Used student loans to pay credit card 2 months back...wait to file?

[BKlooker]

Background:
Single, no children, state is MD
58K/year income
183K mortgage (home worth maybe 150K now), 32K CCs,
car paid in full, 75K student loans (currently in deferment for another year)

I am new to these boards, but have done a crap-ton worth of reading, so I appreciate help in advance! You guys are all wonderful for all the support you give people like myself everyday, so thank you, thank you, thank you so much!

I have 3 dilemmas, really.

The first is my last student loan payment. I used about 8K in student loans to wipe away 2-3 credit cards with outstanding charges on them in order to bring my month payments down, as it was the only way I was able to stay afloat. At the time, CH 7 never entered my mind at all, as I was still working to pay it all down, as they say.

Second is my car…I am gonna need a new car soon, and am contemplating whether to get it now so I lock in a good interest rate, or wait til after BK is over when I will (hopefully) have a lot of cash saved up.

The third is my tax refunds…I get about 6.3K back each year from Fed+State tax refunds. Please spare me the lectures about this, as I never saw myself looking at Ch 7, and this method always worked well for me with regards to paying for car insurance all at once, vacation with family each year, car maintenance work, etc. I know better for the future, but being it’s the end of the year now, I’ll be getting a big refund in March regardless.

For the most part, the rest of my case is pretty cut n dry…no child support/alimony, always fully employed (never self employed), just got too much unsecured debt and need it gone.

Now, I spoke with a lawyer (really 2 from the same firm) yesterday which I really like (they have good reviews online from a few people and I got a reference from a friend, so I am hopeful they are good), for which I had gone to for discussing a short sale on the house. It was there that I was convinced that if I wasn’t concerned with the credit hit, then a Ch 7 was likely the best option for me because of all the unsecured debt.

As noted, my original goal was to get rid of my mortgage. I am 28 years old, and the principle interest will be kicking in with 1 year (on interest only now), and that combined with student loans would jack my debt up to $750 per month instantly. Combining this with needing a new car soon (current one is 8 years old and 120K miles, and starting to go downhill), and I would be underwater.

I have a few questions:
1. I am thinking of just retaining the lawyer now, explain the student loan paying on the credit cards, and seeing what he says about it. The other option is to just wait til early April to get the lawyer and move forward from there.

Anyone else ever done this? Like I said, hindsight is 20/20 and I would never do it again, but it was the only way I could feasibly knock off debt at the time to stay afloat month to month. I am just worried that a Trustee would take me to town on this. Other than this though, it’s clear I have been paycheck-to-paycheck since forever.


2. Should I get a car now or wait til February/March for the tax refund? I should preface this with I have parents who are willing to co-sign as the primary on any outstanding note (they have amazing credit), so I don’t think interest rate would be a big deal either way, but I was thinking this would be a good place to use some of that refund as a down payment on a new car. With the trade-in value on my current car, plus the refund, I could pay off 50% of the car upfront I think. I am not sure if using the refund to front a new car is wise though…


So basically….should I just wait another 5 months for the student loan cc payment to fall off? This was mid Sept that this happened, so if I am turning over 6 months of bank and cc statements to the lawyer upfront as requested in early April (so Oct-Mar), then neither he nor the Trustee would really know about it once I file, correct? I don’t want to seem like I am hiding anything, I just don’t want 1 bad decision to cause me to get in serious flipping trouble.

How easy is it to get a car at a decent interest rate after BK? I have read around I know some of the people here are noting they got one like 4 days after discharge/closing/etc., but I am curious is it really that easy?

Thanks, and sorry for the long post. I am just really anxious to move on with life at this point. This debt has kept me up for way too many sleepless nights

[abkguy]

Paying a CC with a student loan just converts a dischargable debt to a non-dischargable one. The only reason the trustee would care is if the 8K represents a preferential payment to one creditor, but unless it was recent (say within 90 of filing) that probably won't matter. Even then, it would not affect you in any way.

MD has decent exemptions, looks like 5K prop 6K wc, so why not wait until Jan 1, file tax return immed., then file Bk and exempt the cash from the return w/ your wc, and then buy the car post discharge, possibly with large down payment.

[btbeme]

MD exemptions are pretty generous. One thing at a time:

1. Retaining an attorney now definitely has its advantages, so long as the attorney is willing to help you plan for your filing. There is a fine line between being smart about filing and gaming the system (which can mean federal prison). If you or your attorney try to be "cute" with the Trustee, you will be made a poster child. But a good attorney knows how to retain your rights within the confines of the law, and will help you stay between the lines. It is up to you to be honest with him/her, and to follow their directions.

2. Having anyone co-sign anything right now is a bad thing. Paying off anything by 50% right now is also a bad thing. If that sounds really strange, you read it right. Sometimes, the rules for a Ch 7 seem completely backwards, but they are what they are.

3. Using available non-exempt income or cash to purchase allowable expenses and exemptions is perfectly legal and moral. Whether it has wheels or if it can be cooked in a pot on the stove six months from now really has little bearing on your filing - exempt is exempt. Again, planning a BK is a job for a good attorney. Mine says he averages 7 months between retainer and filing. There must be a reason.

4. Are you planning to keep your home? Really? Or does $750/mo x 60 months = $45k cash in the bank sound better to you? You may be able to "afford" it, but...think this through. Nobody can answer this but you.

5. Adjust your tax withholding. Today. Because the Trustee will essentially adjust it for you. No lecture - just reality.

6. The best interest rate you will ever see on a car loan is 0%. You can, however, pay cash for a three year old car every four or five years, and pay less than zero interest. Kinda hard to explain, but see point #4 above to move in the right direction. Repairing a car for $3000 and driving it another 2 years is about $125 a month. Try getting that payment on something new, especially something new and EXEMPT.

Believe me, the subtleties surrounding a Ch 7 do not seem to make sense most of the time. In fact, some rules seem to come from an alternate universe. The hard and fast truth is that BK is designed to provide relief from debt, not ownership. Owing less by paying more can work against you (your student loan payment on your credit cards is 180 degrees from helping you). Conversely, OWNING less by paying less can help you.

Read these forums carefully, and find the right attorney - you will know when you have, and it probably won't be the first or second or third that you talk too.

[backtoschool]

Paying a CC with a student loan just converts a dischargable debt to a non-dischargable one. The only reason the trustee would care is if the 8K represents a preferential payment to one creditor, but unless it was recent (say within 90 of filing) that probably won't matter. Even then, it would not affect you in any way.

MD has decent exemptions, looks like 5K prop 6K wc, so why not wait until Jan 1, file tax return immed., then file Bk and exempt the cash from the return w/ your wc, and then buy the car post discharge, possibly with large down payment.

I agree with abkguy. It is ok that you used the loans to pay the cards off, but it made the debt non dischargable since student loans are non dischargeable. I agree also that you should use your wildcard to exempt your tax refund. If your credit rating is good now then getting a reliable car as part of a bk planning is a sound idea as long as you get a good interest rate.

[BKlooker]

Thanks for the info.

2 more questions…

1. For the “90 day” wait period leading up to BK, what did you all spend the money on that you weren't using to pay mortgage/CCs/etc.? I have read around and heard people used some of it to pay the lawyer, and then the rest on “personal” products such as dentist, medical care, car maintenance, etc. Any other thoughts?

2. It’s probably wise to simply open a new checking account the day after filing and have your work-related cash going into that, right? This is what my lawyer said, as he assured me no one cares what you do as far as stuff that happens after filing, as long as your main account isn’t showing any signs of “moving assets” or hiding cash.



I had a feeling that the student loan thing would be a non-issue, as I wasn’t really looking to discharge it (or expecting to, as most sources will tell you it’s awful hard to discharge student loans), I just wanted to make sure they wouldn’t come after me for loan fraud or “calling the loan”.

The advice about waiting to get a new car is actually really sound; I never really did the full “long-view” calculations on it. But in effect you are right….I do get to live essentially “rent free” and CC free while the BK process is going on, and really the first 90 days leading up to the filing as well.

My lawyer thinks given the current climate and the flood of foreclosures on the market, plus my lender’s general “speed” is likely to mean a solid 6-9 months minimum of me living rent free essentially , plus no CCs after discharge of course, which translates into 2K a month I would be instantly banking for a straight 6-9+ months (and I will stay here as long as I can). That is more than enough to get a new car outright with just straight-out cash. Starting over has it’s perks.

As far as the house, yes I want it gone, as was the original point of getting an attorney. At present, my income is stretched to the max…I am slightly over the medium income for my state (by about 6-7 K if you factor in 401K contributions), but my lawyer looked over my stuff and is confident I still qualify under the means test based on monthly expenses.

The problem is the payment has gone from $1035 per month up to $1460 per month. In addition, I was not told about a clause with the program (first time homebuyers program) that basically says I am NEVER allowed to rent the home til I pay the mortgage in full 31 years from now. Had I known this small detail, I would have never done it. In addition, it’s a small condo, selling it would be very hard either way, and my lawyer says a short sale with my credit (currently excellent) is not likely, and that the hit isn’t going to be that different from a BK anyway, so might as well walk away completely off the hook for any difference and knock off the CCS while we are at it.

No, I am not trying to game the system at all. I have no assets (no other houses, no CDs/Bonds, etc.) whatsoever other than my 2003 Honda, laptop, and 2 stone-age TVs in my house (very little clothing, all used or IKEA furniture, honestly). I have been living paycheck to paycheck for years now and have less than 400 bucks in savings (which means another Christmas of buying people items on credit, and worry about where the money will come from). I am legitimately exhausted of the CC interest rate game (going from a $300 to a $550 to a $450 minimum each month on both cards, depending on the market and my CC company’s mood). Most was debt I ran up when I was much younger and now can’t get overtop of.

I am thinking it would likely be wise to hold off on the car purchase now til afterwards since having an 8 year old car with 120K on it is going to be easier to hold onto through this then a brand-spanking new one. In addition, within 8 months of this being over, I will have 20K saved up.

I am going to talk to HR next week about moving some more cash into my 401K for the duration of this so I can knock that tax return down if possible. That way I can get it under the 6K wild card and hopefully hold onto it if possible. I won’t be able to file until about Feb/March (that’s when I meet with my tax guy, who is awesome), but that is good because the time lag will be prep time for hitting BK court.

[abkguy]

Paying CC with SL is effectively the same as reaffirming a dischargable debt (albeit it with a different creditor). The only party adversely affected by that in BK terms is you, so how could that be fraud?

Don't foget that even if your refund is over 6K, you can spend some of it before filing to get under the WC. You have 5K property so if all you have is a 3K (?) car you still have room to buy some exempt stuff, or spend the money on things that are not assets (but don't pay off you SL, as you have to report payments to creditors).

Talk to a few laywers and retain one soon. If you are going to do BK you want to stop pouring money into your creditors pockets ASAP.

[BKlooker]

Thanks abk. I am going in on Monday to sign a retainer agreement for one....luckily they will take $550 upfront (which is all i have in savings) and then i simply have to pay them the excess $1500 prior to filing, but since i won't be paying mortgage or CCs for 90 days up til that point, it's no problem at all.

The student loan thing isn't much an issue with "reaffirmed debt"...basically the 2-3 cards were paid in full with the 8K, meaning they won't be included in the BK anyway because i don't owe them a dime and therefore they aren't creditors. The 2 that are included in the BK haven't been paid off using student loans at all, so i don't think it should matter. That being said, I am likely to wait til after March is over to file so that those transactions aren't even within the 6 month period up to filing at all, so doubtful they would even be in the playing field. Given that I have no real complicated assets, etc., he doesn't see my case as being overly hard, so we shall see how it goes...

I am hoping the means test works out ok, as I have no interest in a chapter 13, but since I am over the median by a couple grand, it's possible. Oy!

They are very knowledgeable, had a 90 minute talk, and knew from that they they were very detail oriented and had been around the block quite a few times. He is telling me that the best strategy is to take..your...time with this. The more "in order" you are and well planned for what's to happen for the 3-6 months leading up to the filing, the more likelihood things will be a breeze for you, especially if you are honest.

[BKlooker]

Also, yea my car is worth around 4.6K, and the refund would be about 6K, plus the widdle down of all my personal stuff is less than a grand (lawyer says likely half of that at best), so still well under the $11K cut off in MD.

[backtoschool]

Thanks abk. I am going in on Monday to sign a retainer agreement for one....luckily they will take $550 upfront (which is all i have in savings) and then i simply have to pay them the excess $1500 prior to filing, but since i won't be paying mortgage or CCs for 90 days up til that point, it's no problem at all.

The student loan thing isn't much an issue with "reaffirmed debt"...basically the 2-3 cards were paid in full with the 8K, meaning they won't be included in the BK anyway because i don't owe them a dime and therefore they aren't creditors. The 2 that are included in the BK haven't been paid off using student loans at all, so i don't think it should matter. That being said, I am likely to wait til after March is over to file so that those transactions aren't even within the 6 month period up to filing at all, so doubtful they would even be in the playing field. Given that I have no real complicated assets, etc., he doesn't see my case as being overly hard, so we shall see how it goes...

I am hoping the means test works out ok, as I have no interest in a chapter 13, but since I am over the median by a couple grand, it's possible. Oy!

They are very knowledgeable, had a 90 minute talk, and knew from that they they were very detail oriented and had been around the block quite a few times. He is telling me that the best strategy is to take..your...time with this. The more "in order" you are and well planned for what's to happen for the 3-6 months leading up to the filing, the more likelihood things will be a breeze for you, especially if you are honest.

You don't have to include the zero balance cards in your bk as you said, but they probably will be closed by the creditor once they get notice of your filing by doing an account review. Paying them off is no guarantee that they will survive the bk. Most likely they won't.

[BKlooker]

Yes i understand this backtoschool. My lawyer said that many of the outstanding ones may go bye-bye and kill my contract, but that doesn't worry me at all.

The extra money i save in the bank from no mortgage and no ccs is well worth it for me, and there are no shortage of people on here who seem to say that within a month of discharge, they were getting several brand new cc offers, so i don't think getting another one within a year of discharge for emergencies is going to be a problem.

My lawyer also said that there is no guarantee they wont, but if you don't owe them anything and were never late with those creditors and they aren't on BK, it's very possible they will let it ride. Since you can't file BK again for 7-8 years, they know that whatever you ring up from discharge forward is fair game for them, so some have little interest in closing your account. I have read many post of people on here having credit card survive BK.

Either way is fine for me. Thanks for the warning though.

[brokejoker]

Not to be a Debbie downer but how on earth are you going to qualify for a chapter 7 while you're over the means test AND will have $2000 DMI every month? You should take a hard look at the schedules and figure out if a chapter 7 is feasible for you.

[scorpion35]

Thanks for the info.

2 more questions…

1. For the “90 day” wait period leading up to BK, what did you all spend the money on that you weren't using to pay mortgage/CCs/etc.? I have read around and heard people used some of it to pay the lawyer, and then the rest on “personal” products such as dentist, medical care, car maintenance, etc. Any other thoughts?

2. It’s probably wise to simply open a new checking account the day after filing and have your work-related cash going into that, right? This is what my lawyer said, as he assured me no one cares what you do as far as stuff that happens after filing, as long as your main account isn’t showing any signs of “moving assets” or hiding cash.



I had a feeling that the student loan thing would be a non-issue, as I wasn’t really looking to discharge it (or expecting to, as most sources will tell you it’s awful hard to discharge student loans), I just wanted to make sure they wouldn’t come after me for loan fraud or “calling the loan”.

The advice about waiting to get a new car is actually really sound; I never really did the full “long-view” calculations on it. But in effect you are right….I do get to live essentially “rent free” and CC free while the BK process is going on, and really the first 90 days leading up to the filing as well.

My lawyer thinks given the current climate and the flood of foreclosures on the market, plus my lender’s general “speed” is likely to mean a solid 6-9 months minimum of me living rent free essentially , plus no CCs after discharge of course, which translates into 2K a month I would be instantly banking for a straight 6-9+ months (and I will stay here as long as I can). That is more than enough to get a new car outright with just straight-out cash. Starting over has it’s perks.

As far as the house, yes I want it gone, as was the original point of getting an attorney. At present, my income is stretched to the max…I am slightly over the medium income for my state (by about 6-7 K if you factor in 401K contributions), but my lawyer looked over my stuff and is confident I still qualify under the means test based on monthly expenses.

The problem is the payment has gone from $1035 per month up to $1460 per month. In addition, I was not told about a clause with the program (first time homebuyers program) that basically says I am NEVER allowed to rent the home til I pay the mortgage in full 31 years from now. Had I known this small detail, I would have never done it. In addition, it’s a small condo, selling it would be very hard either way, and my lawyer says a short sale with my credit (currently excellent) is not likely, and that the hit isn’t going to be that different from a BK anyway, so might as well walk away completely off the hook for any difference and knock off the CCS while we are at it.

No, I am not trying to game the system at all. I have no assets (no other houses, no CDs/Bonds, etc.) whatsoever other than my 2003 Honda, laptop, and 2 stone-age TVs in my house (very little clothing, all used or IKEA furniture, honestly). I have been living paycheck to paycheck for years now and have less than 400 bucks in savings (which means another Christmas of buying people items on credit, and worry about where the money will come from). I am legitimately exhausted of the CC interest rate game (going from a $300 to a $550 to a $450 minimum each month on both cards, depending on the market and my CC company’s mood). Most was debt I ran up when I was much younger and now can’t get overtop of.

I am thinking it would likely be wise to hold off on the car purchase now til afterwards since having an 8 year old car with 120K on it is going to be easier to hold onto through this then a brand-spanking new one. In addition, within 8 months of this being over, I will have 20K saved up.

I am going to talk to HR next week about moving some more cash into my 401K for the duration of this so I can knock that tax return down if possible. That way I can get it under the 6K wild card and hopefully hold onto it if possible. I won’t be able to file until about Feb/March (that’s when I meet with my tax guy, who is awesome), but that is good because the time lag will be prep time for hitting BK court.

over the medium and a positive DMI
with $2000 left every month good luck qualifying for chap 7

[BKlooker]

Bk and scorpion, you didn't follow my post.

I was saying WHILE THE 90 DAY PERIOD is going on and AFTER it's over, I won't pay mortgage or CCs obviously leading up the the filing, the mortgage is $1200 and $850 for ccs in minimums now, which is where the 2K came from.

Do you seriously think I would be here talking about CH 7 if i had 2K a month lying around?? Right now it's 1200 Mortgage, $850 in CCs, $120 medical, $150 car insurance, $550 utilities, and $210 food/clothing. That's over $3K/month in expenses..... leaves me with about $200 left in take home, and i didnt include gas, car maintenance, home owner's insurance, vet fees, and a mirade of other ones. Believe me, there have been many months where the dog gets feed everyday, but I havent

[abkguy]

But if you stop paying those bills, then you can't put them on Schedule J.

[brokejoker]

If you're not planning on paying the mortgage or the credit cards leading up to filing (not keeping the house) then you will have DMI showing on your schedules since you won't have those expenses looking forward. If you've got $200/month leftover right now, you're going to have to really dig into your expenses to explain away even just the $200 and the $850 from the credit cards. Don't pay the house and you get the reasonable rent allowance for your area. You might want to find out what that is because it could be lower than the $1200. You also won't be able to claim the homeowner's insurance and the maintenance and stuff on a house you're not keeping. You definitely don't want to file showing a lot of DMI or else you will be pushed into a 13.