Negotiating Debt? (Don't know what this is called)

[LadyInTheRed]

Since your husband is already late and can't file bankruptcy, try settling his debts. If that doesn't work, or it does work but doesn't solve your problems, then you can file.

You asked how much you will pay in income tax. That depends on your tax bracket and whether you pay income tax in your state. But, I'd count on paying about 30%. I have read that you may not have to pay tax if you are insolvent, but I don't know how insolvency is determined. A good question for your attorney or a CPA.

Also, ask your attorney how much experience she has with debt settlement and what her level of success has been.

If it were me, I'd exempt the $10k if I could and file Chap 13. You say you can't pay your credit card bills and pay your living expenses. Transferring a balance only prolongs the pain. Can you pay all of your unsecured debt in 5 years?

[moe]

Thank you ladyinthered. I love your pseudonym.

One reason I am reluctant to file the Chapter 13 now is that I have a preferred payment.

It is to my father. I do not want my father to know about my bk.

In a brief discussion w/ a Bk lawyer, he said the preferred payment would have to come out of my pocket but suggested it could be folded into my plan. (He was not the nicest guy--he spoke fast and was very brusque so I could not get details.)

So, in theory, I could file. But I'd prefer to wait a year to clear out the preferred payment.

If I could get the debt load down to $45,000 then I could pay it off in 5 years--exactly five years--so long as we lived very frugally on a cash only basis. And nothing went wrong.

But I'd be in that exact situation if I could negotiate my $43,000 of debt also. I'd be in the same situation with Chapter 13, as long as my negotiation is successful. My husband cannot declare bankruptcy because it would make his job very difficult. (I realize it is illegal to fire someone for declaring bankruptcy. But he would have trouble.)

The debt negotiation is risky. I might lose $10,000 and still have to declare. Then, I would have to come up with a whole 'nother chunk of change to pay the lawyer.

But then I also have to pay $10,000 to the IRS.

I better ask the attorney about her experience with debt settlement and what her level of success has been.

Wow, what a fiasco this is. It's so hard to figure out. I cannot believe I had to make that preferred payment. It was such bad luck!!!!!!!!!!

[catleg]

I'll just step in here and point out that no matter how much your debt is inflated by default interest rates (30%) and late/overlimit fees, your tax liability is limited to the original principal balance, in other words the "value" of whatever was purchased on the card or the amount of cash advance. Minus whatever payment you make to settle the account. If you get a 1099 from the lender make sure it's for the correct amount.

[moe]

Thanks Catleg!

So far, we're on the edge. We're on the edge of everything going wrong and having default interest rates and such. We'll get those if we go through with this plan and I don't pay for 90 days. (Does it have to be 120 days?)

But we don't have those yet.

[LadyInTheRed]

Moe, it sounds like you have a tough decision to make. I have some more thoughts.

You are trying to settle debt for about 25%. From what I've read, that's very unlikely.

Keep in mind that a debt settlement does negatively affect your credit rating. I don't know how it compares to a BK as far as the damage it does.

I mentioned before that your income tax on settlement could be reduced if you are insolvent. Coincidentally, I was reading a legal magazine this mornign and came across an article on the subject. My understanding from the article is that if at the time of debt settlement, your total debt exceeds your total asssets, you can exempt debt forgiveness from taxation up to the difference between liablities and assets. For example, if you settle $43,000 in debt for $10,000, you will have income of $33,000 (leaving out for the moment the fact that $43,000 is probably not all principal as Catleg points out). But, if your debt exceeds the value of all of your assets by $15,000, you can exempt $15,000 of the income from tax, leaving $18,000 in taxable income. If you have certain tax credits, you may have to give back part of the exemption. The article wasn't clear on the deatils of that. I don't know whether you would include your husband's debts and assets in determining insolvency. That may depend on whether you are in a community property state and whether you file separate or joint income tax returns.

Many people are successful in holding off creditors for a long time to delay filing bankruptcy. You may be able to put it off for a year or more, especially with the help of an attorney.

You seem to want to avoid bankruptcy at all costs and I get a feeling it comes from feelings of shame that I think most of us go through. While avoiding bankruptcy is preferable if you can, you need to get past the shame and emotions and look at it as the buisiness decision that it is. Your creditors will not take your decision personally and will hardly notice if you file. You are a tiny drop in their huge ocean. The sooner you figure out how to resolve your financial issues permanently, the better off you and your family will be.

Regarding your father, I was reluctant to tell my father and stepmother of my plan to file, but decided to do it so they could understand why I can't hop on an airplane at any time to go visit. I was pleasantly surprised by their response. They seemed a bit shocked at first as they have always known me to be reliable and they highly value paying off what you borrow (as do I). But, when I explained my situation and how a Chap 13 works, they seemed to understand. When I was getting ready to leave, my step-mother, the more judgmental of the two, said "I think you are making the right decision to file bankruptcy." You might be surprised by your father's reaction. Maybe not. We all want our parents to be proud of us, but we are adults and we need to make financial decisions that are best for us, regardless of whether our parents approve. If you decide you won't be able to avoid bankruptcy forever, don't delay it just to avoid having your father find out. Get it over with so you can get to the end of that five year plan as soon as possible.

That's my two cents, anyway. You have a very hard and important decision to make. Make sure you make it for the right reasons.

I love your pseudonym

Thanks. I'm terrible at coming up with screen names and usually use some form of my real name. For obvious reasons, I didn't want to do that here. I was wearing red when I registered, so a name came easily for a change.

[flyinbroke]

I'll just step in here and point out that no matter how much your debt is inflated by default interest rates (30%) and late/overlimit fees, your tax liability is limited to the original principal balance, in other words the "value" of whatever was purchased on the card or the amount of cash advance. Minus whatever payment you make to settle the account. If you get a 1099 from the lender make sure it's for the correct amount.

Hmmm, one of mine has not been used in 3 years for any kind of charges. Another had not been used in over 2 years. That could be interesting....

[moe]

Thanks to all people here who have taken the trouble to answer my questions.

I truly appreciate it.

Lady: Yes, there is definitely a feeling a shame but there is also a huge thing about bankruptcy in my family. It's complicated to explain so I won't go into that.

The thing I've realized from this forum: It's really to our advantage to get my husband's debt settled, if at all possible. I've seen some that are 15%...I've seen some that are 50%. Let's say we could take $10,000 and settle $30,000. That might give us some breathing room...Maybe...

Maybe that's overly optimistic. My husband's credit would be ruined for some period, who knows for how long.

Then, if the breathing room were not sufficient, I could declare Chapter 13.

That's what it looks like is the most rational strategy at the moment.

The thing about your debt/asset ratio on taxes sounds way complicated but maybe we could go that way to avoid a huge tax bill...

I personally find the idea of debt repayment so alluring not just because of the shame but because, if you could get enough debt wiped out, you'd be freer. Yes, you'd have no credit for years but you aren't locked into anything.

Plus it seems nuts to pay a lawyer 4-5,000 when I could get tons of debt wiped out with that money.

I also don't like the 5 year trap of Chapter 13--but obviously, it may become unavoidable.

Plus, paying back was what I planned all along. Things just got out of hand because of unemployment. So far, it's not that different from what things have been like so far. We've been broke forever, because we've always had these extensive periods of unemployment/underemployment. We'll run out of credit (although I actually have gobs of free credit cards) eventually. We're just delaying the inevitable. I can live on a cash only basis now--we both have full time jobs. FINALLY. The only thing keeping me from living on a cash only basis is the credit card payments. Catch-22.

The problem is getting a good lawyer and getting one to cooperate with us. I honestly DO NOT think this is a fraudulent plan. I am not taking on debt in order to declare bankruptcy. But I'm not sure the lawyer will go for it, as she knows my husband cannot declare bankruptcy and so perhaps she feels we are not dealing fairly with the creditors in pretending that he can. We would sort of be implying that, but we needn't lie about it.

I know people said that you could do it without a lawyer but I'd rather have a lawyer involved when it comes time to ensure they don't sell my debt after the settlement.

[flyinbroke]

I am in the same dilemma. Of 18 accounts I can't pay 5 of them...I chose the ones that were closed as part of opting out. I have about 35 accounts on my CR and all but 4 are in good standing (Citi has not reported me yet and I got a settlement letter today). Filing a 13 (all I qualify for) traps me for five years and decimates all 35 accounts. Default and settlement wrecks five of 35. I know the good 30 won't count as much as the bad 5 but it is a tough call....

[BCA2009]

I am in the same dilemma. Of 18 accounts I can't pay 5 of them...I chose the ones that were closed as part of opting out. I have about 35 accounts on my CR and all but 4 are in good standing (Citi has not reported me yet and I got a settlement letter today). Filing a 13 (all I qualify for) traps me for five years and decimates all 35 accounts. Default and settlement wrecks five of 35. I know the good 30 won't count as much as the bad 5 but it is a tough call....

It's a personal choice, if I had not been able to file chap 7, I would not have gone chap 13, I would have done the settle one at time thing. I would not hire a lawyer or debt settlement company, I would have just doen it myself. You have to decide if you can live on a 5 year plan under a trustee. I know I would fail, so I wouldn't even have tried it.

Good luck with whatever you decide.

[moe]

WAIT! But what about this policy where you don't pay one and they jack up your rates for all others?

Doesn't anyone know about this policy? That's what's going to screw us up big time. Because if our rates go up, we are DOOMED. If they stay where they are, we have a chance with negotiating debt.

[BCA2009]

WAIT! But what about this policy where you don't pay one and they jack up your rates for all others?

Doesn't anyone know about this policy? That's what's going to screw us up big time. Because if our rates go up, we are DOOMED. If they stay where they are, we have a chance with negotiating debt.

If you don't get behind, they won't settle at all. If you don't get at least 4 to 6 months behind they won't go below 50%- 60% of the outstanding balance. The only way they will settle is if they think that is the best that they can get from you. Sorry, but settling multiple credit card debts will destroy your credit just like BK. Settling is probably worse than filing Chap 7. Unless you have alot of cash on hand, it could easily take two years or longer to settle multiple credit cards. In the mean time you have to quit paying them to get them in a position to accept a settlement. So you could have two years worth of bad payment history on your credit report before you can start rebuilding. In a Chap 7 you can start rebuiliding as soon as you are discharged.

I'm not trying to discourage you from settling your debts, but there is no way to do it without tanking your credit.

[flyinbroke]

I believe universal default is dead as a result of the CARD act. Many have decided against it before the new regs came into play. I have defaulted on five so far. GE Money is the only one to raise my rates. No one else has yet.

BCA is right. THe only thing that won't tank your credit is keep on slogging as you are. There are no guarantees there either since CC companies are closing accounts without warning, and dropping credit limits to make you look maxed out. If you want to settle you have to quit paying. If you are filing CH7 there is no point in paying any more payments.

I can only file for a 13, I did not qualify for a 7. Thus I am only hitting the nuke button if I really have to but my credit will still suck. Then again, it pretty much did when I was in the 700s because of all the games they played with balances.

Bottom line...they will not settle as long as you are paying as agreed; they see you can make the payments and they are fine with the status quo.

[moe]

BCA2009: I have $10,000. (Or I will have $10,000.)

I'm trying to settle $45,000 of debt.

I can't file Chapter 7. So it will be 6 months of not paying, right? Will it take 18 mos. to settle with them?

So clearly the best thing for me would be 25 cents on the dollar. But even 50% would not be bad. Because if I don't declare, then I will be paying 100% on the dollar. I guess you have to pay 30% of what you settle for to the IRS? So if I were extremely luck and managed to get them to take the $10,000 for the $45,000 I would have to come up with about $10,000 to pay the IRS.

Any debt we can get rid of could potentially help us. But only if they don't raise our APRs astronomically and then not settle. Then, we're screwed.

It's really a tough one. I wish someone would make it easier to negotiate debt without bankruptcy.

[flyinbroke]

If you have 45K and you pay 10K the IRS will hear about 35K....and you have to document that 35K as income. It may be less since it has to be based on principle, but with the way they finagle the accounting I would not be shocked if they managed to keep all of this intact. The IRS gets a 1099 for whatever you did not pay. If you paid 50 percent, they hear about the other 50 that is now your income. If you successfully negotiate a 25 percent payback, the IRS will hear about the 75 percent you did not pay back...this is now your income.

Now there is the insolvency that you can file for with the IRS...basically as explained already. If you owe more than you have in assets then you are insolvent.

Ultimately, you have to weigh the pros and cons of each and see which will bite the least.

BCA2009: I have $10,000. (Or I will have $10,000.)

I'm trying to settle $45,000 of debt.

I can't file Chapter 7. So it will be 6 months of not paying, right? Will it take 18 mos. to settle with them?

So clearly the best thing for me would be 25 cents on the dollar. But even 50% would not be bad. Because if I don't declare, then I will be paying 100% on the dollar. I guess you have to pay 30% of what you settle for to the IRS? So if I were extremely luck and managed to get them to take the $10,000 for the $45,000 I would have to come up with about $10,000 to pay the IRS.

Any debt we can get rid of could potentially help us. But only if they don't raise our APRs astronomically and then not settle. Then, we're screwed.

It's really a tough one. I wish someone would make it easier to negotiate debt without bankruptcy.

[MyBailOut]