Liquid cash - What and how can I spend?

[Emperium]

Hello,

I'm an owner of an S Corporation with substantial personally secured debt that will pass through to me in the event of a bankruptcy. Whether the corporation will need to file for bankruptcy soon is not certain, but it's a significant possibility within the next five to twelve months.

I have no assets aside from a car that I will likely surrender, some household items and exempt tools, less than $30k in savings, and an IRA. I'm presently not taking any salary or dividends out of the company (while it hopefully recovers) and am living on savings. I'm looking for input, experiences, and perspectives on what kinds of things I can safely spend remaining liquid cash on in the coming months. Specifically--

* Can I safely contribute to my IRA this late? If so, for this year and next year prior to April 15?
* I'm going to school part time on and off and have been paying out of pocket for it. Can I pay my tuition for the coming semester?
* Can I purchase new tools and software related to my profession? (I am a software developer.)
* Can I prepay rent?
* New clothes? Lots of food?

[justbroke]

While I will answer your questions below, you really need to be speaking with a very good asset protection attorney that practices bankruptcy. You have assets. Unless you live in California, you could stand to turnover many items.

* Can I safely contribute to my IRA this late? If so, for this year and next year prior to April 15?

You can contribute up to the allowance which is around $14K per year. You really should speak with an asset protection attorney though. There are cases where the United States Trustee (UST) and/or Panel Trustee have challenged the movement of a non-exempt asset to an exempt asset (like a retirement) so close to filing. However, in general, ERISA qualified retirement plans are usually 100% exempt.

* I'm going to school part time on and off and have been paying out of pocket for it. Can I pay my tuition for the coming semester?

I don't know of any school that allows prepayment. A "smart" Trustee might try to claw this money back since it is not for a secure debt.

* Can I purchase new tools and software related to my profession? (I am a software developer.)

This depends on your State and if there is a "tools of the trade" exemption. Otherwise, it would need to fall under your wildcard or other exemptions.

* Can I prepay rent?

If I were a landlord, I wouldn't let you prepay rent. Too many issues. There are also some Trustees that look for Chapter 7 debtors to pay, to the Bankruptcy Estate, the value of all deposits and "prepaid" rent anyhow.

* New clothes? Lots of food?

Sure, these are usually fine. However, make sure you're not at Neiman Marcus.

I know that you'll probably take this the wrong way, but I'm going to say it anyhow. Bankruptcy pre-planning is neither illegal nor disallowed. However, trying to "hide" money from the bankruptcy estate, is. I would be careful with some of the things that you are trying to do. The court has consistently opined, and ruled, that a Bankruptcy discharge is such a powerful tool, that the debtor needs to be honest and deserving.

Personally, I would have given up $30K to discharge the $1,200,000 that I did discharge. Don't let the need to have lots of cash, cloud your need to discharge a lot of debt.

I'm not an attorney, but I think that the IRA is a good way to go. If you have medical needs that you have put off, those are okay things to do. Stocking up on food is usually okay, within reason. (For example, buying $4K worth of porterhouse steaks, won't pass the smell test.) Planning is important because you want to stay within the exemptions and not bring scrutiny to your case.

Do you know if your case is going to be non-consumer or not?

[Emperium]

Many thanks for the thorough response. Points well taken. I'm a minority shareholder and the potential BK would definitely be non-consumer. BK is by no means certain at this point--the company could even survive and thrive if one or two things go right--and what's tough is being in limbo about if and when BK is going to happen and not knowing what habits I need to change. Though I'd rather not, I suppose I really do need to act as though it's definitely going to happen, get an attorney, and prepare myself straightaway.

[frogger]

Though I'd rather not, I suppose I really do need to act as though it's definitely going to happen, get an attorney, and prepare myself straightaway.

And this is a very good attitude to have. The more time that you have, the better chance you have to plan.

JB gave you some excellent advice above, but let me add one thing. Speaking of purchasing food, etc., if your food budget is normally $300.00 per month and you spend $1200.00 per month for the last month or two before filing, that starts to smell. My suggestion to you would be to pattern/profile your expenses in order that they are consistent. Time is your friend.

[justbroke]

I just wanted to make a correction on the IRA thing. I was speaking of putting "tax deferred" money into an IRA, not "after tax" money.