Questions For Chapter 13 Debtors

[nursebette]

I'm not sure if this is the correct thread to be posting on, but can't find any threads that address this question.

I'm in the process of filing for a chapter 13 BK. Primarily to qualify for the 2nd mortgage "lien-stripping" allowance. Totally underwater on 1st and 2nd. This will be a 5 year program and leaves me with very little expendable monthly income.

Question: I have Approx. 100,000 in a 401k that they will not be able to access, so my atty. tells me. However, once I have the Chap. 13 approved will I be able to access my account for unexpected expenses? My Atty tells me that as long as they are not "large" withdrawals the trustee won't question them.

My thinking is....if the trustee sees me making these withdrawals, he will try to increase my monthly payments.

Would appreciate any feedback. This site has been incredibly informative....learned more here than my Atty ever told me.

[AngelinaCat]

Hi nursebette:

Welcome to the forum. I have moved your question into its own thread so that it can get the attention that it deserves. I have also spaced it out so that it is easier to read for posters to respond to.

I am not a Ch 13 person, so I won't venture an opinion/guess as to your situation, but you will have many follow-ups I am sure.

Again, welcome.

[spidge]

If you are looking for the 401K to supplement your income in times of trouble I would look into what it takes to get any money out first. Some require a true hardship like a "intent to foreclose" notice, excessive medical bills, school bills, and such.

I ask because my company 401K requires you first take out a loan then you can do a hardship. I think its BS and will look for other investment vehicles that keep my money more liquid in the future. Then its taxable on top of all that. You may think to yourself that you can handle it but at the end of the year you may be surprised the difference in taxable income. My difference went from 700 in federal taxes to 7,000 and my income did not change at the same rate. Its very lopsided.

Is what I am saying is that it may only compound your financial challenges.

I am not an attorney, financial, or tax adviser but consider holding off filling and avoid any overtime for a while to establish a lower payment. Then when you file you can work extra overtime to shore up your emergency fund and better insure your CH13 success.

If this helps, great! If it doesn't then trash in trash out.

[nursebette]

Spidge, let me clarify.....I'm 69 and recently retired. living on pension and ss. No penalty with 410k withdrawals and taxes withheld at time of withdrawal so no "tax bite" at the end of the year. Still curious as to how BK trustee will view 401k withdrawals as needed??

[spidge]

Spidge, let me clarify.....I'm 69 and recently retired. living on pension and ss. No penalty with 410k withdrawals and taxes withheld at time of withdrawal so no "tax bite" at the end of the year. Still curious as to how BK trustee will view 401k withdrawals as needed??

In that case I would think that the trustee would allow such withdrawals as needed, but as I said before I am not certain on this. I would think that if your cars transmission went out and you took out just enough to cover the repair and can show proof the trustee would be OK with it as it will not effect the payment in the 13 nor be used for any frivolous items.

i would ask your attorney about what he thinks large is and what would qualify as necessary.
Tough spot in retirement. Thats why I am acting now and I still have 30 years to go based on the government retirement of 72!!!(come on now)

[Flamingo]

Your 401(k) was exempt at your filing; however it is mentioned in your bankruptcy filing/paperwork. If you take out withdrawals during your active 13, you are freeing up money that would be available to creditors and increases your income for that year over and above your income at the time you filed. Those withdrawals are still income and shown on your tax return each year which you have to file if you are getting pension income. If already taxed as you state they still are listed but appropriate boxes checked. Many folks in Chapter 13 are required each year to turn over their tax returns to their Trustee for review and trustees can ask for any financial information at any time during an active 13.

Before you proceed, you need to thoroughly discuss with your attorney; otherwise you risk dismissal.

[nursebette]

Flamingo, thank you so much for the info. It would seem there are too many disadvantages to filing a Chap 13, especially for an older person! My atty. and I have been going back and forth re:benefits of 13 or 7. Been discussing this for almost a year now with no resolution in sight. Stopped paying cc last Jan '10. Stopped 2nd mtg payments 2 months ago.......I'm thinking a chap 7 might be the way to go now, but because of no longer being current on 2nd, wonder if I even qualify? What a mess!

[catleg]

Can you do a under-median, 36 months x 100/month plan?

I think if not, chapter 7 maybe better for you.

Probably will get more advice if we get more info about loan balance, income, etc.

[nursebette]

Didn't want to bore you all with the "messy details", but here goes....69 yrs old, retired, monthly income:pension=2600/mo, SS=1600/mo. 1st mtg=177,000, 2nd mtg=125,000. Appraised in Dec '09 for 144,000. CC debt 125,000.

My thinking was to declare a chap13bk and use the lien-stripping option. My Atty told me I would be in the 5 yr payment plan. Sounded ok initially, but now after reading alot of the info in this forum.....not so sure.

In a case similar to mine, one of the moderators suggested the person file a chap 7 and then try for debt settlement on 2nd mtg. This would totally work for me because I have the cash available for lump-sum settlement.

Another issue, I originally talked with my Atty Nov '09. Stopped all cc payments in Jan '10. Stopped payments on 2nd 2 months ago. Have only paid Atty 1000.00 so far and told all creditors "in the process of filing BK". Haven't heard anything from them since. Any suggestions, what to do?

[catleg]

I would shoot for the 7. Eventually if you live long enough the 2nd would see equity in the house and be worth something in foreclosure, but you can offer to settle before then or just consider it a kind of "reverse mortgage" with the upfront payment to you being the amount you'd settle for.

[LadyInTheRed]

Flamingo, thank you so much for the info. It would seem there are too many disadvantages to filing a Chap 13, especially for an older person! My atty. and I have been going back and forth re:benefits of 13 or 7. Been discussing this for almost a year now with no resolution in sight. Stopped paying cc last Jan '10. Stopped 2nd mtg payments 2 months ago.......I'm thinking a chap 7 might be the way to go now, but because of no longer being current on 2nd, wonder if I even qualify? What a mess!

I could be wrong, but I don't think being late on your 2nd mortgage disqualifies you from filing Chap 7. It just means the 2nd mortgage holder will be able to get a relief from stay so they can foreclose. Since you are underwater, they are not likely to foreclose. What do you think the chances are that your house will increase in value enough or you will pay enough principal on the first to make the 2nd worth foreclosing during your lifetime?

If I were in your position and had the choice, I think I'd file Chap 7. I may eventually try settling the 2nd if I had cash to do so. Or, just risk that I may have to move some day if the bank forecloses.

But, there is something to be said about the peace of mind that would go along with having the 2nd gone. I think it comes down to balancing your comfort level with the risk of a future foreclosure with the advantage of getting things over with quickly in a Chap 7 and moving on with your new debt-free life.

[nursebette]

Here's the deal with being "current on 2nd mtg". When you consider "current expenditures" I no longer am able to claim 1042.00 as a monthly debit. When I consider my MDI at that time, I now have a MDI of plus 340.00 as opposed to a neg 700.00 with the 2nd mtg.being factored in. I'm afraid I would no longer be able to pass the means test to qualify for chap 7BK. Would totally appreciate any ideas or suggestion you all could come up with. I confess, I'm brain-dead at this point!

[catleg]

If you are below median (and SS doesn't count) then the means test doesn't apply.

[SMinGA]

If you're going to file a ch. 13 and 'strip' the mortgage, you would not count that 2nd payment when calculating your DMI. It frees up money for a plan payment. In a ch. 13 you would no longer pay it, they would get a little $ paid from your plan just like any other unsecured creditor.

What is your actual DMI, schedule J detailing your expenses, without the 2nd mortgage? Since you said the atty advised you to expect a 5 year plan - you must be over median for your state/family size. Some districts will allow the 2nd mortgage (even if you're behind) to count as an expense on a ch. 7. You would need to find out how your district handles it - and choose between 7 & 13 based on all options.

Here's the deal with being "current on 2nd mtg". When you consider "current expenditures" I no longer am able to claim 1042.00 as a monthly debit. When I consider my MDI at that time, I now have a MDI of plus 340.00 as opposed to a neg 700.00 with the 2nd mtg.being factored in. I'm afraid I would no longer be able to pass the means test to qualify for chap 7BK. Would totally appreciate any ideas or suggestion you all could come up with. I confess, I'm brain-dead at this point!

[nursebette]

I guess I need to clarify re:"current expenditures". Schedule J. If I wanted to claim chap7bk, my DMI would be (701.00) This would include mo. payment of 2nd mtg 1042.00. If I were to claim chap13bk, my DMI would be 340.00. This of course, would not include the 2nd mtg mo payment.
Atty told me I would qualify for a 7 or a 13, but that was when my 2nd mtg was current....guess I will talk to him again to see if I still qualify for the 7.