His problem was liquidity and an income that was certain to decline.

The disability income would end at 65, leaving him with only Social Security and the income from the illiquid annuities to live on.  Minimum payments on $50,000 of credit card debt took 40% of his current income.  It would take 42 years to pay it off at contract terms.

Like so many clients, he wanted desperately to pay off the debt, yet the credit card interest rates made it impossible without selling off the assets on which he relied for a stable future.

Care to guess what saved the day?  The recession!

The interest rate on federal funds is at .18%.  Less than one percent.

It’s the federal funds rate that defines the interest rate on federal judgments, and therefore the interest a solvent debtor must pay creditors in Chapter 13.

In a Chapter 13 plan, he could keep his house, preserve the annuities he’d need for his support at 65, and  pay the face amount of the debt plus interest.  All that Chapter 13 requires is that creditors do at least as well under the Chapter 13 plan as they would in a Chapter 7 where the trustee would sell the assets of the trustee’s choice to pay creditors.

So,by reducing the interest rate from credit card rates to the federal judgment rate,  my client’s $50,000 in credit card debt could be paid off in a 100% Chapter 13 plan, with less than $300 of interest paid on the debt over the entire 60 months of the plan.

Payments to the plan will be less than the current debt service and in five years, he’ll be debt free.

When we talk about saving, we talk about the power of compound interest.  Savor the reverse, the power of a miniscule interest rate on debts paid through Chapter 13.

I’ve finally found the bright side of the Great Recesssion.

 Image courtesy of Leo Reynolds.

The last image in his signature book, Where The Wild Things Are, is my touchpiece for clients afraid to file bankruptcy.

Do you remember it?

What does a book about a naughty child who adventures in a nighttime land of monsters have to do with bankruptcy?

When you get to the last page, and Max is back from his excursion with the wild things, safe in his own bed, you discover that the “monster” who loomed large and threatening, was the size of a dust bunnie, living under his bed.

In other words, the monsters were all blown out of proportion.  Instead of being three times as big as Max was and vicious to boot, they were insignificant.

Which is a long way of saying that my clients let their imaginations run away with them.  They create mental worlds of horrors that happen when you file bankruptcy.  Such as:

• “they” come to your house and take everything you own
• you can’t keep your house if you file bankruptcy
• you have to explain to a judge why you deserve bankruptcy relief
• you’ll never get credit again, ever
• your name and bankruptcy filing is published in the paper
• you can’t discharge credit cards, medical bills, taxes, you name it

Each of these horrors are made up.  People who are stressed and fearful  take a little bit of truth about bankruptcy, or some of the bad information out there, and blow it up til they are so scared of the unknown they’d rather continue in the world of financial hurt they presently occupy.

It’s unfortunate that my clients can’t make as much money from their imaginations as Sendak did.

But the truth is that when you have good information about how bankruptcy really works, the horrors are mostly made up.  The relief that is available is real and reassuring.

Most of the pain in bankruptcy is self inflicted.  You can beat yourself up about the need for a fresh start as much as you choose.  But it doesn’t have to be.

Image courtesy of geraldbrazell

The truth is income taxes are dischargeable in bankruptcy if 3 reasonably simple conditions are met;  debts to the government are generally dischargeable in bankruptcy.

Please reread that line, and get that bit of law in your head.

Because you wouldn’t know the truth of the statement above from reading the blog of this lawyer (who puts himself forward as an expert on bankruptcy law) whose opening line is utterly and absolutely wrong on the law.

Is Vincent Howard of Orange County  really giving this information out to his clients? I surely hope not.

We routinely tell our clients, he assures us, “that tax debts are not dischargeable in bankruptcy. The public policy goal of this rule is clear: bankruptcy must not allow debtors to escape debts to the government…”

Hogwash!

The Simple Truth About Discharging Taxes In Bankruptcy

The Bankruptcy Code starts from the proposition that all unsecured debts are dischargeable, and calls out the exceptions in Section 523.

A bit oversimplified, the rule is this:   income taxes can be wiped out in bankruptcy if the return was due without penalty more than three years before the bankruptcy case is filed;  if the return was filed late, it has been on file for two years; and the taxes in question were assessed more than 240 days before the bankruptcy was filed.

So, the correct statement of the law is that some income taxes cannot be discharged;  other, older income taxes can be discharged.

Discharge Of Debts To The Government

Despite what the Howard Law Firm says, debts to the government are generally dischargeable.  Debts for overpayment by the Social Security Administration can be discharged;  SBA loans, guaranteed by the government are dischargeable.  Again, nondischargeability is the exception, not the rule.

Just Because The Website Says So, Doesn’t Make It True

Perhaps the democratization of publishing that came with the internet and blogging software was a mixed blessing.  For every genuine contribution to the public’s understanding of  bankruptcy law, there’s some lawyer writing about bankruptcy to get his name before his community, without regard to the accuracy of the information he puts out.  And if he genuinely believes the law is as his blog states, then he stands to harm his clients.

As lawyers, we have a duty to the public to get this stuff right.  The public is injured when someone who has the credentials that suggest he is a reliable source spreads inaccuracies.

Bankruptcy law is complicated, sometimes uncertain, and these days, evolving as the courts interpret the mess that is “bankruptcy reform”.  But the law about the dischargeability of taxes hasn’t changed markedly in more than three decades.

If you are a consumer or small businessperson trying to get your arms around what bankruptcy offers, read on here.  Test propositions about the law across several sites.  Buy an hour of an experienced  bankruptcy lawyer’s time and double check what your internet research has turned up.

The world of bankruptcy information on the internet is a jungle.

My firm is hip deep in bankruptcy cases we’ve taken on after the first attorney screwed things up.  Most of the problems seem fixable, some may resist rescue.

But the clients will end up paying twice;  the cost will undoubtedly be greater than if they’d paid for competent counsel to do it right the first time.

We have three conversions from Chapter 11 to Chapter 7 involving significant real estate assets.

We have cases where big ticket assets were omitted.  We have cases where the initial attorney just didn’t persist with the debtor to get the schedules right, and ones where counsel didn’t explore the choice of chapter.

Almost without exception, the debtors chose counsel based on price.  They went with the lower price for their bankruptcy case, and they bought a rat’s nest.

Why is it that notions of economy only surface after a client has wracked up tens of thousands of dollars in debt?

Many of the debtors gave less thought to credit card expenditures or purchases of investment real estate during the boom than they give to picking a bankruptcy lawyer.

The influx of lawyers to this field and the prevalence of lawyer advertizing suggest bankruptcy law is a commodity.  Lawyers with no track record to tout or past clients to spread the word  compete on price.  If you can buy a $15 toaster, why pay $30? goes the thinking.

The existence of non lawyer petition preparers and do it yourself books reinforce the idea that bankruptcy is more like playing Go Fish than contract bridge.

Then, there are the official forms, suggesting that filing bankruptcy is all about the paper and not about the disclosure.

Quality of counsel is not reliably correlated with price:  I’ve seen some utter newbie lawyers charging more than highly skilled veterans for an inferior product.  But capable counsel is seldom the cheapest.

So, my charge to those needing bankruptcy relief is to consider that hiring the least expensive lawyer is a poor bargain.

Another time, I’ll talk about how to assess a lawyer’s suitability for your case.

Image courtesy of purpleslog.

If it is too complicated for the owner to explain to another, it probably represents a voidable fraudulent transfer.

This man had paid an attorney a fistful of money to create LLC’s and limited partnerships, each of which held fractional interests in the other entities.  Some pieces of real estate were owned outright by one entity or another; others were held jointly.  One LLC was the general partner in another entity.

The client came with a chart, with arrows running back and forth.  He couldn’t explain how it worked, or why it was structured that way, other than to make it difficult to reach his wealth.

But it came down to this:  if there is no explicable business reason for this arrangement, it probably represents a scheme to hinder, delay, and defraud creditors.  One a bankruptcy trustee could penetrate.

What fraud?

One of the hardest concepts for the public to grasp is that of fraudulent transfers.  The law does not permit one to transfer property for less than its present value in order to keep the asset from creditors.

Put another way:  you can’t give your assets away to keep them from creditors.

At law, there are two kinds of fraudulent transfers:  ones with actual intent to hinder creditors, and ones that are constructively fraudulent.

A constructively fraudulent transfer is innocent but has the same effect of putting money where creditors can’t easily reach it.  A gift or a sale for less than fair value are constructively fraudulent.

Charity run amok

Even the most innocent gifts to charitable entitles can be fraudulent transfers if a creditor then holding a claim against the donor is prejudiced by the gift.

When I represented Chapter 7 trustees, I once had to retrieve an art work given by the debtor to the Easter Seals Society.  On the face of it, the debtor was a model of benevolence.  The real story was far different.

The debtor hadn’t disclosed the jade carving in question in his bankruptcy schedules.  Then soon after the bankruptcy, he got his picture on the front page of the local paper, donating the  multi thousand dollar piece to charity.  When we retrieved it and tried to auction it off, we found it was a fake, worth maybe $600.

The debtor was lucky to escape with his discharge.

Wages of fraud

Bankruptcy debtors who make fraudulent transfers expose the recipient to suit by the bankruptcy trustee.  The trustee has the power at law to recover transfers that are either actually or constructively fraudulent.

Large scale, intentional efforts to put assets into the hands of others can result in the denial of the debtor’s discharge.  Defeating the purpose of filing bankruptcy in the first place.

Related posts on legitimate asset protection

Uncle Sam Does Asset Protection

What Can I Keep If I File Bankruptcy

 Image courtesy of Fiona Bradley

Not in my book, if you are self employed.

The self employed don’t have their estimated income taxes withheld from their paychecks.  There aren’t any paychecks if you are among that resolute band of entrepreneurs, small business folk, and independent professionals.

You are expected to make quarterly tax deposits throughout the year toward the current year’s taxes.

But as I asked bankruptcy clients over the past couple of months about the status of their 2011 tax return, I saw a pattern in those who expected to ask for an extension of time to file the return.

Almost always, they were putting off making tax deposits for this year until their tax professional calculated the right amount.  They were not only extending the time to file last year’s return, they were postponing advance payment for this year’s taxes.

Trouble ahead

The light at the end of the tunnel is the approaching express train.

Put off beginning to provide for this year’s taxes, waiting for a precise calculation, and you set yourself up for being short come next spring’s tax season.

In a perfect world, you don’t want to pay more taxes into Uncle Sam’s holding than necessary.  But in my experience, the longer you delay beginning to pay, the more likely you can’t pay when you reach year’s end.

I’ve even advocated ditching quarterly tax deposits in favor of monthly tax deposits.

No harm, no foul

Here’s my proposition for those on extension:  deposit at least one quarter of the taxes from the last filed return in April, and each quarter thereafter until your accountant calculates more precisely what is required for this year.

If that turns out to be more than a quarter of your estimated 2012 liability, you can even it out in the later quarters by reducing your deposits.

If you find you’ll owe more taxes this year than you did two year’s ago, you’ve at least gotten a start toward paying.  You’ll have to make larger deposits in later quarters to avoid penalties for being under withheld.

But that beats confronting a larger-than-expected tax debt without having made any provisions for payment.

Being self employed is a heady proposition, as long as the heady feeling isn’t oxygen deprivation when you learn you owe a fistful of taxes, for which you’ve made no provision.

Image courtesy of complexify.

I am a mortgage law attorney.  I am not a bankruptcy attorney. I never have been.

But in the current financial climate, I see clients in my office daily who desperately need to file bankruptcy…And they won’t.

The reasons they give, and the parade of horrors they’ve built up in their minds about bankruptcy, are the subject of this brief missive.

I’ve listed the six misconceptions below in the rough order of the frequency with which  I hear them.

Consider this my humble attempt to obliterate those “…nattering nabobs of negativism.” as Vice President Spiro Agnew once put it.

Bankruptcy Turns My Credit into Poo for Ten Years

Nope. Not so.

It will indeed be on your credit report for up to 10 years. Some say it is there forever because bankruptcies are public records that are not expunged over time if you know how to look them up.

But if you mean your credit rating? You mean that three digit number thing you’re obsessed with now, that you never even used to look at?

Plan on it returning to the 725-750 range after about two years if you’re busy paying your bills on time post-bankruptcy.

Think about it. You score can’t get much lower after you file, and every bill you pay on time makes it go up. Your credit rating plotted over time looks more like a fetal heartbeat than a gut wrenching roller coaster ride.

No. It just ain’t so.

A Bankruptcy Will Strip Me Naked

I love this one. Bankruptcy is an incredibly powerful debt management and restructuring tool. Just ask WAMU, Lehman Brothers, Worldcom, General Motors, Enron and PG&E to name just a very, very few.

There are several types of bankruptcy filings. Each is a different highly specialized type of tool to be used to achieve very unique purposes.

Corporations use bankruptcy very strategically. The sharpest corporations know exactly to the day when they will file and to the day when they will emerge from bankruptcy. They emerge with the appetite of a hibernating Grizzly bear that slept late into summer.

The mistake most consumers make is that they rush into bankruptcy in great haste after pulling a phone number out of the yellow pages. This alone is huge mistake and often results in the consumers’ downfall.

Consumers need to consult with, and plan their filings the same way GM and PG& E did. A well timed and well considered bankruptcy can produce astonishing results for individuals.

Step one is to avoid “F&F” bankruptcy attorney. (The ones who File and Forget.) Consumers need to seek out skilled bankruptcy attorneys who are well versed in what each type of bankruptcy can do for the individual consumer and when.

Please don’t dig up the cheapest bankruptcy attorney you can find when there is hundreds of thousands of dollars of debt you personally owe. The results of picking the low price leader are uniformly bad.

And the cost to fix the situation is far higher than getting it right the first time.  Some screwups just can’t be fixed.

I’ll Lose My Home if I File Bankruptcy

Nope. Not necessarily so.

Someone likely to lose their home in bankruptcy is probably equally likely lose it without filing. It just may take longer for the house to ripen into full blown economic gangrene that rots and falls off your economic body.

Currently tens of millions of homes are so far underwater that in a Chapter 7 filing, the debtor commonly keeps the house as long as they continue to make the mortgage payment. But they can often get rid of mountains of other debts.

Meanwhile in Chapter 13 debtors can strip off no-equity junior mortgages and encumbrances on the house and permanently discharge them for pennies on the dollar.

In a Chapter 11 debtors may be able to cram down their rental property mortgages to the current fair market value of the property, AND KEEP their no equity home in the bargain.

The United States Government and the lending industry actually caused the massive underwater mortgage problem. Their policies are causing the problem to get worse.

There is no reason debtors shouldn’t make lemonade from the lemons the government and the lending industry are busy growing.

I Owe Income Taxes So Bankruptcy Is Useless

I hate it when I hear this. Bankruptcy is one of the only ways to permanently get rid of income taxes.

We’re living in an era when the IRS, in the Bay Area, will not settle your tax debt unless you are unemployed, on kidney dialysis, and on a heart-lung machine.

Income taxes are dischargeable in bankruptcy if they meet the tests under the Three Year Rule, The Two Year Rule, and the 240 Day Rule. Three special time periods have to run out.

There are complex rules for figuring out if they have run, and certain things the taxpayer may have done can keep these time periods from running out.

“F&F” attorneys don’t have a clue about any of this. That’s why you need a specialist who knows what they CAN do in bankruptcy, how to do it and most importantly when. By the way, the same rules apply to the California Franchise Tax Board as well.

The corollary is that I Owe California Sale Taxes So Bankruptcy Is Useless

See the misconception immediately above. Not true.

The identical general set of discharge-ability rules applies to liability for California sales taxes. The State Board has admitted this in writing while commenting on a proposed piece of legislation. (Oops…)

See Staff Legislative Analysis 2008 for a proposed bill that would stop the accrual of interest on unpaid sales and use taxes for a small business during the pendency of a Chapter 7 Bankruptcy proceeding. Proposed Section 6593.7 for of the Revenue and Taxation Code.)

With My Income, I Will be Forced to File a Chapter 13 and Pay All the Debt in Full

Please see a solid bankruptcy specialist before concluding this is true.

It is true that there is now a Means Test for deciding whether or not Chapter 7 is available.

But it takes a damn good bankruptcy specialist to model what will happen. Depending on what you want to achieve, a Chapter 13 might actually be preferable.

Many Chapter 13 plans pay little or nothing to unsecured creditors.  It may be termed a repayment plan, but that doesn’t mean creditors necessarily get anything.

I Owe Too Much to File Any Bankruptcy

Nope. That’s like being too good looking.

It is not how much you owe. Just ask General Motors.

It is how much money and or property you have that is not subject to any debts. Where you have lots of money or other property which can be liquidated to pay your debts, filing bankruptcy may not be useful because you end up paying all the debts in bankruptcy or most of them.

It’s not the amount of debt. (except in Chapter 13.) There is NO debt limit in Chapter 7 and none in a Chapter 11 proceeding.

Wise up by shedding these bankruptcy bloopers.  Good legal advice from an experienced bankruptcy lawyer may set you free.     

Bill Purdy is a tax and mortgage law attorney in Soquel, California helping homeowners statewide with foreclosure and loan modification issues and the taxes that may follow.  He’s written recently on Foreclosures & 1099′s  and Four Don’ts When You’re Behind on Your Mortgage.    

Image courtesy of Leo Reynolds

I cringe when a client says that they’ve researched bankruptcy on the internet before making an appointment with me.

For every sound, balanced, nuanced article on consumers and their debts, there are bunches of sloppy, inaccurate sites, often trying to make bankruptcy so frightening that you’ll buy whatever they’re selling.

But when a group of bankruptcy lawyers, trying, I’d assume, to provide useful information on bankruptcy get it so wrong, I’m perplexed.

Bankruptcy Home, which identifies itself as a group advertising site for bankruptcy lawyers, has community property absolutely wrong.  At least California community property, which is all I’m licensed to deal with.

When one spouse in a community property state files bankruptcy, the site says, the debtor must include the value of one half of the community property.  Wrong, wrong, wrong!

I don’t know whether these lawyers haven’t read the bankruptcy code or haven’t read the site that they pay for.  Neither alternative is flattering to them.

All Community Property Comes In

Here’s what  section 541 of the bankruptcy code says:

 (a) The commencement of a case …creates an estate. Such estate is comprised of all the following property…

(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—

 (A) under the sole, equal, or joint management and control of the debtor; or

(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

Image courtesy of Tambako the Jaguar.

Why Many Homeowners Need to Run,  Not Walk, to Bankruptcy Court and File for Chapter 13 Bankruptcy.

The world has many sacred sites. Places that inspire great faith. Places where people go to express, renew, and sometimes discover their faith. Rome, Mecca, and the Holy Land come to mind.

But there are humbler locales like Bakersfield or maybe it was Barstow, where, nestled in a modest single family home, one hears tell of the visage of Jesus appearing in the genuine imitation wood-grain veneer on the bathroom door when the homeowner takes a shower.

Closer to home, the forest near Pinto Lake in Watsonville California, is said to contain a tree in which the face of the Virgin Mary appears to true believers. Cool…

In the Internet Age, you don’t have to travel the world to see a miracle, discover your faith, or renew it. Miracles have bubbled up much closer to home than they’ve ever done before, creating a little mini-Lourdes springing forth beneath your feet.

Miracle one

For Americans who are still in their homes, the first miracle may be just to have retained your home against the onslaught of deliberately deceptive neg-am mortgages, mail fraud, wire fraud, conspiracy, forgery, and perjury committed by the financial industry, all of which has gone completely unpunished.

All of  those constitute serious felonies that the federal courts, yet the Untied States Attorneys and of course the FBI, can’t do enough to ignore. Meanwhile these crimes continue to be uncovered daily by civil attorneys fighting desperately, house by house, to save the homes of individual homeowners.

The Miracle You Perform

The hidden miracle under your feet may be something much greater… It’s the second miracle of the disappearing value of the real estate you call “home”. It may  time for you to make lemonade from your biggest lemon.

That “underwater” lemon that is your house could be your own personal financial savior. That is, if salvation consists of keeping your home.

If you want to give the holder of your second and third mortgage that taste of cold steel many of them so richly deserve, now may be the time.

Enter Chapter 13

With lenders engaged in a cruel, corrupt and one-sided game of loan-modification-water-torture, there is a way for many homeowners to level the playing field. It’s known as a Chapter 13 Bankruptcy strip-off AKA lien stripping. For many homeowners it’s now time to quote chapter and verse from the Federal Bankruptcy Code.

Time to do it now. Before a Congress, completely co-opted by the financial industry, does the bidding of its paymasters and removes this tool from the pathetically tiny toolbox of homeowner rights.

Stripping Off Your Second Mortgage in Bankruptcy

In the 9^th Circuit of the federal court system, which sadly includes California, federal district and appellate court judges generally despise distressed homeowners. They’ve made no secret of their hatred of homeowners. The body of decisions emanating from this group reads like and ode to the sanctity of any and all things that will satisfy the lending industry’s every whim.

Standing defiantly removed from that not so august cabal, are the U.S. Bankruptcy Court’s decisions and the judges therein. In particular Zimmer, 313 F.3d 1220 and Lam, 211 B.R. 36 9th Cir.BAP (Cal.). Together these cases establish a potentially massive source of relief for beleaguered homeowners in Chapter 13 by utilizing a simple formula:

If the value of your home is less than the amount of your first mortgage, and you have a second, third or more mortgages mortgage on your home, those junior mortgages can be reclassified as an unsecured debt and treated essentially like credit card charges.

They can be discharged and “stripped off” in a Chapter 13 Bankruptcy proceeding for pennies on the dollar over the period of the repayment plan.

There is no way out of this for the lender and no adverse debt relief tax for the debtor due to the bankruptcy exception provided in Internal Revenue Code Section 108.

For once the lender has to do something they’ve been making California homeowners do for the last 7 years: they gotta stand there and take it.

They who destroy equity in the homes of the people shall in turn have their liens destroyed.  So sayeth the law.

Guest author Bill Purdy practices real estate and tax law in Soquel, California specializing in foreclosure relief, predatory lending, and short sales.  Bill has written on 1099′s and foreclosure and The Don’t Do List for Troubled Mortgages.

Image courtesy of MGChan.

Master a universal system for crafting Chapter 13 plans that meet the confirmation tests, provide enough (and only enough) money to fund the plan, and deal correctly with issues of adequate protection.

Wearing my hat as Director of Education at Law-full.com, I’m presenting a 2 hour program in my bankruptcy basics series on Crafting Chapter 13 Plans April 14 at the Computer History Museum in Mountain View.

The class will presume some bankruptcy experience but no Chapter 13 expertise, so both lawyers new to the field and paralegals should benefit.

The room is small and about half the seats are presold.  So, if  a grounding in how this is done, independent of software and model plans, would strengthen your skill set, join me.

You can sign up online at law-full.com;  or you can download the flyer,  Law-full Chapter 13 Plans, and use snail mail.

At the end of the class, I hope you can see Chapter 13 plans clearly.

Image courtesy of jdnx