MBNA Settlement Offer - What's The Catch?

[Rover]

I have an MBNA credit card that I haven't paid for six months. The total amount is approximately $28,000.

My plan has been to deal with that credit card in a Ch 7 or 13 BK.

One month ago, MBNA mailed a settlement offer to me indicating that they would settle the debt for 40% of the amount owed, or approx $11,200 payable in installments. I ignored the offer and the "deadlines" MBNA set for my acceptance of the offer.

Yesterday I received another settlement offer stating that MBNA would settle the debt for 15%, or a little over $4,000, payable in 3 installments over the next three months (approx $500, 700, $3,000), which I could do.

The settlement offer letter contains the following language:

"By completing this payment plan, your account will be considered settled, and you will not be obligated to pay the remaining balance, provided no additional charges apear on this account after the date of this letter. Also, any future account activity that results in a credit balance will become the property of MBNA. Any violation of this agreement will result in the full balance of $28,000 being due immediately. All payments must be received by the above stated due dates".

So, what's the catch? Have any of you seen any similar offers from MBNA or anyone else?

Obviously, if I filed Ch 7, the entire debt would disappear. However, if I filed Ch 13, which is likely, I might have to pay more than $4,000, albeit over 3 or 5 years.

Also, if I accepted this offer, it would mean that I would have to defer my bankruptcy filing for some period of time because of the preferential payments to MBNA. (What's the rule on this?).

This would seem to be an offer worth considering if:

1) I decided not to file bankruptcy.
2) If I filed Ch 13 and wound up needing to pay MBNA significantly more than $4,000.

However, it seems to me that there must be a catch. Why is MBNA making this offer?

Any thoughts would be appreciated.

[anonymuse]

Have you said anything during any phone contact that you were consider BK? Any indication of your salary (below median, maybe?) With Ch 7, they get nada! Ch 13, very little.

I'd ask them (1) how will this be reported to the CRAs (2) what about the write-off amount that gets reported to the IRS--will you be responsible for taxes on that amount?

[Credit Hater]

Wish I could get a 15-20% settlement offer. Especially in installments, like a few years installments, lol. According to how much other debt you need to clean up, I'd take the offer since its doable.

[Rover]

Have you said anything during any phone contact that you were consider BK? Any indication of your salary (below median, maybe?) With Ch 7, they get nada! Ch 13, very little.

I have never talked to them. Since I concluded that I would need to file BK, it didn't seem like there was any point to talking to them.

[Rover]

According to how much other debt you need to clean up, I'd take the offer since its doable.

I have over $100,000 of other unsecured debt that I would still have to deal with.

So, I am still going to need to file BK.

Therefore, it seems to me that this deal would be worthwhile only if in a Ch 13 I had to pay MBNA significantly more. However, is there something I am overlooking?

[anonymuse]

I have never talked to them. Since I concluded that I would need to file BK, it didn't seem like there was any point to talking to them.

Interesting. I wonder if there is anyway that a creditor can look at your salary history.....

I'd be calling them up and asking questions. (Write them down before you get on the phone and then, if you agree, get everything in writing.) Sure would be nicer on the credit history than BK.

[LostOne0069]

If you're still going to have to file bk then why bother?

one of the things you're forgetting here is that if the creditor settles your $28,000 debt for $4000. You just got $24,000 worth of taxable income... so depending on your tax bracket, you could have a sizable tax bill.... which is NOT dischargable in Bk.

If you're going to file BK anyway, there is NO benefit to settleing with MBNA that I can think of.

[Bobby'sGirl]

I had to remember the tax man, too

The amount "forgiven" by MBNA will be considered income by IRS and if you can't prove to IRS you are "insolvent" there will be a tax bite. This is unlikely to occur if it goes into the BK. My attorney said the IRS looks at assets versus liabilities differently than the Federal Bankrupcy courts. MBNA had made me a 40% offer on $25,000 owed the month before they charged off my account and passed it on to a very aggressive collection agency. He told me that if I get any 1099s in error next year relating to accounts included in BK, I can ignore them for income, and just include a "FYI" letter when I file the 1040 stating my BK and giving the date, number, district, etc, to keep them from even sending an "other income reported to government" notice to you.

So you need to bring up this possibility with your lawyer to also consider when comparing amount you may be paying them in Chap 13 versus settling for much less than owed.

[AMISLANDER]

Forgetaboutit!

I paid $4,500 off in a settlement to MBNA in 2003 and yes, it came up as income this year on my 2005 taxes...if you're filing bk...don't even bother!

[anonymuse]

Might he be able to declare insolvency to get rid of the taxes?

[LostOne0069]

Might he be able to declare insolvency to get rid of the taxes?

But why bother?

Spend that $4000 on something exempt and file bk.

Why pay MBNA ANYTHING and then have the worry about whether or not the IRS is going to accept your insolvency case? Especially since he's still planning on filing BK on TOP of the settlement.

If he was planning on the settlement INSTEAD of BK, I might feel differently... but I see no benefit to settling 1 account and then filing BK on several others.

[anonymuse]

Is MBNA all of his debt? (Mine is on two credit cards--that's why I was asking--my lawyer couldn't believe that I only had two since he sees most people with 20.)

[LostOne0069]

He said he still had another $100k of CC debt after the MBNA and that he would still have to file BK even with the MBNA settled.