Preferential Payments?!

[indianamom]

Hello. My husband and I just recently decided that we are going to file Chapter 7 bankruptcy. I have appointments scheduled for next week to meet with a few attorneys. We have been in denial about our situation for some time now, and have finally come to the conclusion that bankruptcy is right for us. We are upside down in our house about 30K, and my unemployment benefits have been exhausted so we can no longer afford to make all of our payments each month. We currently only have my husband's income which is only about 30K per year.

My question is that in March we stupidly used student loan money to pay off a $7000 personal loan to a creditor and we paid $2300 on a credit card using our tax return money. I was trying to lower our monthly payments so that we would maybe get approved for a modification on our mortgage and then our budget would maybe balance each month. I so wish that I wouldn't have done this.

Will these large payments be a problem with us filing Chapter 7? Will it be ok as long as we wait 90 days after the payments were made to file? I am planning on talking to the attorneys about it next week, but am looking for some reassurance. Any ideas?

[ssmdem]

The $7000 personal loan -- was this to a relative or friend?

[nc73]

You do know you can't discharge student loan debt? Also waiting 90 days doesn't always do the trick.

[indianamom]

Yes, I realize that we can't discharge the student loan debt. That is why we are so upset. We would have been much better off not taking the student loan and filing bankruptcy months ago. The personal loan was to Citifinancial. At the time, we had not even considered bankruptcy so we were really just trying to lower our monthly payments to buy us some time until I got a job. We paid the credit card because they raised the rate to 29.9% and we had our tax return money so we figured we should just pay it off. Now we can't seem to get approved for a modification and we are out of money and we want to file Chapter 7. What is the worst that could happen? The trustee takes the money back and divides it up?

[ssmdem]

Yep - that's the worst - in the big scheme of things, it really doesn't change anything for you. We did something similar - did an $18K 401K loan to try to make ends meet - except we paid some money back to my mom from that so having to wait a year for that to go away.

[indianamom]

So, is there not really anything bad that can happen because of this? Will we probably still need to wait until after 90 days past these payments to file?

[keepmine]

It's not really an issue for you.
If the trustee decides it's a preference issue, they'll go after whomever you paid. It won't affect your filing.

[ssmdem]

Not that I know of. I really don't even know what you'd want to wait 90 days. If you've got the money to retain an attorney, I wouldn't wait just for the reason that you recently paid off a bill. Why would you care if they took some back from creditor A and gave it to creditor B? Doesn't matter.

[indianamom]

That is exactly what I was thinking. I am really hoping that we can just go ahead and file and get it over with.

[ssmdem]

Just be sure to meet with several attornies before you file -- almost all will offer a free consultation. We're meeting with attorney #3 on Thursday, and we have one more that we're going to meet with before we decide who to use. It's obviously something important, and you need to make sure you're putting it in the hands of somehow who knows what they're doing. The first guy we met with - I left in tears because I literally left the office more confused and had no idea what to do next or even if bankruptcy was something we should consider. That's when I found this board and started reading. I've come to the conclusion that the first attorney really thought we'd be a Chapter 13 - he even stated that - and I think he just wants the easy Chapter 7 cases. Turns out we more than likely will be a Chapter 7 but he didn't take the time to look closely enough at our situation to see that. His loss/our gain - glad we continued to shop around.

[indianamom]

So, I met with an attorney today and I really liked her. She said that we should go ahead and purposely file an asset case. She said that if the trustee takes back the $9300 that we paid on those accounts 2 months ago, then some of it may end up getting applied to some of our non-dischargable federal student loans. She also brought up that having an asset case may drag out the foreclosure process some and allow us to live in our house for free for longer. She thinks that we could potentially stay in the house 9-12 months before having to move out. I left her office feeling so relieved and hopeful for the future. She went over everything with me and she is going to file our case next Wednesday. We did our credit counseling online earlier today. We still need to close our bank accounts and open up new ones since we have a credit card with our regular bank that will be included in our bankruptcy. Otherwise, we are pretty well all set. I will be sleeping so much better tonight.

[catleg]

Bingo. That lawyer is a keeper. Filing within 90 days of the payments is the only way to claw that money back into the estate, either to be protected by an exemption (keep it yourself!) or to pay other creditors, preferably the student loans.

Being able to extend the automatic stay while the lawyers tussle over this is just the icing on the cake.

[indianamom]

Too bad Indiana only allows my husband and I to exempt $600 together, but at least it can go towards our students loans. I love that! I was afraid that I had completely wasted that money.

[catleg]

Most of the loan mod deals are losers.
I'm more optimistic about something I heard on the radio today.
Seems the GSE's (Freddie, Fannie) want to convert non paying owners into renters, then (in theory) perhaps you'd file ch7 and 2 years later buy the house back at a market price.
Similar idea has been floated around in some places, the banks will hate this, obviously.

[nceguyfromne]

Too bad Indiana only allows my husband and I to exempt $600 together, but at least it can go towards our students loans. I love that! I was afraid that I had completely wasted that money.

Your state does not have any wildcard exemption? In my state you can apply several thousand in unused amounts from one or more categories toward exemptions exceeded in others. That can be a big help with excess cash or an automobile with a little too much equity. I'm sure your attorney would have mentioned this, though. At any rate, you'll still benefit from getting the money you recently paid to your non-priority creditors seized and put into your BK estate for payment toward your priority debts.

Best of luck and enjoy your sleep!