The Secret Bankruptcy Discharge For Community Property

When only one spouse files

 

Psst!

Let me tell you a secret about bankruptcy law.

You can get 3/4 of the benefits of a bankruptcy discharge without ever going near a bankruptcy court if you are a married person in California, or any other community property state.

If your spouse files bankruptcy and you don’t join in, you still reap much of the protection from your creditors that you would get if you had filed.

How can that be?

It’s the law,  a little known feature of the bankruptcy code that applies to a bankruptcy discharge in a community property state.  §523(a)(5)

Here’s how and why it works this way.

When only one spouse files

Spouses aren’t required to file bankruptcy together.  They can file together, but they don’t have to.

But even if only one spouse files, all of the community property of the marriage becomes property of the bankruptcy estate.

In return, the community property gets a bankruptcy discharge, just as though it was a separate person.  (Which is why I sometimes  say that, in a community property state, each marriage is a menage a trois.)

The discharge protects not only the property that the couple owned when one spouse filed bankruptcy, it protects community property that they acquire in the future. [Read more…]

How Their Telephone Nearly Ruined Elderly Couple

red-telephone-mimooh-01_optThe elderly couple was suddenly in financial trouble.

The two mortgages on their home were a couple of months delinquent.

Their bank account had just been levied by the state taxing authority.

They hadn’t filed tax returns since 2009.

From the outside, it didn’t seem like anything had changed.  Yet their financial world was imploding.

What had happened?

Their phone is to blame

Turns out, they had entered into a debt repayment plan over the phone.

The caller got their attention while they were comfortable at home, over the phone.  They signed up, over the phone.

They couldn’t tell me even who the caller represented, But, the voice on the other end of the phone promised to keep creditors from calling them anymore.

With the clients’ permission, this creditor was automatically taking money out of their account monthly.

And when the tax levy hit, there wasn’t enough money to keep a roof over their heads.

These elders were victims of their telephone and their good intentions.

Only the powerless call

It’s a nearly universal truth that the only creditors who call you about your debts are the least important creditors among those you owe.

Credit card companies can’t force you to pay their debt without suing you, getting a judge to agree you owe the money and giving you a chance to defend.  It’s cheaper and more effective to frighten or shame you into paying.

And even better if they can get you to give them regular access to your bank account.  What could be better?

What seemed to have happened here was a debt collector called up and offered a solution, one that would stop harassing phone calls and pay the credit card debt automatically.

But, the “solution” would only pay the credit card debt.

That is, the only debt that would be paid is the debt that could be discharged in bankruptcy.  The mortgage debt that kept a roof over their head became second to the debt management program.  No attention was paid to the back income taxes.

Who to pay when money is tight

It was exactly the wrong order of payment.  The least had become the first among creditors.

Elders more vulnerable

The tactics of debt collectors aren’t confined to the elderly, but they sure work better if the person who owes the money is frail, alone, or unsophisticated.  That described the couple in my office.

The good news for my couple was that their children had somehow gotten wind of the trouble and came with their parents to see if bankruptcy could help.  And bankruptcy will help.

In the bigger picture,  adult children need to be sensitive to how well elderly parents are managing their money.

The telephone is the instrument by which legitimate but self interested creditors can get to the elderly and convince them to warp their financial priorities.

Whether the pitch uses annoyance, fear or shame, the result is the same:  the elder pays the wrong creditor.

If these could be your parents, screw up your courage and find out what is happening, on the phone and at the bank.

It can be a difficult conversation for elders clinging to independence.  But you have to know to help them, before their roof falls in.

Image courtesy of notKlaatu and openclipart.

 

What happens if you don’t pay your debts

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Overdue debts will not send you to jail.

Please repeat:  overdue debts will not get you jailed.

Yet it is disturbing how many people fear that not paying their debts is criminal and result in incarceration.

Relax:  America abolished debtors’ prisons some 250 years ago.

If you don’t pay

There are still legal consequences if you don’t pay your debts, but the consequences aren’t criminal.

Your creditors can sue you and get a judgment against you. To get a judgment, they have to file suit against you, in the right court, and serve you with notice of the suit.

That’s what due process is all about.

What to do if you’re sued

If you appear in the action, by filing a written answer, a trial on the suit is required, if the parties don’t settle.

A creditor with a judgment can then enlist the power of the state to help them collect the judgment.

Depending on state law, a judgment creditor may be able to get a lien on your real estate, levy on your non exempt assets or, in some states, to garnish your wages.

When you can be arrested

Other consequences of unpaid bills

Even if you haven’t been sued, debt has consequences:  calls from collectors, worry about who to pay, damage to your credit record.

Those negatives often last longer than the life of the debt in question.

If this is your situation, get some help.  Consult a reputable credit counseling agency.  Make an appointment with a bankruptcy lawyer.

Find out what your options are.

But don’t worry about jail.

Image courtesy of Pixabay.

No Time For California Dreaming When Served With Summons

Lawsuit concept.Being served with papers in a collection suit doesn’t generally help your critical thinking process.

In fact, that surge of adreneline seems to blur the eyes and fog the brain.

So when you scan the papers and see a date, months down the road, you exhale and set the problem aside for another day.

Serious mistake.

The date you picked out is the date set for a case management conference in the Superior Court.

Your answer to the complaint is due 30 days after you are served.

No date is typed out because the clerk issuing the California summons can’t know when you’ll be served with the complaint.

The summons form has a summary of what you have to do to defend yourself printed on its face.  Here’s a blank California summons.

The case management conference is only meaningful if you’ve filed an answer and laid out what’s in dispute in the lawsuit.

  • Are you really the person who owes the money?
  • Have they calculated the debt correctly?
  • Has the statute of limitations passed?

A judge will hold a trial to determine the truth of the matter, but only if you file an answer to the complaint that sets out your side of the story.

It does no good to appear at the case management conference, expecting to argue the case if you haven’t filed an answer, in writing, and served it on the plaintiff who filed the case.

Been served?

Sit down and read the papers line for line. The California courts have an online help center for people without a lawyer.

If you can’t bring yourself to read it, see a lawyer who can assess the situation.  Here’s a list of bar association referral panels in California.

Maybe you want to answer;  maybe you concede the debt, and want to pay.  Maybe it’s time to consider bankruptcy.

But whatever your approach, don’t wait til the date on the papers to take action.

More about what to do when you are sued.

Image: © creative soul – Fotolia.com

Your Money Needs A Prenup

Wedding_2The traditional marriage service ends with the charge that what God has joined together,  let no man put asunder.

That’s great  with love, but not so great with money.

Financial partnerships are at least as challenging as marriages.  And business deals don’t have love to smooth the rough spots in the relationship.

Something will likely asunder the business venture.

Yet people pool their money in business, real estate, and investments without a thought to how the partnership will end.

Chances are, it will end, and that end can be very messy and miserably expensive.

My charge to those pairing up for an investment is this:

At the start of any venture involving pooling money, lay out some rules for how you part in the end.

Think of your business wind up rules as a prenuptial agreement for your money.

Maybe, you’ll be content to be partners forever.

Maybe

  • Your financial venture will be wildly successful.
  • Nothing in either life will change.
  • You’ll die simultaneously.
  • Your heirs will be in perfect agreement about what to do with the joint venture.

But I wouldn’t bet on it.

Things change, in predictable and unpredictable ways.  What seemed so amicable and straightforward at the start is less so as life happens.

You buy a house together

Suppose you buy a house with a friend.  Together, you can get what neither of you could afford alone.

But then, change happens:  one of you has to move for job reasons;  you can’t make joint decisions about the property; one of you pairs up with another.

Whatever the reason, it is no longer advantageous to be joint owners.

What now?

Let’s start a business

Two of you hatch an idea for a business.  That’s what we do here in Silicon Valley.

Each  of you is married to another.  You pool your money and your credit and launch your enterprise.

The business prospers until one of you becomes ill or disabled and can’t work in the business.  If the business has to hire an outside  replacement for the ailing partner, it doesn’t have enough money to pay the disabled partner.

Or one partner is sued for divorce and the business must be divided.

Or one party dies, and the survivor doesn’t want to be in business with the widow.

The variations are endless, but the problem of getting your money out of a joint venture is the same.

Fail to plan and…

Absent an agreement that provides a plan for the dissolution, a lawsuit follows.  An absolutely avoidable lawsuit, when you could have agreed, at the beginning, how the joint purchase is unwound.

Why make the separation plan at the beginning?

No one going into a joint venture wants to consider that it will be anything less than a roaring success, forever and ever, amen.  But the beginning of the venture is  when you can most objectively discuss the options for unwinding.

You are full of enthusiasm and good feeling.  It’s easy and emotion-free to discuss parting some long time in the future.

If you wait to hold that discussion til the venture needs to end or one party needs to get their money out, the mood will not be nearly so free and easy.

One needs his money back;  the other is pressed to buyout the departing partner or give up the venture.

And that’s if the relationship between the parties is harmonious.  If the parties no longer see eye to eye, things are worse.

Exit strategies

The ways you can separate your pooled money are as endless as your imagination.

  • Sell the property to a stranger
  • One party buys the other out with the price set by appraisal
  • A buyout price is set by an agreed formula
  • The departing party gets a short term note from the remaining party
  • Insurance funds a windup triggered by death or disability

The more money you pool, the more attention you should pay to the exit strategy.

If you each contribute $100 toward shared season tickets, the stakes when things change aren’t great.  However, if you each mortgage your homes to start a business, the consequences of a rupture are huge.

If I wrote the rules,  joint money ventures,  just like marriage,would require a license in the form of a written separation plan, from the start.

An earlier version of this article appeared on Consumer Ledger.

Image courtesy of Daniel Clark and Openclipart.

 

Sued For Debt? Don’t Bother To Tell It To The Judge

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The New York Times’ great feature on the dark world of consumer debt collection had a marvelous flow chart of the progress of collecting an old bill.

Only it was deceptively wrong.

After following the debt collector’s options and outcomes from first collection call to the various resolutions, the graphic showed two wildly different outcomes if the consumer got sued.

One outcome had the consumer telling the judge, “I’ve fallen on hard times and can’t afford to pay my debt“.  Result:  the consumer loses.  Hard times isn’t a legal defense to a collection suit.

The second outcome had the consumer telling the judge:  “Make them prove I owe the money“.  Result, says the article:  the consumer wins!

Why the different results for different scripts?  Because, the debt buyer has no proof of the debt.  And the burden of proof in a collection suit lies with the person who filed the suit.

Lawsuits require proof

When the collector bought the old account from the original creditor, or an intermediate collector, no supporting documents came with it.  The debt buyer got just a spreadsheet with the consumer’s name, account number, and amount due.  He has no proof that you owe the debt and no proof that the debt is still enforceable.

No proof, no judgment.

But that little lesson in legal procedure is not the point I want to make here.  My point is telling it to the judge at trial gets you nothing if you haven’t raised the issue in a written answer.

Courts rely on the written word

Courts move on the basis of paper.  More particularly, courts act on written pleadings filed with the court clerk and served on the other side to the lawsuit.

If you haven’t filed an answer in the lawsuit, nothing you say to the judge will change the outcome.

Now, on the odd occasion, a judge may consider arguments made for the first time in a courtroom.  It happens just often enough to make me cautious about saying “never”.  But don’t count on it.

If disputing the debt is worth your time showing up at court, then it’s worth filing an answer in your defense.

Don’t think you can simply arrive in court and win on the basis of clever words at trial.

File an answer

Getting an answer on file can be a problem if you don’t have money for a lawyer.  I’ve got that.

You can do it yourself.

Lots of courts these days have pro per help desks where you can get guidance on participating in a lawsuit.  The California courts maintain an online legal self help site.   Here are links to  Bay Area court’s pro per resources:

Santa Clara County 

San Mateo County

Alameda County

Santa Cruz County

Check out the available resources in your area to help you file the right paper so you can defend yourself in court.

Image courtesy of Flickr and Penn State.

 

How Voodoo Economics Curses Your Budget

 

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I can’t save anything because it takes every dollar I make just to get by.

Sound like a description of your budget?

For some folks, that is absolutely true.

But for another slice of working folks, there’s some black magic budgeting going on that hides what’s really afoot.

These voodoo budgets look rational, but only on the surface.  If there were two budget line items:  1) food, and 2) groceries,  you’d see the duplication.

But what often happens is more subtle.  Meet the twins of budget self deceptions.

Electronic entertainment

Got cable?  More than basic cable?  Do you also budget for entertainment, eating out, vacations?

Whoa!

What is premium cable if not entertainment?  You can probably say the same thing about data on smart phones.  These services make our days brighter.  But the cost has to be counted against the same budget category as other non essential pleasures.

Somehow, smart phones and HBO have become, in our minds, utilities or basics, rather than embellishments.  Once you count them as a given expense, then it’s easy to say, I have nothing left to save for the unexpected emergency or the absolutely expected old age.

Put digital diversion in the entertainment category when you lay out your budget.  Putting like with like, you can assess whether the allocation of income makes sense.

Paying on credit cards

Credit card service is the second twin in the world of smoke-and-mirrors budgeting.

Monthly payments on credit cards now rate their own line in most budgets.  If you’re carrying a balance, some part of this month’s income is going to pay for last month’s spending.

But what did you buy with your credit card?  It’s not as though those purchases are distinguishable from the rest of the categories in your budget.

You probably bought gas, clothes, movie tickets, meals out.

By creating a separate cubby in your mental budget for payments on your credit card, you’ve double counted what you spend on transportation, clothes, and entertainment.

Cut through the smoke and mirrors

So, banish voodoo budgeting from your life.

Pull out your cable and wireless bills.  Read through where you used your credit cards last month.  Push those purchases into the right categories.

See if your spending is skewed in a way you didn’t see before.

Image courtesy of Theilr

Dividing Debts At Divorce: What You Need To Know

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The division of the debts of a failed marriage, however carefully crafted at divorce, can be utterly destroyed if one of the former spouses files a Chapter 13 bankruptcy.

A Chapter 13 discharge is double barreled.  It will eliminate the debts that the filing spouse owes to creditors.  It also wipes out any obligation to the debtor’s former spouse to shield that spouse from those debts.

It gets worse:  any obligation of one party to pay the other to equalize the division of assets can be wiped out in a Chapter 13.  (Support debts survive; they aren’t dischargeable anywhere, any time.)

All parties, the divorcing spouses and their family law attorneys, need to consider the impact on the division of assets and liabilities if either spouse drops the bankruptcy bombshell.

Debts divided and protection promised

Where both spouses are liable on a debt, the divorce agreement often assigns the debt to one spouse and imposes on that spouse an obligation to indemnify the other spouse.

“Idemnify”  isn’t in most folks’ standard vocabulary.  According to Merriam Webster, it means

to protect (someone) by promising to pay for the cost of possible future damage, loss, or injury

The spouse who’s to pay the debt promises to pay the former spouse if the creditor has to collect the debt from the other party.  So, the divorce decree creates two duties for the spouse to whom the debt is assigned:  pay the creditor, and if you don’t, protect your ex from that creditor.

Different chapters of bankruptcy treat the obligation to a former spouse for indemnification differently.   In Chapter 7, that obligation is not dischargeable.  In Chapter 13, it can be discharged.

But why, you ask, doesn’t the divorce judgment bind the creditor, too?

Creditors not party to divorce

A divorce deals with the rights and obligations of the spouses and the welfare of any children of the marriage.  Creditors who have rights against the spouses are not parties to the divorce.  Therefore, their rights to collect their debts aren’t affected.

Creditors can be joined to a divorce proceeding but it’s usually not done.

So, American Express (my favorite creditor villain)  is free to collect its debt from either spouse if both were liable before the divorce.

Either spouse is free to file a bankruptcy case and discharge their liability to American Express.  If the case is a Chapter 7, American Express can’t sue the spouse who got a discharge, but can sue the non bankrupt spouse to collect.

And after a Chapter 7 discharge, the spouse who files bankruptcy is still obligated to indemnify the ex, should AmEx attempt to enforce the debt.

Chapter 13 discharges debt and indemnity

In Chapter 13, both the debt and the obligation to protect the former spouse are discharged.  It’s one of the most significant ways that the Chapter 13 discharge is broader than the discharge in Chapter 7.

Also dischargeable is any provision of the divorce that requires one spouse to pay the other to equalize the division of property or to repay other debts between the parties.

Support obligations are not dischargeable in any form of bankruptcy.  Family support, child support, alimony all survive a bankruptcy discharge.

Divorce agreement should anticipate bankruptcy

Any divorcing couple with debts and assets to divide has to assume that the costs of living separately will leave less money to pay on the debts of the marriage.  The possibility that one spouse will seek relief in bankruptcy must be considered.

It’s critical to look at debts and understand which spouse is contractually obligated to each creditor.  Absent joindure of the creditor, that liability will outlive the marriage, unaffected by the divorce decree.

Where both spouses are liable for a debt, you have a ticking time bomb, should one spouse not pay.

One possible tack is for the couple to file a joint bankruptcy while they are still married.  That reduces their exposure to third party creditors.  It may make the divorce simpler by eliminating debt that has to be divided.

A divorce judgment can’t prohibit the spouses from filing bankruptcy.  Each spouse has to look at the marital settlement agreement and consider how they cope if their opposite number files bankruptcy.

Image courtesy of Bryan Burke  

 

 

Is It Too Late For Bankruptcy?

egg timer-ragged edgeYou face a crisis:  you’ve been served with a lawsuit;  judgment has been entered against you; or even, a garnishment has been served on your employer.

Has time run out? Have you’ve waited too long for bankruptcy to help?

While I don’t recommend procrastination, still,  at almost every stage of debt collection, bankruptcy can save your bacon, or at least what’s left of your bacon.

Served with a lawsuit

When a summons and complaint lands on your doorstep, the clock starts ticking on the time you have to file a written answer to the complaint.

Skip filing an answer and the outfit suing you wins whatever the complaint prays for.

Filing bankruptcy at this point stops the lawsuit in its tracks.  The automatic stay that comes, automatically(!), with the bankruptcy case forbids further action in that suit without express court permission.

Assuming the debt doesn’t involve dishonesty or family support, any liability you have on the debt is discharged at the end of your bankruptcy case.  End of story.

It’s not to late to file.

You lose a lawsuit

Once a judgment is entered against you, bankruptcy can still help. Just because a court has determined that you owe the money and the creditor is entitled to all the legal remedies to get its money, the debt may still be discharged in bankruptcy.

The kinds of debts that can’t be discharged are based on the nature of the debt, not where the debt is in the collection process.  Bankruptcy law says that you can’t escape your obligation to support your family or pay your recent taxes, or escape debts created by fraud or other serious dishonesty.  But garden variety credit cards, loans and medical bills can be discharged, even after there is a judgment entered for the debt.

Wait until judgment is entered and there are some consequences that might limit relief in bankruptcy.  Chapter 13 has limits on the amount of debt you can owe and qualify for Chapter 13.  Once a judgment is entered, the amount of the debt is fixed and it might put you over the debt limits.

Another limiting consequence of waiting til judgment is entered is that a finding by a court that you committed fraud or misrepresentation may require a bankruptcy court to make the same finding.  The debt may then be excluded from the discharge.

With those exceptions, it’s not too late to file bankruptcy if a judgment has been entered against you.

Creditor gets a judgment lien

Bankruptcy can change the balance of power even if you’ve waited til the creditor with a judgment has perfected a judgment lien against your assets.  How much change is possible depends on the exemptions available when you file bankruptcy.

One of the basic principles of bankruptcy is that the bankruptcy discharge eliminates your personal liability, but liens survive the bankruptcy attached to the assets you had when your filed.

But there’s hope:  you are permitted to avoid judgment liens that interfere with any exemptions you could claim in an asset.  It doesn’t matter how fresh, or how old, the lien is.  If it prevents you from getting the benefit of an exemption, you can avoid it.

Avoiding a lien requires filing a motion in your bankruptcy case.  It doesn’t happen automatically.  And if you forget to do it in your bankruptcy, you can reopen the bankruptcy case in the future to file the motion.

It’s not too late to discharge your personal liability for a judgment and eliminate the judgment lien as well in bankruptcy.

Your wages are garnished

By the time your wages are threatened with garnishment, your creditor has a judgment.  That judgment brings with it the power allowed by state law to collect that judgment.

But just like each scenario we’ve discussed here, a garnishment can be stopped by filing bankruptcy and getting the automatic stay in place.

Your creditor may be entitled to what ever wages you have earned between the time the garnishment was served on your employer and the day you file bankruptcy.  But gong forward, your wages are yours.

Bankruptcy law also lets you recover amounts your creditor got in the 90 days before you filed bankruptcy.  Wait longer than 90 days, and you lose the right to reclaim the garnished funds.

Bankruptcy stops garnishments.

Timing is up to you

At almost every point in a collection suit, filing bankruptcy can stop the bleeding and allow you to eliminate your debt.  The discharge makes that debt forever uncollectible from you and your assets.

There is some damage to your finances that bankruptcy can’t undo.  Borrow against your home or invade your retirement assets to pay bills that you ultimately discharge in bankruptcy, and you have no legal ways to get that money back.

If you’re facing debts you can’t pay, make a plan.  Early is better than late.

 

Image courtesy of Flickr and openDemocracy