No. of Recommendations: 3
the mother of a friend of mine (M for ease of posting) is in a bit of a quandry, and considering BK (bankruptcy - not Burger King)

She is in her early 70s, Her current income is about $20k.
M lives in a rental, but owns a house that was purchased a couple years before the Big Drop (and was purchased with most of her *retirement savings*)
House is currently worth about $20k less than owed.
That house is rented out - but there is a delta of about $250/month that M is paying.
M has about $20k of CC debt (at 0-4%) that she is paying down $400 ish/month.
M has spotless credit - credit score over 800, because she has apparently always managed to be ON TIME with her payments. She is averse to filing BK, but does not think she can continue to *keep it up*

Her rental apartment + all expenses comes to about $800/month - very manageable on her current income, which is NOT likely to increase.

This came about because friend was asking M if she needed any financial assistance and should she and her siblings pool together to augment M's income ...
Friend & siblings are NOT keen on paying off M's CC debt, but feel like $250/month to finish the house mortgage (15 more years) is acceptable- and a waste to just *walk away* from it.

WHat else should I caution them to consider while they determine if BK is the correct alternative?

peace & objective options
t
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Do they let you keep rental property in BK? I don't know, but always thought no. So if she's doing it to keep that she may not be able to.
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M is not is a position to handle the risk of vacancy or unexpected repair on the rental.

Are the siblings willing to buy the rental property at the value of the mortgage? If they believe that the property is worth keeping, then taking over the property would be a reasonable choice.

(Buying a rental or home with most of your retirement savings is not a good idea.)

Removing the rental cost, she will have an extra $250 a month, which should ease the cash flow issue.

Is the $400 a month, payments on the credit card or decrease in balance? If it is the decrease in balance, then she could continue to make payments on the cards. Possibly reducing the payments by $100 a month. If it is total payments, then she has a more serious problem.

Bankruptcy is not not or never. She can review her situation every 6 months. With a $400 a month principal payment, it will take 50 months to pay off the debt.

How is M's health? Is she currently working? Senior centers often have services to help seniors find part time work. A little additional income would help.
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tconi,

You wrote, She is in her early 70s, Her current income is about $20k.
M lives in a rental, but owns a house that was purchased a couple years before the Big Drop (and was purchased with most of her *retirement savings*)
House is currently worth about $20k less than owed.
That house is rented out - but there is a delta of about $250/month that M is paying.
M has about $20k of CC debt (at 0-4%) that she is paying down $400 ish/month.
M has spotless credit - credit score over 800, because she has apparently always managed to be ON TIME with her payments. She is averse to filing BK, but does not think she can continue to *keep it up*

Her rental apartment + all expenses comes to about $800/month - very manageable on her current income, which is NOT likely to increase.

This came about because friend was asking M if she needed any financial assistance and should she and her siblings pool together to augment M's income ...
Friend & siblings are NOT keen on paying off M's CC debt, but feel like $250/month to finish the house mortgage (15 more years) is acceptable- and a waste to just *walk away* from it.


I think vkg covers most of the issues. However, I have to question some of the details here.

M only has $800/month in expenses, $20K/yr in income and she's not keeping up? Those numbers don't make sense - in more ways than one.

First, the expense number is only $9,600/yr. I imagine M doesn't owe any taxes on her income, so all of that is being kept. (Unless some of the income is from a job, in which case there will be FICA due.) Therefore M has about $1,667/month in income each month.

Second, in what area of the country can you live on only $800/month? Rent and utilities - even in most rural areas of the country - would eat up most of that $800 budget. That would barely leave room for a subsistence rice-and-beans diet.

I suspect M is not evaluating her expenses and income correctly. I also wonder if she's event bothering to file income tax returns. The rental income is taxable and must be reported on a Schedule E. Interest, taxes, maintenance and depreciation are also expenses that she should be reporting on Schedule E. Unfortunately if she's loosing money on the house as a rental and given her low income, she won't get any real tax advantage from the losses she's incurring. Also, M is probably under estimating how much value is actually being lost as the property ages and tenants wear things out (the real reason behind depreciation).

M should be considering all of her expenses and all of her income when evaluating bankruptcy as an option. Simply saying she has $800/m in expenses is probably disingenuous ... as is saying she only has $20K/yr in income.

Now if she ditched the house and the credit cards and could actually live on $800/month, it might be worth considering BK. However, she claims that she's only loosing $250/month on the rental. If her living expenses were only $800/month and she's only spending $250/month on the rental, her total expenses less the credit card payments are only $1,050/month. Minimum payments on $20,000 in credit card debt is about $400/month, plus or minus depending on the issuer.

Once again there is more evidence M is being disingenuous because based on that approach to analyzing her reported income and expenses, she should still have a surplus of over $600/month to go toward the credit card debt. And $200/month to snowball toward repaying the credit cards.

So what do I think you and your friend should consider before approaching M again? I think you should ask for the truth. Failing that, I would suggest your friend needs to encourage her mother to speak to a BK attorney and your friend should otherwise stay out of her mother's finances.

Also, I wouldn't advise anyone give their mother $250/month if they're clearly blowing the funds on a property that is under water and will return either them or their mother some value in the future. Your friend's mother's vanity probably isn't worth $3,000/year. Besides, lending money tends to be a good way to upset relationships between friends and family.

Of course if your friend just has more money than s/he knows what to do with - they could just buy the house from their mother. That scenario removes a financial burden without seriously injuring M's pride - at least if your friend handles it well.

- Joel
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One thing to be careful regarding the possibility of the family taking over the rental house is to avoid the appearance of hiding assets. Selling or handing over a valuable piece of property before filing for bankruptcy can lead to major problems. Please have her (or her family) check with a lawyer first.

Nancy
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Second, in what area of the country can you live on only $800/month? Rent and utilities - even in most rural areas of the country - would eat up most of that $800 budget. That would barely leave room for a subsistence rice-and-beans diet.

North East Texas? Mom sounds very much like M, except that her house is paid off. Her electric bill on her all electric house is only about $90/mth.

With no house note, but a lot of credit card debt, and with just a little income from her oil and gas revenues (most recently just under $200/mth), Mom is making it barely on about $1,000/mth. She thinks if she didn't have her credit card debt, she'd be able to make it just on the SS income of $888/mth.

The only reason we don't have her file for BK is that if she had an emergency, she'd have no credit card to use.


LWW
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One thing to be careful regarding the possibility of the family taking over the rental house is to avoid the appearance of hiding assets. Selling or handing over a valuable piece of property before filing for bankruptcy can lead to major problems. Please have her (or her family) check with a lawyer first.

Nancy


You are right, bankruptcy courts can void transactions that inappropriately transferred assets. Consulting a lawyer is worth the time and money.

Since the property value is below the mortgage, it is a situation of making certain to avoid the appearance of hiding assets.
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M lives in a rental, but owns a house that was purchased a couple years before the Big Drop (and was purchased with most of her *retirement savings*)

What is most of her retirement savings? Are the savings in a bankruptcy protected account such as an IRA or 401K?

The amount of non-retirement assets that can be kept through bankruptcy is very limited.
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since you asked most of the questions- i will respond to yours

M only has $800/month in expenses, $20K/yr in income and she's not keeping up? Those numbers don't make sense - in more ways than one.

First, the expense number is only $9,600/yr. I imagine M doesn't owe any taxes on her income, so all of that is being kept. (Unless some of the income is from a job, in which case there will be FICA due.) Therefore M has about $1,667/month in income each month.


$800 in living (housing/food /utility) expenses - have since discovered that this does not cover insurance (automobile), car fuel/repair expenses, health insurance...

Second, in what area of the country can you live on only $800/month?
Florida

I also wonder if she's even bothering to file income tax returns.
for a variety of reasons, I am certain that she is (with all of the appropriate schedules)-

M should be considering all of her expenses and all of her income when evaluating bankruptcy as an option. Simply saying she has $800/m in expenses is probably disingenuous ... as is saying she only has $20K/yr in income.

she probably is- I only have the broad brush here.

Once again there is more evidence M is being disingenuous because based on that approach to analyzing her reported income and expenses, she should still have a surplus of over $600/month to go toward the credit card debt. And $200/month to snowball toward repaying the credit cards.
so whether M is misreporting to her daughter, or her daughter is misreporting to me I do not know.
But the ball park was that $400-500/month goes to pay down CCs

thanks for the observations

and i do not know the state of- or whether she ever even had any 401ks, or IRAs...and yes, maybe dumping it all int oreal estate was not a good idea - but no changing that...


peace & objectivity
t
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don't really think there is much left in savings.
and to whomever asked about the keeping of the rental- she does not want to do that - knows it will be lost.

she does have a job, and in her 70s, I think it unlikely that she will dash out and pick up a second one - even IF she could find someone to hire her...


peace & protected assets
t
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tconi,

You wrote, $800 in living (housing/food /utility) expenses - have since discovered that this does not cover insurance (automobile), car fuel/repair expenses, health insurance...

Squeezing in food is impressive, though not impossible. The rest doesn't surprise me. But if she threw out a figure of $800/month, either she didn't really have a handle on her expenses or she was trying to down-play them - something that's not usually advisable because it can just lead to further questions.

Also, Florida

Hum. You do know that Florida is considered a "dead-beat haven", yes? The laws are similar to Texas. It's almost impossible to collect on an unsecured debt from a resident of Florida (that has few real, un-sheltered assets) if they just walk away from the debt.

Anyway, just an observation. In theory M could probably just walk away from either the house or the credit card debt or both. Not terribly ethical of course. But then it's not all that much different from filing BK - just cheaper. Unless you consider the creditor harassment to be expensive, of course. And if she does have anything sheltered, her creditors will get theirs from the estate when she eventually passes away as their claims will be superior to her heirs...

Just some thoughts...
- Joel
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Also, Florida
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Hum. You do know that Florida is considered a "dead-beat haven", yes?


Yes, Well Aware, I lived there for a dozen years, and dealt with plenty.

However, Florida is also a haven for old people who are tired of snow...


peace & correlation
t
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