Chapter 7 became our reality TODAY. Need your help!

[justbroke]

"For Chapter 7 cases, while 401(k) loan repayments can’t be counted on the means test, it’s still important to point out that 401(k) loans are being repaid. That tells the U.S. Trustee’s office they need to factor those payments into their “abuse” analysis when they review your case. After all, there’s no point in debtors being in a Chapter 13 plan if their creditors would receive only a nominal distribution–or even none at all."

Chapter 13s are complex when it comes to a person who filed Chapter 7 and there is a presumption of abuse. Even though a debtor may be paying back a loan which is not counted when doing the Chapter 7 Means Test there are other things that happen when deciding to pursue a dismissal under the "abuse" standard.

These other things are specifically what that paragraph mentions but doesn't really explain. When the United States Trustee (UST) decides to file a dismissal for abuse (in a Chapter 7), they do what's called a "hypothetical Chapter 13" means test. IN other words, they simply complete the means test that a Chapter 13 debtor fills out. The Chapter 13 means test is used to determine two things; the current monthly income (CMI) which will address how long the debtor will be in plan (36 months or 60 months), and the debtor's "disposable monthly income" (DMI). Since 401(k) loan repayments are not to be included in the DMI, this may mean that the Chapter 7 debtor is not abusingthe Chapter 7 bankruptcy code and show be allowed to receive a discharge (barring any other "totality of circumstances" issues).

Having wrote that, the article is suggesting that the UST should take the Chapter 13 deduction into account when seeking a claim of abuse. Yes, it's complex and the treatment of the 401(k) loans/contributions can differ by district.

[Chrysalis]

Thanks for that explanation. That makes total sense.

I need to look up the "totality of circumstances" issues you speak of. What I am afraid of (but I felt much better after consulting with this guy today) ~ is that we are going to spend our kids' savings, cash in their life insurance, stop paying our credit cards, etc -- and then, for some reason, have the case dismissed. That would be horrible.

[justbroke]

I would not worry about the "totality of circumstances" (TOC) issues. You and your attorney will know if you have anything like that. Typically, a TOC issue occurs when the end result of a discharge makes no sense. For example, you re dirt poor, creditors suing you, roof caving in over your head, and starving. You file Chapter 7 to discharge $100,000 in debt. However, 7 days after you file you win the Powerball jackpot. While the Chapter 7 Trustee absolutely can not touch those funds (despite what you read on the Internet!), the United States Trustee (UST) could move to dismiss your case under the totality of circumstances.

So, unless you have some windfall or there is something that would otherwise make your case an "abuse" because you' would receive a "headstart" rather than a "fresh start", I would not worry about it.

You can find my old thread where I was trying to keep my mind off of an unfounded and absolutely unnecessary worry about a totality of circumstances objection from the UST. (Keep in mind that the thread is in fun and does not mention the totality of circumstances.)

This is because it's simply not worth worrying about unless your attorney told you otherwise.

[Chrysalis]

Okay, thank you justbroke. None of the attorneys we've spoken to have acted like we had anything to really worry about. Yet... I think I will still worry. ;)

Just so many questions on my mind and still so unsure about some things.

When my husband's back got really bad in the fall -- like really bad, to the point of him being in pain no matter WHAT position he was in -- I realized that I needed to find a career. Not just a job, but something that I can really see myself doing for the rest of the years I am able to work. Suddenly, the 42 years we envisioned him working on the railroad could be cut in half. What can I do that will actually make a difference in this situation? I've been home with the kids for 16 years and my job prospects were just not looking great at all.

I decided to go back to college for a 2-year RN program, which is actually quite affordable (if you have the money) at the community college where I got my previous degree in business. So I am starting classes next week. I asked the attorney if it was okay for us to use some of this money we "have to spend" to pay for my tuition. He said it should be okay as long as I am not paying it like WAY ahead. Well, I wanted to pay the balance of the spring classes I am beginning now... and then in March, go ahead and pay for my summer classes. But looking through the Indiana exemptions today, I see where it talks about "prepaid tuition" and I don't know if they are specifically talking about some kind of special account -- or if it would also refer to, you know, just "prepaid tuition".

There are just so many variables here. Making this decision just feels like jumping off a cliff sometimes.

Edited to say: Outside of getting federal student loans (which I honestly know nothing about and would rather avoid getting MORE loans) -- the only way we have to pay for the fall nursing program would be for us to take a hardship withdrawal from his 401k. This is another thing I'm not sure about... whether this would be an issue or a nonissue in the entire bankruptcy process. I have asked one attorney and he said no ~ but I ran out of time yesterday and did not get to ask the new guy.

[justbroke]

There is a type of prepaid tuition known as a 529 Plan. That's where you squirrel money away into this special account and then use it for tuition for yourself, children, or other relatives. I have never used one and I don't know anyone who has used this special savings account.

I just researched this specific 529 Plan exemption. It appears that anything placed in the account (529 Plan) within the year preceding filing is not protected. Even worse, Federal bankruptcy exemptions never protects funds for yourself or spouse (unless Indiana is more generous than the Federal government on the funds for self or spouse).

Yes, so many decisions.

[Chrysalis]

I just sat here and did some more means test / income calculations, and a Chapter 7 may simply be out of reach for us right now. We still don't know (and won't know until the last minute) if his company is giving a bonus in February. Last year, did not get one AT ALL and it really screwed us. Watch him get a really big one this year, and that could really screw us too. How messed up is that?!

[justbroke]

I like Lennon's quote: Life is what happens to you while you're busy making other plans.

My other is Damon John's quote: Life is a cruel teacher. She loves to give you the test first and the lesson later.

I never know what life is going to throw at me, and she's always keeping me on my toes! Hang in there!

[Chrysalis]

Thanks again (sir?) (I think. lol)

I am going to do one more calculation, and then I'm stepping away from this for the rest of today. My head is spinning.

[Chrysalis]

So just an update and a couple of questions, if anyone can help.

1) Husband's problem at his job, which led me to start this thread initially, actually turned out to not be as bad as he thought it was going to be AT ALL. I thought this was going to be the catalyst which finally threw us into Chapter 7 decision -- but, yeah. Not so much. His pay is still looking way too high for a Chapter 7... although that number will continue to go down, as we keep on trucking and some of those earlier months drop off of the 6-month calculation.

2) I spoke with our CPA about the possibility of us filing this year. (He is a family friend and I called him with some other tax questions, too.) He says we will get a 1099 for whatever debt is forgiven. What?! This is the first I've heard of this. I did some googling and I am still unsure about this. People? Does this actually happen? It shows up as INCOME and gets taxed?

3) A big concern for me is how I am going to be able to pay for my college. I am working toward my RN -- and I have got to be able to continue with that. We've considered a hardship withdrawal from his 401k to pay for tuition, but I am completely unclear about how this would affect Ch. 7. Would they consider it income... or would it look like we were doing something squirrelly, and hold things up? I don't know. The only other option is to get a federal student loan (I've been told they can't deny due to bankruptcy) ~ which I hate to do, because that just feels like perpetuating the "let's do what we want to do NOW, and figure out how to pay for it LATER" mindset -- which is a large part of what got us into this mess to begin with. I have no idea what will happen when I get out of college. We cannot see down the road. Clearly.

[leonel9]

So just an update and a couple of questions, if anyone can help.

1) Husband's problem at his job, which led me to start this thread initially, actually turned out to not be as bad as he thought it was going to be AT ALL. I thought this was going to be the catalyst which finally threw us into Chapter 7 decision -- but, yeah. Not so much. His pay is still looking way too high for a Chapter 7... although that number will continue to go down, as we keep on trucking and some of those earlier months drop off of the 6-month calculation.

2) I spoke with our CPA about the possibility of us filing this year. (He is a family friend and I called him with some other tax questions, too.) He says we will get a 1099 for whatever debt is forgiven. What?! This is the first I've heard of this. I did some googling and I am still unsure about this. People? Does this actually happen? It shows up as INCOME and gets taxed?

3) A big concern for me is how I am going to be able to pay for my college. I am working toward my RN -- and I have got to be able to continue with that. We've considered a hardship withdrawal from his 401k to pay for tuition, but I am completely unclear about how this would affect Ch. 7. Would they consider it income... or would it look like we were doing something squirrelly, and hold things up? I don't know. The only other option is to get a federal student loan (I've been told they can't deny due to bankruptcy) ~ which I hate to do, because that just feels like perpetuating the "let's do what we want to do NOW, and figure out how to pay for it LATER" mindset -- which is a large part of what got us into this mess to begin with. I have no idea what will happen when I get out of college. We cannot see down the road. Clearly.

A 1099 is issued when you settle on debt (not from debt discharged in a bankruptcy). The fact that your CPA raised this concern (and did it without discussing if it's possible to avoid taxes while insolvent) tells me that he is not experienced in bankruptcy matters. I don't really blame him, because there isn't a section on the 1040 that discusses bankruptcy. Short story: you should be speaking with a bankruptcy attorney, not a CPA.

Regarding the 401(k) withdrawal: These funds are currently protected from creditors. I would not take money out of your 401(k) BEFORE filing bankruptcy. If you need to pay for college now, get a federal student loan (not subject to credit checks). AFTER bankruptcy, if you decide that it's best to take money out of your 401(k), then consider it. Also carefully consider a 401(k) withdrawal vs. a loan, if you do head in that direction. With many plans, if you take a withdrawal, you cannot contribute for a minimum number of months, potentially missing out on a company match. With a withdrawal you will also pay taxes and penalties in the year you withdraw the funds. Not the case with a 401(k) loan.

If you do this before bankruptcy, though, the funds aren't income. It's already your money. As you will have to account for how you spent your money prior to filing, you're potentially raising unnecessary questions by taking a 401(k) withdrawal and making a large purchase (payment to university). If you instead got a student loan, the loan's monthly payment may help in a determination of your disposable monthly income (you have to pay your loan back over time).

I'm not sure if you had a question about the 6-month period of income, but I can share that in my case I waited until after a pay cut and filed after having six months of a lower salary. That lower salary reflected my current (go-forward) income as well. If you made any purchases on credit, especially for any large transactions or luxury goods, the additional time can only work to your benefit.

[Chrysalis]

Great points, leonel. I appreciate it very much.

I called our CPA to discuss the education credits -- and just asked him while I had him on the phone, whether us filing this year would change our tax situation at all. He DID say we'd receive a 1099, it would be income, and it would be taxed as such. He also said we'd have to be careful that we didn't end up owing (we usually get a nice refund) because of this. Because, clearly, if we are filing bankruptcy, we don't have much money for taxes!

He did not mention "if it's possible to avoid taxes while insolvent" and I'm not sure what you are talking about. Is there something I should know here? Thanks!

I think the best route, if I do get accepted into the nursing program -- which we won't know until mid-summer -- is to take out a federal student loan at that point. You are correct on all counts about the 401k hardship withdrawal.

I've just paid off my spring semester. Summer classes and books, I can cover with our tax refund. But the nursing program would begin in the fall, and THAT is what I have *got* to have a way to pay for -- and I have to be sure of that, before filing bankruptcy. If I could not finish my schooling, our whole "plan" for any future financial security would just be thrown out the window. I can't let that happen.

Thanks again for your time! It really helps to sort these things out.

[leonel9]

Check out this article on Nolo.com which speaks to the tax treatment of cancelled debt. Note that it specifically states that it does not apply to debt discharged in bankruptcy:

https://www.nolo.com/legal-encyclopedia/tax-consequences-settled-forgiven-debt-29792.html

[Chrysalis]

Thank you, thank you. That article was very helpful & I will forward it to my CPA. Even if we were having debt forgiven outside of bankruptcy -- we have to be insolvent. We don't own very much that has any value at all.

[leonel9]

In another thread Chrysalis posted about an challenge of having cash as well as cash value of life insurance that exceeds the state exemption, believed to be $800.

The question now at hand is:
[How] can Chrysalis spend non-exempt cash without causing the trustee to object to the discharge?

Regarding the cash, it's my general understanding that non-exempt cash can justifiably be spent on attorney fees, necessary home/auto repairs, medically necessary procedures/supplies, food, utilities, etc. Not being an attorney, and not living in the OP's jurisdiction, I don't know what trustees typically find objectionable.

As far as the life insurance covering the children, I would use this as an opportunity to review the value of these policies. Without knowing the face value/benefit and the premiums, it's hard to determine if the policies are a "good deal." I would consider starting there. The fact that there is cash value tells me that these policies are likely whole life policies, which are some times overpriced and not necessary. One question that comes to my mind: Is life insurance for children a necessity?

The bankruptcy means test forms suggest that you may include premiums paid toward term life policies. Given that these policies are likely not term life, but instead whole life policies, it raises another question: Do premium payments on whole life policies "count" toward means testing?

Someone may know the answers here, but I believe these are questions best left to an attorney in OP's jurisdiction. Since an attorney hasn't been retained, it may be advisable to meet with other attorneys and try to get varying opinions. Then, if it is advisable (and won't create an objection to discharge), the OP may consider cancelling the whole life policy and using [some of] the cash value to purchase term life policies with higher face values.

[leonel9]

Thank you, thank you. That article was very helpful & I will forward it to my CPA. Even if we were having debt forgiven outside of bankruptcy -- we have to be insolvent. We don't own very much that has any value at all.

We're probably on the same page here, but just to clarify: you can have debt cancelled (usually via debt settlements) without being insolvent. Insolvency is required to avoid paying taxes on the cancelled debt, unless it's cancelled via bankruptcy discharge or some other exempt process.