Cash advance and a New car

[boston_chris]

Hello,
I am contemplating filing Chapter 7. I have a debt to a family memeber that I need to pay off before hand in the amount of $8,000. My wife and I have a line of credit available to take a cash advance. How bad would it look to do this? Would I have to wait a year to file? Is this considered fraud? This cash advance is only available because we paid it off with the money that we got from the family memeber 3 months ago.

Also, we only have one car and need to buy a second. Are you able to exempt 2 vehicles from a chapter 7?

Thanks in advance for the reply.

[EveryDayAdam]

DONT do this. This will be considered a preferential payment. The trustee assigned to your BK case will take the money you paid your family member back and distribute it amongst your creditors. Plus the creditor you got the cash advance from could file an objection and you might end up having to pay them back as well...so then you'll be out $8000 twice. If you are filing for BK then don't do ANYTHING in regards to the money you owe except for secured debts (cars, mortgage)...Don't pay it, don't transfer it, don't take on any new debt.

Best advice: If you're going to file then don't pay anybody anything, except for mortgage and car payments.

Unfortunately: The credit line will probably go away when the BK is done. So you won't be able to use that to pay back your family member...but you are much better off owing that money to the family member, and paying them back over time, than to take out an advance and then owing the creditor (who can file an objection) and the family member (who got the money taken back by the trustee).

If you file for BK, you can still pay your family member back if you want. BK just removes the legal obligation to pay them back and prevents them from attempting to collect...after it's all done and your case is closed then you are still free to pay anybody back you want. But you must do it AFTER your BK case is closed.

If you finance the 2nd car, then there likely won't be anything there to exempt. If your vehicles are financed, then you can only exempt the equity that you have in those vehicles. (how much the car is worth minus how much you still owe on the loan). If you owe more on the vehicle than it's worth, then you don't have any equity in the vehicle to exempt, and nothing happens. You can reaffirm the vehicles with the bank(s) and keep them during a chapter 7...however, you will have to keep paying the debts on both vehicles during and after the BK.

Now, if you paid cash for the vehicle(s), if one of them is paid off, or if you have paid enough of the loan to make it so you owe less on the vehicle than it is worth then the rules would all depend on the state you live in. Some states allow 2 vehicles. Some only one. Some allow multiple vehicles but up to a maximum amount...etc.

I would DEFINITELY suggest contacting and getting a couple of free consultations with BK attorney's in your area to discuss your situation. There are a lot of unknowns, but there are ways to protect yourself...but don't take any actions without first discussing them with an attorney. The attorney can help you with legally moving assets and keeping the creditors from getting property in a BK case. There are some creative ways of getting around exemptions.

For example: In some states, they only allow so much cash to be exempted, but they have a bigger exemption for a car. Or...they allow the cash, AND the car exemption. So, if you take some of your cash and use it as a down payment on a car, you might be able effectively hide that money, because then you can use both a cash and vehicle exemption. Then when the BK is over, you can sell the car and cash it out...granted you'll lose some money in the process, but not as much as you might have had to give up to the BK trustee if it was all cash when you filed.

My best advice: Find a good attorney...get a couple of consultations. BE 100% completely open and honest with them. You might think that something about your situation will cause you to have to pay money or lose property, but it's the attorney's job to be creative with the exemptions and they work around those things all the time. He very well may advise you to buy a car, maybe put some money in to an IRA, increase your 401k deductions to lower your take home pay, etc. A BK attorney may sound expensive, but they can save you THOUSANDS in maximizing your exemptions...maybe even tens of thousands if they can keep you out of chapter 13...it's definitely worth the money.

Also...2 vehicles is definitely not uncommon these days, especially if you have a spouse who needs one also. They won't blink an eye at having two vehicles.

Finally...Welcome! Feel free to ask questions!

[JRScott]

I wouldn't do this at all.

It would be very highly scrutinized since it would be a preferential payment to an insider.

I'd just go to the family member and explain that you are going to have to file bankruptcy. That due to laws that you'll have to list them as a creditor and the debt. You can also indicate you'll work something out with them after the bankruptcy.

[boston_chris]

Thanks Adam. That is a ton of useful info. I do plan on paying for both the cars and reaffirming the debt. I just want to get the second one while we still have our credit score.

The $8,000 is another story. It is something that will not go away that easily. It's a gambling debt that needs to be taken care of. Would my best option be to wait to file? we could probably hold off 6 months if needed.

[EveryDayAdam]

Thanks Adam. That is a ton of useful info. I do plan on paying for both the cars and reaffirming the debt. I just want to get the second one while we still have our credit score.

The $8,000 is another story. It is something that will not go away that easily. It's a gambling debt that needs to be taken care of. Would my best option be to wait to file? we could probably hold off 6 months if needed.

This is exactly what I did! Bought a new car that will last me until my scores improve 2 months before I filed :-D

As far as the $8000, I thought you said it was a family member who paid off a line of credit? While the general rule of thumb is 6 months, i've seen trustees go back as far as a year and reverse preferential payments...and if you take out a cash advance and give it to your family member with no intention of paying it back, then it IS fraud. If they find out (as unlikely as it may be), you might still be held liable for the debt even if it is 6 months. If you take that advance with no intention of paying it, then it is fraud and you can be liable for that...it's best not to risk it.

I still stand by my original suggestion: Leave everything in regards to your debt alone. Don't move anything, don't pay anyone (Except for cars and mortgage), don't take on any new debt (except for debts you are going to repay...like your car). It's as simple as that.

Whatever it may be with the $8000 will be BEST handled after the BK is closed. I know it may make your family member mad to not be paid for a few months, but in the end, it will be worth it in not having your BK case thrown out, or being liable for the $8000 twice.