Our Story... Guidance Appreciated

[Bberg23]

Hi Everyone -

I've been lurking here for awhile and reading through all of the great information provided by the experts on this forum. I was hoping to share our (my wife and I) story and hopefully receive some guidance here. I'll try to keep this as short as possible, so please feel free to ask any clarifying questions...

My wife and I are both planning to file Chapter 7 bankruptcy around the April timeframe of next year. The reason we need to hold out is because we both make too much money currently, but my wife will be quitting her job in November when our first child is due.

At the moment, I make around 71k per year and my wife adds another 35-40k - well over the amount to qualify for a 7. I also have the option of dropping down to semi-part time - 30 hours per week, which would reduce our income even further. We've just stopped paying on our unsecure debts and we're hopeful that we can save a little money while also holding off any judgements until April.

Now a few questions...
1.) Does it make sense for me to cut my hours down even further, or should we be able to qualify for a chapter 7, even with my current income? We have both a house ($1800mo) and car payment - $500mo (and own a second car outright), which should help with our means test. Plus with a new child on the way, our overall household expenses will be going up.

2.) Instead of quitting her job in November, my wife has the option of staying on maternity leave for 4 months at 60% of her current pay. I'm fairly confident if we go this route, we won't be able to file until 6 months after her maternity leave ends in March '12, since our income will be too high. Do you agree with this assessment? I'm worried we wouldn't be able to hold out that long without our creditors obtaining judgements.

If you need to know the specifics of our current debt, bills, etc. - feel free to ask.

Thanks in advance!
bberg23

[keepmine]

Nobody can tell you wheer you stand until, you fill out schedules I and J to determine if you have enough MDI to fund a 13.
Here's a link that'll help.

http://www.legalconsumer.com/bankruptcy/means-test/index.php

Regardless of your income, I'd hold off filing until all medical bills from the delivery are accounted for. Anything insurance doesn't cover, include it in your bk.

[Drazil65]

I guess the first thing you probably need to do is figure out how the 60% of your wife's current pay while on maternity leave will benefit you compared to the option of filing chp 7 sooner. You will have to figure out if it would actually be more beneficial to file sooner rather than later and plan accordingly. My husband and I are in the planning stages of his chp 7 (late Oct/early Nov) and are making preparations during this time. We stopped paying his unsecured creditors and the secured ones on the rental property he will be surrendering etc. We found that after going over all the upcoming events for the next 6 months (financial events) we were able to nail down a timeframe which made everything kind of line up and start to fall in place. If the 4 additional months of 60% pay does not really make a significant difference in your financial plans then you might want to base your decision on that instead of waiting. Depending on how much stress you are under and how much relief you would gain from the chp 7 not to mention the new start on your lives you will have to decide how fast you need to make this happen! Good luck!

[dman]

The first question I'd ask is...how much debt do you have? How much is unsecured?

If you're filing bankruptcy on $40,000...it makes no sense to drop your yearly income by $30,000 or so just so you qualify for bankruptcy. Now, if you plan on a decrease in income because of your new baby (wanting to take paternity and maternity leave, one wants to become a stay at home parent, etc.), that's different.

Next...you say you've stopped paying your unsecured debts...are any late yet? I'd highly recommend reading this thread start to finish, and not just because I wrote it: 12-step plan to deal with collectors and keep your sanity!. In short, go ahead and remove each other as AUs, setup a google voice number (or two), give one just to creditors, and change your home number. It's going to be stressful enough with a new baby coming, don't need dozens of calls coming in daily to deal with too.

I don't know what the median income is for your area...I picked a zip in CA at random and came up with $68,670 for a household of three. Now, you can be over the median, but things are simply easier if you're under. So...if your income drops pretty close, say it was under $70,000...then I'd worry about trying to lower your income some more. If it's a good deal over...but you can pass the means test...I wouldn't change anything (something else to ask the lawyer about).

Without knowing exact details...it's awfully hard for me to recommend not taking advantage of free money (60% pay for four months). Instead of turning that down...I'd see what your company offers for paternity leave. I'd probably choose to take an unpaid paternity leave for four months while my wife received 60%...than to keep working (reduced hours or not) while she received 0%.

How attached to the house are you? Are you underwater? Might be a good time to start looking at alternatives, while your credit is still good (and if none of your debts are over 30 days late yet...you might want to keep paying until you have a new house to rent or a new mortgage for a cheaper house...note that your credit has to be perfect until after the mortgage is 100% done...they can keep pulling your credit up to the last possible minute). Another option is to just stop paying but stay there rent free...whether that's a good option for you, I cannot say; it's just something else to look into.

Also, the median income is based on the past six months. So if the limit was say, $68,000...half that to $34,000...if you're below that for the past six months, you're under median. So if your income drops now, and your wife takes maternity leave...the best time to file would probably be the month after her maternity leave is up (or possibly the last month of...until she returns to work, you can't guarantee she'll return to work and get a jump in income).

Ok, to break it down a bit better...if you file anytime in April (doesn't matter if it's the 1st or the 31st) then the 6-month lookback covers October-March. So...IF you are sure you'll file in April, and IF you want your income to be lower for the 6 month lookback, then there's NO reason for your income to drop before October (remember...it's by pay date...so your hours probably need to drop toward the end of September for October's first paycheck).

Until then, I'd make as much money as I could. Plan for the future (a mostly debt-free future). You're expecting your first child, setup a 529 account for him/her. You don't want to be a burden to your future child, so setup a Roth IRA and contribute the max ($10,000/yr total...$5k for you, $5k for your wife). Setup a 401k or increase your contributions. If you have money leftover, start knocking out some other stuff like, stocking up your pantry. Get a deep freeze and stock up on all the good meat sales (and whatever else can be frozen). If you've been putting off a yearly physical, go get that done. Dental work (for you...check with your wife's OB before she gets dental work). Then I'd check closely into the exemptions...do you have a good bit leftover? What could you spend money on, that would be exempt in the case of a bankruptcy, and actually be beneficial? Perhaps you just lease a car...you figure that due to the vehicle exemption and wildcard, you can afford a $10k vehicle. Look into ditching the lease and purchasing a reliable used car (or two lower priced cars). Or if you are going to surrender your current house, and are purchasing a new house...extra money could go toward a down payment. Definitely check with a lawyer first.

Hope that helps some.

[Flamingo]

If you stopped making all your payments now as you state and do not plan to file until late spring of next year, you will be saving a lot of money somewhere that is going to grab the attention of your trustee as you could be asked for bank statements, income records, etc. for a year or more by your trustee. They will see you stopped making payments on the bills and you socked the extra money away somewhere, even in your 401(k) or elsewhere - it has to go somewhere. You also run the risk of dropping your income and possibly not getting your old job back and unless your wife quits her job they are going to take all that into consideration that she is just on maternity leave and will return to work. When you go into personal planning questions such as this, it is always best to consult with a good BK attorney. You will also have to figure out if you will actually be able to afford to keep your home if you want to stay there as not only will you have less income, you will have more expenses with another child. It's hard to give personal advice for events that could be situational as you don't really know what is going to happen - you or your wife could lose your jobs tomorrow or some other event occur as next April is a long way off. I would suggest a consultation appointment with a good BK attorney to evaluate your entire situation as to all your debts/assets/income, current and possible future situation - otherwise you could really mess up bad. If I were you, I would get professional financial/BK advice before you do anything further.

[Bberg23]

Thanks to everyone for all of the responses thus far. I'll try to answer a few of the questions posed here. First off, the whole reason we're doing this is so my wife is able to stay home with our child. Daycare is insanely expensive here and I'd rather her be able to raise our child even if it means financial sacrifice. We are around 60k in debt if you include our car. Our house is basically even at this point, so we aren't planning to walk away from that and have been continuing to make payments. I've actually talked with two different attorneys, both of which stated we'd have to reduce our income dramatically to qualify for a 7. I know we're capable of doing that through the methods I described above, I just want to be sure there won't be any issue with that when it comes to the Trustee. As far as having extra money, most of that is going towards things we have to get for the baby, so I don't see how that can be looked at negatively. Thoughts?

[Flamingo]

Again, you have a lot to consider and if you've spoken already to two attorneys, should have a handle on what to do for your particular circumstances. A lot also depends on the amount of assets you have and and if you only have about $40,000 ($60,000 which includes a vehicle) in unsecured debt, are you truly insolvent? At this point it appears you are not and remember you can be asked to provide up to a year or more of financial information as to all your financial transactions and bank statements, paystubs, etc. for the trustee's review. No one can state for certain whether or not you will have trustee issues at the time you file. Again, I would suggest getting professional advice and since you've already talked to two attorneys, it may not hurt to consult a financial advisor in this situation due to your high income and low debt ratio.

[keepmine]

Again, you have a lot to consider and if you've spoken already to two attorneys, should have a handle on what to do for your particular circumstances. A lot also depends on the amount of assets you have and and if you only have about $40,000 ($60,000 which includes a vehicle) in unsecured debt, are you truly insolvent?

You don't have to be insolvent in order to file a Chapter 7 bk. Many of us have exited bk with a very positive net worth due to the exemptions we were allowed under state law. The OP is in Ca. which has some very generous exemptions.
I'd just say that the OP won't be the first one around here that has reduced work hours or quit a py job to get their income below the median. Also, many here have had a spouse either quit or take an extended leave in order to stay with a new baby. That in itself won't raise any eyebrows. And, with Ca. $10K wildcard a lot of cash can be exempted if you have no equity in your home.
Just run these ideas by your attorney's and see what they suggest.
I'd not setup a 529B account. Money deposited into those within a year of filing can be seized by the trustee.

http://doney.net/bkcode/11usc0541.htm

542 of this title;

(5) funds placed in an education individual retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986) not later than 365 days before the date of the filing of the petition in a case under this title, but--

(A) only if the designated beneficiary of such account was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were placed in such account;

[dman]

There's a section below that, that deals with section 529(b)(1)(A). Can't quite wrap my head around it this morning, I blame lack of sleep. As always...run everything by your lawyer first. You're talking about potentially large assets...a lawyer could be worth his weight in gold. Actually, with gold prices where they're at now...let's say a lawyer could be worth his left pinkie toe's weight in gold.

[BKAttyMI]

Another thought, you should not be purposely reducing your income to qualify for a 7. Should a Trustee inquire about this, you could be looking at trouble. i.e. dropping down your hours voluntarily.

[dman]

First off, the whole reason we're doing this is so my wife is able to stay home with our child. Daycare is insanely expensive here and I'd rather her be able to raise our child even if it means financial sacrifice.

I think this is important. Now, what's the main reason you're reducing your income...so your wife can stay at home with your child, or so you can file bankruptcy? If it's so you can file bankruptcy...that could be frowned on. Plus...how much is owed on that car? If it was say, $20,000...that'd be $40,000 in unsecured debt...and you'd be dropping your income by about that much or more on a yearly basis so you'd qualify for Chapter 7. Doesn't make sense to me.

Now...if the main reason your income is dropping is because of lifestyle changes due to a new baby, that's a completely different story. Intent does play a part in it. If your income drops 20k over a six month period because you want to file bankruptcy...that's quite a bit different than if it drops that much due to a new baby in the house.