Chapter 7 became our reality TODAY. Need your help!

[Chrysalis]

We've had the kids' life insurance policies since they were newborns. They are $50,000 each, and we pay $57.72 per month TOTAL for the three of them.

My parents had whole life insurance policies for us, which they turned over to us when we each got married, to do with as we pleased. We could either keep paying on them (and eventually you are supposed to get to a point where you no longer have to pay on them) ~ or we could cash them in. You can probably guess what I did, as well as my sister, who has also filed bankruptcy. Sigh.

My point is -- this is what my parents did for us, and so it just made sense for me to do this, as well. You never want to picture ever actually needing these policies -- however, if something happened to one of our children, not only would we have all of the expenses that go along with that -- but my husband would need time off work. Maybe a lot of time. His job for the past 21 years has been insane and involved A TON of travel. I can't imagine losing a child and then having to go right back to that. It would be horrible.

I'd like to keep these policies. I have the paperwork here to cash them in, and we will do that if it comes down to it -- but if there is the option of keeping the policies and loaning out the cash value instead, I feel like we should maybe go that route. I don't plan on spending any money on anything questionable. We are already only buying necessities, and have been for awhile.

And leonel9, yes we're on the same page re: insolvency. I was saying, even if the debt were not discharged in bankruptcy, according to your article we still should not have to pay income tax on forgiven debt, due to the fact that we are quite likely insolvent. My CPA didn't mention any of this, which just tells me that he does not have to deal with this situation very often (or at all).

[leonel9]

My point in raising the question about the whole life policy isn't to justify whether it's a good idea or not, but rather to discuss how whole life policies are treated in bankruptcy. As I view them, whole life policies are effectively low-earning savings accounts with a death benefit.

If you are close on your means test, I'd research how the premiums on whole life policies for children are treated. It could be that they are viewed as a non-necessity. We already know the cash value is a mostly non-exempt asset, and there's a question on what to do with the cash value.

If whole life policies are not treated favorably in bankruptcy, and you wanted to explore other options, I would suggest term policies for you and your spouse, with riders that provide coverage for the death of your children. I believe that these types of policies would be treated favorably in bankruptcy (i.e. premium payments can be counted in a means test), and generally provide higher levels of coverage. While term policies have no cash value, you may be able to purchase the policies with your whole life surrender value. You may not want to consider replacing the whole life policies, and that's perfectly fine too.

The question still remains: What other expenses are justifiable when considering spending non-exempt cash?

[Chrysalis]

Thanks again, leonel. From what I've gathered -- reading through the means test, as well as various sites with Indiana bankruptcy code -- I don't believe that life insurance for children is going to factor in anywhere favorably. I don't believe they see it as a necessity at all. I suppose many people don't.

So it just comes down to: Do we want to cash them in, or do we want to take a loan on them?

I don't think we're going to have any problem using that cash on things that would be considered necessities. Especially considering we have stopped using the credit cards.

Our oldest son is almost 16, and will be needing a car. All three attorneys we've spoken to see no problem with using his portion of the cash and buying him a car -- in our names, so it doesn't look like we are trying to do anything shady. He has about $4000 of his own money that would be "going down" if this is what his parents decide we have to do.

What a crappy situation. Probably too late for anyone out there who is actually reading, but -- DON'T put your kids' money in your own names!

[leonel9]

Thanks again, leonel. From what I've gathered -- reading through the means test, as well as various sites with Indiana bankruptcy code -- I don't believe that life insurance for children is going to factor in anywhere favorably. I don't believe they see it as a necessity at all. I suppose many people don't.

Whole life insurance on your children wouldn't seem to qualify/help in a means test calculation, but I think if you were to get term life policies in your name + your spouse's name, with additional riders that provide coverage for your children, those expenses could be used. Of course, I'd run this plan by an attorney, and also evaluate if these insurance payments are even necessary for your means test.

In my opinion, you could also make more by investing the money than by waiting for the cash value to build up. That's just my opinion though, and ultimately the topic is bankruptcy, not what type of life insurance is best.

[Chrysalis]

I really did intend the life insurance policies to be just that -- life insurance policies. When you buy them as newborns, the rates are so low. It was like, why not? And figured if they wanted to cash them in when they were older ~ whatever. Extra cash for whatever they wanted to do with it. I used mine for a down payment on a new minivan years ago.

My husband and I already have term life insurance policies, which we've had for a long time. It's something to consider, though, and I appreciate the advice.

I was reading through the "insurance" section here last night, and seeing how many people had price increases on their home + cars after bankruptcy. That makes me so mad. You're already in a bind ~ how about we make it even worse?! It should be based on our 20+ years of excellent driving history -- not the fact that we spent more money than we ever should have gotten into. But I already know that our insurance company (Farm Bureau) DOES factor in your credit report when deciding your rates. Our agent told me that years ago. So now we are thinking of switching to another company... We have an acquaintance who works for State Farm, and someone here said they do not do credit checks. I don't know if that's true or not -- but it's worth talking to him about.

I've thought about starting a thread here called "bankruptcy surprises" ... or maybe there already is one, if I search. We are trying to think of every little detail that could come up, because this is a such a HUGE and scary choice to make. Some days I still try to convince myself that we can somehow make it through until I get my RN. But that just doesn't seem realistic, and I need to quit burying my head in the sand and face reality.

The insurance hikes would have been a BIG surprise. I just hadn't thought about it yet at all. I wonder what else we should know that we don't. I will just keep on doing my research.

I sent an email to our CPA with the link to your article, and when he responded, he still made it sound like we would have to prove that we were insolvent at the time of filing. And that if the bankruptcy then "made us solvent", we may have to pay tax on some of it. That's not the way I am reading it. It's my understanding that you include form 982 ~ and if the debt was discharged in bankruptcy, you don't pay tax on it. Period. Am I wrong?

https://www.irs.gov/pub/irs-pdf/f982.pdf

[leonel9]

If you get debt cancelled before/without filing bankruptcy, you are generally issued a 1099-C for the amount cancelled if the amount is over $600.

If you file bankruptcy and receive a discharge, I wouldnt expect to receive a 1099-C.

Maybe what he was saying was if you settle in debt, and then later file bankruptcy, you will likely not be insolvent after the bankruptcy, and therefore may not qualify to have the taxes "waived."

This would be a question more suited for a CPA, though.

[Chrysalis]

Question for the day:

Is there ever a point, when filing a Chapter 7, where your "actual" expenses come into play -- or is the only thing that REALLY matters "Schedule J"?

What I mean is -- the attorney gave us an expense form to fill out, and he has listed on there things like tobacco and pet care expenses -- things that are not included anywhere on Schedule J. When it comes down to it, do these things fit in anywhere? Or are they both considered "luxury expenses", and therefore, they don't care to hear about them?

[Chrysalis]

And gifts. Christmas gifts, kids' birthday gifts, etc. -- does that go in the category with charitable contributions? Or do they simply consider these "unnecessary" in a bankruptcy situation?

I am asking these questions because I am trying to get my expense spreadsheet as close to Schedule J as possible. I have been keeping track of everything for a few months now, but my categories were a little different than what I am seeing on that form.

[justbroke]

You just list everything. If the Trustee is going to complain, they'll have to knock down each one. Your expenses are your expenses and that's simply what they are. That's not to say that some expenses are "luxury" expenses.

Gifts, pet care, gym (health club!), and even smoking are expenses that are typically not luxury (unless that "gym" membership is really expensive so you should call it a health club instead). There are boxes on the form that are for "other expenses", but they just require explanation. If you look at Form B22 you'll see those things itemized (well, not cigarettes). Schedule J just included major categories.

Trust your attorney's form. They have probably done this hundreds of times and the forms that collect that data are quite common.

[Chrysalis]

Good info ~ thanks, jb. I tried to search form B22 earlier after I saw it mentioned on an attorney's blog, but I didn't have much luck. Do you have a link? Thanks again!

[justbroke]

I still call it Form B22A (Chapter 7 Means Test) but they renamed it to Form B122A-1 and Form B122A-2 (both Chapter 7 Means Testing forms).

You can find them here... http://www.uscourts.gov/forms/bankruptcy-forms

[leonel9]

And gifts. Christmas gifts, kids' birthday gifts, etc. -- does that go in the category with charitable contributions?

Just to chime in here (again) -- the charitable contributions line item is typically things like donations to non-profit organizations, church tithing, etc.

Christmas gifts should be budgeted for, but I don't believe they are appropriate in the category of charitable contributions.

[Chrysalis]

Just to chime in here (again) -- the charitable contributions line item is typically things like donations to non-profit organizations, church tithing, etc.

Christmas gifts should be budgeted for, but I don't believe they are appropriate in the category of charitable contributions.

Thanks ~ I didn't think they should be in that category, either. I was just trying to see if I could make everything fit into one of the Schedule J categories... but it doesn't seem to work that way.

justbroke -- that is what came up when I searched "B22" -- means test info/forms. That makes sense now. The attorney's blog post I found here:

http://www.bankruptcymastery.com/bankruptcy-abuse-schedule-j/

She says:

"How to avoid such disasters? First, the official form is not an exclusive list of expenses. Note that there are no categories for vacations, kids school activities, repair and replacement of household goods, pet care, grooming, yard care, etc. If you look at the elements that make up the IRS standards, you find allowances for housekeeping supplies (cleaners, toilet paper, etc.). Add those to the Schedule J expenses. Look at the expense categories on the B-22. Several of them don’t appear on J."

I still don't see categories on the means test for the things she mentions above (or tobacco). So I was trying to figure out where, exactly, those things do fit in. If they do. But I guess what you're saying is -- let my attorney figure that out? Okay. I can make my categories match the sheet he gave me. Thanks again, guys!

[Chrysalis]

Here's another of her posts I found applicable and interesting:

http://www.bankruptcymastery.com/bankruptcys-eternal-struggle/

[justbroke]

I think that you are overthinking this and reading a little too much into where to put things. Technically, the creditors don't care if you have a dog or smoke. You need to budget for those things from other areas. Sure, your attorney will ask specifics but they'll end up somewhere on the form.

The Means Test is actually based on the IRS Financial Collection Standards which, again, don't care if you smoke or want to go to the gym. The real purpose is not to substitute things that are voluntary for things that you are obligated to do. Not my words, but the words of many judges. One judge even opined that a person with his live-in girlfriend and her kids, could not support them because he was not "legally" responsible. Harsh, yes.

So, back to budgeting. (these are only example) A debtor that smokes may want to consider a cessation program. Otherwise his/her attorney may look at making sure the maximum allowable for other expense categories are taken so that there is cushion for that vice. A gym membership is really a "health" club membership, so it's as simple as classifying it when it comes to Schedule J. On the Means Test, the (IRS Financial Collection) standards include a miscellaneous category along with food that includes other things (it could be your smoking).

You'll never see smoking, alcohol, pet supplies, and other (essentially) voluntary items on the sheets. It's simply that the IRS Financial Collection Standards are pretty cut and dry.