topic Defaulting and then settling debts vs bankruptcy in Bankruptcy

Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 16:20:27 GMT

So a few weeks ago I posted that I was looking at filing for BK. Having spoken to a few BK attorneys it looks like there are some significant reasons this won't work in my situation. So as a Plan B I am considering defaulting on my credit card debt and trying to reach settlements instead. I have around $190k in unsecured credit card debt, and don't think I can pull the money together to pay them off. They all have 20-29% interest rates so just paying min balances isn't going to help. But I do think I could muster up $60k to maybe $90k to settle these things. I have a call with a guy who specializes in advising people on this (not a firm that takes your money and does it for you, more they just advise how to handle settlements yourself)

I am trying to think from a credit perspective the differences between the two. Debt is split over maybe two dozen cards primarily between Amex, Chase, and Citi. So assume I end up with 24 30 days lates, 60 days lates, 90 day lates and then potentially some charge offs depending on strategy chosen. Let's say worst case 24 charge offs in 6-9 months from now. But then I assume at seven years beyond that they will all drop off reporting?

How will other lenders act when I rack up this many deliinquencies? I have some other cards with guys like CapOne, Penfed, Synchrony etc. I know if a BK hit my credit those accounts would get closed. But if 24 charge offs show up, do they do same, or do they like just cut my limit to like $100 or $500? Anyone with any experience? My one hope is a few of these cards could survice which would help average age of account once I get through this mess. It is not a deciding factor by any means, but something that would be helpful

I assume I will be burned from these three big lenders forever after. Not ideal, but then neither is paying them crippling interest

Any other credit repurussions to be aware of?

Re: Defaulting and then settling debts vs bankruptcy

Rogue46 — Sun, 18 Jun 2023 16:57:09 GMT

I cannot give you advise on whether you should default or not but I'm pretty certain once your other creditors start seeing defaults on a number of cards they would almost surely close those accounts. Possibly a very slim chance they cut your limits but I don't want to get your hopes up on that. Either way your credit is going to take a significant hit for many years.

Re: Defaulting and then settling debts vs bankruptcy

GZG — Sun, 18 Jun 2023 18:12:37 GMT

@ProbsBroke wrote:
So a few weeks ago I posted that I was looking at filing for BK. Having spoken to a few BK attorneys it looks like there are some significant reasons this won't work in my situation. So as a Plan B I am considering defaulting on my credit card debt and trying to reach settlements instead. I have around $190k in unsecured credit card debt

did they not offer their services to help you navigate these settlements and when you probably? get sued on these debts?

I would defintely ask them for their help in navigating this

Re: Defaulting and then settling debts vs bankruptcy

JoeRockhead — Sun, 18 Jun 2023 18:46:30 GMT

You'll likely experience adverse action in some form or another from your other issuers. If a chapter 7 or 13 is out of the question and you have 90k to work with, why not snowball the cards you can, and reduce as much of the debt as you can... If you can't make the minimum payments or slightly more every month until they're gone or transferred to new 0% cards, negotiate settlements from there.

Once you have multiple lates and COs, your credit is trashed. I've personally walked this very path, had all the lates, repos, collections, judgements, you name it. The effects are much longer than 7 years. If I couldn't qualify for a BK, I'd do everything I could to not just maintain my credit, but also improve it to get away from the high interest cards.

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 18:49:50 GMT

Yes - in fact one of them, the one that seemed the most knowlegeable out of those I spoke with, suggested this as the best path for me. But they didn't suggest them assisting with that. After all that path does not involve actual bankruptcy.

You only get sued if you are unable to settle with them. Yes it is possible that one or all of these creditors will hold out for 100%, and could sue me for that. But I think in practice, there is a reasonable chance I can get them to settle for around half the total, based on research performed so far.

As a specific example, I did have one business credit card that I already let default. It's a long story but it wasn't showing on my personal credit and I just let them chase for me serveral months. The debt was around $6k. Knowing that it was getting close to the point they would charge off the account, I finally answered their calls and asked how much they would be willing to settle for. They immediately offered 30%. I paid them that amount and that was the end of it. I was concerned that they would eventually report the settled amount, and/or that they would issue me a 1099-c for the "forgiven" portion. Neither of those occured. Now the question is, how much will that scale with the other three banks?

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 18:53:44 GMT

@JoeRockhead wrote:
You'll likely experience adverse action in some form or another from your other issuers. If a chapter 7 or 13 is out of the question and you have 90k to work with, why not snowball the cards you can, and reduce as much of the debt as you can... If you can't make the minimum payments or slightly more every month until they're gone or transferred to new 0% cards, negotiate settlements from there.
Once you have multiple lates and COs, your credit is trashed. I've personally walked this very path, had all the lates, repos, collections, judgements, you name it. The effects are much longer than 7 years. If I couldn't qualify for a BK, I'd do everything I could to not just maintain my credit, but also improve it to get away from the high interest cards.

I am curious can you be specific about what makes the effect much longer than 7 years? At 7 years past the point of settlement they have to remove those accounts from my credit reports. I understand that with those specific banks I may never be able to do anything ever again, but that would be the case if I burned them in ch7 or ch13 anyway. What ELSE am I missing?

The problem with snowballing is the weighted average rate on all this is 25%, and I just feel hustling to come up with $90k would just be wasted in that it might buy me a couple of years but then the remaining amounts will just keep me chained down. Whereas this approach gives me a shot at "trading" my credit for 7 years for a clean sheet now, and then go from there

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 19:02:17 GMT

I am speaking with Michael Bovee at Consumer Recovery Network tomorrow, who seems to specialize in this area. I spoke to him previously about that prior default, and it opened my eyes to this possibility

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 19:33:23 GMT

Just one other addition - I have also already had success with this with Amex in another country. not wanting to get TOO specific as I don't want to doxx myself lol, but I used an Amex card I had in another country and racked up around $10k of debt on that and just let it go default. Amex has closed the account and sent to a collection agency that are offering to settle in full for 50%. I am going to take that. This was a personal card (the other one was a business card which is why I thinkt they settled for less)

Re: Defaulting and then settling debts vs bankruptcy

Brian_Earl_Spilner — Sun, 18 Jun 2023 19:48:44 GMT

The biggest difference is when you file bk you're able to start rebuilding after discharge or during the payment plan. Charge offs will severely limit you for years.

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 19:59:56 GMT

Gotcha, that makes sense. Very quick googling suggests possibility of getting new cards maybe 1-2 years after the charge offs settle down.

Also some of these could settle pre charge off. But given the number and three lenders I expect at least one to go CO. But in theory some possibility they all just end up showing 90 day late then settled for partial balance. No idea how that would impact getting credit.

Do you know if existing lenders would 100% shut me down? Just keeping one thing open with $500 limit would of course be huge

@Brian_Earl_Spilner wrote:
The biggest difference is when you file bk you're able to start rebuilding after discharge or during the payment plan. Charge offs will severely limit you for years.

Re: Defaulting and then settling debts vs bankruptcy

Jnbmom — Sun, 18 Jun 2023 20:21:16 GMT

@ProbsBroke wrote:
Gotcha, that makes sense. Very quick googling suggests possibility of getting new cards maybe 1-2 years after the charge offs settle down.

Also some of these could settle pre charge off. But given the number and three lenders I expect at least one to go CO. But in theory some possibility they all just end up showing 90 day late then settled for partial balance. No idea how that would impact getting credit.

Do you know if existing lenders would 100% shut me down? Just keeping one thing open with $500 limit would of course be huge
@Brian_Earl_Spilner wrote:
The biggest difference is when you file bk you're able to start rebuilding after discharge or during the payment plan. Charge offs will severely limit you for years.

If you start defaulting it's like a domino effect once other creditors see this most all will shut you down.

Is there a reason why you can't do a BK 7 or 13?

90 days lates, chargeoffs and settling for less will hurt your credit for quite some time .

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 20:33:51 GMT

@Jnbmom wrote:
@ProbsBroke wrote:
Gotcha, that makes sense. Very quick googling suggests possibility of getting new cards maybe 1-2 years after the charge offs settle down.

Also some of these could settle pre charge off. But given the number and three lenders I expect at least one to go CO. But in theory some possibility they all just end up showing 90 day late then settled for partial balance. No idea how that would impact getting credit.

Do you know if existing lenders would 100% shut me down? Just keeping one thing open with $500 limit would of course be huge
@Brian_Earl_Spilner wrote:
The biggest difference is when you file bk you're able to start rebuilding after discharge or during the payment plan. Charge offs will severely limit you for years.

If you start defaulting it's like a domino effect once other creditors see this most all will shut you down.

Is there a reason why you can't do a BK 7 or 13?

90 days lates, chargeoffs and settling for less will hurt your credit for quite some time .

BK7 is not an option because of income, not remotely close

BK13 is not an option down to very specific circumstances. Prefer not to put out in public for fear of it being identifiable. Happy to share in PM if that is an option on here. However all the attorneys I spoke with said given my set of circumstances, BK doesn't seem viable. It just does not alway work

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Sun, 18 Jun 2023 20:37:16 GMT

I do have two auto loans. I just read through the loan agreements and I don't see how either of those could be closed. They do both have language that they are in default if I start BK proceedings. But nothing about my credit status or behavior with other lenders. So I can at least keep those going

Re: Defaulting and then settling debts vs bankruptcy

CreditCuriosity — Sun, 18 Jun 2023 20:46:16 GMT

I think what mentioned up thread is what bugs me most about BK you can rebuild a heck of a lot quicker than CO's. Sounds like you have the means to settle for less and not involve the courts and creditors are certainly going to take some vs. nothing or will in time. You will certainly on a lot of creditor be given tax forms you mentioned once you start to settle and be responsible for reporting to the IRS though. Sounds like you have a partial plan. I wish you the all luck was in a similar solution back when started to rebuild and just buckled my belt and paid off some huge charge-offs and within a year or a bit after they were all gone, but as mentioned felt like i was punished a lot more for it and also had to pay it back vs. someone that could do a BK. I know people will disagree with me, but can care less. Most people on this forum has either filed BK's or are/were rebuilders and will get some good advise either way.

Best of luck to you.

Re: Defaulting and then settling debts vs bankruptcy

Brian_Earl_Spilner — Sun, 18 Jun 2023 21:20:16 GMT

@ProbsBroke wrote:
Gotcha, that makes sense. Very quick googling suggests possibility of getting new cards maybe 1-2 years after the charge offs settle down.

Also some of these could settle pre charge off. But given the number and three lenders I expect at least one to go CO. But in theory some possibility they all just end up showing 90 day late then settled for partial balance. No idea how that would impact getting credit.

Do you know if existing lenders would 100% shut me down? Just keeping one thing open with $500 limit would of course be huge
@Brian_Earl_Spilner wrote:
The biggest difference is when you file bk you're able to start rebuilding after discharge or during the payment plan. Charge offs will severely limit you for years.

1-2 years is best case scenario. Significant derogatories as in 60+ days late tend to hold their strength for up to 5 years. The other thing is the card limits you would get. If you had 2 people defaulting on cap1, the one with bk could open a card with 3k limit as soon as bk discharged or payments started. The other person that let it charge off would be looking at a 300 limit maybe a couple of years after charge off if lucky.

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Wed, 21 Jun 2023 00:18:13 GMT

So just following up on this. I spoke to the Bovee guy who I think is a good guy and super helpful. He said that in his experience not all lenders will cancel all cards when they see other cards going late / co. Specifically he mentioned that Capital One won't even reduce your credit limit. This is really helpful as I have one Capital One card so plan to keep that safely to help the recovey. And as mentioned my auto loans will be ok. His view was also that at 1-2 years past the settlement dates I'd be able to go for FHA mortgages.

Anyway we are going to find out. I've given this a lot of serious thought, and done a lot of research, and in my own unique circumstances I am pretty sure this is the best path for me to take. I will provide an update at the end!

Re: Defaulting and then settling debts vs bankruptcy

MileHigh96 — Wed, 21 Jun 2023 12:01:26 GMT

Just something I haven't seen mentioned yet. Why wait to go into default/charge off before trying to negotiate? There is a chance that if you call the individual creditors that you could negotiate a reduction in interest (sometimes to zero) if you set up a plan, or maybe see how much they will accept to settle and close your account in lieu of having it defaulted on and charged off.

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Wed, 21 Jun 2023 15:46:07 GMT

@MileHigh96 wrote:
Just something I haven't seen mentioned yet. Why wait to go into default/charge off before trying to negotiate? There is a chance that if you call the individual creditors that you could negotiate a reduction in interest (sometimes to zero) if you set up a plan, or maybe see how much they will accept to settle and close your account in lieu of having it defaulted on and charged off.

I did discuss this with Bovee guy. He said that was an option, and you can also call most lenders and get them to accept 90% of the balance without ever going into default. However the end result on your credit is the same - the account will eventually show zero balance and settled for less than amount owed. So you may as well try to minimize the amount you pay to get to that point

Re: Defaulting and then settling debts vs bankruptcy

NeroStar — Wed, 21 Jun 2023 16:09:13 GMT

The difference being that there are no late payments / charge-offs shown in the data. You would think that your score will take a much bigger hit with the delinquent data posting than a comment stating settled.

I do agree with you that you have more bargaining chips after the lates/COs. If you have no immediate plans for attaining new credit it may be worth the money saved. Guess you just have decide if posted DQs for several to potentially seven years is worth the possibly thousands saved.

Best of luck no matter which direction you choose to go.

Re: Defaulting and then settling debts vs bankruptcy

ProbsBroke — Wed, 21 Jun 2023 16:28:32 GMT

Yeah on this I am not sure. However I am not able to come up with the cash to settle in full or at 90%. And if I even get them to accept zero interest, I feel I will be dragging it out over years to get this down. I am basically around $200k underwater. I think I can hustle and come up with $75-80k to settle this stuff and take the credit hit and move on. Given it looks like I will keep a Cap One account open, along with two auto loans, I genuinely think my credit will recover well after a year or two. Of course risk is it doesn't, but I just feel it is the path that looks most likely to get me out of the mess