Dear Debt Adviser, I was laid off in November 2008 with many others. I owned a boat at the time. I tried to work with the lender to lower payments until I could find a job. They would not compromise, so I let them repossess the boat. They auctioned it off for less than half the value ($100,000) leaving $147,000 outstanding in debt. Three years later, a legal firm representing the lender has contacted me to begin legal action to collect on the loan. I am working now but due to the lender's arrogant nature, I don't want to deal with them. What bankruptcy option(s) do I have? -- Craig
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Dear Craig, I wish I had better news for you, but you should expect your association with the arrogant lawyers and lenders to continue for the foreseeable future. Your bankruptcy options would most likely only include a Chapter 13 bankruptcy filing, where you would have to pay at least a large portion of what you owe in a repayment period of five years. My guess is that if you could afford a $250,000 boat, your current job has you earning more than your state's median income. This is the standard that is used to determine if you can file for a Chapter 7 bankruptcy -- where your debt is forgiven -- or not. You'll be better off if you can work something out with the lender. I understand your desire not to work with your lender. Although they were in no way required to compromise on the terms of your loan, they were not required to act like jerks.
You owe a large amount of money, and your lender has turned over the balance due to the legal department for collection. I recommend that you, too, hire an attorney to advise you. Dealing with the arrogant attorney yourself will continue to expose you to their grief. In my experience, attorneys deal better with other attorneys than they do with civilians. Call it professional courtesy or whatever, but lawyers tend to be less high-handed when opposed by competent counsel. It could be that your attorney may be able to negotiate a reasonable settlement offer that you can afford and that your lender will accept. A settlement would be less damaging to your credit and hopefully to your wallet than a Chapter 13 bankruptcy.
I also suggest you look into the laws of your home state to see if wage garnishments are allowed. All states allow wage garnishment for child support, alimony and tax debt. The state that you live in may prevent your lender from some collection proceedings. For example, if you live in Pennsylvania, South Carolina, North Carolina or Texas, your wages cannot be garnished for creditor debt. However, even if your state allows garnishment, the federal government dictates the allowable amounts that can be garnished. It maxes out at 25% of disposable income, which is defined as after federal, state and local taxes, Social Security, unemployment insurance, and state employee retirement systems. It could be that a wage garnishment would leave you with more income than a Chapter 13 repayment plan.
Under Chapter 13 bankruptcy rules, you would be allowed living expenses based on Internal Revenue Service guidelines, and the rest would go to satisfy your arrogant creditors. One last resource you might consider is a nonprofit credit counseling agency. A certified credit counselor may be able to negotiate a repayment plan with your lender that you can afford and would be acceptable to the lender.