Potential complicaion to future Ch 7??

[CaraMia007]

Hi all and thanks in advance for your help... I've been lurking for the past few weeks, considering a Ch 7 and just found out about a potential wrinkle...

Some Background:
-We currently meet the 2nd part of the means test
-160k (ouch) in unsecured debt due to getting stuck with two homes in the real estate melt down and my job in... u guessed it, Real Estate going south
-one home that we would like to keep, estimated equity 40-50k? - used to be 130k two years ago...
-one home with no equity that we will be letting go...
-one car that we will keep (upside down on loan, but a low mo payment)

We just stopped using credit to live on in May when it finally dawned on us that we are digging a hole we will never get out of.. so we are waiting to file Ch 7 until Dec 1st - hopefully that will get us out of the danger zone for fraudulent use... May is also the first month that we didn't make all of our minimum payments, although we did send something to each creditor other than the house that we will be letting go.

Due to my job being so terrible, our current plan is to sell our truck that we own outright and buy a new truck for a couple thousand for DH to drive. We plan to use the rest of the proceeds (maybe 16k?) to pay for a 12 week trade school so that I can start a new (hopefully more stable?) career, and also to cover our living expenses over the next several months until we are ready to file. This would not give us enough money to make the actual minimum payments on all credit cards, but I plan to use a pro-rata plan so that every creditor gets something each month through October. Any cards that were used in May, I will give them the minimums through August. Any pitfalls that you can see so far?

Then comes the wrinkle, DH just found out that he might get a promotion that would relocate us to another state, from California to Washington in September. He would get a pay increase of about 6k/year and there's a buyout program where they would buy our primary residence for 5-10% less than market value - I believe that they will do the buyout for up to 12 months after the transfer. With just the pay increase, we would still pass the means test, but without the house payment we wouldn't! I haven't seen any similar situations posted, so I am wondering - if at the time of filing for BK my kids and I remain in our existing home, would the trustee/courts look into the future of us selling the home and relocating to be with DH?

Sorry this is so long...

[Help!]

This is like deja vu! We have about the same amount of unsecured debt, a result of several of years of treading water to make mortgage payments on a home we can't sell for anywhere near what we owe. We are a few months ahead of you, though, in that we have already relocated. The rest of this reply is going to sound really bossy, but my intention here is to help you avoid the misery we're going through.

I see a number of pitfalls arising. What state will you *and* your husband be residents of when you file? If Washington, you will need to wait the better part of 180 days (in other words, 91 days after the move). The means test is based on the six months prior to filing, so the mortgage payments you've been responsible for in those past six months will be included.

The issue based on what you've described will be schedule J, which cannot reasonably include in your projected expenses the house payment which will disappear when DH's employer buys out your the mortgage on your primary residence. Try out schedule J based on your projected income and expenses after relocation (assuming discharge of any debts)... if it shows there is a net income of $100 or more you can expect a very strong push toward Ch. 13. If your income is significantly above the median (in Washington it is about $85K/yr. for a family of 5) expect the UST to become involved.

If you choose to relocate, keep meticulous records about any relocation benefits you receive. Even if you are not required to submit receipts to your DH's employer to show how relocation money was spent, keep those receipts. In fact, keep a written record of everything you do that involves your finances. Get a spiral bound notebook and set it aside only for this purpose. Write down anything significant that happens, e.g., "Received a check for $652 as a refund for overpaid escrow taxes". When you hire an attorney, use that same notebook to summarize the advice they've given you, e.g., "disclosed to attorney $1100 received in cashed out stock options. Per attorney's paralegal amount does not need to be included in means test income because the amount is small".

We were asked about details like these at our 341 hearing (e.g., "When did you receive that check?") and sat there with our jaws dropped! Know that even though the attorney and paralegal take care of the paperwork for you, you should understand the calculations and be prepared to defend them with receipts.

Ch. 7 is not just about the means test, as we are learning. I am only offering my opinion based on what we have learned in this process. The most important thing to do is to find the very best attorney you can. Do not choose a name from the phone book! It is hard to muster up the energy to go see three or four attorneys, but I really wish I had done this before filing. We could have avoided a lot of pain!

You are so much better informed already than we were having found this forum. Best of luck to you!!

[CaraMia007]

thanks so much for your input! We will be filing under California residency if we file Dec 1st. So if I understand you, if we still own the home when we file and have our 341 meeting, we can include the mortgage payment? I guess I'm really wondering, when they ask about future earnings/windfalls and we disclose that we will be selling the primary home in California, will they re-do our budget without the mortgage payment? Also, once I finish school, I will apprentice in my field for a few months, but then will start working again, maybe in March '09. Do they count that?

[Cali]

What part of CA are you at where you can go to school and pay living expenses for a couple of mths for 16k? I want to move there. LOL

[CaraMia007]

LMAO... that's 16k (less roughly 5k for schooling & supplies) plus DH's take home of roughly 4k/mo...

[Help!]

I am confused. If your husband will have relocated to Washington and earned income in Washington by the time you file in Dec., how are you going to file jointly for BK in California? My advice would be to either handle the BK first, then relocate... or you relocate first, then file for BK. Attorneys may tell you that you file, have a 341 hearing a month later and that's that, but the truth is that it can be a very long process.

If your reason for not relocating with DH in Sept. is to be able to include the house you're currently living in on the means test, it is not necessary for you to do this. We relocated in January, filed in April and included the mortgage payment for our out-of-state house in the means test. As long as that mortgage is in your name and you are financially responsible for those payments, it goes into the means test regardless of whether or not it is your residence.

The current and projected income goes into schedule I, current and projected expenses into schedule J. I & J determine, in conjunction with the means test, whether or not you will be allowed to discharge your debt in a Ch. 7. In these schedules, your budget will be based on your post-debt life. If your income will outweigh your expenses, it will appear that you have money left over to pay your creditors and you can expect opposition to discharge under Ch. 7 (regardless of the means test) because of your "totality of circumstances".

If the mortgage buy-out is projected to net you any amount of money, the equity in that house will be treated as an asset in your BK. You are only allowed to keep a certain total value of assets ("exempt assets"), and depending on where you live, it is not a very large amount. Any assets you have in excess of that amount are subject to liquidation as "non-exempt assets". There are a few assets that are protected as exempt but not counted against you, like funds held in a 401K.

Your Ch. 7 would be a very complicated one, so if you plan to file in CA I'd start getting some legal advice (and I mean the good, sound, competent kind!) right away.

Finally, once you file Ch. 7 there is no turning back. Even if you suddenly change your mind and move to dismiss your case (as we attempted), a Ch. 7 is on your credit report for 10 years. Regardless of how your circumstances change or what you think you can do after you've filed, you have already signed over control of your assets.

[CaraMia007]

My thought was that if he moves on Sept 15th (for example) and we file on Dec 1st, he meets the residency requirement to file in California.

[CaraMia007]

Thanks again Help! for your input...

Running the numbers, we would only get about 7.5k from the proceeds if they buy it for 10% less than market value... And if I understand correctly, we could file under Washington laws after living there for 91 days?? I thought it was 6 months...

To me it would make sense to just allow the trustee to have those proceeds, that way the creditors would at least get something! I filled out schedules I & J using estimates, and it looks like without the current mortgage our disposable income would be $6 per month prior to the time I would begin working. Maybe less, we would have to have more taxes withheld as we would lose our homeowners interest deduction on our tax return. I don't believe that I would start bringing in an income until the middle of next year if we end up moving there, so I'm guessing I wouldn't have to include any projected income for myself?

Also, another question that occurs to me: would the proceeds of selling the truck be considered income??

[Cali]

CA has a great homestead and wildcard exemption.

[CaraMia007]

Cali, If I understand what you're saying... it would be better to file in California even if we have the 7,500 in proceeds on the house? It does look to me like Washington's exemptions are not as good as California's.

I am so confused! Better to keep the house? Sell? File here or wait and file in WA? ugh...

[CindyLou]

You can file in WA after 91 days, however you will still use the exemptions of CA...

You can file in the state where you reside the GREATER PORTION of 180 days...which is 91 days. But there is a much longer requirement for using the exemption of your new state...which works out better for you anyway.

[CaraMia007]

wow!! That's awesome, thanks CindyLou! LOL... here I am getting excited about my BK, I think I feel a fever coming on!

[Help!]

The exact legal phrase is "the better part of 180 days" which means just more than half of 180 days, or 91 days. You would not have to include any projected income for yourself on schedule I unless you have been offered employment. If any of your expenses on schedule J exceed the IRS standard, you should be prepared to explain how you arrived at that amount (we were asked for 12 months receipts for medical bills) and to justify why exceeding the IRS standard is reasonable and necessary. Be sure to give yourself the IRS standard amount in cases where you might spend less.

Yes, any money that changed hands prior to your filing will be asked about. Any income tax refund or stimulus check you received will also be taken into account and they will want to know where the money went. It depends on your income, but I would say that if you are well above the median you should be prepared to explain anything about your finances that comes up. You may be asked to provide 12 months of bank statements. If you use debit cards, be prepared to answer questions about your account history. This can work to your advantage, though, if the money leaving your checking account clearly goes to bills, food, gas, etc.

If your schedule J shows a near-zero net income and you are confident you can justify those numbers (with receipts and documentation, not just verbally) I'd say you're in good shape.

One more comment on taxes... if you currently have a large amount withheld (say, 25% of your income) but on your 2007 taxes your tax liability was less (e.g., 10%) because of itemized deductions, the trustee may re-calculate your 2008 tax liability. You would have the opportunity to explain that your tax rate will be higher this year because you will not have the benefit of the mortgage interest deduction, but it would be a good idea for you to calculate that number yourself and figure out how much it will change.

On the means test, be sure to subtract from "taxes paid" the amount you received as a refund from your 2007 taxes. If you do not, they will do it for you.

Cali brings up a very important point -- if you file while living in CA you have the benefit of that homestead exemption. I would be careful with that one if there's documentation that shows you plan to relocate (e.g., acceptance of an employer's offer letter) as you may be required to state that you intend to occupy the home for the foreseeable future.

[CaraMia007]

Thanks Help!
-Our income would only be 2k over the median at the time of filing, and our tax refund will be long gone - absorbed into every day living expenses.
-I will definitely have to take a long look at our tax withholdings when they change if the promotion takes place.
-If we just let the Trustee take the house into the BK estate - we won't get a homestead exemption, is that right?

When you talk about having to explain our monthly expenses and where our money went for 12 months (?!?) - we started using the envelope system a few months ago - we pull out cash at the beginning of the month for food, clothing, etc - if we only claim the regular allowances will they still want receipts?

[Help!]

It is good that you are close to the median. Maybe you will stay below the UST radar and you won't have to detail calculations. We didn't use the homestead exemption so I can't offer advice there, other than that it is my understanding that the exemption is only allowed if the property is to remain your primary residence.

I have been asked to detail calculations and show receipts for expenses that were not in excess of the IRS standard. The documents we were asked to provide are typical of an audit, which most of the Ch. 7 filers in this forum have not encountered. In our case, I think there were just so many things that raised flags... high income (about $20K over the median), high debt load, abnormally high medical expenses, etc. It sounds unlikely that you would be subject to an audit, but I think it's good to have the knowledge that these audits do happen to think about how the decisions you make before you file could affect your case later.

As for the timing of a potential move, keep in mind that there aren't very many Ch. 7 cases that are over with quickly. My observation is that those below the median seem to range 2-3 months and those above the median are rarely less than 4 months. If your husband relocates in September, that will make it pretty difficult for him to attend the required hearings with you if you file in CA in June/July. Just another thought...