P/L's and taxes. Still keeping all options open and now wondering about the arbitration card.

[GoingDown]

Yes, settlement is the last option to ever consider.

Your credit will still be shot for 7 years.

You must have a lot of cash on hand or a huge income to even attempt such a thing. And then you will be hit with 1099-C forms the next year and you'll have to probably end up paying the taxes on the forgiven amounts because if you had that much cash on hand, you probably won't fit the IRS definition of insolvent. If you file BK, you won't owe any taxes on the discharged debt.

And if you don't word the settlement agreement properly and have them sign it and return it to you before you pay them anything, they can sell the unpaid debt to a junk debt buyer who will them come after you for the rest of the money.

If you can't file BK for some reason, then your next best alternative is to just make yourself as judgment proof as possible and wait them out, and not voluntarily pay them another penny. It is sometimes the cheapest and easiest of all the alternatives.


EDIT--- arbitration, at least according to other members, seems to be a waste of time in states that have mandatory arbitration laws. I wouldn't count on that doing much for you.

[keepsmiling]

Ack I keep hitting the "cancel" button by mistake, instead of "reply".... hope the third time's a charm lol.

Goingdown---NO as to huge income and cash, roflmao. We are well under the median and probably always have been, in fact we get some help from Liheap and Familycare. As to cash all we have is some very old bonds (that the trustee is going to want, based on the arguable amount of equity in my falling-apart house). However , if we could have worked a reasonable settlement, family would have helped out out. The tax part has now screwed me on that though--- I was hopeful til I read that part. Since we are in our 50's and have not been able to grow anything else for our future- and mine took a huge hit, down 50% at the bottom not long ago- I really don't want to touch the 401K unless it's life or death.

Meanwhile, having to cancel the health insurance, not knowing what income- if any- will be from one month to the next, and concerns for ds's college have all contributed to stalling.

Since I have spent all my free time on this board, I haven't had a chance to get over to the college boards to see how this all plays out when it comes to getting help for the fall. Appreciate any input on that as well, tia.

[catleg]

The way I look at it, settlement turns a dischargeable consumer debt into a non-dischargeable tax debt by virtue of the 1099c.
That's why, if you're high asset or high income, settlement is rarely preferable to a well planned BK even a ch13 if you can't file ch7.
You may want to consider taking a 401k loan, and use that money to fund an IRA or pay off student loans.
You may want to buy 1 or 2 new (used) cars with financing that runs 60 months or 72 months.
You may want to take out additional term life insurance before filing.

[keepsmiling]

Our credit is probably too shot for financing a car. Haven't paid cc's since August and income is pathetic. What I would probably do is cash in my bonds and buy a used one. I am driving a 93 minivan with 150k+.
As to life insurance-- well, what I really need is health and disability. Both $$$$.

[catleg]

You might as well pay for the insurance if the alternative is giving the same money to your creditors in a chapter 13 plan.
You can get a car, the interest rate may be crazy high but again, you're just taking money away from unsecured creditors in your plan to pay it.

[GoingDown]

This is good advice. Listen to Catleg.

[keepsmiling]

Don't you need to have some minimum amount of income for a 13? Is there such a thing as doing a 13 just to keep the house and pay nothing to unsecured? We have very low income- well under half the median.

[HHM]

Don't you need to have some minimum amount of income for a 13? Is there such a thing as doing a 13 just to keep the house and pay nothing to unsecured? We have very low income- well under half the median.

You have to pay something, at least pay back the mortgage arrears. If your budget is that tight, paying ANYTHING other than living expenses is already a challenge.

Usually in low income situations, the better route is to NOT SAVE THE HOUSE. You really need to sit down and do an affordability analysis of the home. Is the mortgage payment 25% or less (ideally 20% or less) of your gross monthly income. If no, dump the house, you cannot afford it anyway.

[keepsmiling]

We don't have any arrears. We can pay the mortgage.
We just couldn't continue to pay crazy cc's and insane health insurance
We would have to live in a one room shack or a really crummy neighborhood to pay less than we pay now. NJ is pretty pricy, and we must live in state.

[HHM]

Well, if you are not behind on the mortgage, why are you considering a chapter 13?

[keepsmiling]

Well, I wasn't lol.
but somehow the convo sort of took a turn that way--- so I wondered, is it a thought if there is determined to be equity?