To file or not to file

[nmocean]

My wife and I have credit card debt, mine was from going to college and totals about 15,000 hers totals around 20,000.

We were ok making payments on time etc until within a four month period we both took 50% pay cuts at work. We started getting behind on the CC as we struggled to work overtime etc.

We are behind on all the cc's and they are offering settlements to clear the debt. I have a bonus coming in March a lawsuit settlement coming in May and would be able to take a 401k loan this month to settle more almost all them.

The question is BK will kill our credit and stay there for 7 years, settlement will kill the credit but not be as bad as BK since the credit is dead. I have a daughter going to college in a few years and I want to be able to be there to help her.

I keep hearing the settlement is a much better way to go what does everybody think?

[justbroke]

First, I must say this and by all means don't take this as a.) not answering your question, b.) being mean and unhelpful, and/or c.) not minding my own business.

Never borrow from your future to pay for the mistakes you made today. (Reworded: never borrow from your 401(k) to pay for credit mistakes today.) While you would payback the loan in the 401(k), you lose the interest that the money would have earned, compounded, for whatever period you have the loan. You actually lose money over the life of your career before retirement. )

The question is BK will kill our credit and stay there for 7 years, settlement will kill the credit but not be as bad as BK since the credit is dead. I have a daughter going to college in a few years and I want to be able to be there to help her. I keep hearing the settlement is a much better way to go what does everybody think?

A Chapter 7 stays on your report for 10 years. I have been able to rebuild my credit and do just about anything I wanted all in just 2 years from filing (converting to) my Chapter 7. It really depends on how you treated credit before filing and how you treat it after filing! While I'll probably never have an American Express again, I am comfortable with what credit is available to me (and it is significant).

I don't know whom you hear from, that tells you that settlement is better. Settlement is just as bad as bankruptcy and settlement does not have a guaranteed finality. A settlement will still show on your credit as "paid less than owed" (or whatever the notation). It is a negative mark, just like bankruptcy. It will be there for 7 years.

I will agree that bankruptcy is the nuclear option. Once you pull the pin, you can't use it again for 8 years (for Chapter 7 discharges -- a Chapter 13 could be filed in the interim). This nuclear option may not be right for everyone, given their income and debt.

Now, is bankruptcy right for you specifically? I do not know, but your debt seems a little on the lower end. You may also have an issue in bankruptcy since the creditors may review the purpose for your spending, see that it is college debt, and seek to have it declared non-dischargeable. (That is because it would otherwise had not been dischargeable.) It's a gamble in bankruptcy when you have charged non-dischargeable taxes (income, property, etc) or non-dischargeable student debt to a credit card.

I would consult with several bankruptcy attorneys in your area that can handle student debt. Again, you may not be a good candidate because of both the student debt and the relatively low amount of debt.

[keepmine]

Another potential problem is, that lawsuit settlement may well become property of the bk estate unless it can be exempted.
You really need to see a few lawyers because, your bk isn't going to be a routine run of the mill case.

[AngelinaCat]

Do NOT EVER consider robbing your 401K. You are robbing your future. Trust me I know. 'Hub and I liquidated his trying to stave off BK. That was one of the worst decisions we ever made.

We now only have 'Hub's measly pension and social security to live on and could use that 401K money....

Do NOT do it. Hear me?

[LadyInTheRed]

If only I had thought of filing BK before I decided to take a 401k loan to pay of a portion of my credit card debt! BK didn't even cross my mind as an option. I filed BK less than a year later and am still paying off the 401k loan that I used to pay a debt that would have been discharged in my BK.

If you use a 401k loan to pay off debt and then end up having to file anyway, your 401k payment will not be deductible as an expense on your means test. That could throw you into a Chap 13. (I would have been a 13 anyway, but it may make a difference for you.)

[LadyInTheRed]

I keep hearing the settlement is a much better way to go what does everybody think?

Kilowat didn't find that settlement was a better way to go. Read the following threads started yesterday and today:

http://www.bkforum.com/showthread.php?81611-How-to-deal-with-collecters-that-just-resell-your-debt

http://www.bkforum.com/showthread.php?81612-Oh-I-give-up-I-m-filing

[pamkev]

Do not use your 401k we were very close to doing that till we found this forum and so thankful we did not follow though

[AngelinaCat]

@pamkev:

[bcohen]

The idea that settled debts look "better" on a credit report than bankruptcy is a myth. In fact, most people find that their credit improves as soon as they file, and recovers significantly after the discharge is granted. Once the case is closed, offers for new credit will start pouring in, which if used responsibly can allow you to have top-tier credit again within a year or two. Settling the debts won't allow for that to happen.

I won't even get into the idea of robbing your future to pay old defaulted debts, or the possible tax consequences of settling, because I KNOW you won't be foolish enough to do that!

[AngelinaCat]

I won't even get into the idea of robbing your future to pay old defaulted debts, or the possible tax consequences of settling, because I KNOW you won't be foolish enough to do that!

Good for you! That would be like throwing perfectly good money down the toilet!

[nmocean]

Well I have read all the responses so far and I know people who have filed BK and they are out traveling buying new cars like nothing ever happened. I just hate mentally to have that stigma that I filed BK. I had excellent credit before the job pay cuts mid 700's, I know bad things happen to good people and pray to be guided the right way. We have gone to two attorney's one told us to file everybody does it etc etc. The other one said hold up wait don't file BK is too hard and you really don't want to go down that path. Who knows I think I'll make another appoint with another attorney to see what they say.

[justbroke]

A bankruptcy attorney that tells you that it's too hard and that you don't want to go down that path, probably doesn't exclusively practice bankruptcy! I always recommend that you see at least 3 attorneys, but 5 is more practical. Make sure they are not just general practitioners that are too busy doing family law and other things (unless it's a larger firm with many staff attorneys and areas of practice).

[LadyInTheRed]

Well I have read all the responses so far and I know people who have filed BK and they are out traveling buying new cars like nothing ever happened.

One of two things are happening. Either they no longer have debt so are now able to afford to do those things or they haven't learned their lessons and are going to get themselves into trouble again.

I just hate mentally to have that stigma that I filed BK. I had excellent credit before the job pay cuts mid 700's

The stigma really will all be in your own head. Yes, your credit report will be affected, but it will recover. Don't base your self worth on your credit score. It's simply a mechanism created by the credit industry so they can decide who to give credit to at what terms. It's all business, not a reflection of your value as a human being. Filing BK is a business decision. If you look at it that way, you should be able to get passed the shame which should play no roll in your decision.

We have gone to two attorney's one told us to file everybody does it etc etc. The other one said hold up wait don't file BK is too hard and you really don't want to go down that path. Who knows I think I'll make another appoint with another attorney to see what they say.

Definitely talk to at least one more attorney.

If you came up with a tight budget and had the discipline to stick with it, could you pay off your unsecured debt within 5 years without filing BK or using your 401k? If the answer is no, that is a good indication that BK is a good option for you. Don't rely on settling your debts when answering the question. Too many people tried that option and filed bankruptcy later wishing they had gotten it over with earlier.

[nmocean]

Ok, I just talked to the attorney and have an appt for Friday at 10:00 am I gave him a bunch of info he asked me questions about and he still seemed we could file a chapter 7 and said for me not to pay off any of my CC with 401k. He said even if I had mine paid off and my wife didn't they would still come after me about her cards. He stressed that we won't lose anything etc. seemed like he knew what he was talking about. He is the third one by the way

[keepsmiling]

Can you use the lawsuit money to settle?
What did the other two attorneys say?
And that stigma thing.... gotta get past that. That's something the banks have created so they can keep robbing us blind.
BK is a business tool, plain and simple. The banks use it all the fricking time.