Question about pre-BK spending

[rcoveles]

Hi all - I'm currently in the process of dismantling my business, for an eventual BK filing. My filing will be CH7, due to the majority of my debt being business related (about 180K cc). I will be filing alone (my wife is not involved - we live in a tenancy by the entirety state). I'm just concerned about a few things.

First, we sold off about 35k of joint investments and paid off our mortgage on our house. With the stock market the way it is, and the uncertainty of my future, we just didn't want to be saddled with the 1k a month payment any longer.

Next, we received a tax refund this year, and combined it with some money from a chunk of my business inventory that I sold to another dealer, we put new siding on our house, and a few new windows (both were MUCH needed). Total was around 14k.

I have about 20k coming my way from the sale of remaining business property, and I was planning to pay down a few personal CCs (approx $1500 and $2000), and use the rest to get new kitchen appliances (refrigerator is on its last legs, stove has 1 out of 4 working burners), as well as some sprucing up of the kitchen (wallpaper is falling off, linoleum floor is torn, cabinets are broken etc.) I know those 2 smaller CCs would go away in BK, but they honestly had nothing to do with my business, and I thought it would be a show of good faith to pay them off.

I had always thought that household things were OK to do, but I recently read some stuff about "repairs vs. improvements."

Should I be concerned about this? I guess you could consider the kitchen a "remodel." Is that a repair or improvement?? I mean, I'm sure they won't be thrilled to see like 35k spent down, which could have gone to creditors, but that would not have even made a dent. Even if I was able to settle for a ridiculously low number, I'd have the 1099-Cs to deal with, creating a new problem.

Should I be worried, or at the very least, should I delay BK for a while due to the recent spending? I'm at about 9 months of non-payment right now.

[tcreegan]

need attorney

Hello rcoveles,

A lot of this sounds fishy, do you have an attorney? If not, you really should find one. Some questions:

Is the payment to the mortgage lender considered a preferential payment?
Can the house be exempted? (what state are you in?)
Does paying the two ccs and not the others constitute a preferential payment?

show of good faith to pay them off. They will most likely close the acct once you file BK, unfortunately good faith doesn't go very far in the cc business.

You are going to need a good lawyer to explain why you can spend $69,000 this year and yet can't pay your debts.

Good luck with all this,

Tom in Colo

[keptdigging]

Your instincts sound about 100% wrong. You need to embrace the strange world that is bankruptcy. You need to do a lot more research including consulting attorneys before you make any more moves.

A lot of things are state/circumstance specific. For example, paying off your mortgage may risk losing your house, or even getting a chapter 7 (being business filer only keeps you from having to take the backwards looking means test--you still have a disposable income test looking forward.)

Improving your home, if the home is exempt and the improvements not necessary, can be interpreted as deliberately hindering creditors, which can deny you a discharge on ALL your debt (the bankruptcy "death sentence".)

Good faith payoffs of small CCs won't be interpreted as good faith at all... it's a preferential payment that, while not a risk to your discharge, can complicate your case as the trustee claws the money back to distribute it evenly.

There is such a thing as bankruptcy planning, and done well, you can advantage yourself. But it's a subtle thing and you don't want to push the envelope because you don't want someone to decide to contest your case even if you are likely to win.

I don't really want to scare you... but as one who made a number of mistakes myself before I learned what I needed to know... you need to stop doing things and get legal advice.

Both controlling law and accepted practice vary wildly from district to district so there's no substitute for a local experienced attorney's opinion. My gut is that paying off your mortgage is a red flag, so I'd want the opinion of multiple attorneys. You can make the case that your repairs were necessary (though I wouldn't want to push it.) But the 35K sounds a lot like deliberately stashing money where creditors can't get it. The good news for you is that I'm not an attorney and I don't really know.

It's a strange world down here and I wish you good luck.

[backtoschool]

You are not in a good position for a chapter 7 because of all the paying off you did. Paying $70k to create more assets for yourself, while not paying your creditors, will cause the trustee to claw back some of that as preferential. Even if it is not preferential, it is a huge red flag to the trustee and the US trustee that will cause them to dig deeply into your finances.

The home improvements are not necessary, and are going to be a huge red flag to the US trustee, and will put you at risk for a totality of circumstances dismissal.

There is no such thing as "good faith" payments to certain creditors. They will be considered preferential payments, and the trustee will go after the credit card companies and get the money back. Your cards will be closed as soon as you file bk anyway, so its a waste of money to pay them.

Your debt being business related only helps you with the means test. It does not remove the other chapter 7 red flags and restrictions in regards to payments, assets, income, etc. To the trustee and the US trustee it is going to look like you are hiding $70k of assets, and this will be a huge red flag that could get you a totality of circumstances dismissal.

[rcoveles]

I hear you on the good faith - I know - I guess that's just plain dumb, but I do pay my personal debts - the business just basically tanked over the past 2 years. (though it would NOT be a preferential payment, because filing non-consumer, the limit is over 5k per creditor, not $600). I realize they will shut the cards down anyway - I've been living CC free since January, so it doesn't matter to me.

As for the house - we are in a tenancy by the entirety state, so it would be protected - we would have kept it out of the BK anyway (again, it is only me filing, not my wife). I don't see why that would be a preferential payment? We've been paying our mortgage all along anyway, so if that were the case, the payments probably would have exceeded the preferential threshold anyway - also, since the investments were joint, they may have been safe, or partially safe anyway. We really just wanted to get rid of the 1k payment. I guess the good news is that this was done a few months back. If it were to present a problem, I guess I would try to ride this out a bit longer to get it in the rear view mirror a bit.

I guess the "necessity" of the improvements would be a judgment call, but siding falling off, windows that leak etc. seemed necessary to me. Also, my wife does work, and makes decent money - part of the improvements were funded by our joint tax return.

I guess the other good news for me (if you want to call it that), is that the hole is so deep, most creditors would probably not bother trying to sue, though I'm sure at some point, one will.

I do have a question about this statement though:

"(being business filer only keeps you from having to take the backwards looking means test--you still have a disposable income test looking forward.)"

As I understand it, and have been told, if your debt is primarily non-consumer (business) debt, then it doesn't matter WHAT you're making now. Is this correct? (though I'm really not making a lot now either)

[backtoschool]

I hear you on the good faith - I know - I guess that's just plain dumb, but I do pay my personal debts - the business just basically tanked over the past 2 years. (though it would NOT be a preferential payment, because filing non-consumer, the limit is over 5k per creditor, not $600). I realize they will shut the cards down anyway - I've been living CC free since January, so it doesn't matter to me.

As for the house - we are in a tenancy by the entirety state, so it would be protected - we would have kept it out of the BK anyway (again, it is only me filing, not my wife). I don't see why that would be a preferential payment? We've been paying our mortgage all along anyway, so if that were the case, the payments probably would have exceeded the preferential threshold anyway - also, since the investments were joint, they may have been safe, or partially safe anyway. We really just wanted to get rid of the 1k payment. I guess the good news is that this was done a few months back. If it were to present a problem, I guess I would try to ride this out a bit longer to get it in the rear view mirror a bit.

I guess the "necessity" of the improvements would be a judgment call, but siding falling off, windows that leak etc. seemed necessary to me. Also, my wife does work, and makes decent money - part of the improvements were funded by our joint tax return.

I guess the other good news for me (if you want to call it that), is that the hole is so deep, most creditors would probably not bother trying to sue, though I'm sure at some point, one will.

I do have a question about this statement though:

"(being business filer only keeps you from having to take the backwards looking means test--you still have a disposable income test looking forward.)"

As I understand it, and have been told, if your debt is primarily non-consumer (business) debt, then it doesn't matter WHAT you're making now. Is this correct? (though I'm really not making a lot now either)

That is not correct. Passing the means test lets you try for a chapter 7, but if you are making more than you are spending (once your debt is eliminated) then you will be pushed into a chapter 13, if the excess is over $150 or so a month.

[catleg]

I think paying off the mortgage will prove to be a mistake, and I think spelling this all out in a narrative could be considered unwise if your identity can be traced back to you from here. Most of the rest of it just seems like aggressive pre-bankruptcy planning, but again, loose lips sink ships.

I too am curious about how a non consumer BK7 works. I assume it still uses the pre-BAPCPA rules, and you had a lot of flexibility with schI/J to zero out money available to creditors. I don't know if it actually had to be zero either. But then again you have the totality thing to deal with.

[frogger]

Eventual needs to be the key word here. While there is nothing wrong with planning, it must be done right. You are going to need to get some time in on what you've done.

Stop, study, and plan before you do anything else that's gonna bite your a$$...

[backtoschool]

With all the money that was spent to improve assets, filing this year is going to be difficult. The US trustee will see your case as a totality of circumstances case right now the way it stands.

[backtoschool]

I think paying off the mortgage will prove to be a mistake, and I think spelling this all out in a narrative could be considered unwise if your identity can be traced back to you from here. Most of the rest of it just seems like aggressive pre-bankruptcy planning, but again, loose lips sink ships.

I too am curious about how a non business BK7 works. I assume it still uses the pre-BAPCPA rules, and you had a lot of flexibility with schI/J to zero out money available to creditors. I don't know if it actually had to be zero either. But then again you have the totality thing to deal with.

Let's assume that pre-paying off the mortgage (and getting behind on other bills as a result) is not seen as any sort of preference. The fact that there was $70k of cash available to pay off and improve a home that is exempted is a pretty strong totality of circumstances situation. Some of that money should have been available to pay creditors. The US Trustee is going to see all of it as a huge red flag in my opinion.

[rcoveles]

Thanks for all the input - I guess I've made some mistakes - probably not thinking right, with all of the stress I'm under. I'm still due 20-30k, so that money is going aside for now, till I figure out what to do. With another tax refund around the corner, as well as a new job, and selling everything that isn't nailed down, I might even be able to get into settlement territory, or at the very least, have enough $$ to maybe make the trustee happy.

[rcoveles]

That is not correct. Passing the means test lets you try for a chapter 7, but if you are making more than you are spending (once your debt is eliminated) then you will be pushed into a chapter 13, if the excess is over $150 or so a month.

For business debt?? Are you positive? That's not what I've been told, or read elsewhere. I even heard this from a lawyer.

[backtoschool]

For business debt?? Are you positive? That's not what I've been told, or read elsewhere. I even heard this from a lawyer.

The means test just determines whether you are eligible to try for a chapter 7. It is backward looking for the last six months prior to filing. Your expense schedules are forward looking, do not count your debt as part of your future expenses, and take your disposable income into consideration. If you have disposable income on your schedules, then you will be put into a chapter 13 or a chapter 11.

The fact that most of your debt is business debt only applies to the means test. It does not apply to your expense schedules for your current and future expenses. If you have disposable income on your expense schedules, or if your expenses are questionable to the trustee, you can be put into a chapter 13 or a chapter 11.

[catleg]

Don't feel bad about anything. Put your own interests and those of your family first. Just realize that it may go a little rougher than expected. But in the end broke is broke and it's tough to argue with that, and we still have the 13th amendment protections against involuntary servitude (although I'm sure the banksters are working on a way around it).