Bankruptcy - What do I need to know? (1 Viewer)

[Clinton McClure]

Over the past three years, my wife and I have done okay income-wise. We don't make a bundle of money but we make enough that we don't go hungry. We've tried to be smart about our spending and budget for what we can. We try to stick some money back but something always seems to come up (car or homeowner's insurance, a doctor's visit, medication, auto maintenance, etc). However, due to an ongoing illness with which my wife may miss a day or two a week (or sometimes the entire week altogether), it looks like we may have to file bankruptcy soon. I'm not going into reasons why we are in debt other than to say we are about $45k in and only net $35k/yr ($47k/yr gross). We have gotten to the point where we are falling behind on bills and having to swim like hell to keep afloat. (The main reason my DVD and HT-related purchases have come to an end.) We are fortunate in that we own our home free and clear and my car is paid for. My wife's credit was bad when we got married and mine has gone south trying to carry hers so a mortgage is out of the question. We owe about $14k on her car, I have a personal loan for $10k and she has a student loan for $2k. The rest is unsecured debt. I have tried debt consolidation which I highly recommend but it has gotten to the point where the monthly payments for that, her car, my loan, her loan and the bills equal more than we bring in on weeks where I am the only one working. Hence the possibility of bankruptcy.

My question is this: Has anyone had any experience with bankruptcy since the new laws took effect in 2005? What are good things to know? What do we need to look out for? I realize our already-tarnished credit will be nil for the next 7 years then we'll have to slowly rebuild it. If I'm not mistaken we'll have to file a chapter 11 so there will be no liquidation of assets. Any thoughts?

 

[Tim Glover]

Clinton, I don't have any knowledge on this really other than my oldest brother filed it on his business a few years back. Both he and his wife do make good money and have been able to re-buy a home and new cars etc...but it did take it's toll and they are still seeing some side effects from the loss.

I sincerely hope you and your wife find a solution and that it can bring you some peace. From personal experience and from being a Counselor for nearly 20 years, there aren't many things that can tear a family apart like financial issues can.

My prayers are with you.

 

[JohnRice]

Clinton, the only bit I have to contribute won't exactly be good news. The fact your home is paid off makes it highly unlikely you are eligible. The laws vary by state, but here in Colorado you can't have more than, I believe, $45K in equity in a home to be eligible for bankruptcy. The laws have gotten far more stringent, as you know. When it comes to legal matters, don't ever seek advice on a forum. Bankruptcy attorneys are not as easy to find as they used to be, due to the stricter laws, but try to get a personal referral, or just check the phone book. You should be able to find an attorney to at least give you an overview of the restrictions. You can also check with your local Bar Assoc. for a referral. They may have a web site for that. If you know anyone who has to deal with legal matters regularly, like a Realtor or developer, ask them for a referral. It most likely won't be someone who deals with this, but they might be able to give some referrals.

 

[Brian Perry]

How about a reverse mortgage? There must be some way for you to pull money out of your house. It would not be fair for you to be able to declare bankruptcy and still have 100% equity.

 

[DaveF]

Like others have said, a good tax accountant is what you need. I've a relative who has done tax and bankruptcy accounting for their career and it a good accountant will help you work through the realities.

I'm very sorry to hear this -- this is the typical case it seems. Middle class struggling with bankruptcy due to health bills, and not frivolous spending. :frowning:

I don't know your situation and time / energy constraints, but with $50k in bills and $40k in income, can you find $10k in additional revenue? Working a second job? Freelancing? Pay raise, or getting a new job?

What about that car? Sell the car, buy a cheap used one, and maybe come out with $9k or even $4k in debt instead of $14k? Sell your car you own, buy a cheaper one and put the different to debt. Those together might reduce debt by $5k or maybe even $15k!

Family loan?

Take in a boarder and earn a few more bucks in rent?

Or more creative debt consolidation? A home-equity loan to pay off all high-rate debt with a longer-term, but lower rate, payoff to make it managable.

Talk to a pro. You've got jobs. You own your house. And your debt is roughly one-years salary. It still seems extreme to need bankruptcy. But I don't know anything about this stuff.

 

[Colin Dunn]

In my opinion, you should do whatever you need to do to avoid bankruptcy. The recent bankruptcy law changes mean very few people qualify for a Chapter 7 (liquidation of assets / write-off of debts). Many more people are being forced into a Chapter 13 (restructuring of debts).

Reverse mortgages are only available to retirement-age clients. As far as I know, banks do not offer them to anyone younger than 62.

Getting mortgage/home-equity financing with damaged credit has become very difficult lately, due to the sub-prime mortgage crisis.

If debt-consolidation through a home equity loan is not possible, I would try the following:
- Sell the car with the $14K in debt. Apply any excess over the loan amount to replacing it with a fully-paid-for "beater". Insure the cheap car with liability only. This will save you several hundred $ a month in cash flow, and your auto insurance bill will decrease.
- Sell the house, use the proceeds to pay off debts, and "trade down" to a less expensive home. If not enough cash is left over to purchase a less expensive home, stash the cash in a savings account and rent until your financial situation (and mortgage availability) improves.

 

[Clinton McClure]

Thanks for all the input so far.

I'm pretty sure our house isn't worth $45k, at least not on an Arkansas market. It's also next door to my parents and I'm not going to sell it and have who knows what kind of people end up living next door to my folks.

I've tried looking for a 2nd job but the hours at my primary job are so unpredictable it would be hard to hold down a second. (Besides, I already drive an hour each way every day with traffic sometimes upping my commute time to over two hours.) Also, we are entering the time of year at my job when we will begin working a lot of weekends.

There is a higher paying job I'm trying to score before it's filled, but it requires A+ certification. I'm studying when I get home each night.

We have discussed selling her car and downgrading to the "beater" class but most of the time you're buying someone else's problem which is about as expensive to keep running and is unreliable. My car is a 2000 model with over 180,000 miles so I would be very wary of getting rid of hers. (It's a 2005 with 27k miles.)

A family loan is not possible. Her parents have just bought a new house in Georgia so they're tied up with that. My parents are nearing retirement age and do not have the disposable income for such a loan.

I have not looked into a home-equity loan yet, mainly because processing an application for such a loan will cause my debt-consolidation firm to drop me. I have already checked into that.

We do not want to file bankruptcy except as a last resort. I'm not expecting expert advice, just general information from anyone who may have dealt with the system. I may go speak with a bankruptcy attorney just to see what he thinks is the best option.

Thanks again for the input and especially Tim for the kind words.

 

[JohnRice]

Clinton, talk to an attorney or accountant.

Whatever you do, DO NOT replace unsecured debt with anything secured by your house. DON'T DO IT, without extensive consultation first. NO NO NO NO.

 

[nolesrule]

Never, ever, ever borrow money from a relative.

No offense, but your reply to some of the suggestions mentioned are just excuses, not reasons. You will get some of the same exact pointers from advisors for those in your exact situation.

Follow the advice on used cars.

Find a job (or two) closer to home. You're wasting money and time on gas driving so far, and you might even find something with better hours so you can get that second job.

You should talk to a good accountant.

Just don't ruin your future over your present.

 

[BrianW]

Exactly. The best way to do this is to avoid a home equity loan altogether, even if it means making a current creditor upset and taking a hit on your credit record.

Get some advice from an accountant, and keep us posted. I wish for you every possible success.

 

[Devin U]

As someone who has gone thru a bankrupcy, my suggestion is, dont. I do suggest going to talk to an accountant, but dont go to an attorney. Why? The attorney is going to tell you to file because he wants to represent you. By owning your own home outright, you wont get a chp. 7 discharge because you have more than the allowable assets. Personally, I understand your reluctance to go into your home's equity. This is what I would do:

1. Sell your wife's car, and save to buy something reliable for 2-3k
2. Cancel your debt CONsolidation-you can do everything they have been doing for you without paying them on top of you payments.
3. Put the student loan on hardship defferal.
4. Cut your expenses drasticly. Shut off the cable/sat tv, ditch the cell phones, go to the cheapest internet avalible, or completly do without. Stop going out to eat, to movies, ect.
5. Have a ebay blowout/yard sale. YOu would be suprized what you can make from your old stuff.
6. Get a job closer to home (see you're working on that). Pick up some extra income delivering pizzas after work or working at like ups/fed ex sorting packages in the morning before work. You can do an extra $1000-1500/month easy doing either.

Personally, Im a big fan of Dave Ramsey. I just wish I found him before I filed bankrupcy 4 years ago. I highly suggest checking out his book The Total Money Makeover.

 

[KevinGress]

That's not necessarily true. From Clinton's posts, he stated his house probably isn't worth 45k. That and the fact that he has to travel an hour each way spells rural. Meaning it isn't likely there's a comparable paying job nearby.

He'd have to do the reverse - sell his house and rent in the city- which could ease his money problems by using the proceeds towards the debt, but would move him away from his parents. Depending on the health of the parents, that might be an option to consider before bankruptcy.

I'll echo everyone else about selling the car.

 

[Clinton McClure]

Exactly, Kevin. I live in a rural area with most jobs paying minimum wage, hence having to commute. I am 99% certain I have landed a new job which pays around $400/month more than my current job. I should know for sure this week.