Expert: Terry Leeders - 5/7/2009

Question
QUESTION: I am considering paying off our $10,000 car balance with chase with a low interest wells credit card.  If something were to happen and I lost my job in couple months, would they be able to take our car if I couldnt make payments for several months?  myself and my wife both have excellent credit and I hope to keep it that way, but with layoffs happening so often, who knows what can happen.  we have thousands in credit card debt prob $30,000 and would prob have to file bankruptcy as we would have no means of paying anything.  I really hope it doesnt happen but I just like to know ahead of time what can happen.  Will they take our car if it is paid off and its worth like $9000?  We live in az by the way and prob would do chapter 7.  Also, how many months before creditors send it to collections?  We also own a home and have little equity in it.  We just bought it for 106,000 and zillow says its worth like 130,000 but not sure if that is really the appraisal value.

ANSWER: Several issues. If you pay off the car - you would have a recent usage objection by the creditor you rang up the bill to pay it off with.  They can object for usage right before bankruptcy.  The second issue is that the court could liquidate the car, since your exemptions will probably not be large enough to protect it.  So, if you file bankruptcy, I would suggest not paying off the car, and just reaffirming the debt with the car lender so you can keep it. That would be the best way I see. The home would be ok in chapter 7, just stay current on your payments.

---------- FOLLOW-UP ----------

QUESTION: I rethought that and agree with you that we should reaffirm the car.  My idea is that if and when I got laid off, I would on the same day borrow a few thousand dollars from our low interest credit line to try and stay afloat and keep caught up on bills with the hopes that within a few months I can find another decent paying job.  If say 6 months or so go by without success, then we would probably go ahead and consult attorney and decide to file or not.  See any problems with that?  Also, do we lose our tax return following filing if we file for BK?  Will I lose my couple thousand in retirement plan I will get after taxes taken out?  We also have $7000 in savings now and is there anyway to hold onto that?  How far back will banks check my savings accounts?  Will I get in trouble for stashing cash somewhere?  Thanks so much for volunteering to help!

Answer
I would suggest you meet with an attorney now to properly plan the case. I advise my clients not to run up any debt once they contemplate bankruptcy, to avoid any objections by creditors. Your attorney can review your exemptions to advise you how much cash you can protect. You would be better off spending down the cash instead of running up the credit before filing.  You must disclose all assets and transfers and payments to insiders and creditors in your case, so 'stashing' the cash will not change the situation.