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 Dear
Bankruptcy Adviser,
We tried to refinance our house, but couldn't because of a judgment my husband has due to a restaurant failure. He has been trying to sell the business for a year to settle with the creditors without luck. He does not own the building, although he put a lot of reconstruction into it. The owner may get tired of waiting for the sale to happen, and may also put a judgment on him. The total debt is enormous, that we can't pay it if we don't get anything to settle.
At this point my credit report is around 700 and my husband's is 500. The only document that I signed with him was the lease of the building. If the restaurant is not sold, and the building owner issues a judgment on both of us, then we both will have very bad credit.
What options do we have?
-- Reynalda
 Dear
Reynalda,
There are two issues here. The first is the degree to which
you and your husband are in the same boat. The second is what can be done to provide
some relief from all the financial pressure.
First, most states
will allow one spouse to file without the other. That is state-by-state specific.
Also, you and your husband own some assets individually and yet you share some
assets in common (like your house). It may be possible for your husband to take
actions which do not affect your credit score, but his situation is likely to
affect you in a substantive way because of the assets you share. However,
you may live in one of the nine community property states: Arizona, California,
Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In
a community property state, you are 100% liable for any debt incurred by your
spouse during the time of marriage. Your wages, bank account and other personal
assets may be in jeopardy. And, even though your credit is good, a few judgments
will ruin it completely. Regardless of whether you live in
a community property state or not, your house is at great risk right now, along
with any bank accounts you share and possibly even your cars. You could have difficulty
opening up new accounts and you might be forced to live without being able to
use credit cards and you may not have good credit for years to come. Your
options depend on a) how much equity is in your home and b) what state you live
in (which will tell you what the laws are in regards to community property and
creditor's rights). Having said that, here the best options I believe you have.
I've put them in order from best to worst.
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Options: from best to worst | |
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| 1. | Do
nothing: It might seem odd to do nothing, but in this case, it might be
the right move. If you do nothing, you don't incur any additional costs, you get
to stay in your house and you get the time you need to sell the business and negotiate
with your landlord. It’s okay to let the creditor attach a lien to your house.
The debt will grow per year at an interest approved by your state, usually around
10%. When you sell the house, this debt will need to be paid before you receive
anything. | | 2. | Negotiate
a settlement: This might be impossible for you because you will usually
need a significant lump sum to settle the account in full. However, even if you
could put together the lump sum, there's the complexity of the case (involving
what’s owed to the backers of the restaurant) and other outstanding debts you
may have (like credit cards). To negotiate a good settlement, you might have to
raise money and hire an attorney who specializes in this kind of negotiation.
This is not a bad option if you can swing it. | | 3. | File
Chapter 13 bankruptcy: I'm not a big fan of Chapter 13's because, in my
experience, often the payment plans are too high. Attorneys like Chapter 13's
because they are worth more to the attorney, but don't let anyone talk you into
filing a 13 unless you're 100% confident that you can make the payments. |
| 4. | Sell
the property now: If you sell the property you can execute the debt negotiation
plan in #2 above. Plus, you may be able to keep some money. It's stressful to
move (and it can be expensive), but often the best way to recover from a business
failure is to get lean and start fresh. | | 5. | Refinance
the property to pay the debt: This option may seem attractive, but I like
it the least. For example, based on your situation, you may end up with a higher
rate on your loan than the 10% a creditor could get with a lien on your house.
Plus, you'll be making payments on a larger amount of debt (current mortgage plus
the cash you take out to pay debts). You do get a tax write-off, but that's only
useful to you if you have enough income. So, this may be an option to consider
if you've got enough income, but the numbers would have to work out perfectly. |
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Finally, Reynalda, it's very important
that you think about this situation as going beyond the restaurant and the debts
you owe your backers. It's about your entire financial picture. You may have credit
card debt or other outstanding debts and you don't want to pay off some debts
and let others linger (and grow). It's time to take a look at all the money coming
in, going out, and owed. Once you're looking at the entire picture, it will be
easier to make good decisions. |
