Attempting To Settle Debts Before BR

[NonSequitur]

I am wondering what ways people have tried to settle debts
creditors before filing bankruptcy. This example was emailed
to me. It makes some sense.

"If you can get the help of a friend, lawyer, or legal aid society
so much the better.

Have a separate letter typed to each individual creditor along
these lines:

Gentlemen:
I have been retained by (or, represent) Mr._________ for the
purpose of settling as many accounts as possible before filing a
petition in bankruptcy.
Mr. ___________ total debts at the present is $5000.00, with
assets on only negligible value.
In an effort to settle honorable with his creditors, Mr.
________ has managed to raise $500.00 for this purpose. This
money will be distributed on an equal percentage bases only among
the creditors who accept this offer.
Of course your percentage my be as little as ten percent,
and may be much more (may be large enough to repay the debt),
dependent on the number of creditors accepting this offer.
The funds in settlement of debts due will be mailed on
_________. (write in the date of 10 days from the time you mail
this to the creditor.) Your response must be received prior to
this date.
To accept this offer, all you need to do is sign the
enclosed copy of this letter and return it to me using the
enclosed self-addressed envelope.
Pursuant to the provisions stated above, we hereby agree to
accept a minimum of $________, or a greater amount pursuant to
the number of creditors accepting this offer, as full payment and
settlement on account number _______________.
Name of Creditor _______________
Authorized signature ___________
Date ___________________________

A letter like this is very effective. None of the other
creditors will want to be the fall-guy. Sure they only have the
chance of receiving only 10%, but by the same token there's a
chance of receiving alot more and by nature, creditors love a
gamble. They'll jump at your offer, knowing that this is one
play the stand to win at least something, and cannot lose more
than what has already been lost."

[StaciMM]

I don't think it would be effective. Assuming you're dealing with multiple creditors-the likelihood that they would all agree is next to nothing, which means the person would end up filing anyway. And, if a settlement payment had been accepted by the creditor, they would probably end up paying it back to the trustee.

[concerned]

Our attorney told us not to deal with creditors at all, but to forward them to him. I'm not sure how it would work if you were filing on your own (pro se).

[sunshine08]

Some creditors will work with you and may settle for 1/2 of the debt. But I can assure you that a large percentage will not make this offer. If you call them, they MIGHT offer to lower the interest rate for a certain period of time, if you meet the criteria. I can also almost guarantee that they won't settle for 10% either.
Problems associated with this are: You will not get a 100% of creditors to work with you, if you have more than several. 2nd if you end of filing bankruptcy there is the preferriental payment issue to contend with. 3rd, MBNA, chase, BOA aren't likely to. Sears might, but is basically a one time offer as a last ditch attempt to collect. Citibank likes to just serve you with a civil summons.
This might work if you owe probably less than $5000. But I think creditors would look at the future ability to pay and decide a judgement would be more beneficial.

[HHM]

Honestly, if your going to file BK, what is the point in settling.

I have never heard of any creditor, even debt purchasers, settling for 10%.

The only purpose to even attempt settlement is if for some reason you cannot file BK. Otherwise, settlement is by far the most costly way to deal with debt. The only people I ever recommend debt settlement to are those with higher incomes who, for whatever reason, cannot qualify for a chapter 7, and would not be good candidates for a chapter 13.

[sunshine08]

I also forgot, I thought I read somewhere on here that if you settled, that you had to count the balance as income and that you had to list and pay taxes on that amount.
I still can't get over the 10% issue, when was that during the depression?

[HHM]

That's right sunshine, if you settle a debt, the creditor will 1099 you on the unpaid portion and you must declare it as income on your taxes.

For example, if you settle a $12,000 debt for $5,000, you will have to pay income tax on $7,000.

[hhou812hh]

Correct. It counts as income since you aren't legally bankrupt. I read an article on this too that most folks that need help but don't want bk will settle, go about their lives and wham! They owe a few grand on taxes putting them right back where they were.

This will work for some, but not others. No one size fits all in financial management. That's for sure.

To bad the new bk laws didn't amend the tax code capping some of these settlements. It would save some people from filing.

[quest42]

New laws to help the debtor??? Seems like Mr. Bush has pushed that one through to help big business and punish the poor citizen...

[SleeplessInMI]

New laws to help the debtor??? Seems like Mr. Bush has pushed that one through to help big business and punish the poor citizen...

That shouldn't be a surprise... it has always been like that in this country.

[egul105]

It supposedly is just as bad to settle with the creditors than it is to file bankruptcy. they will put on your credit report that you settled for less than what you owed. I read somewhere it's right up there with a judgement or bankruptcy on your credit report. Plus, it doesn't go away for 7 years either. At least with bankruptcy you are starting fresh and have a chance to rebuild your credit.