Expert: Terry Leeders - 5/21/2008

Question
I currenty have 4 credit cards with about 25K in balances as well as medical bills for about 5k. I have a home which we live in, with a 1st mortage owing 267k and 2nd owing 240k. My home is worth about 550-600k. I also have a rental house with an estimated equity of 100k. I have about 15k in stocks. My plan is to claim bankrupcy for the credit cards as well as the medical bills. I have met with a real estate agent to list my rental property and plan to use the equity to pay down my second mortgage and also sell the stocks to pay down the 2nd morgage. How does the timing have to work? Can I file for bankrupcy prior to selling the rental property? If I do will I be required to use the equity in the rental to pay down the credit cards and medical bills. So my question is should I sell the rental property 1st and pay off what I want and then file for bankrupcy? The problem with this is it could take a long time to sell given the current market. Or can I file prior to selling even with that equity and still be able to keep that equity to pay down my second mortgage?

Answer
Hi Sheila,
You should meet with a local bankruptcy lawyer.  Since you do have assets, the attorney can do a liquidation analysis to see what will be protected.  Chapter 7 bankruptcy liquidates any unexempt assets to pay your creditors.  Also, any recent usage, refinances etc. would have to be disclosed to the court, and the trustee can undue them if not done properly, they can bring back any money you paid down back to your bankruptcy estate to be disbursed properly under the bankruptcy guidelines too.  In Illinois, you would not qualify for the chapter 7 due to having too many assets, unless you didn't want to keep them.
The second, and I feel the more important part of the equation will come down to your current income-job, rental income etc, and what is called the means test.  The court analyzes your income for the 6 months before your case to determine if you have income to pay back your creditors in a chapter 13.  Under chapter 13, you would pay back enough of your consumer debt to protect your assets/equity that you have.  Most bankruptcy lawyers offer free consultations, so before you take any actions here, I highly recommend that you speak to a local bankruptcy attorney to properly advise you through the process.