Good Credit, Losing Savings - DMP, Settlement, or Chapter 13?
Date: Wed, 04/11/2012 - 14:09
I was hoping for a faster economic and personal financial turnaround but it has not happened. I have a long standing history of many accounts with no negative items on my credit report. Currently 780 credit rating and only negative effect is high balance to available credit ration and high balance in general.
I have been able to pay all cards on-time by cutting all luxury items out of my budget long ago and minimizing discretionary spending. I have no room more to cut, and I'm either breaking even or having to dip a little into savings every month. I have virtually no emergency fund left, depleted retirement accounts, etc. I have $200K equity in my home but cannot access it due to income level (already have a $400K mortgage). Selling the house is very last resort option that I won't go into details why it is last resort - so for sake of discussion you can take that option OFF the table.
I can't continue to live like this. I avoided DMP/Settlement to preserve my credit but living month to month like is taking its toll on mentally, effecting my marriage and my family. I have no need to purchase a new home or cars so I really don't need good credit for at least 7 years until after my kids move out of our home.
I've done my homework. Spoke with a bankruptcy attorney and a credit counselor but I still feel unclear on the best strategy to take. My goal is to get out of the debt as quickly as possible, minimize the credit hit, and most importantly, protect the equity in my home which is essentially all I have left to build on for retirement (I'm 42.) It seems I have 3 options:
1) Enroll in a DMP to get lower rates. (I already tried to negotiate directly with the banks but they won't budge do to my steller history always paying on-time). The Consolidation firm was able to get the average rate down to about 5%, all cards considered, but it doesn't lower my total monthly payment hardly at all due to the 5-year repayment plan. If I went this route I would just start with the two highest rate cards to save a couple hundred interest a month and continue to hope for increased income. Counseling agencies are unable to give me clear answers on exactly how much the DMP will effect my credit, and for how long.
2) Settlement. This would require me to stop paying some or all of the cards for several months from what I understand. I've heard one can negotiate themselves if they do their homework. This obviously will severely hurt my credit, I assume the more payments missed the worse, so it would be best to only do this on the cards with the highest balances if possible and still try to pay off or enroll in a DMP on the lower balance cards to minimize the number of late payments reported on my credit? This route also risks legal action which I hear is very rare for it to go through without settlement but if the creditor finds out I have $200K in equity, I don't see why they wouldn't want to proceed to get a lien on my property.
3) Chapter 13 Bankruptcy - The Homestead Exemption in my state is $125,000. It cannot be double by filing separately. So from what I gather, I would be required to payback most of the debt. But what I'm unclear on is if the judge would order me to sell my home to use the equity to erase the debt.
My gut is telling me to by more time by using a 'phased in' approach going from the least drastic to the most drastic measures. Enroll half the cards in a DMP to reduce the balances faster and give me slightly lower monthly payments. I'm afraid I'm borderline past this point. One problem is, one of the highest balance cards is the lowest rate ($50K balance, 10% interest business card). If that card was the 24% rate I'd go the settlement route on it to give some relief while only having negative reporting on one account.
One thing that is nice is that being an IT guy, I've setup a VOIP phone system that will allow me to direct all the phone calls from creditors directly to voicemail so no phone ringing off the hook.
Another thing is that in examining my current credit reports I see that a couple of the accounts are not being reported on my credit. They must be reported under my Partnership's Federal Tax ID. But the thing about a partnership is that it is the partners that are liable for all debt. It's not like a Corporation where the officers can insulate themselves from liability. If the business credit isn't important to me, it seems like I should go ahead and stop paying the business cards that are not being reported under my social security number?
Be it a DMP or Bankruptcy, your credit score will take a major h
Be it a DMP or Bankruptcy, your credit score will take a major hit but as you say that filing bankruptcy is not a possibility by law, I think DMP is the only option you have left. You can try falling behind on your payments and negotiating a settlement after that but you might just get sued in the process if the creditors play hard ball.
In a similar situation with equity in home, business debt as wel
In a similar situation with equity in home, business debt as well as over 100k in credit card debt. I chose option number 2 and no longer have any savings.
The business cards will (most likely) be reported once they are late or charge off.
Unless you can come up with 25-50% of the debt, settlement will not work and you are best speaking to a BK attorney.
Debt management or debt settlement
Hi Drowning,
It is normally pretty difficult to straddle different debt relief options. While some of your thinking of how to manage your situation makes perfect sense, the reality when you have one foot in debt settlement and the other in a debt management plan with credit counseling is very different.
A reputable consumer credit counseling program typically will advise you that all but perhaps one card will have to be enrolled in the debt management plan. That's not their rule. Its a policy of many creditors.
When settling accounts, your results will generally be optimized when you appear to be unable to pay most and/or all accounts. Creditors and debt collectors can see your credit report real time during the negotiation phase. If you are paying some accounts, but not the account being discussed, there will be objections. There are limited methods to explain away a situation like this. There is also the increased risk that, come time for placement of your account to a third party, the paying on some accounts, and not others, will impact who the account goes to. The concern here would be an account placed with legal for collection. That could happen during the settlement plan anyway, but the goal is to not add to the factors that increase the risks of being sued - if you can help it.
Your risk profile for being sued when using a settlement strategy can be better assessed by weighing who you owe, and how much, along with a few other details. There are strategies for mitigating the risks in a debt settlement plan along the way. It would help to know the bank name and balance and the state you live in.
Your stated:
Quote:
My goal is to get out of the debt as quickly as possible, minimize the credit hit, and most importantly, protect the equity in my home which is essentially all I have left to build on for retirement (I'm 42.) It seems I have 3 options: |
The DMP option is 4 to 5 years. The chapter 13 will be 5 years. Both of these options provide zero flexibility and suffer poor completion rates as a result. If you start off on a set payment plan in either instance and are later unable to make the agreed payment due to a drop in income, or a life event, the programs and benefits will end abruptly. The money paid into them for what ever period of time will become lost resources (to a degree), as they were deployed in a plan that did not succeed. I am not pointing this out to deter you from either path. It is just good to look at them with eyes wide open.
At first blush, IO is right about chapter 13 looking like a reasonable path if you cannot accumulate the settlement funds inside of 12 to 24 months. However, your opening sentence about variable income would be my number one concern for you succeeding in the chapter 13.
You may consider chapter 13 later, after starting down the settlement path, if you need to for a strategic reason (something like sued and judgment enforced).
