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
—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.
About Michael BoveeMichael started CRN in 2004 with a mission to provide people in need with detailed debt and credit help and education. Michael has participated as an expert panelist in federal consumer protection rule making, collaborated on state law changes governing debt consolidation, has worked as an expert witness in court matters related to the debt relief industry. He is available to speak with you about your financial struggle and helps people resolve their debt problems daily.
I am just starting to fall behind on my debt. 3, 10k personal loans, 3 credit cards totaling 12k, a travel trailer at 20k, and I had a repo which after they sold it I owe 25k. They stated on my credit that they reported as a loss, but not sure what that means. We recently moved so I am having to start my career over, I am a business owner, but I feel confidant that between my husband and I we can within 6 months get back on track,
Is 6 months to long with late payments?
Do I need to file Chap 13 now?
Or do I start settling debt, or wait until we have money again?
Suggestions on how to handle this would be great!
Why are you focused on chapter 13, and not chapter 7?
Have you talked to a bankruptcy attorney and found out if you qualify for chapter 7?
If not, do that first. If you cannot do a chapter 7, let me know, and we can go from there about how to avoid chapter 13.
Hi Michael,
I have a situation that I’d like to get your feedback on.
I recently found out that I was a victim of a 3-year long scam. During the 3 years, I maxed out 5 credit cards and took out 5 personal/unsecured loans; my total debt > $95,000. (Side note: I’ve reported the scam to the appropriate authorities, but I likely won’t be able to collect anything back.) I also borrowed from friends/family, whom I’m currently repaying. I was told that this is a “bad” idea and that I should repay my creditors first, but I’d rather salvage my relationships for my own mental/emotional sake at this point. I’m paying family/friends about $2000 per month and will be done repaying them in about 1 year.
I haven’t made payments toward any of these accounts for 1 year now. All of the accounts are with debt collectors. My estimated amounts are as follows–
1) Capital One: $6,600. Got a letter saying that my account has been deemed eligible for further legal action; was offered a one-time lump sum settlement of $2,990.
2) Chase: $8,219. Sent letter offering one-time lump sum settlement of $1,995.76
3) Discover: $1,218. Offered one-time lump sum settlement of $650
4) Amex: $4,500
5) First Bank: $1200. Offered one-time lump sum settlement of $725
6) Loan Me: $17,000. Offered one-time lump sum settlement of $6,351.11
7) Rise Credit: $5,000
8) Net Credit: $10,000. Offered payment plan of $124/month for 89 months.
9) Lending Club (sold to Velocity): $30,000. Offered settlement of $23,000
10) Avant (sold to CACH): $12,000. Offered settlement of $8,000
As of now, (*knock on wood*), I haven’t received any notices regarding litigation. I’ve consulted with a few bankruptcy attorneys. All of them have told me I don’t qualify for chapter 7 because my income is just a bit too high, but I could do chapter 13. I’m wary about doing a chapter 13 because of the low success rates and the little amount of control I’ll have over a huge aspect of my life. Even if I were to do DIY debt settlement, I figure I would need around $50,000 which I don’t currently have. I recently got a new job with a higher salary and moved to a different apartment with lower rent, so I’m more confident that I could save up a substantial amount within 2.5-3 years.
I’m still debating whether a chapter 13 vs a DIY debt settlement. What are your thoughts on this?
Thanks for your time!
How much over the means test for chapter 7 are you?
Your is a situation where you have too many creditors and debt buyers that are going to sue you. If you cannot settle quick enough, you will likely look to chapter 13 to protect your wages anyway. I know the inflexibility of the chapter 13 is not going to be easy, but it is likely the best option for you right now.
I should ask, what is your ability to pull money together to settle debts?
Hi Michael,
I think I’m over the means test by at least $2000/month. I currently earn around $3800/month after taxes: I work full time. I wouldnt be able to make less money unless I worked part time only.
I’m guessing that it would take me around 2-3 years to earn enough money for a DIY settlement.
If you would like to go over the settlement percentages I see available to you now, and moving froward, so that you can compare that to your ability to save up and knock these down one by one, call me at 800-939-8357, ext 2, or fill in the talk to Michael form in the right column of this page so we can email each other to set up a time to talk.
Instincts tell me chapter 13 is going to be a better solution for you, but I don’t mind going through the exercise with you.
Hi MIchael,
I live in Mississippi and I have overwhelming credit card debt. I’m currently considering filing chapter 13. I have a home that I’m purchasing and I have a car that I’m financing. Those are being paid on time. The credit cards are also being paid on time and are not behind however, I’m paying out so much in monthly minimum payments (because I’ve maxed them out) that i don’t have any money to actually live on. All of my paycheck shy of $20.00 is going to monthly minimum payments that run between $147-$150 a month. 1st card: credit limit is $6,000 but my balance is 5900.00(monthly payment $150), 2nd card: credit limit $5,000 but the balance is 4900.00,(monthly payment $147) 3rd card: credit limit 2000,00 but balance is 19800.00 (monthly payment is 120.00) 4th card: credit limit 1630.00 balance $689.00 monthly payment $80.00. I have a line of credit 1000.00 (through my bank) balance 700.00 monthly payment $120. I have 2 personal loans that are being paid via payroll deduction with payment being $303.30 a month. So I’m drowning right now. I want to keep my home and car and as I said everything is being paid timely and i’m not behind BUT i’m unable to live, eat, or put gas in my car. So this is why i’m considering filing bankruptcy.
oops on that 3rd card I meant 1980.00
If you can file chapter 7 and still keep the home, that would be ideal. What state do you live in?
If you cannot do chapter 7, settling is often better than chapter 13. If that is the case, you can call me for a free consult at 800-939-8357, ext 2, or fill in the Talk to Michael form in the right side of this page.
It may be worth calling a credit counselor for a free quote on what your monthly payments can be reduced to. Are many of your interest rates on the credit cards in the teens and higher?
The name of the debt buyer is CACH. This is the only debt I have. Should I go ahead and offer them what I can, 4200.00 or is there some sort of strategy? Thank you so much!
Settling judgment debt for half is an optimistic, yet realistic target. I would continue to try to negotiate the deal you can afford with a lump sum. You will learn a lot of strategy from the negotiating a judgment article and the many comments there.
Hi! I received a judgement in November 2015 from the Federated Law Group in the amount of 8175.00 and incurs interest. It is from a credit card that was originally with Best buy and the balance was under 3000.00. I have offered them a 2000.00 payment and just recently offered them 3000.00 with the help of family. They told me today they will take 6560.92. There’s no way I can pay that much and I am very uncomfortable with making monthly payments as income is low and have a little one on the way. I am wondering how it would effect me if I filed for bankruptcy, compared to having the judgement. Not sure where to go from here. The most I can possibly come up with is 4200.00, does that amount sound at all possible?
Thank you!
What is the name of the plaintiff (creditor or debt buyer Federated Law works for)?
The judgment is relatively new, but I do still see 50% settlements in this scenario. That $4,200.00 is about as optimistic as I would be without knowing more details.
Chapter 13 bankruptcy costs more than your first offer, so I do not like that option.
Chapter 7 bankruptcy compared to settling would be more cost effective (think 1500-ish), but I am not a fan of filing chapter 7 over an amount of debt this low, and when you have the resources you can pull together to avoid it.
Are there any other unpaid debts than this one?
I am manually posting the reply from Mick that he sent in response to my above feedback because I had not enabled comments on this page:
“Thank you again for your feedback.I initially determined to keep the BofA and AmEx cards for several reasons. 1- I wasn’t sure we were going to file Bankruptcy, 2- wanted to keep my cards I’ve had for years for gas etc and the AmEx cards have a lot of Airline miles attached although I’ve since moved those miles and 3- if we had any chance of negotiating or settling our way out of this mess I didn’t want even more delinquent cards and creditors going after us as I was at least able to make the minimum payments.
None of those cards are business accounts and out second Mortgage is $60k.
We got into this situation by over spending and back when times were good we were getting bombarded by 0% credit cards. Some were promotional for periods of time up to a year and some were not. Then about 3 years ago my wife was laid off a good paying job and I became ill. We thus took a big hit in income loss. We continued to pay our cards for close to 2 years until we had no savings other than IRA’s.Finally decided to stop paying all her cards and a few of mine over the last 6-13 months to ease the immediate financial burden. Not sure it was a wise decision. I did try to negotiate with the creditors when we were struggling but hadn’t missed any payments however they would not agree to lower interest rates or work any deals. Also, I might add another big factor in stopping the payments altogether was based on a guy that we had heard on some talk radio and tv shows talking about walking away from debt. He couldn’t have been more wrong or provided poor information in our case. He claimed the chances of being sued were virtually nil unless you owed less than $3,000. His logic was if the amounts were over $3,000 than the credit card companies, collection agencies, wouldn’t sue because they would figure you had money to challenge or defend your case. Also , I’ve since found that his info about defending the lawsuits has essentially been not true. He was saying in most cases the companies that sue fail have the proper information and when you show up to court the Judge will normally dismiss the case after you say they there unable to show proof that the debt is yours. I don’t think it’s that easy and that the agencies and law firms handling the debt are that remiss in all cases. Anyway, my own opinion would be to stay way clear of Nicholas Carrols “Walk Away From Debt”.
Regarding my Bankruptcy figures it’s a little tricky because I’ve been to several BK attorneys and the one thing they have been consistent with is not telling us what percentage of our debt we will have to pay off even after I’ve providing our income figures and listed expensive. It’s a bit complicated but even when I’m liberal with the expenses were left with a disposable income of around $4,000. Our debt of $215,000 plus the trustees 10% and attorney fees would come to around $240,000 and decided by 60 months is $4,000 a month. However as you indicated it is a specific formula that the Court comes up with in determining your payment figures so I don’t know how accurate mine are. The only thing the attorneys have said is maybe you will be at 100% or you might not be at 100%. It’s my understanding that we would have to actually hire an attorney and go thru the whole process and see what the Judge /Trustee would allow regarding our expenses before we would ever know what our approved payment plan is.
On the Capital One account that we have been sued on they are offering a settlement of 55%. In terms of negotiating what should be my next step and if I do reach an agreement what do I need to have in writing before paying them. Discover is offering 60% at this point. Regarding the others should I be talking with the various collection agencies or wait until I actually have Money for a settlement. Thought maybe discussing with them might be a delay tactic where if they here nothing from us they might be more likely to sue. Any comments?
I would appreciate if you could forward the names of 2 or 3 collection defense attorneys. I do not want to list my zip code if that can be done privately or by calling that would be great.
No real future credit needs at this time. My only reluctance to filing Chapter 13 now is that we might be at a payment plan of 100% and more so that it drags on for 5 years. Whereas dealing with this debt collectors may be difficult but I’m hopeful of being able to tap into a little money to negotiate and then start saving to negotiate the rest. Just not sure of timelines. If all else fails of if we start to get a judgement or two against us and unable to come up with the money then would file.
Capital One. $17,500 stopped paying May/2012
Discover. $16,750 stopped paying May/2012. Believe law suit filed but not served. They have offered 60%
Chase. $4,854. May/2012. Original debt was $3,975
Capital one 14 months being sued $18,750 need to answer complaint in next 10-15 days.
Discover 14 months Feb 1 discover sent to capital management for collection.$15,500
Chase. $6,100. 14 months
Chase. $8,400. 14 months
Chase. $10,750.14 months
Nordstrom $5,750.14 months
Macy’s. $3,000. 14 months
Care Credit $6,750 14 months
Sears. $6,750 14 months
As indicated current on 3 AmEx and 1 BofA card totaling 88,000
Sorry for the delay, thanks for all your input can’t tell you how much I appreciate it.
Mick”
All of the additional details you sent in are very helpful in getting a clearer picture.
The first thing I want to hit on is the radio show you listened to that led to some of your decision making. You have already learned that not all creditors treat delinquent accounts the same way. Capital One actually sues as much on balances of around 1k, as they do on balances the size of your wife’s account. Discover is not as prone to sue on smaller balances like Capital One, but they are certainly active with collection litigation on larger balances. You are at a higher risk of collection suits with Sears. Chase does not file many direct collection lawsuits for the last 24 months, but Chase does sell a good amount of their charged off credit card portfolio to debt buyers. Those debt buyers will look at your making monthly payments to Amex and Bank of America and use that as a metric to sue you (they see you have money to pay American Express and BofA, so suing you would put them in a priority situation). If the radio guy message you bit on was correct about anything, it would be that you can successfully defend collection lawsuits. But the success in defending credit card collection lawsuits is more attributed to when a debt buyer sues, not Discover or Capital One necessarily (there are really good collection defense attorneys that have got original creditor lawsuits dismissed, but not for all the same reasons debt buyer suits get dismissed). Defending against this stuff is not a cake walk, and requires a ton of research and time to do it successfully. Even then it is not enough sometimes. Everything else you attribute to the guy, at least in the limited commentary you provided, is just too simplified and incomplete – and therefore dangerous for folks to follow.
If you have been liberal with calculating your expenses, and are still left with 4k discretionary, it does stand to reason that you will be paying all, or close to all of the debts back, but under court supervision, and at the additional cost of the bankruptcy process. If there is an alternative to filing the chapter 13 in order to avoid garnishment and bank levy, I want to help you find it. It will involve raising cash as quickly as possible though. The property lien concern you have is real, but that can be dealt with. Especially on an underwater home. Its the garnishment and levy that will force some decision making if you want to resolve the collection actions outside of bankruptcy.
The current offers from Capital One and Discover, being that they are suing, are good ones. You could avoid the expense and/or time involved with defending them by taking those offers. What to look for in an agreement is covered in this debt relief program report: What to look for in a debt settlement letter. Because you are settling in a much more formal setting with court actions already instigated, the verbiage and formatting of the agreements will take on a different tone and flavor, but the essential elements outlined in that linked report will be the same.
Thanks for the additional details on the remaining creditors and the balances and timelines. My estimates for settling the remaining debts (exclusive of the bank of America and American Express accounts) remains roughly the same. But the fact that you are paying on the AMEX and BofA accounts complicates your efforts in settling with others, and will obviously complicate your ability to save up money to settle debts.
I have no problem recommending you contact us for a consultation to run through some alternatives to filing chapter 13 bankruptcy. I don’t mind telling you that you have gone about some of this in an odd way that has placed you in the position you are in today. In order to navigate where you are at now, and where you can find yourself in 12 to 24 months, you are going to need to tap resources, and develop some flexible strategies to make up for what I see as 12 months of lost time. In other words, I think you have a shot at avoiding the chapter 13 by settling, but you would be better served having a guide, which is one of the things that CRN membership provides you.
I sent you an attorney referral that is south of you, but one who may still be able to work with you, or will be able to recommend an attorney resource nearer you.