Filing Bankruptcy Vs. Settling with Creditors Directly?

**creditcardfree** · 08-21-2016, 04:00 PM

You are correct about paying income tax on the difference with your settlement. If you can settle, I'd likely go that route over bankruptcy.

**danstelter** · 08-24-2016, 03:30 AM

About settling - what % is realistic?

Would my projection of settling for an average of 15-25% of the face value of each bill be realistic? What number would be?

**dczech09** · 08-26-2016, 07:30 AM

Originally posted by danstelter View Post

Now, I understand settling with creditors directly works like so (please correct me if I'm wrong):

You call and negotiate a settlement. Then, you pay your income tax bracket (for us most likely 15%) on the difference between the amount originally owed and the amount settled for.

If that's the case, it'll financially make more sense to go and settle than pay a monthly lump payment. Plus, we won't have a bankruptcy on our credit. And our credit should repair faster.

At the core, you are pretty accurate. You call and negotiate a settlement, pay the settlement, and pay taxes on the forgiven amount. However, there are a few things to note...

Settlement is not that easy. If you owe the money to the creditor (and it sounds like you do), they will want to get most if not all of what you owe. They want to limit their loss, however so do you. So it is two parties trying to limit losses, and unfortunately they have the upper-hand. They may require you to "prove" that you cannot afford to pay off the entire debt. If you cannot prove it through certified financial records, then they can require you to pay the full amount and sue if you do not. I don't mean to scare you - just want you to know that debt settlement is really not as easy as calling and getting a settlement deal (many settlements take months).

There are two types of bankruptcies: Chapter 7 and Chapter 13.

Chapter 7 is total bankruptcy. This is when you are able to discharge your debts completely. It is extremely difficult, takes a lot of time, and when you are done the bankruptcy mark stays on your credit history for up to 10 years. An important thing to note - federal student loans are extremely difficult (if not close to impossible) to discharge in a Chapter 7 bankruptcy. They are one of the only debts that can survive total bankruptcy.

Chapter 13 is more like a payment plan. This is when you work out a deal with creditors to pay them off over the course of 3 to 5 years with fixed installments. These are less involved than a Chapter 7, but also requires the debtor (you) to follow a strict plan. Many people who file Chapter 13 end up filing Chapter 7 because they cannot stay true to the plan. This type of bankruptcy stays on your report for up to 7 years.

It sounds like your attorney is trying to move you in the direction of Chapter 13. That being the case - it is likely you will not qualify for Chapter 7 (most attorneys prefer Chapter 7 because it would result in more attorney's fees).

If you file any of the two bankruptcies, you will have to answer "yes" to any future applications that ask if filed. Even when the bankruptcy is old. Bankruptcy can also affect your ability to obtain credit, rent, or employment in some cases. So bankruptcy is really not a "clean slate" like a lot of people like to say. Still, you can file bankruptcy and live a pretty normal life.

Keep in mind that if you go the debt settlement route, your credit history will indicate that your debts were settled for less than owed. This is a problem because potential creditors will look at this the same as they would look at a bankruptcy.

If you go any of these routes, your credit will be trashed. But do not let that deter you! You need to go with what is best for you - just know the consequences. Your credit will be trashed and it will take a few years to rebuild it to a decent place, and it will take about 7 years for it to be clean again.

Here is what I would do...

A. If at all possible, get on a plan to pay the debts back the normal way (no bankruptcy or settlement). If this is simply not possible, then...

B. Contact your creditors and try to work out a settlement deal. This will likely take several calls and may require you to send additional information (like an income statement from a CPA). Tell the creditors that you are considering bankruptcy (maybe that will motivate them to work with you). If this does not work, then...

C. Pursue the plan proposed by your attorney. The attorney is proposing this for a reason.

**dczech09** · 08-26-2016, 07:37 AM

Originally posted by danstelter View Post

Would my projection of settling for an average of 15-25% of the face value of each bill be realistic? What number would be?

Assuming that you go this route...

This will be a negotiation, so start out obnoxiously high (in terms of amount forgiven). If the creditor does not scoff at your offer, it is not high enough. So propose settling for 10% of face value. I would imagine that you will not get very far... at first...

This will be a tough negotiation and you may need to show proof that you cannot possibly pay the full amount. You also need to let them know that you are considering bankruptcy.

You may be able to arrive at like 20% - 30%, depending on your situation. So start out with a ridiculous offer that gives you room to breath and space to bargain.

One thing to note...

Do not even try to settle your student loans. It just will not work. Federal or private, it really does not matter. They have no incentive to negotiate because those loans are not easily discharged in bankruptcy

You: "I will file bankruptcy if we cannot settle."
Lender: "Be my guest!"

If you have late fees or other charges, you may be able to negotiate those away. You also may be able to negotiate interest on any private student loans, but not federal. Federal student loans are guaranteed for principal AND interest.

**dczech09** · 08-26-2016, 07:46 AM

At the end of the day, these tools are available for anyone who legitimately cannot repay their debts. These are not for people who simply will not apply themselves, or want to get out of paying what they owe.

If you legitimately cannot repay these debts, then pursue settlement or bankruptcy. However, if you can legitimately repay these debts, then do it.

If you are just trying to get out of paying your debts, but have the means to do so, you will get eaten alive! Your creditors will find out, they will sue you, and the courts will rule in their favor.

This message is not intended for danstelter (it sounds like their attorney is trying to get them to go with Chapter 13 which means there is a precedent).

This message is for anyone else reading this and getting any "wise" ideas for their debts

**creditcardfree** · 08-27-2016, 04:28 AM

Originally posted by danstelter View Post

Would my projection of settling for an average of 15-25% of the face value of each bill be realistic? What number would be?

I don't know on that. It's a negotiation.

**LivingAlmostLarge** · 08-27-2016, 10:33 AM

I've found medical bills are often negotiable. But I wouldn't say that you can immediately expect to settle with everyone.

Filing Bankruptcy Vs. Settling with Creditors Directly?