Chapter 13 Bankrutpcy or Settling Credit Card Debt – A Comparison
We have $215,000 in unsecured credit card debt. $88,000 of that, I'm current on and still paying. That consist of 1 Bank of America and 3 American Express credit cards. The remaining $127,000 is made up of various credit cards that my wife and I have and we stopped paying on those cards between 6-13 months ago. The cards as I indicate vary from Capital One, Discover, Chase, Sears, HSBC, Nordstrom, Macys. Also there are a few outstanding medical bills but probably not totaling more than $1,500. The cards we stopped paying on are in various stages. I think although I'm not quite positive that they have all been turned over to at least one collection agency. My wife's Capital One card has been sent to a Law firm collection Company and she recieved a summons approximately two weeks ago. That is in the amount of $18,750. I intend to answer the summons if only to delay time. Our county courts are backed up a minimum of 3-4 months. The same Law firm has apparently filed suit on myself for a Discover card in the amount of approximately $16,500. I have not recieved the summons for that. Both of these are part of the $215,000 we owe in total. I did contact the Law firm in regards to my wifes Capital One card and they are willing to settle for 60% of the $18,500. That's the only conversation I've had with them. Currently, we do not have the money to negotiate without tapping into IRA's, however are hopeful of coming up with about $15,000 in the next couple of months from the sale of my parents home. I have met with a couple of bankruptcy attorneys and know we would qualify for chapter 13 but am not sure what our 60 month payment plan would be although it could be at 100% plus 10% for the trustee and attorney fees making the monthly payment $4,000 for 60 months. The 100% is based on me running numbers having not actualy filed chapter 13. I can and am willing to provide much more information that would be helpful in evaluating our situation should you need more info.
We are looking for options beyond bankruptcy and how to deal with the various crfeditors and at current 2 lawsuits. I have no idea what these companies will actually agree to in settling the debt and not sure the best approach to settling given the various stages the cards are in default. Also, if a creditor recieves a judgement can you still negotiate a lower amount provided we have funds at that time. If no one will negotiate I suppose bankruptcy would be the only option to stop any wage garnishment, levy or lien on our house, although we are upside down on our house. Thanakls again for any help, or assistance you may be able to provide. Mick
You are juggling many creditors, and at a year plus of delinquency, are fast hitting timelines where your exposure to collection lawsuits will increase. Making a comparison of how settling the credit card debts will stack up beside filing chapter 13 bankruptcy is timely. I do have several questions for you, and I am going to get some of those down now, then get into comparing what look to me like your two remaining debt relief options.
Why did you determine to continue with payments to Bank of America and American Express?
Are any of these business accounts? If so, did you guarantee any business accounts personally?
Do you have a 2nd mortgage or a HELOC? If so, what are the amounts?
Can you briefly describe the events that led to the inability to keep current with payments on all of the credit card debts?
You calculated the monthly payment in a chapter 13 bankruptcy to be 4k. When calculating your other bills, mortgage, car, utility etc., what is left? Is the 4k something that you can cover?
Settling with Capital One or Discover when recently sued.
Capital One settlement targets, at the time of this feedback, do not get lower than 40%, but that is on the best of days, and when the account is only in the general collection pipeline (still withing Capital One’s internal recovery department, or assigned out to a debt collection agency).
Settling a Capital One account in critical stage collection, which is where you are at, will often be at a floor of 60%. There are some files that have reached the lawsuit stage with Capital One that I have seen settle at 50%, but that is not common.
Discover card settlements at the stage your account is at (lawsuit filed, but not served) means the initial cost outlay by the collection attorney is already in motion. Settling your Discover card account at this point will likely be in the same range as the CapOne account.
Filing an answer on the Capital One and Discover lawsuits will certainly buy you some time. Will it buy a couple of months? Probably, but there would likely be some discovery involved as part of the lawsuit during the time you file an answer, and any appearance.
You may want to consider getting some help from an experienced collection defense attorney on the Discover and Capital One accounts. I can help you locate one that you can consult with at no cost. Just post the nearest large city as part of your comment follow up.
Chapter 13 bankruptcy will protect you from creditors and stop the lawsuits.
I asked above about what that 4k monthly payment estimate would look like with your budget. That 4k may be too high an estimate.
The calculations that will go into your chapter 13 repayment plan use a specific formula. When those numbers get crunched, it may show that you will only be repaying 60% of the unsecured credit card balances back in that 5 year period. Some find that only as little as 10% of unsecured debts get paid back during the chapter 13.
Chapter 13 is a rigid process. You live under the trustee’s financial supervision the entire time. It is not an easy thing to live through. Roughly 70% of chapter 13 bankruptcies are not completed. Much of that poor completion rate is due to further financial trouble that can lead to a 13 being converted to a chapter 7 bankruptcy. But I also suspect a healthy amount of the 13’s that get dropped are due to how rigid and inflexible the chapter 13 tends to be.
Having said all of that, the chapter 13 bankruptcy will protect you from creditor’s aggressive collection actions. Both Capital One and Discover are at the higher end of using litigation to collect on credit card debts that go unpaid inside of a 12 month period. Your other accounts may not sue as original creditors, but they do sell distressed credit card debt portfolios to debt buyers. Many of those debt buyers may later file suit.
File chapter 13 bankruptcy or settle credit card debts.
Using the information you have provided thus far, I would be leaning more to chapter 13 bankruptcy providing the relief you need. Settling the credit card debts at the stage you are at would look something like this:
Settle the Capital One lawsuit: 11,250.00
Settle the Discover lawsuit at an estimated 60%: 9,900.00
Settling your remaining accounts with Chase, Sears, HSBC, Nordstrom, Macys – where I estimate the balances total 91,750.00, and at an average of 45% would mean coming up with about 41k.
Using the 15k you are expecting to be available in a couple of months will likely not cover the settlements for the two lawsuits with Discover and Capital One. But assuming you can cover the difference with other cash resources, where does the 40k to settle the rest of the credit card debts come from? How long will it take to raise that money? The longer it takes, the more likely a debt buyer picks up the account and sues.
Some additional questions:
What other resources can you tap in order to settle these debts as rapidly as possible in order to avoid chapter 13 bankruptcy?
What, if any, future credit needs do you have over the course of the next 3 to 5 years?
What are the exact balances on each of the other credit cards you have listed, and how long has it been since each has been paid (answering this will help me give you more targeted settlement percentages)?
If you can answer all of the questions from my above feedback I will be in a better position to make some comparisons and help you weigh costs , benefits, timelines etc.
Anyone with questions or concerns about filing any form of bankruptcy compared to settling debt is welcome to post in the comments below for feedback, or call me for a free consult at 800-939-8357, option 2 rings to me.