Pre BK advice/input

[fatherhill]

I'll try to keep it as brief as possible--

Currently, my wife and I have about $60k in revolving debt--won't go into details on why, the $$ stacked up over the last 7-8 years for a variety of reasons--we hold no one accountable but ourselves.

Two mortgages, no car loans, one student loan (mine--$10K), no medical bills or anything extraordinary...

Her job: $30K/year. My job: recently took a different job that I start next week--income going from $42,500/year to $34K/year (again, not all the gory details, but the 60-70 hour weeks and the stresses thereof reached their breaking point)...

I've used one of the online bk calculators to see where I might stand--with my old job, we couldn't file a 7, only a 13--now with my new income, the calculators indicate we most likely are under the wire as far as the means test goes for a 7.

A month ago today, I sold our truck--came out $4K ahead (we just didn't drive it enough to justify keeping it, plus with gas @ $2.67/gallon)--anyway, the surplus is in the bank.

Today, I requested distribution on my 401K from old job, with intent to roll into new job 401K within 60 days (already taking hit for 20% taxes and 10% early withdrawal, although now that I think about it, I may be able to recapture or escape 10% since going into new plan)...rollover amount will be a little over $7K (if I understood everything right).

As far as equity in home, it's negligable after the first two mortgages are factored in.

Vehicles--now down to 2--a '92 Geo that I drive (like the Energizer bunny) so I'm not worried about that asset. Wife's is a '99 Subaru, with no lein, but value looks to be $3075 (private seller average Kelly Blue Book value).

Here's where I need input (especially if you've "been there/done that"):

1) I realize last 6 months wages are usually looked at, but what sort of impact does a sudden 20% pay decrease have on filing (7 vs. 13)?

2) Recent sale of truck and excess proceeds.

3) 401K--from what I've read, a 401K is exempt, but does rolling it out of one company and into another throw a huge monkey wrench into everything?

Any input is greatly appreciated.

Thanks.

[jal1129]

Welcome! What state are you filing in?

I can go ahead and answer question 1. for you the answer is none. Your income will be looked at for the previous 6 months to see if you qualify for chap 7. if your income just recently has gone down, you may have to wait for 6 months to file in order to get your previous 6 months of income down.

[fatherhill]

Missouri.

[SinkingFast]

The 401K monies should be exempt. If the plan is ERISA qualified.

Maybe your old company will roll directly to the new company's plan. Then you wouldn't have to pay any taxes or claim the roll-over as income. Or maybe you can leave the money with the old company's plan administrator,............ Fidelity, T Rowe Price, or whoever,.......... As a retirement IRA.

If you physically take the money in the form of a check, it's gonna be taxable income. Could even be considered income for BK purposes too.

In Missouri, you probably won't have enough Exemptions to cover the cash.

http://www.bankruptcyaction.com/moexemptions.htm

Husband and wife can double if both file Joint. But, you can't apply excess Exemptions, such as Homestead or Household Goods, as a WildCard under Missouri Statutes.

You'll need to spend the money from the car sale. Have your bank balance as low as possible on filing day.

Buy necessary things. Clothes, doctor's visits, dentist visits, food. Non perishables like TP, paper towels, canned goods. Repairs on your house or cars. Things that need to be done and you haven't had the money for in the past. And be sure to keep receipts to prove where you spent the money.

[boiler704]

the initial means test looks at last 6 months of income. . . .HOWEVER that does not mean you won't qualify for a chapter 7 based on current income. There is a reason the worksheet has you continue. From my understanding if you loose your job, cut in pay then you can qualify for a chapter 7. CMIFYC qualified immediately from a chp 13 to a chp 7 buy quiting one job when he was working two. You might get looked at a little closer and a bk lawyer might try to charge you more but it can be done without the long wait. However I would hold out as long as possible just to ensure your safe.

[fatherhill]

I've already set the wheels in motion in regards to the 401K--I had two loans outstanding, and didn't have the money to pay them off (in the 90 day time period) in order to roll over the funds directly into my new 401K; that being said, when I get my disbursement from the 401K, and roll it into the new 401K (in the first 60 days), I should be OK there--as long as the paper trail is there, I'm not hiding anything.

As far as the last 6 months of income being the calculating figure as opposed to your new income--that's where I get a little confused. The median income qualifier is based on last 6 months average, AS WELL AS THE means test qualifier (keeping in mind they are two seperate tests)--correct? But--and I'm speculating here--the attorney has the expertise (can't think of a better word) to file using current income if you've had a significant change in salary (and 20% is significant to me at least)?

If the law insists I use 6 months regardless, then I'm only buying
time/delaying the inevitable writing on the wall by filing a chapter 13 and then having it converted into a 7 six months from now.

Thanks for the advice so far.

[SinkingFast]

I reread my post and realized I wasn't clear about the cash.

You should be able to take the retirement monies and move them to a new retirement fund. I didn't mean you should spend that cash.

When I commented about spending the cash, I meant from the sale of the car. The $4K sitting in the bank your referred to.

As far as filing a Ch 7 vs a Ch 13,............ There is "Totality of Circumstances". You've had a reduction in income. Maybe that counts for something in a case like this.

Your best bet is to Consult with at least 2-3 attnys who specialize in BK. Get various takes on your particular situation. How things will work in your Court where you live.

[fatherhill]

That's OK, I knew what you meant (401k money vs. sale of truck money).

Thanks again.

[lrprn]

I wish you had checked with 2-3 bankruptcy attorneys before applying to withdraw your 401K funds. What seems logical and reasonable to you may not be the right thing to do when bankruptcy is involved. You need sound legal advice from a bk lawyer familiar with what is acceptable in your bankruptcy district. Any time bk-protected money in a 401K is turned into unprotected cash close to filing, some trustees can get greedy. Be certain that money is in the second 401K before you file! Hopefully everything will be fine. Just curious....did your former employer force you to withdraw the money from your 401K, or was withdrawing it your idea? And what loans did you pay off with your 401K money? Were they dischargeable if you file bk?

The median income qualifier is based on last 6 months average, AS WELL AS THE means test qualifier (keeping in mind they are two seperate tests)--correct?

After the Oct 05 bk law went into effect, all of the income you both earned the last six calendar months from all sources before you file count and your six month income figures are the only figures that go into the first part of the Means Test. Your 20% reduction in income doesn't matter under the new law - people get fired, have NO income overnight, and they still have to wait for the last six months average of their income to drop enough to get under the median income for their state before they can file.

The median income for a family of two in Missouri is $46,246 - http://www.usdoj.gov/ust/eo/bapcpa/2...come_table.htm ). Even with your new lower income, the two of you will still make $64,000/year ($30K for wife and $34K for you) - significantly above the MO median. With the debt load you described, I don't know what online bk test you did to show you can now file Ch 7, but I don't see how you can qualify for a Ch 7 by being under the MO median income unless there are some financial circumstances that you haven't shared so far.

But--and I'm speculating here--the attorney has the expertise (can't think of a better word) to file using current income if you've had a significant change in salary (and 20% is significant to me at least)?

Sorry - answer is no. The new bk law took the control out of attorneys' and bk judges' hands - that's the main purpose of the Means Test. It's the last six months of income before filing that matters and how that income compares to your state's median income.

If the law insists I use 6 months regardless, then I'm only buying
time/delaying the inevitable writing on the wall by filing a chapter 13 and then having it converted into a 7 six months from now.

Don't speculate - it's very risky when making such a huge financial decision that will impact your family for the next 7-10 years. Go make several free consultation appointments with 3-4 experienced bk lawyers in your area - they will know what are the best options for you in your situation, and you will learn a great deal about whether filing bk makes sense or not.

Hope everything works out for you - be sure to let us know what you find out. Good luck to you!

[SinkingFast]

I think FatherHill meant he/she had loans against the 401K. Which, in the case of a termination,........... Depending on the company,.......... Could become immediately due and payable.

[fatherhill]

On the median income issue--our household is four (2 twelve year-olds).

And yes, upon seperation from the job, the 401K is immediately due and payable (and the two loans were out of the 401K).

Thanks.

[SinkingFast]

I did find something of interest for you, FatherHill.

At the 8th Circuit, BK Court website, for Western District of Missouri, there's a case regarding 401K funds.

Here's the Western District Website:

http://www.mow.uscourts.gov/

If you click on Opinions in the Left Hand Tool Bar, next page, select Judge Jerry W. Venters, there's an Opinion about 401K Funds and the CMI.

July 13, 2006 Case No. 06-40886

You can click on the Link and read the Opinion. Sounds like, most likely, you'll have to figure the portion of your 401K that you do not roll over into your 6 month CMI.

Just a heads up so you don't get caught unawares. Definitely something you want to discuss with attnys as you Consult around.

[spell]

Quick question:

If these debts built up over 7-8 years, why can't you wait for the higher income to scroll out of the 6 month period?
The fact that you're also experiencing a significant cut in income, how about taking a 4 month breather to see if it's possible to live on your current income without incurring any new debt.

If the end result is that you can't live on your income without going further into debt, you'll be very glad you waited. Those new debts would be included in your eventual filing.

[fatherhill]

I did find something of interest for you, FatherHill.

At the 8th Circuit, BK Court website, for Western District of Missouri, there's a case regarding 401K funds.

Here's the Western District Website:

http://www.mow.uscourts.gov/

If you click on Opinions in the Left Hand Tool Bar, next page, select Judge Jerry W. Venters, there's an Opinion about 401K Funds and the CMI.

July 13, 2006 Case No. 06-40886

You can click on the Link and read the Opinion. Sounds like, most likely, you'll have to figure the portion of your 401K that you do not roll over into your 6 month CMI.

Just a heads up so you don't get caught unawares. Definitely something you want to discuss with attnys as you Consult around.

Wow--interesting read indeed.

From what I can gather in regards to that case, the Debtor's wanted to keep their 401K disbursement (not roll it into another) AND not have it counted in their CMI.

From my perspective, I just want to roll my current 401k into my new employer's plan; I think where I will get hit is on the LOAN side of the 401k; my loans amounted to $7k (I didn't have the money to pay them off); they HAVE to be paid off in 90 days following employment seperation, or they are counted as a disbursement--which, if I file before the 6 months lapses, then the loan proceeds are counted as CMI (right?).

Honestly, this whole 6 month business is a real ordeal, that's for sure. I look at it like this: I will file, it's just a question of when--I just don't like the whole idea of wading through 6 months of phone calls/letters/threats, etc, when I know what the ultimate outcome will be.

Secondly, I vacillate on my moral obligation to proceed ASAP with a 13, only because that's my personality; but I don't want to get skewered in the process just because I didn't wait 6 months.

And--while I'm on this subject--just how (or approximately how) do the courts determine (calculation-wise) what your monthly payment plan will be in a 13?

Thanks for all your help guys.

And, just to reiterate--I'm rolling over the portion of my 401K into my new job's 401K; it's just not going to be direct, but will be done within the 60 day time frame (per my prior 401K rules and state/federal laws--I THINK).

As opposed to 1) Old 401K 2) New 401K, it will be 1) Old 401K, 2) Me 3) New 401K.

Thanks again.

[fatherhill]

Quick question:

If these debts built up over 7-8 years, why can't you wait for the higher income to scroll out of the 6 month period?
The fact that you're also experiencing a significant cut in income, how about taking a 4 month breather to see if it's possible to live on your current income without incurring any new debt.

If the end result is that you can't live on your income without going further into debt, you'll be very glad you waited. Those new debts would be included in your eventual filing.

I've thought about this as well.

I'll be honest, we just live above our means, and it's time to knock it off, plus it's time to stop the financial hemorrhaging--but my CONSIENCE side tells me to file, don't incur any further debt, and start fresh and learn from my (our) mistakes. (my consience and chap 13 go hand in hand).

But I have those moments where I think: if you don't do something NOW, and nuke this debt (ala chap 7), and change your ways (spending), then your kids will be the ones suffering down the line (college money, or lack thereof), no discretionary income AT ALL, etc.

Sorry for the non-linear trains of thought here, it just really gets my head to spinning when I think about it too much (and I'm sure you guys understand this).

Thanks.