Introduction and Question

[HalfPaycut]

Until about 3 years ago, my wife and I both made about $100K each. We had a home we could afford and no debt other than the house (but almost no liquid savings either).

Then one day she decided she was fed up with corporate politics and decided to start a business. We borrowed $65 to buy a franchise. The business has lost money every year since and we now have $210K in unsecured debt. She has no interest in returning to work and I'm ok with that because our 3 kids have benefitted greatly from having her home. I am willing to consider bankruptcy if it allows her to stay home with the kids.

My credit score is still 700 and I'm current with minimum payments on everything, but that will change the first time Murphy's Law kicks in. I expect to have to file Chapter 7 (already checked Means Test) someday but want to position myself as well as possible for when that happens.


Here is my first question:

I owe my parents $50K that I've been told I cannot pay back because the creditors will get it back from him if I pay within 12 months. I have to pay him back. Here is my plan.

1. In my state, the homestead exemption is only $25K. I may have as much as $150K in equity but the house is not in sellable condition due to 3 years of no maintenance and incompleted projects. Is it a good idea to refinance and pull as much equity out of the house now while my credit score is still good enough to qualify for the HE loan? Then I could pay him back and ensure I had enough cash to make 12 more months of minimum payments before filing.

Since the home equity is going to go to my creditors if I don't get it first, is this a good plan? If I wait and let my credit score fall, eventually I won't qualify for a home equity loan and I won't have the option of getting that money before the crditors do.

[Trixie007]

On the surface, that does seem like a viable plan. I wonder, though, if you would be able to get a HELOC at this point. In the current market, lenders have really tightened up underwriting guidelines - chances are you might only be able to borrow to 80% of the home value (which may still leave too much equity?). Also, do you qualify for the payments since you have so much unsecured debt and only one income?

[fltoo]

Firstly, I would definitely find out the market value of the house based on what other houses similar to yours have actually sold for in the past 3-6 months.

A cash out, HE loan in this lending environment is going to be tough.

[HalfPaycut]

I would be converting from a 20 year loan to a 30 and the rate will be lower so those will help lower the payments. HOPEFULLY, I can qualify for the payment I already have in spite of half income.

I suspect 80% LTV is all I can finance. I just want to give up as little of my equity as possible if there is a foreclosure.

All the extra interest (30 year loan) doesn't concern me since I probably won't have the house more than 2 more years.

Also, there is a chance my employer will buy the house in 2 years and move me to another state.

[keepmine]

I doubt very seriously that you'll get a 6 figure cashout refi with your current debt load and only one income supporting a family of 5.

It's time to face reality. BK isn't always the answer. If you really have $150K in equity, sell the house and encourage your wife to go back to work and just pay this mess off. That's gonna be a lot easier and cleaner than trying to preplan a bk with preference payment issues, a 6 figure cashout refi within a year of filing not to mention a shakey economy where any sort of salary reduction or job loss on your part can bring the roof down. Be thankful you have the resources to manage this without a complicated bk.

[HalfPaycut]

Keepmine,

Please explain "preference payment issues".


Do I have to try to pay all creditors "the same" without prefernce to any one?

Shouldn't I give preference if paying more than the minimum to the ones with the higher rates or the lower balances?

[Overmylimit]

If I can ask; what kind of franchise did you buy into?

[keepmine]

The preference issue as it pretains to bk is, paying your parents back before you pay your other unsecured creditors.

[HalfPaycut]

Would they notice if I continued to make minimum payments for more than 12 months after paying my parents?

[Flamingo]

A few things pop out here; first, you may not have as much equity as you say you do and without an appraisal really have no other way of finding out except estimating; secondly, with your high debt load you may have a very hard time getting a HELOC; lenders are really careful now about lending and you may pose too high a risk for them with your debt load, non-working spouse and several children at home. Third, as to your questoin about making payments for 12 months on your HELEC if you were able to get one, they probably would not notice but as some can attest on here, if the trustee suspects something they can go back further than one year to obtain information. There is no guarantee.