Navigating a business failure at 45

[Benjamin132]

I am a new member of this site interested in retirement planning.

I want to know how I am doing in retirement planning.
I want help to develop a strategy for retiring debt and recovering from a MAJOR financial mess.
I want to retire at 67 in 22 years with my home paid off.
I dont mind having investment properties with mortgages while in retirement.

I am 45, have been working at my job for 21 years, and am married with 4 children. I have owned rental real estate for 21 years. My oldest 2 children are through college and married. My 3rd child is starting high school and my youngest is in the 5th grade.

I personally lost $500,000 in a business venture that went south. I did not invest retirement funds in the business. Two years ago I sold the business and retired $150,000 in business debt. Last year I filed chapter 7 personal bankruptcy and discharged $260,000 in business debt. The downturn in the real estate market prevented us from selling any real estate and none of our properties are paid off. Our properties have been listed for sale for
the past 4 years.

Our net worth is $700,000.
Our combined annual salary is $116,000.
25% of our net worth is in retirement accounts. (401K, Pension, IRA)
75% of our net worth is invested in commercial and residential rental real estate valued
at $2,500,000.
We owe $1,900,000 in mortgages.
$9,500 in credit card debt at 15% interest.
$95,000 to IRS/State for back taxes.
$30,000 to family members.
$25,000 on a 401K loan.
We have no vehicle loans and drive clunkers.
We live very much within our means.
We afford one luxury at $7,000 per year. (Private school)
We have a strict budget.
We pay cash for everything.
We rented our basement to help with mortgage.
We have $4,000 in savings.

 

[obgyn65]

Hello Benjamin - I cannot advise you financially but others here will. Just wanted to say welcome to the forum. I am sorry to read you have major debts.

 

[kumquat]

WADR, if your net worth is $700K, why are you bankrupt, or how did you convince a judge you were? If your income is $100K+ why did a bankruptcy judge allow you to quit paying?

I thimk more info is required.

 

[FIREd]

Welcome Benjamin,

what is the cash flow situation on those investment properties?

 

[Benjamin132]

Legal technicality. Properties are all jointly owned Tenants by the Entirety. This recognizes husband and wife as single entity. Business debts were all incurred by husband personally. Bankruptcy is not final yet. The cashflow situation on properties are that they are carrying themselves from rents. Part of net worth is in retirement accounts and as such are protected from bankruptcy. Partof net worth are in Real Estate and were protected by form of ownership. Attempts were made to sell properties but real estate market prevented that.

 

[pb4uski]

Benjamin,

Welcome and sorry to hear of your recent financial difficulties.

One tool that I think might be helpful to you in planning your financial future is Quicken's Lifetime Planner (part of Quicken Deluxe and higher). You'll need to input your assets and a number of assumptions and then the software does a deterministic projection of your assets to see if your assets will last for your lifetime. While the software has its warts (no Monte Carlo for investments), I have found it useful in thinking through the details of a plan and it is easy to use.

I supplement QLP's deterministic analysis with FireCalc using the same assumptions.

 

[Texas Proud]

Just a question.... did you actually lose the $500K or because of BK you lost only $240K ($260k being discharged)...

It looks to me you are in a world of hurt... I would get rid of that 'luxury'.... there is not evidence that private school is better than public... especially in 5th grade...

Your hope is that the RE market turns around and that the value of what you own goes up... other than that you have a long way to go....

Good luck...

 

[rodi]

Welcome to the forum.

From what you are writing about the real estate, you say it isn't selling because of the market. But that it cash flows (rents cover mortgages, taxes, expenses.)
If you are trying to sell - it's not the market, it's the price. Anything will sell if the price is right. I live in an overvalued market (southern california) and there are a lot of sellers who haven't figured out that their sales price is bubble price, not current market price. And those properties don't sell. I'm glad I don't have to sell in this market...

As for coming up with a plan... until the BK is resolved, you need to protect the assets you have. I'd funnel as much money into the 401k/retirement funds as possible to shelter it from creditors. I'd also payback the 401k loan as quickly as possible. That $25k will have time to grow/compound in the next 22 years. Then I'd tackle the credit card debt. I run up credit card bills - but pay it in full each month. (I put everything on the credit card to get cash back and mileage.) You need to stop using the credit cards and pay them off. Since you state you pay cash for everything - this isn't a stretch. But take the extra step to remove them from your wallet (and your wife's wallet) and put them someplace you will have to think twice/three times before using them.

 

[Texas Proud]

/snip/ But take the extra step to remove them from your wallet (and your wife's wallet) and put them someplace you will have to think twice/three times before using them.

I think it was one of the main finance gurus.... but I remember someone saying to put your emergency credit card in a block of ice in the freezer... you can not use it without spending some time getting to it....

 

[ERD50]

We live very much within our means.

$9,500 in credit card debt at 15% interest.

We pay cash for everything.

This does not compute.

How can you be living within your means, if you racked up $9,500 in credit card debt at 15% interest? Or was that 'in the past', and now you are LBYM?

I guess I wouldn't define my budget as LBYM unless it included the monthly cost of paying off the CC, family, 401K and IRS in a reasonable time frame.

I might even pay family first, even if that is a low (or no) interest rate. It could be 'costing' you in other, more important ways.

Good luck, facing a problem is the first step. I guess I'm also curious how your back taxes can be so high if your businesses lost money?

-ERD50

 

[haha]

Good luck, facing a problem is the first step. I guess I'm also curious how your back taxes can be so high if your businesses lost money?

-ERD50

Easy: unpaid payroll taxes, maybe taxes on forgiveness or adjustment of debt, etc., etc.

Our overlords always get paid, even when we are starving.

Ha

 

[Benjamin132]

$9,500 in credit card debt is from the business failure. It was used for material purchase for a job and when the business went down this debt could not be paid or discharged. It was not discharged in bk since this account is a joint account in both husband and wife's name.

Since the business sale two years ago we have been living below our means.

The bankruptcy was purely business debt. It was not from consumer/real estate debt. Since it was only in husbands name it was easily separated in the legal procedure.

The back taxes are business Payroll taxes for Feds and State government.

 

[Benjamin132]

The advice of tackling 401k loans first is good. I like and appreciate this support. There are three loans totaling $25k. Rate is 4.25%. I am focused on the smallest first ($4,700) with as many advance payments as I can make. This will free up $200 per month for other debts. Does anyone have experience using the debt snowball?

Unloading private school is sage advice too. I like that idea and it is tough medicine. Public schools where we live are just lame. I will add that I pulled my 14 year old from private school two years ago although not for financial reasons.

 

[Texas Proud]

$9,500 in credit card debt is from the business failure. It was used for material purchase for a job and when the business went down this debt could not be paid or discharged. It was not discharged in bk since this account is a joint account in both husband and wife's name.

Since the business sale two years ago we have been living below our means.

The bankruptcy was purely business debt. It was not from consumer/real estate debt. Since it was only in husbands name it was easily separated in the legal procedure.

The back taxes are business Payroll taxes for Feds and State government.

OUCH.... those are the worst taxes to owe... they do not discount at all and usually will come after you quickly... I am sure BK has put them off, but if you are out, I am surprised they have not come calling to get their money... when my BIL went through this, they garnished wages, took out money from bank accounts etc....

I hope you have an payment plan already agreed... if not....

 

[Texas Proud]

The advice of tackling 401k loans first is good. I like and appreciate this support. There are three loans totaling $25k. Rate is 4.25%. I am focused on the smallest first ($4,700) with as many advance payments as I can make. This will free up $200 per month for other debts. Does anyone have experience using the debt snowball?

Unloading private school is sage advice too. I like that idea and it is tough medicine. Public schools where we live are just lame. I will add that I pulled my 14 year old from private school two years ago although not for financial reasons.

I will disagree with the advice of paying your 401(k) first... why should others have to wait

I would first tackle the tax issue... if you have a payment plan, great... then go for the CC first, ....but I would pay this off as fast as I could... having a taxing authority after you is not a place I would like to be....

Then after taxes and CC, pay off your family.... unless they agree to not be paid as fast because you are paying above market rates, they should be paid before yourself....

I would then save enough money for a rainy day fund.... THEN I would pay off my 401(k) loans...

I think getting rid of private school is a no brainer.... there are NO luxuries with anybody in the family until your finances are in order... no exceptions...

 

[sunrise]

$9,500 in credit card debt is from the business failure. It was used for material purchase for a job and when the business went down this debt could not be paid or discharged. It was not discharged in bk since this account is a joint account in both husband and wife's name.

Since the business sale two years ago we have been living below our means.

The bankruptcy was purely business debt. It was not from consumer/real estate debt. Since it was only in husbands name it was easily separated in the legal procedure.

The back taxes are business Payroll taxes for Feds and State government.

OUCH.... those are the worst taxes to owe... they do not discount at all and usually will come after you quickly... I am sure BK has put them off, but if you are out, I am surprised they have not come calling to get their money... when my BIL went through this, they garnished wages, took out money from bank accounts etc....

I hope you have an payment plan already agreed... if not....

Yep, those payroll tax obligations will just keep growing. Interest and penalties are high. Get in touch with both the IRS and the state to work out an IPA / payment plan (and possibly forgive a bit of the back taxes). I have always heard it is better to keep in touch rather then avoid them.

 

[Texas Proud]

Yep, those payroll tax obligations will just keep growing. Interest and penalties are high. Get in touch with both the IRS and the state to work out an IPA / payment plan (and possibly forgive a bit of the back taxes). I have always heard it is better to keep in touch rather then avoid them.

My BIL was told by an IRS agent they would never reduce payroll taxes as this was 'other people's money'..... It was withheld from people's paychecks and is supposed to be sent in in short order...

The only reason why he never paid it was they screwed up in his BK and then the statue of limitations finally came....

 

[sunrise]

My BIL was told by an IRS agent they would never reduce payroll taxes as this was 'other people's money'..... It was withheld from people's paychecks and is supposed to be sent in in short order...

The only reason why he never paid it was they screwed up in his BK and then the statue of limitations finally came....

AH, yes. I should clarify, I mean forgive some of the interest and penalties incurred, not the actual payroll taxes.

 

[lemming]

I'm surprised the 401k loan didn't come due when the business failed. Or since you were the owner/admin maybe you didn't call it on yourself?
Could you default on that loan? If your income is lower now the tax might not be as high as your credit card interest.

 

[BLS53]

I'm surprised the 401k loan didn't come due when the business failed. Or since you were the owner/admin maybe you didn't call it on yourself?
Could you default on that loan? If your income is lower now the tax might not be as high as your credit card interest.

I think a few of the moral high ground members, saw "personal bankruptcy" in his post, and proceeded to run him off.

Elsewhere on the boards, the benefit of marijuana usage was being discussed.

 

[Benjamin132]

I think a few of the moral high ground members, saw "personal bankruptcy" in his post, and proceeded to run him off.

Elsewhere on the boards, the benefit of marijuana usage was being discussed.

I did not default on these loans since they are with my current employer. I had not thought of defaulting though. maybe I should think about defaulting in order to increase take home pay.

 

[Benjamin132]

Yep, those payroll tax obligations will just keep growing. Interest and penalties are high. Get in touch with both the IRS and the state to work out an IPA / payment plan (and possibly forgive a bit of the back taxes). I have always heard it is better to keep in touch rather then avoid them.

Talking with state on the amount due. I am securing a discounted number. It is working by doing this. I have sent correspondence challenging the amount they say is due. I have secured a hearing too in order to show my evidence of payments made.

IRS is waiting for now. I have made payments by them holding my refund check. They have also dropped all penalties and interest charged to the business. I am preparing to make an OIC when my BK clears.

 

[Benjamin132]

I'm surprised the 401k loan didn't come due when the business failed. Or since you were the owner/admin maybe you didn't call it on yourself?
Could you default on that loan? If your income is lower now the tax might not be as high as your credit card interest.

I will see if I can default on those loans to use that cash to pay others. The loan payments on 3 notes total over $1,200 per month. That is an idea I had not thought of.

 

[Amethyst]

Benjamin,

I am sympathetic. You have really taken it on the chin, but at least you have a realistic goal (retirement in 22).

I agree with those who advise reducing your asking price for real estate, if you really want to sell. People have been sitting on RE since 2008 since they refuse to "take less than my property is worth." I bid a "comparables-value" offer, not an insulting lowball, on one such home recently, and was turned down flat. The owners would not negotiate, but they are apparently rich, and can afford to wait. Can you?

As for LBYM, you ain't seen nothing till you've read some of the posts from the frugalistas on this forum - and elsewhere on the Internet. I mean, we have folks who will cut an industrial -size toilet paper roll in two, horizontally, with a hacksaw! Just google "Frugal living" and the possibilities are endless.

Good luck.

Amethyst

 

[Buddha44]

Benjamain, I sympathize with your situation and wish you the best. You should also seek professional advice so that you can consider all of your options during and post BK. Having said that, I would urge you to reconsider defaulting on the 401(k) loan. You should confirm this but I think doing so may cause it to be treated as a distribution from your 401(k), resulting in taxable income and a 10% penalty even if it is considered a hardship withdrawal.

In addition, you need to think of your financial stability first, so paying your 401(k) loan will increase your protected assets. This is likely an unpopular view, but I don't think there is a moral obligation to pay everything so that you are destitute. In the business world, BK and debt forgiveness are merely strategic options, although I don't condone the pension raiding that was used so often in the 80s. Personal loans to friends and family I think you should honor since they extended such loans when no one else presumably would. Good luck.