Fear of Bankruptcy Misplaced

Shadow of a businessman standingFear accompanies debt, like a man and his shadow.

People in debt are afraid of the caller on the phone.  They are afraid of the process server.  They are afraid of the truth getting out.

Yet, they fear bankruptcy more, apparently.

They seem to fear that life as they know it will end if they file bankruptcy.

Well, at some level, the miserable life of living in debt; sleepless nights;  having no financial  reserves will end if they file bankruptcy.

But they have cultivated a fear of bankruptcy that is stronger than the fear they live with now.

Most fear is self generated

It’s easy to fall into the trap that filing bankruptcy represents defeat, as a personal failure.

My view:  most bankruptcy these days is driven by job loss, ill health, and divorce.

Some fear public exposure.

They imagine those around them standing in judgment on their life choices.

Yet which of us chooses illness, accident, or unemployment?

The failure I see is the unwillingness to utilize an effective and legal means to become economically stable.

Why no fear of penniless old age

This seems to me to be a real fear.

Almost every client who’s struggling to repay credit cards, now at 29% interest, is skimping on saving for retirement.

Courtesy of the Great Recession, they have no equity in their homes.  If they have a job, there’s no pension attached.  They have little or nothing set aside to augment Social Security.

Yet fear of bankruptcy keeps them paying monthly on debt they can never repay.

My last post talked about the institutional purveyors of this fear.

I’m on this soapbox and don’t want to step down til I make some headway on this issue.

The only thing we have to fear is fear itself.

Be fearless.  Better yet, be solvent.

Image © Tinx

Your Business And You In Bankruptcy

multi faceted issueFacets on a gem bend light and change how we see things.

The same thing happens when bankruptcy law encounters a small business owner and the business itself.

Seen from one angle of the law, the business is a valuable asset.

Seen from another, it is nothing more than a job for the owner, having no real value without the owner.

It depends on where you stand and where the light hits.

Is incorporating dangerous?

The question comes up when individuals have a small business that provides a living, but the owners have accumulated crushing debt.

I wrote earlier about how incorporation could create a separate legal entity that could continue to operate during the bankruptcy of its shareholders.

My good friend Doug Jacobs pointed out that under some circumstances, incorporation could be seen as a fraudulent transfer.

A fraudulent transfer is one where the entity conveying property either intends to put it beyond the reach of his creditors, or, receives less than the asset was worth in exchange, leaving the transferor less able to pay his debts.

The bankruptcy code allows the bankruptcy trustee to recapture assets transferred in fraud of creditors.

My counter argument to Doug’s point is that incorporation hardly conveys away the value of the business, as the debtor simply exchanges his outright ownership of the business for outright ownership of the stock in the corporation that owns the business.

If there is real value there, a bankruptcy trustee can reach it by dissolving the corporation.

My second argument is that before incorporation, the business was indistinguishable from the individual. The idea of “transferring” debts to the newly created corporation is facially pleasing, but cannot relieve the individual of any liability he had before incorporation.

It is an axiom of law that no agreement between two entities can bind a third: that is, the individual and his corporation cannot by agreement cut off the right of the individual’s creditor to look to the individual for repayment, even though the new corporation and the individual might agree that the corporation will be henceforth liable.

This analysis is probably more theoretical than real.

The small businesses my clients usually operate are little more than personal services businesses. Incorporation simply provides cover for the trustee who, because of incorporation, doesn’t have to shut the business down as part of his duties to preserve the assets of the estate.

Law colored by local culture

But whether you see incorporation representing a meaningful transfer or not, the issue highlights the fact that the legal culture does vary from place to place.

I practice in Silicon Valley; Doug practices in the Central Valley. Like it or not, even though the law is the same in both places, judges often bring a slightly different perspective to the bench, depending on where they practice.

For that reason, when you select a bankruptcy lawyer, you want one who knows the judges before whom your case will be heard and understands the legal culture in that community.

Image:  Nemo & Pixabay

A Marital Threesome

 

3 paper dolls_optSounds kinky, doesn’t it?

Three players in a marriage.

Sharing.

Everything.

Only this is something you can talk about openly, without blushing: community property.

Community property is the default arrangement in California for a married couple.

Yet it is poorly understood by those practicing it and it isn’t inevitable.

How community property works

The community property system provides that everything acquired during marriage is equally owned by the spouses, regardless of which spouse acquired it.

The law provides that property owned before marriage or acquired by gift or inheritance is the separate property of the spouse who acquired it.

The most vivid way to imagine the community property system is to see marriage as comprised (for financial issues) of three players:

  • husband,
  • wife, and
  • the community property.

Each of the three may have different exposure to debts.

[ I speak here of the traditional composition of a marital couple, but remember that both same sex couples and registered domestic partners fall under the California community property system. ]

The central concept is that only the person who contracts for a debt is personally liable.

Personal liability will outlast the marriage.  It’s yours, married or not.

The community, however, is liable, regardless of who incurred the debt.

All of the community property is liable for the debts of either spouse.  There’s no halvsies here: no “my half of the community is liable for my debts”.

On money issues, the community is all in.  All the community property is liable for the debts incurred during marriage, regardless of which spouse incurred them.

And that’s not all:  the community property is liable for the debts of either spouse incurred before marriage.

Liable for my spouse’s debts?

You, personally, don’t become liable for your spouse’s debts by reason of living in a community property state.

That means that the credit card company can’t sue you for a debt contracted by your spouse.  So, no judgment against you for his debts.

But a judgment against your spouse can be collected from the community property, including your wages!

Community property can be avoided

Spouses in California are free to agree that they won’t have community property.

That’s what a pre nuptial agreement is often about.  Spouses can agree that their accumulations during marriage will be the separate property of each spouse.

If you are already a married Californian, maybe the three of you want to talk about this.

 

 

Collections Is A Boogie Man For Businesses Too

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“Being sent to collections” is a boogie man for businesses as well as for individuals, I learned this week.

I was counseling a small business with lots of vendor debt.

We were looking for a strategy that could keep them in business.

When I suggested that management sort their payables into vendors they needed and wanted to keep, and those they could live without and wouldn’t pay going forward, I heard the familiar refrain:  “but they’ll send us to collection!”

So?

Sent to collections

Where is “collections”? What is so bad about a corporation being there?  It isn’t painful…

Let’s think:   “collections” is little more than an accounting category including debt that isn’t paying or isn’t likely to pay without something more.

Collectors, whether business or consumer, rely on the same weapons.  Their job is to “motivate” the debtor to pay up, because the alternative approaches for the creditor are expensive, timeconsuming, and uncertain.

My pitch to this business was premised on the idea that

1) there wasn’t enough money to pay everyone;

2) they had multiple sources for the product they bought from this vendor; and

3) the survival of the business was at stake.

It is certainly unpleasant to face the fact that you can’t pay everyone you owe.  But that’s a risk that comes with being in business, for both the debtor and the creditor.

Individuals face the same dilemmas when there isn’t enough money to go around.  I try to inculcate in consumers the same view as I pitch to businesses:

this is only money we are talking about.  It’s not character or self worth.

Both sides to a credit transaction know at the beginning of a transaction that payment isn’t assured. That’s why credit comes with a cost, to cover that risk.

Business sometimes requires that we make decisions and take actions that we wish we could avoid.  It comes with the territory.

This group of clients left with a plan to focus on the big picture, reduce the overhead, and trim the cash outflow dealing with the past.

My hope is that there is a future for them as a result.

Image courtesy of Toybot Studios and Flickr

 

 

Doing The Means Test Yourself

test-361512_1280_optI keep encountering posts on internet bankruptcy boards from individuals who have “filled out the means test” and then proceed to announce their conclusions.

Given the uncertainties in the legal community about how to apply the means best and the think and re-think I engage in preparing Form 22, I can’t imagine a non lawyer learning anything reliable from trying to do this themselves.

The tricky issues include how to deal with income from non filing spouses; from roommates or extended family member; and how to handle business expenses for the self employed. (One bankruptcy appellate panel recently decided that the judges who drew up the form did it wrong!)

Then there is the dispute on the deduction side about operating expenses for paid for cars; operating allowances for older cars; debts associated with property you’re surrendering, and just what part of your telecommunication expenses go on the form.

I cringe when I ask a client to sign this form, as they cannot possibly validate all of the entries on the form.

While I won’t say “don’t try this at home”, I am certain you should draw no conclusions about the means test and your eligibility for Chapter 7 based on your efforts to take the test.

Get an experienced bankruptcy lawyer involved.

Read more

Means Test Misunderstood

Means Test Is Paper Tiger Here

Means Test In Chapter 13

Image courtesy of Pixabay.

Foreclosure: The Unseen Hazards

It’s not the foreclosing creditor that really threaten California homeowners.

It’s the forces that follow foreclosure.

The junior lender and the tax man can deliver  truly punishing blows to a family losing a home.

Cut-off Junior Lienholders

Californians enjoy the protection of the one action rule governing foreclosures.

A creditor who conducts a non judicial foreclosure of its security interest cannot collect anything more than the property it forecloses on.

Foreclosure is, as lawyers say, an election of remedies. When the lender chooses to foreclose, it gives up the right to pursue the borrower for anything more.

But, the typical foreclosure sale destroys all liens on the property that are junior (inferior) to the foreclosing creditor.

The HELOC lender, the second deed of trust, the SBA loan are rendered unsecured by the sale. Even though they no longer have a lien on the foreclosed property, those cut off lienholders CAN sue you for what’s owed on the debt.

The exception is the California purchase money rule:  If the junior lien secured a loan used to acquire a property you used as your home when you bought it, the lender cannot pursue you personally.  The limitation on purchase money lenders suing you personally is often called the “antideficiency” statute.

So, if foreclosure is in the cards, you need to have a plan for dealing with the other players who no longer have a lien on the real property. There’s a four year statute of limitations on collection actions, so the problem doesn’t go away quickly.

Cancellation of Debt Income

The tax code provides the second blow in these unhappy circumstances: debt that is forgiven may be treated as if it were cash received by the borrower whose debt is satisfied for less than was owed. [Read more…]

What To Disclose In Bankruptcy Papers

gecko-wikimedia-cropped.If the headline drew you in, like the Geico gecko, you can complain you’ve been duped.

In bankruptcy, you disclose everything. Period.

Disclosure is the price of the bankruptcy discharge.

Shortchange the system by leaving out inconvenient facts and you risk both the omitted asset and the discharge.

A false oath on the bankruptcy papers or transfers intended to conceal assets from creditors are each grounds on which the discharge of all of your debts can be denied, while the trustee recovers and sells the assets.

It’s nasty and comes at a very high price.

Tell the whole truth

The problem of incomplete bankruptcy schedules is not so much an intention to conceal that leads to omissions of assets.  It’s  the filer’s failure to take disclosure seriously.

People ready to file bankruptcy don’t want to read the questionnaire that prompts them for various kinds of assets they might have. They don’t commit to thinking about how this question might apply to their situation.

Or they assume because an asset has little market value, it’s excluded from the schedules.

Not so. [Read more…]

How Long Does Bankruptcy Take?

the-eleventh-hour-pixabay_optEvery client asks that question: how long will bankruptcy take?

Probably, the real question is “when will this be over?”

Like so many questions in the law, the answer is “it depends.”

Filing to discharge

In a Chapter 7, filing to discharge is about four months;  in Chapter 13 it’s three to five years.

But, too often, the real gating issue is getting ready to file.  

How long will it take you to get your attorney all the needed information.

And that’s a timeline that the client controls.

The source of delay

It is getting the raw information to us that is the real slow-down in most cases.

Cases lag when

  • the client fills out as much of our questionnaire as they find convenient;
  • provides most of the paystubs;
  • promises the tax return; and
  • has to search for information on the insurance policy.

We hustle to get the schedules done, and the client then doesn’t have all the necessary funds to finish paying us.

Once filed, a Chapter 7 marches fairly predictably to discharge.  The debtor’s obligations after filing are few:  show up at the 341 meeting, and complete the post bankruptcy education class.

The time required for the debtor to empower the attorney with a full deck of cards is unknowable, to the attorney, and  within the control of the client.

So how long will it take?

Image courtesy of Pixabay.

Which Legal Rights Change When You’re “In Foreclosure”

Foreclosure AuctionThe old saw about Oakland, California is that there is no “there” there.

I suggest it’s the same about being “in foreclosure”:  foreclosure is not a place, it’s a path.

Nothing legally meaningful changes until you get to a foreclosure sale.  Everything before that is prelude.

Yet several clients have asked whether they can remove personal property from their home while it’s “in foreclosure”.

Another client wanted to know what the rights of the foreclosing creditor were to come into her home before any sale was held.

Another thought he needed to vacate the house before the sale.

Rules of California foreclosure

Be clear:  it’s your property until there is a foreclosure sale.

Your rights to the property are unchanged by any default on the mortgage payment.

Likewise, the lender is still an outsider unless and until it obtains title to the property by being the highest bidder at the foreclosure sale. [Read more…]

What You Keep After Bankruptcy

How bankruptcy grubstake exemption works

 

 

 

 

 

The word grubstake never appears in the Bankruptcy Code or the California Code of Civil Procedure where the exemptions available in bankruptcy cases filed in California are found.

Yet every bankruptcy lawyer uses the phrase; and seemingly, every bankruptcy debtor struggles to understand it.

Here’s the standard English definition of grubstake.

1.provisions, gear, etc., furnished to a prospector on condition of participating in the profits of any discoveries.
2.money or other assistance furnished at a time of need or of starting an enterprise.
The miner’s grubstake allowed him to buy food and feed his burro while prospecting.  The bankruptcy grubstake does the same:  it furnishes the wherewithal for a fresh start.
The grubstake exemption, sometimes also called the wildcard exemption, is expressed as a dollar amount.  In a California case, that amount is currently $25,340.  That’s the total of the amounts provided in sections  703.140(b)(1) and (b)(5).
While other exemptions in the California bankruptcy exemption statute are limited to particular kinds of property ($1425 for jewelry, $4800 for equity in a car, etc.) the grubstake can be applied to any kind of property.
More importantly, it can be divided among different kinds of assets.
A person filing Chapter 7 or Chapter 13  can use part of the grubstake to protect extra value in a car; part of it for the balance in a bank account, or stocks held for investment; or part for a timeshare or business interest.

[Read more…]