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Soon to be...Another Statistic


Jimmy Spears
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Hi I've read over a bit on this site and really appreciate such a forum available as it is.

I'm in California. Family of 4, self employed, sole proprietor, own home, one rental house, two cars.

My business has gone to crap, I've run up 200,000 in unsecured credit cards over the past 2 years. My credit score is currently 760 and I have just missed the first payment of any kind in 10 years.

I've exhausted all savings, credit lines, etc. I currently earn only half of my monthly "nut" and the writing is on the wall. It's time to reset.

I owe way more on the house and rental and cars than they are worth. I am no longer using any credit cards. I have no significant assets in my business - all leased equipment.

I'd like to start to dump all payments for cards, credit lines, and rental house and eventually spin out in Chapter 7 towards the end of the year or later, depending upon the heat applied by my creditors. My ultimate goal would be to come out on the other side with a clean BK and no loose judgements.

My questions are as follows:

I've got about 30,000 in 529 savings accounts for my kid's education - No contributions will have been made in the prior year to filing BK 7. Will these funds be in danger?

Should I allow foreclosure of the rental house prior to filing BK and why?

I've made some hefty balance transfers (20,000 per) in the past few months that mostly borrowed from Peter to pay Paul. Are there any special considerations here in BK filing?

My main house negative equity by at least 50,000 but I'd like to keep it - The payment is actually quite acceptable when compared to other options. I'm locked 30 years at 5.875%. Should I try for renegotiation once defaulted on other loans?

Did I mention I'm being field audited by the IRS for 2005 2006 & 2007 and I will definitely come out with a big bill in a few months??

I'd really appreciate any advice that anyone could offer.

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I owe way more on the house and rental and cars than they are worth. I am no longer using any credit cards. I have no significant assets in my business - all leased equipment.

I'd like to start to dump all payments for cards, credit lines, and rental house and eventually spin out in Chapter 7 towards the end of the year or later, depending upon the heat applied by my creditors. My ultimate goal would be to come out on the other side with a clean BK and no loose judgements.

My questions are as follows:

I've got about 30,000 in 529 savings accounts for my kid's education - No contributions will have been made in the prior year to filing BK 7. Will these funds be in danger? It appears that you are protected with the 529 plan as long as you have been contributing over the long term, but NOT contributing recently. A pretty good article on this is here: http://www.bankruptcylawnetwork.com/2007/08/16/section-529-plans-in-bankruptcy/

Should I allow foreclosure of the rental house prior to filing BK and why? If you have both a foreclosure and a BK on your record, your score takes a bigger hit. However, it takes a long time now in most areas to foreclose because of the record number of foreclosures. Best to surrender the house in the BK if you can.

I've made some hefty balance transfers (20,000 per) in the past few months that mostly borrowed from Peter to pay Paul. Are there any special considerations here in BK filing?Balance Transfers typically only have a look back of 70 days, however, for the larger transfers the Trustee will lookback further. Because you are self employed, you are more likely to get a little additional scruitny anyway. In my BK the Trustee reviewed 2 yrs of Bank Statements, 2 yrs CC stmts, 4 yrs tax returns, 10 yrs real estate transactions. I too am self employed. While you are current, download all of your data to your hard-drive. Once you are behind or you file, you will no longer have access to your on line accounts. Prepare yourself completely just in case the Trustee wants additonal info - this is the best way to make it through a successful Ch 7.

My main house negative equity by at least 50,000 but I'd like to keep it - The payment is actually quite acceptable when compared to other options. I'm locked 30 years at 5.875%. Should I try for renegotiation once defaulted on other loans?I don't know about this - is the $50k a 10% neg equity or what? It's not the absolute dollars - its the likelyhood of recovery in your specific area. I surrendered my home because it was $200k neg equity and would take too long to recover. This is your chance to decide how clean a fresh start you are looking to achieve. Be decisive here.

Did I mention I'm being field audited by the IRS for 2005 2006 & 2007 and I will definitely come out with a big bill in a few months??If you are filing a Ch 7, the IRS will not collect during the Ch 7. But the bill will grow. You can negotiate with the IRS before you file and after you are discharged. Another alternative is to consider a Ch 13 where you pay IRS debt in the 13 and discharge old IRS debt (I would have to check the timing, but I think the debt must be older than 3 yrs and filed on time to discharge). There is such a thing as a Ch 13 plan where you only pay your attorney fees, Trustee fees and IRS debt and zero goes to unsecured. Check with a couple of attorney's. In fact you should interview 3 - 4 BK attorney's that have experience with small business filers (even if you are filing a personal Ch 7, the small business complicates it a little).

I'd really appreciate any advice that anyone could offer.

This was not a comprehensive answer to your questions, make sure to read the stickies here in the bankruptcy forum and also check out another site. www.bkforum.com for additional info. There are some exceptional people on this site that know A LOT about BK - so keep asking. Also do not touch your retirement accounts during the lead up to BK, those are exempt. Check your states exemptions so you can plan accordingly.

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As Denita said your kids 529 is safe. Your own retirement funds (401k/IRA/Roth) are also safe.

If you want to keep your primary residence, you MUST bring it current if it is behind and keep it current no matter what. If you are not throwing money at credit cards this may be possible.

If you intend to surrender the rental property, you can keep collecting the rent and simply stop paying on that property. Keep the insurance current though...until the property is no longer in your name; the last thing you need is to get sued because someone fell down the stairs or whatnot. Once you file, the trustee may want the rent money going forward. But, if the rent does not cover the basic expenses on the property, the trustee may abandon interest in it. If that happens you can continue to pocket the rent if you want or let the tenant live there rent free until they are evicted by the lienholder which will take several months after the discharge is entered.

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