Sunday, January 25, 2009

Bankruptcy is not an option…

I recently spoke with a gentleman in the northeast who told me that his wife was acquiring and running up credit cards for the past 6-7 years without his knowledge. She was also embezzling from their business; probably in part to make payments on these accounts so he wouldn't find out about them. When she left him a few months back everything came to light. Her parting gift to him was credit card debt in the six figures, books that were cooked, and divorce papers.

Bankruptcy was not an option by virtue of a contested divorce. Even without the break up, the prospect of bankruptcy isn’t very attractive. Because of the changes in the bankruptcy laws a few years back, many people make too much to qualify for Chapter 7 (liquidation) and Chapter 13 is no more than a court structured repayment plan. Less intrusive and more cost-effective alternatives are appealing for both debtors and creditors.

In this case debt settlement was chosen. Trying to make minimum payments until the divorce is final, with the hope that somehow “she” would receive her fair share of the debt, didn’t make any sense. His credit score wasn’t an issue either. Another factor is that the banks have shown an increasing willingness to settle; preferring to receive a smaller lump sum in the short term as oppose to a long term payment plan or uncertain terms.

What’s your take?


AZ Mom of Many Hats said...

It's hard to say what would have been the best option. Any way it is looked at, He (and she)is going to have to live with the repercussions of the spending. Debt settlement probably was a better immediate option. However, it may have been an option to try and file the chapter 13, and then get a judgment against the ex-wife. That way there would be a legal paper-trail of the situation. Maybe that may help his credit situation in the future.

Love your blog - hubby and I have been cash budget advocates for years! Such freedom in having no debt!

NSB Mom said...

I spoke to an attorney not too long ago as I inherited a bunch of divorce debt to include credit cards and some back taxes. He told me that if I "made a deal" and paid say half of one of these massive credit cards that there was a good chance the credit card company would submit the inpaid portion as income to the IRS and I would be taxed on it like income? Is this true??

Stephen V said...

In short, yes this is true and you may want to consult with a qualified tax professional. The longer answer assumes that you're considering negotiating a reduced amount with the credit card company. Email me if you'd like and I'll give you my cell.