Settle Debt, Close My Bank Accounts, or File Bankruptcy?

I had a default judgement entered against me by Capital One in 2009. I never received anything in the mail notifying me of a court date. However, I lived in an apartment complex and frequently received mail for my neighbors by mistake. The last date of activity/contact on the account was December 2003. I lived in Kentucky when the card was issued but moved to Ohio in February 2006. In January 2012, I received a 1099-C from Capital One for $601. I believe the original judgement was for $800. I filled out the form for insolvency when I filed my tax return. I had recently lost a job and was working part-time and collecting partial unemployment benefits.

I am currently working as a server and receive public assistance (food). My paychecks amount to about $60 biweekly so I am not concerned about garnishment. I have 2 checking accounts, one through Higher One and one with USAA. I keep virtually no money in the USAA account, pay mostly with cash and use the Higher One account for anything that requires me to have a recurring payment. I don't keep much money in the Higher One account, just enough to cover bills. I am working on my MBA and my student loan money is disbursed into the Higher One account. I can close the USAA account if necessary, but the Higher One account has to stay open to receive my student loan disbursements. I can opt for a paper check, but would have nowhere to cash it as USAA doesn't have a branch in Ohio.

I generally transfer part of the loan disbursement into my PayPal account and never leave more than $300 in the account. At this point, do you think the will try to freeze my bank accounts? The USAA account was opened in November 2011, the Higher One account in September 2012.

I have also moved to another part of Ohio since the judgement was entered and have been at my current job for less than a year. This job is not listed on any of my credit reports. Should I try to settle this judgement? How do I find out how much it is now? Will me contacting Capital One restart the SOL on the old debt which would have expired in 2010? I do have other debt, less than $10, 000 of which a little more than half is medical. I had thought about filing Chapter 7, but would that include the judgement?

Thank you for any advice you can give me.

Should I settle this judgement, close my bank accounts, file bankruptcy?

—Kelly

Your bank accounts are always at risk of being levied as a result of a judgment debt outstanding. Settling the Capital One account judgment in order to protect your funds deposited in your bank accounts is a good idea. But you brought up bankruptcy too, so you first need to compare the benefits of chapter 7 against settling the judgment, and have a plan for your other debts too.

Bankruptcy vs debt settlement.

You did not say what the current balance owed on the judgment is. Only that it was for 800 back in 2009. Interest is allowed to accumulate on judgment debts, so let’s assume the balance on the debt is rounded 1200.00. At the time you originally defaulted on your CapOne credit card payments in 2003, Capital One was still selling charged off credit cards to debt buyers (they don’t do that much for the last few years). Let’s assume the judgment is actually owned by a debt buyer.

Given you can document and show you are on public assistance lets assume you can settle the debt for half of the current balance owed. Basing that amount on the assumption above this would mean coming up with 600.00 to settle.

Can you come up with eh 600.00?

The cost of filing bankruptcy can range from roughly 1500.00 to 2200.00 depending on the simplicity of the filing, where you live, the attorney you hire etc. Comparing a 600.00 settlement with the cost and knock on impact from filing chapter 7 bankruptcy makes choosing settlement a no-brainer using only a dollar comparison, and only considering the judgment debt that could result in a bank levy.

Yes, filing bankruptcy, if a chapter 7, would eliminate the judgment debt too.

If you want to find out the precise amount owed on the CapOne credit card judgment you can:

Contact the judgment creditor listed on the original court documents. If the judgment debt was sold to another debt buyer you would be able to learn for the original judgment creditor who they sold it to, or possible see inquiries from the debt owner in your credit report.
Pull the judgment entered by the court and see what interest rate was allowed and then calculate that interest annually for what looks like 3 years or so.

Settling medical bills in order to avoid bankruptcy.

With your additional 10k of debts, of which half are medical bills, suggest more consideration be given to the benefits from filing chapter 7 bankruptcy.

I will make a couple of general assumptions about your remaining debts and then pose some additional questions for you to answer using the comment box below.

Assume your remaining 10k of debts could be settled for half of the balances owed. You would need to come up with 5k either up front, or over a period of time in order to settle. If taking some time to settle the accounts, you would want to prioritize which ones to work on first in order to avoid a similar situation – being sued and a judgment entered. How much time you have to come up with the additional money will depend on the type of debt, who is collecting, and how long ago payments were made.

Using all my assumptions, you would be able to avoid bankruptcy for about 5600.00, or file bankruptcy for probably less than 2k and wipe out the debts that way. So, now bankruptcy wins the cost and dollar benefit analysis. You would then start to consider other angles of the 2 options. One I would point out first is that chapter 7 bankruptcy is a reset button for your finances that can only be pushed every 8 years. Also, you would never be able to answer the question you see on all the forms we fill out in our life time of – “Have you ever filed for bankruptcy? If so when?” – with a no.

Let’s assume the cost differential between your settling the judgment and all other debts and chapter 7 is 4k. Is that 4k additional expense worth avoiding bankruptcy for you?