Accumulated a lot of Debt - What should I do?

[guru1000]

I am in California and yes paid by W-2.

Here are the cards:

Chase Visa: $17,000
Chase Visa 2: $8,000
Bank of America MC: $24,000
Barclays MC: $24,000
Citibank Visa: $6,000
Discover: $8,000
AMEX: $3000

I'll break my response into six parts:

1) Creditor expectations;
2) Personal time constraints vs. hiring counsel;
3) How to navigate the settlements/lawsuits;
4) Statute of limitations;
5) Tax liability or loophole; and
6) Bankruptcy vs. settling.

CREDITOR EXPECTATIONS
What would motivate an unsecured creditor to settle their balance with you? No payments to a creditor renders you a non-performing asset that needs to be mitigated. We will address the question of collectability in the third part.

Each original creditor has by-laws by which they operate. Some creditors like Discover will hold on to their debt with you for five or more years. Other creditors like Chase will discharge the debt or sell the debt to debt buyers within 24 months of delinquency. With limited funds to settle (I assume), having the correct expectations will make your settling debt a much simpler process.

Before we delve into appropriating reasonable expectations, I will state that settling seven credit cards is an arduous process, depriving you of time. Whether you decide to hire an attorney or do it yourself is a business decision we will discuss further in the second part.

Let's begin:

You have limited funds. However, I assume that to service $90k in unsecured, you are spending $1,500-2000+ monthly as minimum payments. Accordingly, when you stop paying, you will be savings $18k-$24k per year that you could use to settle with these creditors at average settlements between 25% - 50% of the principal balance today (not inclusive of arrears, future interest, or penalties.) So in the worse debt-settlement negotiations, if you were to settle at 50% with all creditors, it would take you 2 - 2.5 years of non-payments (and savings) to fully settle your portfolio.

I will use the terminology "escrow" as monies you are putting aside for settlement by not paying your credit cards. The term escrow is not to be confused with a bona fide escrow account. Further, if you are funding your escrow, your personal assets are at risk to be frozen upon judgment following a lawsuit which weakens your negotiation so I would recommend keeping your funds in a corporate/LLC account or other vehicle not titled individually. When your debt settlement is complete, then feel free to use your personal account.

Some creditors like CITI and AMEX will settle at reasonable percentages the first year. Other creditors may take 2-3+ years, before a settlement of 50% or below can be reached. Accordingly, expect the process to last 2-3 years on average. Although longer than a Chapter 13 bankruptcy, there are advantages to settling debt, which we will discuss in the last part.

Let's begin:

CITI
1) Will likely be one of the first two of your creditors to sue.
2) Usually serves you with a Summons & Complaint within 12 months by outside counsel.
3) Settles relatively quickly.
4) Tends to settle at low percentages (25-35%), but requires lump-sum payments.

One of the first two settlements you negotiate and pay should be CITI.

AMEX
1) Will likely be one of the first two of your creditors to sue.
2) Usually serves you with a Summons & Complaint within 12 months by inside counsel.
3) Settles relatively quickly, but if you are a garnishable W2 employee, will require a 3-4 offer/counter-offer exchange.
4) Settles at 35-45% range, also as lump sums. Likely to be in the higher-end of the settlement range as a W2 employee.

Settle AMEX and CITI first. They litigate and settle quickly.

More to come later ...

 

[Reyaj]

Chapter 13 is a type of bankruptcy. Settlement is not a bankruptcy; it is a settlement. The former is governed by law; the latter is a negotiated. Though, in some bankruptcies, settlement negotiations can ensue policed by a judiciary.

I would encourage you to stay away from companies that settle debt. Most operate outside of the law. Most cannot represent you if you are served with a Complaint, as these companies have no in-house counsel, and if they do, often counsel is out-of-state unable to represent you in your state.

You are a W2 employee with garnishable wages. Essentially, you are "fresh meat," ripe for the picking.

Accordingly, if you elect to proceed with settlements, exercise due diligence and do it yourself, or hire a local attorney not to exceed $5,000 in fees for full service of your debt including negotiating, settling, answering complaints, discovery, serving and opposing motions, and trial. If you have less than five creditors, quite a few debt-settlement attorneys would be willing to engage under such terms.

Both hurt your credit. Bankruptcy lowers your credit score more in most instances:

If you have creditors that you don't settle and continue to pay on time such as auto, real-estate, student loans, and you are behind only in credit cards, debt settlement will not impact your credit anywhere near a bankruptcy.

Alternatively, if your credit comprises only credit cards and you fall delinquent on all cards, then debt settlement will likely impact your credit score similarly to a bankruptcy.

Interest rates will increase to the top percentage allowed by law as well as other fees. Nonetheless, you will settle anywhere between 20-50% on the original principal balance.

In 95% of cases if you are trying to settle, you will settle before trial. Debt buyers who sue will likely order the contract or billing statements from the original creditor before trial. Notwithstanding whether they have evidence or not, debt buyers will still settle with you, as (1) They buy debt for 2-5% on the dollar; (2) They don't know if you have other judgments that will be or have been entered before theirs (they have to stand in line until other judgments have been paid in full before garnishing your wages); (3) They don't know if you are employed (some do); (4) They have no guarantee on continued employment for wage garnishment; (5) They don't know if you will file a bankruptcy post-judgment.

Hey Guru thanks for all the info and educating us. I was re-reading this today and I think debt settlement is probably the way to go... You said it doesn't hurt my credit report as much as bankruptcy as I am able to pay my rent and car lease. I think what I am going to do is continue to pay the minimum payments until next year. If I am not in a better financial situation I will then look at debt settlement. Am I better served in using a company (I know you advised against it but there must be some good reputable ones?) or just calling each of my credit cards directly and negotiating?

 

[marmel75]

If you are in that deep vs. that income level, consult with a good bankruptcy attorney. He will give you your options per the state or country you live I've. Any advise from the Internet is useless to you at this point.
If indeed you have to file, you can regain good credit after 7 years, and use those intervening years to do some spending introspection.
Probably not what you want to hear, but that is what I would do under that financial condition.
At some point the money juggling act has to stop and seek a good long term solution.

Yeah, honestly that might be the best bet. Sh!t happens, it will give you a chance to get your life back in order, but unless you've learned a lesson from this you likely will find yourself right back in the same boat in a few years time.