How can I delete text from BEHIND a transparent image?

[Kayla Bruce]

Hi! Can someone please help me figure this out...I've tried everything and can't seem to find answers. 

I have a transparent image, and I'm trying to hide/delete the text behind it, as seen in the image I've attached. I've tried offset path and shape builder and just about anything else I can think of. 

Also, any ideas on how to get that transparent border around the image so there's a buffer between the text and the image? 

Thanks in advance!!

[Jacob Bugge]

Kayla,

What happens if you select everything, then Ctrl/Cmd+G (hold Ctrl or Cmd and press G) to Group everything, then in the Transparency palette tick Knockout Group?

[Kayla Bruce]

Jacob,

Everything goes transparent when I tried that rather than just the letters inside the graphic.