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Is bankruptcy our best option?


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Please forgive me if I am repeating earlier threads, but I'm not sure which direction to go.

It seems as if we have done all the wrong things over the past several months, every time we take a step that we think will improve our situation, it's a mis-step. With impending layoffs at his job in California, my husband and I took an an opportunity to relocate to Arkansas with a different company. Even with the pay cut, no relocation reimbursement, we thought it a good move for our family in the long term. We thought we did due diligence in comparing the move financially. We talked to realtors who did not think we could sell our house for what it was worth, but thought it could be rented for almost the mortgage amount.

To try to make my long story shorter:

-Did not rent for a while.

-Rented for way less than mortgage.

-Unexpected move expenses.

-We had a lot of unexpected medical expenses, not covered by new insurance.

-I can't find work like expected.

We were pretty frugal before, so now that we really need to be, I don't have anymore fat to cut out. We used retirement money and credit cards to keep us afloat, all the while thinking tomorrow would be a better day.

Luckily, after a few months of non-payment, the mortgage company worked out a modification with us that is about what the rent is...but now the tenant is having financial problems and is inconsistent with payment. One step forward, two back.

I've meet with CCCS and Creditguard, apparently they have agreements with many creditors, so they could significantly reduce interest rates, but the payments were still over our heads.

We have nothing of value to sell. I don't mind driving an 18 yr old car or even not having money to fix it... but trying to convince my 6 yr old that taking a handmade present to a b'day party was better than a Hannah Montana Doll is challenging or when she can't go somewhere with friends because we can't afford it -hurts.

So here we are, in a new state. Isolated from friends and family, with almost 30k in unsecured debt, no savings - harassed by creditors/collection agencies. I can say that depression is setting in. I REALLY believe that we can dig our way out to a more manageable existence in about six months, (my husband is expecting a raise and I SHOULD be able to find something (even if it's fast food). In the meantime, our FICO has gone from just over 700 to? Creditors want something...which we don't have. What should we do? Bankruptcy would probably stop the calls, but would it hurt us more in the long run? I welcome any suggestions, but hold any harsh criticisms please.

Maybe I just need a therapist instead of credit counseling.

Thanks for reading,

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Agreed. One caveat- make sure the worst is behind you before you actually file. You really only get one crack at this. And post-petition debts are a whole new ballgame for creditors. I'd wait to file until you are cash-positive every month again- either with your husband's raise, a new steady job by you, or both. Unless you're talking about substantial income, you should be fine under the means test. Remember, its a disposable income test (for which you have little or none), not an income-based test.

In the meantime, send the unsecured creditors & CAs limited cease & desist letters. Tell them they are causing depression and that you demand they contact you by mail only. That should help alleviate some of the calls in the interim.

Your credit is probably destroyed by now anyway with all the +30, +60, +90 day lates accruing. After BK7, with proper credit repair, you can have 700+ scores within 24 months. You still won't get certain credit cards and superprime deals for years because a BK7 stays on your reports for 10 years. But then again, WHO CARES? A BK should be a once-in-a-lifetime event that helps you free yourself from the shackles of debt anyway. :)

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You can become cash-positive very quickly in this circumstance.

Now understand that what I am about to write is not illegal in any way. And keep in mind that you will loose the house in California.

Stop paying unsecured debts. Stop paying the mortgage on the California house, pocket the rent money. Be dilligent in getting the rent money. The house is yours until it forecloses so the rent is yours. It will take about 60-90 days for the lender to start foreclosure proceedings. Ignore credit card collection calls...just hang up. Don't argue, don't make promises, and don't say "bankruptcy". They will find out soon enough.

Use those funds you hoard to pay your bankruptcy attorney and to build yourself some reserve cash. You may need the cash to buy out a vehicle loan through redemption, to buy a late model vehicle, or to pay for security deposits on utilities. If you have a home loan in Arkansas, get it current and keep it current if you intend to keep it. If you have a reasonable vehicle payment, try to keep that current if you plan on keeping the car.

Keep your bankruptcy attorney apprised of the california mortgage and instruct him to file the bankruptcy case once the lender serves you with foreclosure papers. This will stop the foreclosure temporarily and allow you to collect another couple of months rent. Sooner or later the tennant will find out about the foreclosure but by then you will have collected several months of rent. When the tennant does they may stop paying rent. Since you would be letting the house go in bankruptcy you need to emotionally let go as well. Since the bankruptcy wipes out your liability on the mortgage the lender won't be able to go after the rent you have collected even if the mortgage has such a turn-over provision in it.

I know this may seem a harsh way to treat a renter, but this is your family survival here. The renter will be fine and will likely stay rent free until the foreclosure is done or they may simply move out. At that point it shouldn't matter to you. I recommend you be nice and return their security deposit in full. Any damages to the property are the lenders problem once they take the property.

With a chunk of cash and debt wiped out you should be able to get your financial house back up in short order. I recommend you take a financial management course from a non-profit (Financial Peace University is my recommendation, but there are others) and stay off the debt hamster wheel.

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Stop paying the mortgage on the California house, pocket the rent money. Be dilligent in getting the rent money.
I beg to differ. 11 U.S.C. 541(a)(6) is clear. The rental property is property of the estate and the proceeds, rents, profits derived therefrom are clearly within the estate. If you pay the mortgage and you're upside down, then its a moot point. If you don't pay the mortgage, then you have profit that the trustee has the authority to grab. Definitely discuss with the attorney before assuming the cash is yours to keep. Note that this is entirely different than post-petition wages.
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I beg to differ. 11 U.S.C. 541(a)(6) is clear. The rental property is property of the estate and the proceeds, rents, profits derived therefrom are clearly within the estate. If you pay the mortgage and you're upside down, then its a moot point. If you don't pay the mortgage, then you have profit that the trustee has the authority to grab. Definitely discuss with the attorney before assuming the cash is yours to keep. Note that this is entirely different than post-petition wages.

The rent is pre-petition until the case is filed. Post-petition rent is not included and the lender can't touch it because the liability to the lender would be discharged.

What I described is the way my bankruptcy was handled at the end of 07. The attorney fees are priority a claim so funds from rent to pay the attorney are protected. Likewise funds used to redeem a vehicle are protected.

Also, unless they have lived in Arkansas for more than 730 days, they get the exemptions from California. If they choose California's system-2 exemption they can exempt up to $17,500 (double if filing joint) in personal property, including cash...assuming they have no homestead exemption to use, which would be true if reaffirming an Arkansas property loan.

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Thank you all for responding. We do not own any property here in Arkansas and my emotional attachement to the house in California is gone. Especially since it has been more of a pain in the a$$ since we left. We were there for over 5 years, nothing major needed, within in two months of our leaving - replace water heat, new electrical and a few minor stuff.

Another question - most of the debt is in my husband's name alone, is it worth paying off my couple of little things and he file alone? Or should we both start over...? Also, I have made appointments with two attorneys next week, so I will be preparing myself with the use of this site. Regards to all.

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I’m going to suggest a different view here although I agree to a large extent with Methuss’ suggestions. However, bankruptcy may not be necessary and while it may seem like the easy way out, it isn’t always.

In many, many cases, a bankruptcy can’t do anything for you than you can’t eventually work through on your own…the key is to not give up and not to let the creditors/collectors coming after you push you down a path you may not want to travel.

Keep in mind that a bankruptcy will not in any way increase your income so an important question to ask and know the answer to is whether, without the debt payments on all the unsecured debt, mortgage in California, etc, if you can make it month to month and have enough left over to save and do the things you should be doing financially….if you don’t then bankruptcy will not change that.

By the time creditors get around to suing you (assuming they do); it’s likely you can work out deals to settle those debts for relatively little money plus I would suggest that the “hit” your credit history will take or likely already has taken is not nearly as bad or as long lasting as a bankruptcy.

By all means go to the attorney’s you’ve made appointments with but keep in mind that asking a bankruptcy attorney if you should file bankruptcy is like asking a kid if he wants ice cream.

You may, eventually, have no real choice but to file bankruptcy but it is not something you should rush into by any means…the “relief” bankruptcy provides generally appears better than it turns out to be.

And yes; in case you are wondering, I filed for Chapter 7 many years ago and I’m still ashamed I did so. If I knew then what I knew now about how comparatively easy it would be to have worked through my situation rather than give up just to stop the collection calls and get out of a bad marriage; I’d be far better off today. I think about that every time I’m asked the question “have you ever filed bankruptcy?” on a job or some other application.

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Postpetition rent IS part of the estate according the the Code. Its the same as receiving postpetition stock dividends. If the stock is part of the estate, postpetition dividends attributable to that stock are also part of the estate. Methuss, if your attorney told you otherwise, then that must be a local nuance due to trustee practice. The inclusion of thes erents is a logical rule too. Why would a debtor get to profit from property that is clearly marked for creditors?

I agree with everything else posted. Except the "morality" of bankruptcy filing. Treat yourself like a business entity. Play within the rules to your advantage. One of those rules happens to be a bankruptcy filing if that is the best option after weighing pros and cons.

I added a few example cases below that explain why postpetition rents are nonexempt & part of the BK estate, deeming them collectible by the trustee. A quick headnote search revealed +100 cases that were on point with no readily apparent example where a debtor would get to keep postpetition rent payments...

In Re Allegra Davis, 2007 Bankr. LEXIS 3821

“The Court ruled that the rental proceeds collected by the debtor postpetition on nonexempt real estate were properly exempted under Ala. Code § 6-10-6. However, upon further review of the case law, the Court concludes that this conclusion is erroneous. What is property of the estate of a debtor is determined first by reference to 11 U.S.C. § 541(a)(1). It provides that the trustee succeeds to all legal and equitable rights of a debtor in property as of the date the debtor files bankruptcy. Section 541(a)(6) states that property of the estate includes "proceeds, product, offspring, rents or profits" from property of the estate as well. Therefore, unless the rents claimed by Ms. Davis are exempt on their own merits (since the real estate is not exempt), it is clear the rents are property of the bankruptcy estate….Therefore, the Court concludes that the postpetition rents are not personal property that can be exempted under Ala. Code § 6-10-6. The postpetition rents belong to the trustee since the underlying real property is not exempt and became property of the bankruptcy estate at the filing of the bankruptcy case. The rents follow the real property.”

In re Allen, 226 B.R. 857 at 862:

“11 U.S.C.S. § 541(a)(6) is both an "inclusion" section, expanding the pool of estate property, and an "exclusion" section, imposing limits on what property the estate may take in. It expressly includes proceeds, product, offspring, rents, and or profits of or from property of the estate, but expressly excludes earnings from services performed by an individual debtor after the commencement of the case. Section 541(a)(7) is a catchall that sweeps into the estate any interest in property that the estate acquires after the commencement of the case.”

In re Temple Court Assocs., 1996 U.S. Dist. LEXIS 13772 at 16:

“Under 11 U.S.C.S. § 541(a)(6), the post-petition rents are considered property of the debtor's estate. As § 541(a)(6) states: The commencement of a case creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after commencement of the case….Under 11 U.S.C. § 543, the debtor's estate is subject to the administration of the Chapter 7 Trustee. Accordingly, under both Judge Brozman's Orders and the Bankruptcy Code, it is clear that the post-petition rents belong to the Trustee.”

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I suppose I should have been more clear.

If the trustee abandons the real property (because the mortgage is upside down), then the trustee isn't going to be taking the rent money collected post-petition.

My attorney was pretty clear on it: Once the Trustee enters a no-asset declaration to the court, then the rent money coming in isn't a claim by the estate.

So to a point we are both correct. If the trustee decides to take the property in receivership then from that point the rent goes to the trustee. Rents collected pre-petition would be subject to exemptions first, then to redemptions and priority claims.

However I find that an Arkansas trustee is very likey to NOT be interrested in the logistics of collecting this rent and would likely abandon the property...especially since the OP has already said there is more owed on the property than it is worth.

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