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TJ, Esq.
TJ, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 9615
Experience:  Licensed to Practice Law
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Hello. We live in Washington state, and my husband was just

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Hello. We live in Washington state, and my husband was just let go of his job of 13 years, with no severance, no health insurance, and we're not sure yet if he'll get unemployment. We're carrying about $13,000 worth of credit card debt, have no car payments, and do each have a 401K plan. My husband also has some stock through his company. We have about $200,000 equity in our home. Our immediate plan is to take out some money through an 18-month 0% interest loan (through my bank account) -- the higher interest is only on the amount you don't pay back -- just to have access to some additional cash before we start having trouble making some payments. At this point, we have excellent credit. I have a job but my income is about 1/3 of our former combined salaries. If we ultimately declare bankruptcy (or maybe we should consider that now?), what would we get to keep -- the house, the paid-off cars, the 401 Ks, the stock? Also, our cars really need to be replaced. Would it be strategically wise to purchase new cars before we declared bankruptcy (and before our credit tanks)? Thank you very much.
Submitted: 10 months ago.
Category: Bankruptcy Law
Expert:  TJ, Esq. replied 10 months ago.
Hello and thank you for the opportunity to assist you. My name is XXXXX XXXXX I will do my very best to answer your legal questions.

Based on what you wrote, I would not even consider bankruptcy right now.

First, it is usually unwise to file for bankruptcy before the bleeding stops. In other words, if you were to file for bankruptcy today, then what would stop you from getting back in a hole beginning tomorrow? Your husband still has no job. Imagine that you're in a boat and it's sinking because of a hole in the bottom. You have two immediate choices: fix the hole, or use a pail to dump out the water. What do you do first? You fix the hole, right? Using the pail to dump water will be pointless because the hole will keep letting in more water. In that analogy, the pail is bankruptcy, and the unemployment is the hole. Fix the hole first, then deal with the water.

Second, it doesn't sound like you have much debt. You mentioned $13k in credit cards, and nothing else. I'll assume that you have a mortgage, but otherwise no substantial debt. I would almost always advise against filing for bankruptcy over $13k. I'm not even sure that I can think up a scenario where it would make sense. In a worst case scenario, you would default on the credit cards, and you could probably negotiate a settlement for half of what you owe. If you have 401k plans, paid off cars, etc., I imagine that you could scrape together $6k-$7k if need be to get rid of those credit cards. And it may not even come to that because all you need to do is pay the minimum while your husband looks for a job. So, I don't see what debts you'd really need to discharge if you were to file for bankruptcy.

Third, you stand to lose a lot of money if you were to file for bankruptcy. If you were to file, then you could only keep up to $3250 for a vehicle for each (i.e., $6500 in total). If your vehicles are worth more, then the bankruptcy trustee would sell them and use the proceeds above $3250 per car to pay your creditors. Even more troubling is what would happen to your house: You'd likely lose it. In Washington, you can only protect up to $125k worth of equity. You stated that you have $200k in equity. This means there is $75k that can be used to pay your creditors. The bankruptcy trustee would sell your house to get at that $75k. And what would that $75k pay off? The $13k in credit cards? That makes no sense. Geez, you could just sell your house now without filing for bankruptcy, and use your equity to pay off those credit cards. You'd be saving your credit from being destroyed, and you'd be saving a lot of money because of legal fees, etc.

However, you would get to keep your 401k accounts, but not stocks that are not in an ERISA plan.

The botXXXXX XXXXXne is this: It is far too early to consider bankruptcy. You can probably minimize the bleeding, tighten your belts, and get through this unemployment hump long before bankruptcy would ever make sense. I'd simply stop paying the credit cards long before I'd consider bankruptcy. Moreover, even if your husband were to never get a job again, there are likely much better alternatives if the only substantial debts are a mortgage and $13k in credit cards.

Does that answer your question? Please let me know if you need clarification, as I am happy to continue helping you until you are satisfied. Also, your positive feedback is greatly appreciated. Thank you for using our service!

If you would like to direct additional legal questions to me in the future, then please type "To TJ, Esq." in the subject line of your question.
Customer: replied 9 months ago.

Thank you so much; that was very helpful and clear. This is all so new to us as we have always had great credit. But my husband is in a very specialized field, and at age 58, may or may not ever get another full-time job. Hopefully some freelance work, at least.


 


Yes, we do have a mortgage; sorry I didn't mention that. My paycheck is now going to have to stretch to cover everything -- there are so many expenses, including much more expensive health insurance through my company -- and that's not going to be possible for very long if my husband doesn't find work. Do you think it's a good idea to take out the 18-month no-interest money from my bank, just to have a couple thousand dollars on hand in case our credit crashes and we can no longer get these loan offers? It will cost 3%, but the interest if you don't pay it off in time is not too high (12%) and only charged on what you don't pay off.


 


Thanks very much,


 


Beth

Expert:  TJ, Esq. replied 9 months ago.
Hi again, Beth. Thank you for your follow-up question.

Taking out the money probably is a good idea if you don't already have a savings account that you can use for emergency money. You could use that money to pay the minimum on your credit cards for a few months if necessary.

As an aside, the new health plans under Obamacare will become available on October 1st. You may find that those plans are more affordable than what your job currently offers. I'm not completely up to date on all of the rules and regulations pertaining to those health plans, but I certainly think it's worthwhile checking them out.
TJ, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 9615
Experience: Licensed to Practice Law
TJ, Esq. and 4 other Bankruptcy Law Specialists are ready to help you
Customer: replied 9 months ago.

Thanks, XXXXX XXXXX out we can't get Obamacare because I have an "affordable" option through my employer. (Though it's $400 a month more than we were paying and very high deductible).


 


But since you asked, I do have a couple of follow-up questions.


Smile


First, if my husband is unable to find work for an extended time, would it be wiser to tap into our 401K or take out a home-equity loan? I hate the thought of either option! We owe about $160,000 on our home, which has an appraised value of $325,000.


 


Also, we haven't had any late payments -- YET -- but it's almost sure to happen and hurt our credit. Right now, we have an offer of up to $6,000 at 2.99% interest for 24 months with no balance-transfer fee (goes to 12% on any remaining bal), through my husband's credit union. We have the following balances: $3,000 on one Visa at 10.24%; $3,522 on another Visa at 10.99%; $2,000 on a line of credit at 11.4%; $600 on a Citicard at 0% (goes to 12% on any remaining bal). (We also have $3,000 in medical bills that we're paying off.) If we take out money on the 2.99%/24-month deal, it doesn't seem like it would lower our monthly payments that much, but it would give us longer before higher interest kicked in.


 


Any suggestions you have would be very welcome!


 


Thanks,



Beth

Expert:  TJ, Esq. replied 9 months ago.
Hello again, Beth.

Q: First, if my husband is unable to find work for an extended time, would it be wiser to tap into our 401K or take out a home-equity loan? I hate the thought of either option! We owe about $160,000 on our home, which has an appraised value of $325,000.
A: As you said, neither is ideal. But if I had to choose one, I'd likely take out the home equity loan. The reason is based upon the bankruptcy laws. If you must file for bankruptcy in the future because the situation does not improve, then you can protect any amount of a 401k. However, you can only protect up to $125k of equity in the home. So, I'd rather tap into something that can't be protected.

Q: Right now, we have an offer of up to $6,000 at 2.99% interest for 24 months with no balance-transfer fee (goes to 12% on any remaining bal), through my husband's credit union.
A: I'd go for it and transfer the other debts with the highest rates. Even if it doesn't lower the payments too much, something is better than nothing. However, you will want to consider one thing: Credit Unions almost always include cross-collateral clauses in their credit cards. These clauses state that any balance in a savings/checking account or any collateral for another loan will act as collateral for the credit card. I've seen many surprised people who find their vehicles repossessed for not paying a credit card, and the reason is that the car was collateral for a car loan. But if you don't have other loans with the credit union, or any balances in accounts, then it's not likely an issue.

I hope that helps.
TJ, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 9615
Experience: Licensed to Practice Law
TJ, Esq. and 4 other Bankruptcy Law Specialists are ready to help you
Customer: replied 9 months ago.

Wow, this is extremely helpful. One of our Visa cards and a line-of-credit are through the credit union, so now I will look closely into the collateral issue.


 


Thanks so much for your help.

Expert:  TJ, Esq. replied 9 months ago.
You are quite welcome. Thank you for using our service!
Customer: replied 9 months ago.

I have a question about bankruptcy. You mentioned that only $125,000 worth of equity in a home can be protected during bankruptcy. What if you take out a home-equity loan before filing for bankruptcy that leaves you with less than $125,000 in equity? Would the equity for bankruptcy purposes be based on market/appraised value, or for the actual equity remaining after the home equity loan sucks up some of the equity? So if the house is worth $300,000 and you owe $150,000 on your mortgage, that would leave $150,000 in equity -- so they'd sell your house for the $25,000 you couldn't protect. But what if you also had a home-equity loan for more than $25,000?


I hope this makes sense! Thanks!

Expert:  TJ, Esq. replied 9 months ago.

Hi again, Beth.

Q: What if you take out a home-equity loan before filing for bankruptcy that leaves you with less than $125,000 in equity?
A: Then all of the equity would be exempt (i.e., protected) because it is less than $125,000.

Q: Would the equity for bankruptcy purposes be based on market/appraised value, or for the actual equity remaining after the home equity loan sucks up some of the equity?
A: The equity consists of the fair market value of the property, less the secured debts. So, you would subtract any mortgages, liens, home equity loans, etc., from the fair market value, and what remains is the equity. If what remains is less than $125,000, then it can all be exempt (i.e., protected).

Q: So if the house is worth $300,000 and you owe $150,000 on your mortgage, that would leave $150,000 in equity -- so they'd sell your house for the $25,000 you couldn't protect. But what if you also had a home-equity loan for more than $25,000?
A: If you owe $150,000 on a mortgage, $25,000 on a home equity loan, and the property is worth $300,000, then that means you have $125,000 in equity. In that scenario, it would all be exempt.

Does that answer your question?

TJ, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 9615
Experience: Licensed to Practice Law
TJ, Esq. and 4 other Bankruptcy Law Specialists are ready to help you

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