Bankruptcy vs Credit Counseling

[Anonymous]

I spent hours reading posts on this forum today.  It appears to be comprised of really awesome people - which is comforting.

Brief History:  I am navigating a business venture that went bad.  I have various business debts that I'm not too worried about since they are in the business name. However, I racked up about $65k in credit card debt - the largest balances are Amex and Barclays.  I stopped paying the minimum payments on the two cards with the highest balances.  I have a second mortgage of $80k and a business loan of $450,000 that is secured by my home.  I also owe about $30k in real estate taxes.  

While Im pretty sure real estate taxes are nonnegotiable in any scenario, Im trying to figure out my options going forward.  

I was able to hit the reset button a bit.  I now have an excellent job but make a meager salary...for now...barely getting by.  Within a short time the company will close on private equity funding and I will recieve a very nice salary.  So, looking forward everything is great.  But I still have so much to deal with from the past and the daily calls and letters from creditors are killing us...my wife especially.  

I wanted to negotiate a payoff with Amex and Barclays but I cant until I know when I can afford to make the required payments.  I dont have a definitive date when my salary will be raised but the card companies dont want to hear anything except "how much can you pay today?".  I thought about engaging a credit counseling service but have the same issue - not sure what I can comit to right now.  But after reading here, I dont think they can do much more for me than I can do myself and ultimately are no more effective than filing Chapter 7 - seems worse actually.  

The concensus seems to suggest that bankruptcy is favorable to a credit workout - with Chapter 7 being the favorite.  

From what I understand, if I file Chapter 7, all creditors are treated equally.  That raises serious concern for me.  First, I live in PA and, from what I understand, there is no homestead excemption.  So, if the bank is unwilling to take a haircut, I guess bankruptcy wouldnt help me there.  Second, I have other credit cards and a lease that are not in default and Im concerned that they will be cancelled.  I dont really care about the credit cards, but if my lease is cancelled, how would I qualify for another car?

My primary concern is the business loan since there is enough equity in my house to cover the loan if they foreclosed.  Selling my house is not an option.  

While I take my financial responsibilities very seriously, the pressure has pushed me to consider wiping the slate clean - as clean as legally possible.  

If anyone has any suggestions, I would greatly appreciate them.  Especially with regard to how to possible handle the non-homestead exemption. 

Thanks

[daveg38]

Well, first of all welcome - I surely wish your first post was under less 'stressful' terms.

So here's what I see as being viable steps in your situation:

1) Bankruptcy will erase everything EXCEPT anything with legal connotations (any personal taxes newer than 3 years, property taxes assessed within the last year). While the city may take an interest in your property due to tax debt, erasing your mortgage would knock the real estate lien deriving from unpaid taxes out of position #2, meaning it becomes civil since the bank sits comfortably in position 1. They short sell, recoup some money, and move on.

Of course, the taxes could also attach to the property for the next owner, meaning the bank could quit claim the property - that would cause the next owner to foreclose on their own property to release the lien.

But....

Good news: you're usually only liable for property taxes that were assessed within the last year. The rest is dissolved in a BK petition.

(IMHO, I'm surprised a tax warrant wasn't put out).

2) This would me you and the wifey may need to live in a swank apartment for a year or two, depending on what comes of the tax issue.

(The business loan originator will duke it out with the mortgage bank and the assessor's office for who gets dibs on the title - so just wipe the house out of any equation).

3) You file Ch.7 and let the trustee take anything you don't need, which then will go towards the legal stuff first (i.e. taxes that aren't dissolved). What is left over goes toward the non-essential debts (credit cards).

IF you want to spare AMEX (which I cannot see a trustee really going along with that if you're unable to afford your domicile, but it's worth a try), reaffirm their debt.

4) Unless you borrowed from Don Corleone, you'll be in the clear in 90 days, in which I would HIGHLY suggest avoiding any risky ventures. Get a Capital One card, a store card, wait two years and get a fresh (inexpensive) mortgage that would fit your salary.

Burning AMEX is bad, but it sounds like you're in full-blown survival mode.

[Anonymous]

Thank you for your insight.  The property taxes are due for 2014 and 2015.  They wont take any action until December of 2016.  I have some cash comming in that will pay at least 2014 if not 2015 as well.  

I can deal without credit cards.  My main objective is to NOT sell my house to pay off the business loan.  Again, there isnt a homestead expemption in PA.  Do I have options other than negotiating somehting directly with the bank?  If they want to take my house, do I have any protections available to me?  Thanks so much.

[daveg38]

Well, I guess it would be helpful to know if you're upside down on your second mortgage. Because right off the bat, you have $530,000 sitting on your deed regardless what the house is worth.

If your loan payments to both the biz loan place and the refi bank are affordable, pay those taxes off. Divert some of the wife's income toward AMEX if she's willing.

Or, again, walk away from it all and leave the headache with those more professionally trained to handle such.

[Anonymous]

The house is worth around $1m-$1.1m.  Im current on the home equity.  I dont have a first mortgage.  The equity is there and the taxes will get paid.  With increased income, I can pay the business loan interest only and pay off the credit cards on a 5 year plan.  Maybe within a year of so the bank will convert interest only to a 30 year fixed.  If they dont want my house, I guess thats their best chance of getting paid without me filing for any protection.  But Im not sure what kind of protection is available to me given PA bankruptcy law?

[Anonymous]

If you have ~$500,000 in equity in your house you're basically SOL. You may be able to qualify for Chapter 13 but if have some others here comment on that. I know you've probably heard this but keep business debt and personal debt seperate.

[Anonymous]

You have enough equity in your house to pay off all of your debt. I don't think Bankruptcy is intended for individuals in that situation.