Drowning in Debt

[yapsalot]

Two questions:

1. In what state do you live? In some states, like Florida and several others, for example, a judgement for unsecured credit card debt does NOT act as a lien on your home in which you or your family physically reside. 

2. What is the level of income and most importantly is your income subject to garnishment under the law of your state? In Florida, for example, if you have a spouse, children, or other persons for whom your income provides over 50% of their support, your wages are not subject to garnishment. I'm assuming there are no assets other than your car, home, and no other income other than wages. Please advise if these assumptions are incorrect.

I'm approaching this from the standpoint that you are soon not going to be able to make even the minimum payments are looking for alternatives.

Amex, Chase and Discover are known to sue for unpaid debt and thus you would expect a number of suits for which you likely do not have a viable defense.

But there is another side to this. Depending upon state law, your home and income may not be subject to attachment. If so, that opens a door for negotiation of some or all of the unsecured debt. Since you car is upside-down, no rational judgement holder would attempt to levy on it, since they would get nothing after the loan was satisfied, which comes first.

If you are fortunate enough to have state law protection from a lien on your home and state law protection from garnishment of you wages, you may be able to negotiate extremely favorable settlements of some or all of your unsecured debt.

I can give you a real life example: debtor owed $30k to Bank of America on an unsecured credit card. After Bank of America was informed of the debtor's circumstances, Bank of America agreed to accept $3k in full settlement of the debt. The debtor borrowed the $3k from relatives and satisfied the debt. This all happened within a matter of days.

If you go this route, you will have very negative consequences to your credit score, as any such debt will be reported to credit bureaus as settled for less than amount due. But considering your overall debt situation, you are likely to have have a degeneration of your credit score regardless of which route you take. Bankruptcy, default without bankruptcy, or consumer credit counseling will all result in negative credit consequences.

Please advise of your state of residence.

[MarkintheHV]

I seem to recall also, that if you settle a debt, there is a very real chance that they will issue you a 1099 form in the amount that you did not pay, thus causing you to pay income tax, as the federal government views this as income

[MattyIce]

Instead of a HELOC, are you able to do a cash out refinance on your house?  They could pay off the debt straight from the refi, so your DTI wouldn't be as much of an issue.

[yapsalot]

Yes, the IRS does consider cancellation of debt as income. There are, however, several ways out of it. For example, if your liabilities are more than your asset you can file a from with your original return and exclude the income. See IRS form 982. Many people burdened by debt will qualify for this exception and its not widely known by preparers.

[righthererightnow]

I second the reaching out BEFORE you hit the trouble zone. Especially these past few years, lenders are kinder, and more open to work with you. Wish I would have known (and made the effort to reach out) before I filled my BK. Reach out, talk with them, see what they can offer you to help you get back on track and stay in good standing.

And kudos to you for realizing where you are, and starting the process to dig yourself out of this. 💜