Inflated Income, $100k unsecured, $36k assets

[FreekingOut]

Ok... I just discovered this forum and it’s been awesome. I’ve gone through the search for topics related to my situation. Please give me your take. I’m at the end of my rope, I’m losing sleep, barely eating, I just need some peace of mind. My lawyer seems calm, but it’s early in the process, he’s still looking at everything.

I’m unemployed since Jan 2020, due to COVID closing my job. I have $102k in unsecured credit card debt, spread over five cards, to: Navy Federal($37k), Chase($16k, $16k, $13k) and Citi($20k). I have $28k in a brokerage account. I have a paid off car worth $8k and household goods. I’m working with an attorney and we haven’t filed anything yet, we’ll talk again next week after he reviews my documents. I’ve racked up this debt over 7-8 years and balance transferred it around and paid the minimums, never late. I’m current on everything and have no other debts.

I’m freaking out over a few potential red flags that could trigger an AP. First, on Navy Federal, I racked up $10k from November 2020 to February 2020. It was 90% on eating out every day, multiple times per day; plus bills. I feel that they may say I abused debt, knowing that I couldn’t pay it back, which I would argue that I have $28k in cash that I could have used. Second, if that gets triggered, they may check my application, which might have an inflated income of 20-30%, as I was expecting business to pick up but it didn’t. Plus, I left my FT job so I may have an app with $100-120k income, when it may have been $35k-$85k. I don’t remember which cards I may have done this on, but I did it once or twice. I was trying to build failed business after failed business and always felt that I could and would pay it back. The balance transfers are ending and the minimum payments will kill me, because I have nowhere else to run (my credit is maxed out). My lawyer said that they may only look to take $20k in cash and wipe the rest. He said I would likely be able to keep the car and other MD state exemptions.

Can anyone tell me what may be likely to happen for Chapter 7? I’ve seen lawyers say that Chapter 13s always have objections and I want to avoid them digging too much. What would happen if they argue the inflated income constitutes fraud?

[justbroke]

Welcome to BKForum!

I’m freaking out over a few potential red flags that could trigger an AP. First, on Navy Federal, I racked up $10k from November 2020 to February 2020. It was 90% on eating out every day, multiple times per day; plus bills.

I don't see any issue with this at all. (I think you meant February 2021.) So long as you get some distance between any major luxury charges and cash advances from February 2021, I don't see a problem at all. Making purchases to live -- food, clothing, housing -- is never considered a luxury. In my first filing, I had charges up to and even after filing for food and other living expense. I accidentally kept using the gas card a week after filing, but it was shut down quickly (I mistakenly thought I could keep the card).

I feel that they may say I abused debt, knowing that I couldn’t pay it back, which I would argue that I have $28k in cash that I could have used. Second, if that gets triggered, they may check my application, which might have an inflated income of 20-30%, as I was expecting business to pick up but it didn’t.

I know that for Navy Federal (NFCU) they usually do income verification for limits over $25K. So that's usually their due diligence which should have caught an income disparity. In any event, you based it on your business earnings and that's fine.

Adversary proceedings (APs) -- also known as complaints -- regarding dischargeability of a debt are rare. I don't mean that they never happen, but they happen more rarely than people believe. Especially given the facts of COVID, many creditors have started to reduce credit lines to prevent a run-up of credit in order to survive. The fact that you did not make luxury purchases or take large cash advances makes the probability or an AP less likely.

My lawyer said that they may only look to take $20k in cash and wipe the rest. He said I would likely be able to keep the car and other MD state exemptions.

I assume that your attorney is talking about exemptions. Exemptions cover your personal and real property. Since you have $20K+ in cash in your brokerage and have a car, your attorney will look to protect as much of that as they can. It appears that your attorney thinks they can protect all but $20K of your cash and can protect your vehicle.

Can anyone tell me what may be likely to happen for Chapter 7? I’ve seen lawyers say that Chapter 13s always have objections and I want to avoid them digging too much. What would happen if they argue the inflated income constitutes fraud?

This is likely to happen (as it does in 95% of the cases). You file, the Trustee marks it as an asset case, you attend a 341 Meeting, the creditors file claims (to get paid), you surrender the $20K in the brokerage, the case discharges (60 days after your 341 Meeting), the Trustee sends checks to creditors, the Trustee files a final report (30-60 days after all checks sent out), the Trustee then asks to be removed form the case, the case closes.

I don't think you will have an issue and I'm sure your attorney said the same. Fraud is hard to prove and you did base some of them on your job (when you were employed). Most of those creditors (especially NFCU) have controls which should have kicked in to verify your income.

If your attorney says it's okay, then it's okay. It is what it is at this point. By that I mean that the worse case is "maybe" one of the creditors, NFCU, decides to seek non-dischargeability of the debt. Should they win their argument, then you'd just be responsible for paying that back.

[FreekingOut]

Thanks justbroke. I burst into tears after reading just the first sentence. The stress has been debilitating and I never thought it would come to this. The inflated income has always haunted me. I’ve seen people say a million times that it never comes up; but with the other factors in my case and the amount of debt, I’ve been losing myself. I’m going to see it through, everything and everyone I’ve seen talk about these things says that it should be ok. I just needed an opinion from this forum, because the community here seems phenomenal.

I’m current on everything and have signed up for six gig apps like UberEats, Shipt and Instacart. If there’s a chance that I could hold off and pay it down before filing, would it make a difference? I seriously believe that I could pay it off within 3-5 years, but I don’t want to stretch it further and make matters worse if it’s time to pull the plug.

[justbroke]

FreekingOut it is almost always understood that actually paying on the debt over some period of time looks much better than charging and not paying a single penny. If you had these cards for some period of time and have been making your regular payments (minimum or more) then it could be said that you did intend to pay.

It would look really bad if you just obtained a card, took a $10K cash advance, and then never made a single payment. It could look better for that same $10K had you made 3-6 monthly payments before filing for bankruptcy. We are assumed to be insolvent (bankrupt) 90 days prior to filing. So taking large cash advances and making luxury purchase on the eve of filing (3 months) could be construed as not intending to pay.

I'll keep assuming that your attorney says that you should be fine. Sure, a creditor could threaten to file an AP, and many have, but many times that's just puffery. It appears that you had these credit cards for some time and that this debt has built over a period of time. The pandemic is certainly a reason for the increase in dependency on the credit cards. I still don't see any glaring issue here.

[FreekingOut]

justbroke understood! Thanks again!

[FreekingOut]

justbroke it looks like I may need to amend tax returns for 2018, 2019 and I still need to file for 2020. All in all, I may owe thousands in unreported income and recaptured business property deductions. I’m going to talk to a CPA, but if I owe $5000-$10000 in taxes, will it be a problem to pay the IRS before filing Chapter 7? Would that be “preferential” to pay income tax debts before filing?

[justbroke]

Just my opinion, but I don't believe that paying income taxes would normally be a preference. The only way that I know that a Trustee could get to tax payments is if it was a fraudulent transfer. There are two cases out from the 9th Circuit (California, Washington, etc) and the 7th Circuit (Illinois, Indiana, etc), but those were fraudulent transfers of money not belonging to the debtor.

I would talk to a bankruptcy attorney before making large payments to the IRS on the eve of filing. Even if you didn't pay them and the money ended up in the bankruptcy estate, the IRS would get first bite (albeit the Trustee would "earn" their commission).

[FreekingOut]

justbroke ok. I’ll be talking with my bk attorney on Tuesday. I’m also wondering if I’ll have to wait for the IRS to bill me before including the tax debt in the Chapter 7. I’m fine with it being non-dischargeable, but if the IRS takes 16 weeks or more to process the amended returns and to send the bill, I’m not sure how long I can last financially. I’d like to make the minimum payments until we file, to avoid adding late charges to the Chapter 7; and I’m wondering how long I could go without making payments before the creditors filed suit for garnishment. It seems at this point that any minimum payments will be preferential, since they’re getting to be over $600, but I figure that if the cash will be gone anyway, wouldn’t it make sense to avoid late marks on the credit report too? Or does it make sense to prioritize the cash at hand for necessities, and to stop making payments until we file; since the timeline for filing is in question.

I’ll definitely be asking my attorney, but if paying the IRS wont be preferential and I don‘t have to wait for the bill to be assessed; I’m guessing that I could get the taxes done, send the IRS a check and file Chapter 7 by the end of the month. How long do the creditors typically take before filing suit? Would it make sense to ask for COVID relief, to push the payments for three months?

[FreekingOut]

This is what I’m thinking now. Worst Case: If I get the taxes done, cut a check to the IRS, get the COVID push to lower or defer payments and still make those lower payments over 90 days; then all transactions will have 90 days between them and the filing, the lower payments shouldn’t be preferential, because they’ll be lower than $600, I can avoid late marks on the credit report, the IRS tax debt will be satisfied, I can still work to pay the bills outside of the cash-on-hand (but still stay below the means test for Chapter 7), I’d still have $15,000+ for the Trustee to take after the tax prep, lawyer fees and tax payment and there should be no reason why it doesn’t go smoothly after the 90-day mark. Does that sound reasonable?

[justbroke]

If your tax returns already indicate that you owe money, that is sufficient proof that you have a tax liability. Except for certain non-dischargeable debt, there's an interesting fact about preferences. A clawback doesn't really affect you personally. Preferences are clawed back from the creditor(s) to whom you made payment(s). That clawback is then used to pay all the unsecured creditors pro-rata (an equal share based on the percentage of total unsecured debt that each unsecured creditor has claimed).

It's best not to make preferential payments only because it delays the administration, but not the discharge, of a case. I don't believe that paying a non-dischargeable (past due) tax debt should be treated as a preference but that's something that you can ask your bankruptcy attorney.

(Take note that it could be a preference to pay the IRS more than they would have received in your hypothetical Chapter 7. My guess is that this is to prevent debtors from overpaying the IRS by paying for future tax liability. A debtor might do this in order to keep the money out of the bankruptcy estate. For example, you said that you'd have $15K left after paying the IRS. If you had "prepaid" taxes for 2021 , by paying the IRS an extra $15K over what you owed before filing, that could be seen as a preference and subject to clawback.)

At least those are my general thoughts on this.

[FreekingOut]

justbroke understood. Suppose I simply get the taxes done, assess the total tax debt and file Chapter 7 without any IRS payment. Am I understanding that the cash would go to the IRS first, even though the tax debt is non-dischargeable (with the amended tax debt being assessed sooner than 240 days and not being at least three years old)? Or can I expect that the trustee will pay the creditors and I’ll have to get a payment plan after the IRS sends the bill.

[justbroke]

Trustee would pay themself a commission (usually 7-10%), and then pay the priority unsecured debt (IRS and State non-dischargerable tax debt), and then the general unsecured debt (pro-rata). This is something to ask your attorney to see if they have a better idea so that you maximize what gets sent to the IRS.

[holamola]

justbroke ok. I’ll be talking with my bk attorney on Tuesday. I’m also wondering if I’ll have to wait for the IRS to bill me before including the tax debt in the Chapter 7. I’m fine with it being non-dischargeable, but if the IRS takes 16 weeks or more to process the amended returns and to send the bill, I’m not sure how long I can last financially. I’d like to make the minimum payments until we file, to avoid adding late charges to the Chapter 7; and I’m wondering how long I could go without making payments before the creditors filed suit for garnishment. It seems at this point that any minimum payments will be preferential, since they’re getting to be over $600, but I figure that if the cash will be gone anyway, wouldn’t it make sense to avoid late marks on the credit report too? Or does it make sense to prioritize the cash at hand for necessities, and to stop making payments until we file; since the timeline for filing is in question.

I’ll definitely be asking my attorney, but if paying the IRS wont be preferential and I don‘t have to wait for the bill to be assessed; I’m guessing that I could get the taxes done, send the IRS a check and file Chapter 7 by the end of the month. How long do the creditors typically take before filing suit? Would it make sense to ask for COVID relief, to push the payments for three months?

The IRS took a year and half to amend one of my tax return and they came back last month saying that whatever I provided them did not really help (even though I had a bookkeeper and a CPA work on it and supplied them with all documents, invoices ...), the IRS have millions of returns that they did not finish yet, let alone the amended returns, they are finding any reason to not refund any money they owe. Do not believe the 16 weeks, for me it took around 15 months, over 7 months in the waiting for their first letter in which I thought they never got my amended return, then they took another 7-8 months in the back and forth, at the end, they should have paid me $50,000+, they claimed that I may owe them more or I should sign a waiver that they owe me nothing. I picked the waiver because I got sick of it, never ever pay the IRS in advance for anything as you will never get it back.

[justbroke]

The IRS is still "processing" millions of 2019 tax returns. They have yet to process my personal taxes or my business taxes from 2019. Another friend of mine complained because her taxes were held up for a missing form although she filed electronically in February 2020 (for 2019). They still haven't processed her taxes either and she had filed electronically.

They took 2 months to respond to AMEX that they didn't like something on my IRS 4506-T and it was perfectly done. Did it again and another 2 months went by. AMEX cancelled my application because it took more than 90 days. Had to apply again.

The IRS is a hot mess.

[FreekingOut]

justbroke I hope you’ve been well. I was supposed to file Chapter 7 yesterday, but my attorney said that I’m having too much disposable income and that the trustee will argue that I can do Chapter 13 (which I don’t want to do). I’ve changed my exemptions to just $10,800 in cash and $600 in household goods, leaving roughly $17,000 in assets exposed (car and household stuff). My lawyer said that the trustee will go after my paid off car (valued at $9,500) and $2,000 in unprotected cash (which I’m fine with; I’d rather give up the car and get a cheaper one on payments)

As to the income, I work a seasonal job that ends October 3rd. It pays well during 6 months of the year and then nothing til next April. He said that when it ends, leaving me unemployed, the trustee can’t force me to get a job; so my lack of income will easily qualify me then, no problem. I’m not worried about the job/income, I’ve been there for 15 years and even the unemployment covers my bills for the 6 months off. Besides, I’ll have the $10k to supplement.

I’ve been searching through the forum, but here’s my question: is my lawyer correct that unemployment will quickly qualify me for Chapter 7? I’m paranoid that he’s trying to set me up for a Chapter 13, which from my research, means that he’d get more money from the monthly payments. He said that it looks like I can afford to pay $650-$900/month, based on my current (seasonal) income. I did the 6-month lookback calculation on my paychecks and it averages $1800/month after taxes, with two of those months receiving no pay at all. He said it looks like I’m receiving $2800/month.

Second question: I’m considering raising my internet bill by $100 and my car insurance by $100, to raise my monthly budget on-top of the unemployment in October. Could that raise a red flag? We’re not filing for another two months; and I don’t care about the money, because all cash beyond the $10,800 is getting taken anyway.