10 Reasons Why Chapter 13 is Better than Debt Settlements When You Owe a Lot of Money

Chapter 13 vs Debt Settlements; a Re-Match

What is a Debt Settlement?

A Debt Settlement is a non-judicial process whereby you or your representative contact your creditors and ask them to take a settlement.

What is a Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a court process to reorganize your debts over a 3 to 5 year plan of repayment.

In the rest of this post, I will assume that you do owe a lot of money and that you do not qualify for a chapter 7 straight bankruptcy.

Round 1: Chapter 13 Can Also Cut Your Balances

With a chapter 13 you might not even have to pay all your credit cards in full in the first place. You might be able to cut your balances by more than the settlements.  On top of that Chapter 13 gives you up to five years to pay them off too.

If you don’t own a lot of property and if your income is too high to file a chapter 7 but not high enough to pay your debts in full, then in your chapter 13 plan you pay your debts whatever you can afford. Take that Debt Settlements!

Of course, you’ll have to ask your attorney how much you can reduce your debts with bankruptcy. Know your options because knowledge is power.

Round 2: No Need for Large Up-Front Cash Pool

To do a debt settlement you have to have access to a large amount of cash. Usually, 40% to 50% of the total balances on your credit cards. That’s got to come from somewhere. Often people pull it from savings, their 401k plan, or other retirement plans. Sometimes you have to borrow it from someone else like your parents or grandparents.

In a chapter 13 you set up a payment plan to pay back your credit cards. You don’t have to liquidate your family heirlooms, cars, trucks, jewelry, wedding rings and 401k plan in order to pay your chapter 13 payment plan. You pay it out of your regular earnings.

Round 3: Attorney’s Fees

Attorney’s fees in debt settlements are determined by the number of accounts settled plus the percentage of the amount saved. If the person doing the offers to settle your debts saves you 50% of a $10,000 credit card, they’re going to charge you from 10 to 20% of the $5000 savings. Plus you’re going to pay a flat amount per account up front usually from $100 to $500 per account.

For instance, if he saves you 70% of a $10,000 account, then the savings is $7,000 and 20% of that is $1400. You’re going to pay $3000 on the account, + $1400 in fees, + you paid a down payment. That’s 38% to 45% of the debt. You could have probably gotten that same deal or better yourself to begin with.

In a chapter 13, it’s $4000 to $5000 to handle all of the debts en masse.  So, if you owe a lot of money and have a lot of different accounts to settle, then file a chapter 13.

Round 4: Certainty

In a chapter 13 bankruptcy, you know how much you’re going to pay and for how long.

Debt Settlements can take a long time. You won’t know how long until it’s done. While settling one account here or there, the other accounts might sue you in the mean time too. Uncertainty leads to stress in the home and domestic quarreling.

Round 5: Your Credit Is Toast Either Way

Trading your nest egg of savings away in order to settle your debts for less than full value because you think it will preserve your credit rating is a lie. Don’t believe it.

Round 6: Retirement

If you get to retirement age with a lot less money because you liquidated your retirement savings to pay debts, you’ll kick yourself all the way to the Walmart where you’ll be applying for a door greeter job. Ooohh, Debt Settlements takes a black eye, and the crowd goes wild!

If you borrow against your 401k plan and even if you pay it back, you still lose money. If you borrowed $30,000 and if you pay it back on time at 7% but if you would have earned 10% then you’re going to lose more than $40,000 even if you do pay it back on time. If you end up defaulting on the 401k loan instead of paying it back, you would lose over a Million Dollars.

You realize that your retirement savings is protected in a bankruptcy whether in chapter 13 or chapter 7. You could keep all of your 401k plan’s savings when you file bankruptcy.

Round 7: 401k Loans Cost More Than Chapter 13 Payments

If you “borrow” from your 401k plan in order to pay your credit cards, how much does that cost? If you borrow $30,000 from your 401k plan, what is the 401k loan payment?

ANSWER: Borrowing $30,000 at 7% interest for 60 months at 26 pay periods per year yields a $541 payment per check.  That’s over $1100/month.  60 months later you’ve paid back $66,000. This is the real cost of your 401k loan and it’s ugly.

Depending on how much money you owe, your chapter 13 plan payment may very well be lower.

Round 8: You Borrow From Your 401k then Lose Your Job

You’re screwed to put it mildly. Imagine you’ve settled $60,000 with the $30,000 you’ve borrowed from your 401k plan. You’re out of debt, sort of. Except that you’re paying the $30,000 back. If you’re on an 8 year repayment plan at 7% then your payment will be $355/check based on biweekly pay periods. Then you lose your job.

First you’ve taken a humongous hit on the amount of retirement you thought you’d have, and that’s going to be in the hundreds of thousands of dollars, and you’re going to be applying at Walmart.

Second, if you had been in a chapter 13 bankruptcy and lost your job, you’d convert to a chapter 7 and discharge the debt. Your retirement savings would still be preserved and you’d be out of debt.  Debts Settlements takes a Right Cross to the Jaw!

Round 9: TAXES

In a chapter 13 bankruptcy, you just pop them into the plan, recent taxes will have to be paid in full, however, while paying those in full, you can also reduce your payments on your credit cards to as little as 0%.  (Depending on your circumstances). Older taxes may be lumped in with the credit cards and given as little as a 0% pay out too.

Debt settlements cannot touch this with a 10 foot pole. Debt Settlements gets a body shot and is going down!

Round 10: Rental Property Mortgage Benefits in Chapter 13

Imagine stripping the 2nd and 3rd mortgages off of your rental properties and at the same time, cutting the 1st mortgage down to the value of the property and rewriting the mortgage. Can your purveyor of Debt Settlements do that?

Chapter 13 gives Debt Settlements a rabbit punch on the way down, but the referee misses it!  Debt Settlements is down!

CALL to set an Appointment for a FREE Consultation 951-200-3613

10 Things You Must Know About Chapter 13 If You Do Not Qualify for Chapter 7

So, Attorney Gandalf has told you that “You Shall NOT Pass!”

That’s what Gandalf in the Lord of the Rings told the Demon-Balrog as it attempted to cross a narrow bridge deep in the Mines of Moria. So now you’ve been told by another attorney that you don’t qualify for a Chapter 7 bankruptcy. You’ve failed the Means Test. Perhaps based on your own research you think your income might be too high. But it’s not like you’re wealthy and or made of money. You’re struggling just like everyone else, just at a higher level of income. At the end of the month, you have the same amount left over as everyone else; nothing.

What now?

Get a 2nd Opinion About the Means Test

I’ve seen cases where a client’s initial consultation with another attorney missed a couple of key items that made all the difference. When you come in for your free consultation, we’ll go over them together. Attorneys are not supermen, we’re fallible.

Okay, I’m not but some are. Some of the lawyers who are newer in the field of bankruptcy might not know all the ins and outs yet. I’ve filed several Chapter 7 cases where the first attorney thought that the clients didn’t pass the Chapter 7 Qualification Test called the Means Test.

Let me have a look at it if you’re in California, maybe I can help you. I’ve been a bankruptcy attorney since 1994 and I’m located in Murrieta conveniently close to Temecula, Riverside, Wildomar, Menifee, Lake Elsinore, Canyon Lake, Santa Ana and San Diego.

Sometimes Your Only Bankruptcy Option is Chapter 13

There are worse things, just ask Gandalf, more importantly ask the Balrog.  But if you have to file a Chapter 13, there are things you must know.  Here are the first 10 that come to mind off the top of my head.
First: It’s not the end of the world.  The sky will not fall. The police will not show up and arrest you (there is no debtor’s prison). Your friends will not laugh at you. In fact more of them have filed or are about to than you might imagine. You won’t walk around with a watermark of a B on your forehead. Frankly, if you make too much money to file a chapter 7 then that’s a good problem to have. You’re going to get to do what you promised to do in the first place; pay your debts.

Second: A Chapter 13 bankruptcy is a bankruptcy with a payment plan attached. If you don’t qualify for a chapter 7, your payment plan must be 60 months unless you’re able to pay it off earlier. You might even be able to strip your 2nd mortgage lien off of your house.

Third: If you don’t qualify for a chapter 7, your chapter 13 bankruptcy has a version of the Means Test too and it is used to determine, at least in part, how much of your unsecured non-priority debts you must pay back through your chapter 13 payment plan.

The definition of unsecured is any debt that is not attached to something that can be repossessed if you don’t make the payments. Priority debts, roughly speaking, are debts that either you owe directly to the government or that the government must pay if you don’t. So for instance, credit cards and medical bills are unsecured. So are student loans. Recent taxes are priority debts, which you do owe directly to the government. Child support is a priority debt too because if you don’t pay, then the custodial parent may be forced to go on welfare. But student loans on the other hand are not priority debts because if they were a lot of people would never qualify for Chapter 13. But that’s a whole nuther ball o’ wax!

Fourth: You may not have to pay all your credit cards, medical bills, student loans, old taxes (under the right circumstances and conditions of which there are many) and so on in full. Depending on your circumstances, you may be able pay off lates on your mortgage, back child support and recent taxes in full while paying only what you can afford to on your credit cards, medical bills, student loans, and old taxes.  Of course, you will still owe any unpaid student loans after your chapter 13 payment plan is over.

So, “it puts a book mark in the student loan.”  ~Anna.

Fifth: The other thing that determines how much of your unsecured non-priority debt is how much stuff you own. If you have accumulated a lot of stuff or a lot of unprotected savings, you may have to buy it back again. So, never ever have unprotected savings. Basically if you could protect only $50,000 worth of stuff but you have $75,000 then you must pay at least $25,000 into your chapter 13 bankruptcy. So, whichever requires you to pay more is the one that you go with.

Sixth:  Even if you have to pay everything in full, 100% of the principal on your unsecured non-priority debts, but if you can do it with 0% interest, then you will most likely have a lower payment than if you go to a debt consolidation program outside of a bankruptcy.

Seventh:  If you pay less than 100% of the principal they will take your tax refunds away from you every year you are in your chapter 13 bankruptcy so sometimes it’s better to bite the bullet do a 100% payment plan.

Eighth: If you owe more than $1,149,525 to secured debts such as your houses and cars, you can’t file a chapter 13.  Or if your credit cards and medical bills and other unsecured non-priority debts come to more than $383,175 then you cannot file a chapter 13. In those circumstances your options are consolidate your debts outside of bankruptcy, settle some of the debt and then file the 13 or try a 7 anyway and hope they don’t try to force you into a chapter 11 where you will have to pay more than $20K in attorney’s fees (and that’s just the beginning).

Ninth: If you’ve been behind on your payments to your houses and cars then in some jurisdictions your bankruptcy judge will require that you pay your regular monthly payment on your mortgage to your bankruptcy trustee rather than directly to your mortgage bank.  In the Central District of California in the Riverside Division, there is one judge that does require this.  Called a conduit payment, it helps to insure that you don’t get into any further trouble with your mortgage payments.  However, if you haven’t been behind in your house payments, then you are still allowed to pay directly even in that Judge’s Court.

Tenth:  A Chapter 13 bankruptcy has a qualification test too, it’s called the feasibility test, which means what it basically sounds like.  You have to be able to pay the payment plan.  If you can’t, then they dismiss your case or suggest that you convert to a chapter 7 bankruptcy.  So, if at a later date you lose a job, or your spouse loses their job or that second job, then maybe you can request that the judge assigned to your chapter 13 reduce your plan payment based on the new lower income or even request a conversion to chapter 7.

I’ll be expanding the list, so if there’s something you think should be on the MUST KNOW List, please put it in a comment below.  I look forward to your thoughts.