Going down the tubes. BK best option?

[ndkblondie]

Hi all,

We are in Southern California and in a situation where we have a massive amount (over 200k) of cc debt and are upside down in our mortgage. Our debt was incurred by remodeling a house with personal funds and then losing an investor. We put the property on the market right when it tanked and lost so much on the deal we weren't able to pay off any of the cards we used to do the project. Ugh.

We were still making it but the credit card companies all raised our rates from 2.9 and 6.9 to 30 - 32% when they pulled random reports and found that we are over extended. Mind you, this is not with late payments, just by being overextended in their opinion.

I now can't pay my Chase mortgage because my Chase cc's (X3) are triple the payment they were. Talk about cutting off your nose to spite your face. Who's driving the ship over there anyway?

We just consulted with a bk attorney about filing and he's advised us to stop paying on everything which isn't hard, there's nothing to give! He also told us that the credit card companies won't look kindly on using personal debt for a business purpose and that they may likely litigate against us as well since the amounts are so high. If they do, what can happen to us? There's no money for them to get but they can't put us in jail or anything, can they?

My hubbie's business in residential contracting and mine is film. His work has been devastated by the housing crises and mine stopped with the writers strike and now... we have a newborn at home and I'm on maternity leave. Talk about the 1,2,3 PUNCH!

Anyway, here is my question in a nutshell. What is the benefit of going bk over simply letting everything get sent to collections/charged off, etc. and then negotiating payoffs and cleaning it all up? It seems that would be faster than having a bk kill your credit for 10 years. What am I missing?

I'm new to the game, I used some great advice here to clean up my husband's credit but I've never even had a 30 day late until about 2 weeks ago. I'm in over my head and want to go down in the smartest way possible. I appreciate any advice anyone has to offer.

Thank you for reading and in advance for all your support.

[willingtocope]

Anyway, here is my question in a nutshell. What is the benefit of going bk over simply letting everything get sent to collections/charged off, etc. and then negotiating payoffs and cleaning it all up? It seems that would be faster than having a bk kill your credit for 10 years. What am I missing?

Welcome to the club. We've all been there, done that, got the t-shirt and everything. We'll help you get through this if we can.

What you're missing is this. A BK 7 puts a stop to everything...right now. Your creditors can't sue, you owe no taxes on "found income" for any "forgiven debts", and, you can start over immediately after discharge. Yes, the BK will be on your reports for 10 years after, but, you'll be able to get credit again during that time.

A BK 13 is a little rougher, but, you'll have the courts to make your creditors play nice.

If you don't BK, you'll be fighting off law suits starting in about 6 months, and, because the debt was "business" related, you won't have the protection of the FDCPA to make the collection agencies play nice. "Settled for less than the full amount" is almost as bad as BK on your credit reports. Plus, you get to pay income taxes on the forgiven amount.

[Methuss]

If you do choose a BK strategy, get your mortgage current and keep it current FIRST. Credit cards should be at the bottom of your list, not the top. Don't let them pressure you into paying credit cards first.

If your mortgage is not current when you file bankruptcy (and chapter 7 is probably the better choice given your decription) then your home WILL be in jeapordy.

[bingo]

First of all, see another lawyer or two. Plenty of people have business debt on personal credit cards and filed bk with no issues.

If you're upside down in your house, I'd just let it go in the bk. Bk is about a fresh start. Nothing fresh about dragging a liability with negative equity through your bk.

[jq26]

And BK is not the "credit killer" that some made it out to be. If you follow some of the advice on this site, you can open new credit immediately and bump your scores up. It took a little over 2 years after my BK7 discharge to get my scores all over 700- for the first time ever.

[ndkblondie]

Wow, thanks for all the input. I was still grasping at straws but after reading here I would say that a bk is definitely the way to go.

Our attorney supposedly has 40 yrs experience doing bk's but I'm totally fine with consulting with more than one. He is pressuring us to go bk13 instead of bk7 because our amounts are so high that the companies my litigate. We have a lot of debt and it's only spread out over a few companies. He said Amex and Chase are not going to take it lightly when they find out they aren't going to get their 90k and 70k respectively. Does anyone here have a perspective on this? I don't want to go through a whole bk and still owe 30 cents on the dollar, that's still a lot of money. He says the courts look more favorably on a 13 than a 7.

Also, we were hoping to keep my hubbies credit clean and out of the bankruptcy but the attorney said we are in a common law state and they can still go after him anyway. He said he should either file also or I can include his debts in my bk.

Finally, his fee is $2500. Does that sound right? My friend says that doesn't sound like enough and he would be doing the bare minimum for that. Are there surprise costs down the line?

Regarding the house... the attorney suggested that we stop paying on it and in about 3 months he can call and re-negotiate a new loan amount and payment based on "current market value". (I know someone who is actually doing this right now and the bank even forgave her the past YEAR of payments she didn't make to keep her in the house.) He said it's crazy to pay for my 2nd mtg at all because it's no better than a credit card at this point because with the value drop, it's a completely unsecured debt.

Whew, so many questions and thank God for all of you. I was drowning and you all threw me a massive life preserver! Thank you, thank you!

[willingtocope]

The 40 years experience is a plus...however, the laws changed dramatically in the last couple of years, so, the question is...has he kept up?

The choice of whether to do a 13 or 7 is made for you by the new BK laws. You have to "qualify" for a 7, based on your income.

When we did a BK 7 in 2004 (before the laws changed), we had about $70k in AMEX (business & personal) and around $30k to chase. Neither objected. YMMV.

By all means, talk with another lawyer. You need to find one you're comfortable with.

And...$2500 is about normal these days. The change in laws made their job a little harder (we only paid $1500)

[bingo]

Creditors need a valid reason to object. Running up the card on business expenses is not a valid reason.

Trustees will quizz high income/high debt filers a little more closely but, the numbers are what they are. If there was no recent credit card use prior to filing, continuing payments as the charges mounted, a truthful application, etc. you should have no problems.

[jq26]

The BK7 isn't income based really, it is disposable income based. Use the IRS guidelines for living expenses and add all secured debts and then figure out how much disposable income is left. Technically, you could make $150k/year or more and qualify for a BK7 in certain circumstances. In fact, my buddy & his wife are in the 100k+ crowd and filed last week (they make roughly $125k- dual income, no kids). Your attorney should know the means test inside and out. A liquidation (BK7) is almost always more debtor-friendly because the slate is wiped clean. A 13 puts you on a payment plan and usually wipes out some of the unsecured debt and in some cases the unsecured portion of liened assets.

Unsecured creditors can challenge either: 1) the inclusion of their particular debt in the filing OR 2) the discharge itself (more of a substantial abuse argument). But there has to be grounds for it and courts don't look favorably on it. With large sums involved, the creditcard issuers may go through all of your statements and then compare to your filings and look for ways to challenge (such as fraudulent transfers or the six month look back on purchases of luxury goods totalling over $500 (now inflation adjusted)). If your filing is correct and everything was above board, it will likely fall on deaf ears.

Regarding what type of filing, that is up to you. $2500 is now the norm following the 2005 BK bill. The new bill requires attorneys to do a lot more work. That is clear. Plus, the new attorney liability provisions have had two more results: a) it weeded out the non-BK specialist from attempting to practice in this area and forces attorneys to charge more per client to account for the personal liability that is now forced on them by the court. This potential liability only exists when clients go into a 7 filing and not a 13. Therefore, many attorneys are steering clients into BK13 when, all things being equal, the debtor would be better served with a 7 filing.

If I were in your shoes, I'd get a 2nd opinion (free consultation) with another BK attorney. Especially when dealing with a principal residence.

[Methuss]

The one thing not answered here so far...about the house.

He can only renegotiate it under a chapter 13. In chapter 7 you must state your intention to reaffirm or surrender it. No other options. You don't have to DO what you say in your statement of intentions, but, take it from me, discharging the house and then trying to work the lien afterwards is not so simple.

[jq26]

The one thing not answered here so far...about the house.

He can only renegotiate it under a chapter 13.

True, but primary residence cramdown cannot occur. Congrss was clear about that. Lender has to agree. And if the house is underwater, aside from sentimental reasons, it seems pointless to reaffirm a debt in excess of the value of the house. So maybe lender will play nice, but they don't have to.

what was your experience Methus? You didn't go that route?

[ndkblondie]

Ok, so to re-negotiate the mortgage it has to be a 13 but it also puts me in a situation where I'll have to repay quite a lot on all the other debt, which we can't afford.

Maybe I should ride this out for awhile. I am getting my very first 30 day lates this month. If I wait another 3 or 4 months before I file that gives me more time without paying bills and a mortgage. We need time to make and save some money, especially if we are going to end up moving the whole fam damily. If your credit is trashed with a bk anyway all the lates shouldn't matter, right? Then maybe I'd have time to re-negotiate with the mortgage lender myself before filing for bk.

What is the difference between including your your home in a bk as opposed to letting it go into foreclosure? I think you have to pay income taxes on the difference between your loan and the sale amount if it goes into foreclosure I wonder if that applies in bk too.

I also want to have time to meet with other attorneys. This one told me AFTER I poured out my heart that he is considered an officer of the court and is obligated to share all information I give him. So much for confidentiality. I will be much more careful about what I say and how I present things next time I meet with someone. I really felt tricked because I thought it was confidential. I thought he was on MY side...

[Methuss]

You can't do a "cram-down" on a primary residence in the traditional sense, but you can do lien stripping. If you have a 1st and 2nd loan on the house and the value of the house is less than just the 1st mortgage, then the 2nd loan can be stripped off and treated as unsecured. You can only do this under a chapter 13.

As for me, well, both of my houses were discharged because I had the misfortune of getting laid off right after (like 2 hours after) my 341 meeting. I did not get re-employed before the case was done so my attorney refused to certify any reaffirmations and the judge also refused. Both of my houses were discharged.

As I have found out since, you cannot enter any kind of workout agreement with a lender after this happens. You can only pay the arrears in one large lump-sum or file a chapter 13 to put the lender into a repayment program. Why? Because the permanent injunction bars any attempt by a lender to impose personal liability of any kind. A workout agreement, even if the debtor asks for it, imposes personal liability to make certain payments on the debt on a defined time-line thereby violating the injunction.

Learn from my mistake if you find yourself filing BK7. Your house must be current when you file and must be kept current through the bankruptcy if you plan on keeping it. You should reaffirm it because if you ever fall behind after the BK discharge you will not be able to work anything out with the lender...and a new loan (it's not a refinance) at a decent rate isn't very likey for at least two to three years off from the discharge.

There are no taxes on discharged debt at all. Just like the creditors the KGB...er...I mean the IRS are similarly barred from collecting taxes on the discharged debt. On foreclosure deficiencies, there is no tax on the first $1 Million ($2 million for married couples) of debt written off thanks to a recent law...so you can be upside-down by up to $2 million and not pay any tax on the foreclosure. This is only for 2007, 2008 and 2009. In 2010 it's back to paying tax on it again.

[parsoc]

more careful about what I say and how I present things next time I meet with someone. I really felt tricked because I thought it was confidential. I thought he was on MY side...

[parsoc]

I wonder who he would share with and who?

I meant to say WHAT would he share and with who (whom?!)

[bingo]

I will be much more careful about what I say and how I present things next time I meet with someone. I really felt tricked because I thought it was confidential. I thought he was on MY side...

Not sure what you mean by this but, you have to tell your lawyer the truthful details of your situation in order to get the maximum value of their service. He can't protect you if there is something he doesn't know. Also, no lawyer is going to cooperate in a scheme to defraud the court. If what you propose is in violation of the bk code, expect a chilly reception.

[jq26]

This is why the attorney liability provisions are so offensive. It is the only area of law where an attorney is put in a role to police a client. It is the antithesis of full and truthful attorney-client communication. Now, instead of having a client come in with some ideas (some good, some not so good) and have the attorney steer the client towards full use of LAWFUL bankruptcy proceedings, now clients will withold information and not disclose everything to their attorney. Everyone loses.

[ndkblondie]

It's not my intention to defraud anyone... I just felt really vulnerable because I poured my heart out to this guy thinking it would be all confidential. The thing I regretted saying was that my parents had to lend us some money to buy gas to get to work and milk for the kiddos (yes, it was THAT bad for awhile) and we were barely able to pay them back. He jumped on this and wanted to know exactly how much and when we repaid them because he had to disclose it so the creditors could go to my parents and demand that they hand over the milk money I repaid in order to recoup some of their losses. Apparently you can't show favoritism and pay someone else back before the creditors. It makes sense I guess, but the reason we were so broke is because we WERE paying the credit cards! If I had stopped paying those cc's months ago instead of living in denial my family would be much better off right now.

Anyway, just got a Notice of Default in the mail today on my mtg. Says we are behind 2 payments. Here we go...

[jq26]

It's not my intention to defraud anyone... I just felt really vulnerable because I poured my heart out to this guy thinking it would be all confidential. The thing I regretted saying was that my parents had to lend us some money to buy gas to get to work and milk for the kiddos (yes, it was THAT bad for awhile) and we were barely able to pay them back. He jumped on this and wanted to know exactly how much and when we repaid them because he had to disclose it so the creditors could go to my parents and demand that they hand over the milk money I repaid in order to recoup some of their losses. Apparently you can't show favoritism and pay someone else back before the creditors. It makes sense I guess, but the reason we were so broke is because we WERE paying the credit cards! If I had stopped paying those cc's months ago instead of living in denial my family would be much better off right now.

Anyway, just got a Notice of Default in the mail today on my mtg. Says we are behind 2 payments. Here we go...

My comments were NOT intended towards you...they were criticism of the brutal 2005 BK bill. Your attorney's role has been tweaked by statute for the worse.

I am sorry to hear about the home notices. Seek assistance...

[LoveToGod]

Hi all,

We are in Southern California and in a situation where we have a massive amount (over 200k) of cc debt and are upside down in our mortgage. Our debt was incurred by remodeling a house with personal funds and then losing an investor. We put the property on the market right when it tanked and lost so much on the deal we weren't able to pay off any of the cards we used to do the project. Ugh.

We were still making it but the credit card companies all raised our rates from 2.9 and 6.9 to 30 - 32% when they pulled random reports and found that we are over extended. Mind you, this is not with late payments, just by being overextended in their opinion.

I now can't pay my Chase mortgage because my Chase cc's (X3) are triple the payment they were. Talk about cutting off your nose to spite your face. Who's driving the ship over there anyway?

Let me tell you that when I filled my Chapter 7 BK it was a relief, but if I had to do it over again I would NOT have filed the BK. I did not realize then what I realize now. There are other options.

Everyones situation is different, but I have an idea you might be able to use. Maybe, maybe not.

The creditors know that if you file a BK they are out of luck.

Contact the creditors and point out to them that since they jacked up the interest rate it has made it very difficult to pay. Also, tell them that if you they will not work with you and give you lower payments, lower interest, waive all the late and over limit fees that you will have no choice but to file the BK.

If they know that you are about to go bankrupt, they should be willing to work with you.

Some people do a chapter 13 which sets up a payment plan, but if you can negotiate your own with them then you maybe able to avoid a chapter 13 as well.

Do you think your situation will improve financially in the next 6 months to a year?

What ever you do, keep a sane mind. You can only do what you can do. Alot of people are facing these problems. You are not alone.

[willingtocope]

Calling your creditors...and asking for the "hardship" department...and seeing if you can work something out is a good idea. However, you do have to realize that they'll want a lot of information and depending on what they see, they may not play along. If they do agree, there requirements are likely to be pretty strict...miss a payment, and you're hosed up all over again...so don't agree to something you might not be able to carry through with.

Also, realize that having a "in repayment plan" or "settled for less than the full amount" on your credit reports hurts almost as bad as a BK.

So...I'd suggest you go talk with another BK lawyer or two. Get another opinion. While you might not qualify for a BK 7 under the current rules, a BK 13 might still be a better option than working out your own deal with the creditors. With a BK 13, you'll have the courts to make your creditors play nice.

[ndkblondie]

Thank you for that info. Why exactly would you not do it again? I'm not sure what's really in store for us if we do file.

My bk attorney told me NOT to tell the cc companies that we are considering bankruptcy. I was wondering about working something out with them but I was under the impression that they are pretty inflexible, maybe not. Would me communicating with them in this way encourage them to speed up a litigation process or perhaps help avoid one?

Yes, our income should improve a lot over the next 6 months. I'm on maternity leave for another 4 weeks or so but I've been making the most of the time by doing work from home projects as they come up. We are doing everything we can to stay afloat. That being said, our income would have to improve in a superhuman way in order to start being able to manage all this. However, if we were able to negotiate reasonable re-payment plans and avoid bk it would be worth it. Or would it? I've heard others comment on the clean slate being a real second chance and true new beginning.

If you can re-build your credit in a couple of years what are the not so obvious reasons to avoid bk in our situation? What are the reasons to avoid it at all costs?

Has anyone out there had luck negotiating with cc companies on their own to avoid bk?

[betam4x]

If you could do BK7 I would go for it. BK13 is another beast entirely. As others have said you don't have to wait 10 years to be eligible for new credit.

[willingtocope]

The front line phone jerks who call you to collect, or who answer the phone when you call, are not authorized to do anything more than yell at you to "pay up, you deadbeat!" You need to talk to someone higher up the food chain.

As to whether the BK attorney is right that you shouldn't tell them you're considering BK...I don't know. The decesions that CC companies make usually have little to do with you personally...they're usually more about "today's company policy" or new management or time of the month. Its hard to predict exactly how they'll react. If you call and say "I just don't know what to do...I'm thinking about BK...what can you do to help", you might get a positive answer. They will pull your credit reports. It probably won't speed up the lawsuit.

I still say you should go talk with a couple more BK attornies. We talked with 3 before we found one we were comfortable working with.

[Freak]

The front line phone jerks who call you to collect, or who answer the phone when you call, are not authorized to do anything more than yell at you to "pay up, you deadbeat!" You need to talk to someone higher up the food chain.

As to whether the BK attorney is right that you shouldn't tell them you're considering BK...I don't know. The decesions that CC companies make usually have little to do with you personally...they're usually more about "today's company policy" or new management or time of the month. Its hard to predict exactly how they'll react. If you call and say "I just don't know what to do...I'm thinking about BK...what can you do to help", you might get a positive answer. They will pull your credit reports. It probably won't speed up the lawsuit.

I still say you should go talk with a couple more BK attornies. We talked with 3 before we found one we were comfortable working with.

I agree. I didn't tell mine either. It would have done little in my situation.

I also agree with Willing' on getting additional opinions. Our first one gave me the impression he would have tried to convince Bill Gates to file. The second one acted like he could care less, and we were another number. The third one took the time to sit down with us, look at everything, and gave us a couple of options. One of which wasn't even "in his best interest." This was before the BK laws were reformed.

It is a big decision that has consequences that will last for years and you should way your options carefully. While the social stigma may not be as large as it used too, for me, the personal effects weighed heavily.