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Stupid Moves Before Seeing A Bankruptcy Lawyer

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before bankruptcy

Don’t tidy up your financial affairs before consulting a bankruptcy lawyer.

You may waste money or lose bankruptcy options when you make last minute changes to your situation.

You’ll have the widest set of options for a fresh start if your lawyer sees the situation as it is today.

What looks to you like complexity and disorder may look to your bankruptcy lawyer as opportunity and advantage.

The high cost of financial housecleaning

My heart sinks when a new client tells me that they’ve just paid off the loan their parents made them before seeing me.

Or borrowed against their retirement to fund debt management.

Or paid off the taxes so that all the remaining debt is credit cards.

For different reasons in each instance, those actions complicate a bankruptcy or squander assets that could have been saved in bankruptcy. [Read more…]

The Kind of Person Who Files Bankruptcy

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who files bankruptcyThis is last place I ever expected to be, says the client sitting in my bankruptcy office.  I hear that probably twice a week.

Or, the client assures me:  I’m not the kind of person who doesn’t pay their debts.

My clients seem to think that only someone who is different or defective has trouble paying their bills.  Not so at all.

Who IS the kind of person who files bankruptcy?

It just happens that Leslie Linfield has assembled a composite picture of  the “kind of person” who filed bankruptcy last year.

Leslie should know:  she heads the Institute for Financial Literacy.

The typical bankruptcy filer

White, married couples in their mid to late 40″s, college educated and  both working are the “kind” of people who file bankruptcy.

Doesn’t sound very different or distinctive, does it?

Most of them find themselves in bankruptcy by reason of a loss of income.  Even if both are once again working, their income is now less and it’s not enough to pay the accumulated debts.

Trends

Over the past decade, the average age of  those filing bankruptcy has risen as more seniors file bankruptcy.  Many have carried consumer debt  and substantial mortgage payments into retirement  and find they can’t make it.

In my Bay Area  practice, over the past three years not only am I seeing more people who are 60 plus, I’m seeing more people whose last job paid $150,000 or more.

Now, they are either unemployed, or back to work after an episode of unemployment  at far lower pay.  Investments in real estate that were expected to provide supplemental income crashed.  Expenditures that were manageable and appropriate at higher incomes couldn’t be sustained with a drop in pay.

I am also seeing lots of small business owners, some with businesses that have survived for years, only to go down in the Great Recession.

The face of bankruptcy

In the past week, my new bankruptcy clients have included:

  • a 50’s entrepreneur with a well established business floundering  under credit card debt that financed operations
  • a young couple walking away from a house that is grossly under water
  • a retired couple whose start up didn’t
  • a 50 ish couple, housing their adult children and their kids, on half the prior income
  • two couples who invested in out of state rentals before the crash
What kind of people file bankruptcy?  All kinds, as you can see.
Or maybe it’s only those who are smart enough to see that bankruptcy offers a way out of an impossible situation and clears the decks for a better financial life.

More about the decision to file bankruptcy

What factors should you look at when considering bankruptcy?

You don’t need bankruptcy if….

Debt settlement as an alternative

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Inclusion in Bankruptcy Doesn’t Equal “Discharged”

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include debts

Convincing clients that they need to include all of their debts in bankruptcy is one of the hardest parts of being a bankruptcy lawyer.

The struggle often seems Herculean.

Sometimes, they will tell me they don’t want to include their car loan in the case because they “need the car”.

Sometimes I find the student loan payment in the budget but not on the list of creditors.

Or there’s a creditor they don’t want to know about the bankruptcy.

Listed not the same as discharged

Part of the issue is confusion between scheduling a debt and discharging the debt.

When you file bankruptcy, you are required to list all debts and or risk denial of discharge if you don’t.

After all, you sign the schedules under penalty of perjury.  One of the standard questions the trustee asks at the first meeting of creditors is “did you list all of your debts”.

Rules for testifying when you go to bankruptcy court


You need to be able to say, honestly, “yes”.

However, debts are not necessarily discharged just because they are listed.

The Bankruptcy Code specifies a number of debts that simply aren’t dischargeable in bankruptcy. Those debts still must be listed.

Debts secured by your assets must be listed, even though the lien on the asset will survive the bankruptcy.

The bankruptcy bargain involves making full disclosure of your financial situation in exchange for the discharge.

Debts after bankruptcy

The desire to exclude debts from the schedules is sometimes fanned because debtors don’t know that they can reaffirm debts during their case.

A reaffirmation agreement essentially waives the discharge as to that particular debt.  A reaffirmation agreement puts the parties back on the same legal footing as they had before the bankruptcy was filed.

Reaffirm the car loan and you are protected against repossession as long as you make the payments as you did before bankruptcy.

More on keeping your car through bankruptcy

You can keep paying

Clients are frequently surprised when they learn that they can continue to pay a discharged debt voluntarily if they wish.

“Pay the dentist after the case is filed if you wish, but list them in the bankruptcy if you owe money when the case is filed. “

Then, there are the clients who “love” their credit card issuer and want to keep paying because of loyalty or out of fear of being without plastic.

I have to tell them the sad news that the love is one sided.  The issuer has other ways to find out about the bankruptcy case and may cancel the card independently of being listed or not in the case.

Moral of the story, there are a number of options for debts post filing, so don’t get tripped up by leaving out creditors.

More

Who you need to pay after bankruptcy

If you left a creditor out of your bankruptcy papers

Image credit:  Monidas de Mon and Flickr

Collection Suits and Court Dates

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glasses-983947_1280_opt

Those in financial difficulty are frequently not operating at their peak.  I know that.

But for the life of me, I can’t understand how the recipient of a summons and complaint from a California court can read the papers and absorb only that they have a “court date”.

Arghhh!

How California lawsuit works

The basic outline of a law suit is that the creditor files a complaint with the court. The court issues its summons, which validates the complaint and puts the defendant on notice that there is a legal suit pending.

The summons tells the person served plainly that they must file a typewritten answer to the complaint within 30 days of service.  Fail to file an answer and the other side may get a judgment for the relief prayed for, which is usually money.

Served along with the complaint is a notice of case management conference on a given date.  The CMC is well after the date on which the answer is due.

At the case management conference, assuming that an answer has been filed, the court will set deadlines, trial dates, etc.

But none of this scheduling is necessary if the defendant has not contested the complaint by filing an answer.

You must answer

Why is it that a consumer debtor grasps only the date of the case management conference, and absorbs none of the rest of the message that says clearly, in two syllable words, that one must file an answer for there to be anything for a court to decide?

Stress MAKES you stupid

I should have a cassette tape to play to tell clients that the case management conference date is meaningless if you didn’t file an answer.

If you don’t have a defense to the action, that’s fine.  If you agree that you owe the amount of money shown in the prayer of the complaint, there may be no need for an answer and a defense.

Just don’t obsess about a date that means nothing if you didn’t take the time to read the summons and understand that filing an answer is the price of admission to the courthouse.

Lawsuit is a wake-up call

Often, the filing of a lawsuit is just the most dramatic evidence that your finances are scrambled.

Consider whether you spend your energies fighting this one action, or whether you need a more global remedy like bankruptcy.

Bankruptcy and the alternatives

Image courtesy of Pixabay.

Behind On Your Car Payment? How To Keep The Car & Pay Less

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car repossessionIf you are one of the  7 million Americans living in fear that your car will be repossessed, consider how Chapter 13 bankruptcy can save your wheels.

Losing your car can accelerate a torrent of nasty financial consequences.

No car, no way to work.

No work, no income.

So, what can a Chapter 13 bankruptcy do to put you back on the road?

Stop repossession

All chapters of bankruptcy impose an injunction on creditor efforts to collect debts, or enforce liens, automatically when you file.   That automatic stay applies whether or not the creditor knows about it.

So, file bankruptcy and any collection actions taken without court permission are void and legally ineffective.  If they pick up your car after you’ve filed, you can compel its return.

The only exception to the stay applying automatically is if you’ve had two bankruptcy cases dismissed in the past 12 months.  More on multiple dismissals.

Spread out car payments

Chapter 13 allows you to put forward a plan to restructure your car loan.  The remaining payoff balance on your car loan can be spread over 60 months.

Unless your car loan is very new, or the original term very long, that probably lowers what you pay each month through the plan.

Reduce interest rate

You can adjust the interest rate on a car loan paid through the plan to the current day, market rate.  As I write, that interest rate in California is between 4 and 5%.

This power to lower the interest rate is central to a successful readjustment of a high interest car loan.  It’s of little help if your loan is less that today’s market rate.

But Chapter 13 in the states of the 9th Circuit has another trick up its sleeve.

Strip out loan add ons

Part of a Chapter 13 plan can be cutting the car loan down to the portion of the loan that financed the car itself;  you can knock out any part of the loan that paid off an underwater trade-in, or a service contract, or gap insurance.

The 9th Circuit said in Penrod that these additions to the amount financed were not protected by the 2005 bankruptcy amendments that gave special consideration to car lenders.

So, you can pare down the car loan that has to be repaid to just the amount of the loan balance used to buy the car itself, and not all the extras.

Deal with other debts

You don’t just file bankruptcy on one debt; bankruptcy includes all your debts.

Some may be absolutely dischargeable, perhaps without paying anything on them.

Some liens can be wiped out.  Back payments on home loans can be caught up in Chapter 13.

Chances are that there’s more going on in your financial life than just the trouble with  your car loan.

An experienced bankruptcy lawyer can help you look at the big picture and propose a solution to keep you trucking.

 

 

 

Shorted Thousands On Mortgage Interest Form

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How can you pay thousands of dollars in mortgage payments in a year, and get a  tax Form 1098 for a fraction of actual mortgage interest paid?

That’s what my client wanted to know.

His monthly mortgage payment is $2715.  The loan is currently interest only.  All the payments were made.

And yet, the Form 1098 from PNC says the year’s mortgage interest paid is only $1800.

So what happened to the other $30,780?  That’s a lot of money to go missing.

Welcome to the further screwed up world of mortgage loan servicing.

The short answer right now to the question I posed at the top is I don’t know yet.

But here’s what I suspect.

What servicer does with your payment

I’ll bet that PNC, the servicer I love to hate, has put the monthly payments in suspense, and has not posted them to the loan.

Federal law requires mortgage payments be posted the day of receipt

By holding them in suspense, they don’t show up as interest paid on the mortgage.

Why the payments were put in the suspense account I don’t know.

What it takes to get them out of suspense, we’ll have to see.

Getting your taxes right

My advice to the client and his tax preparer is to claim a deduction for all of the year’s mortgage payments.  It may conflict with the information provided by the servicer, but the servicer’s information doesn’t necessarily control.

If you don’t claim as large a deduction as you think you are entitled to, the IRS isn’t going to come back and urge you to correct an error that’s in their favor.

You may have to later convince the IRS that your calculation of the amount of interest you paid is correct and the servicer’s statement is wrong.  A copy of the monthly mortgage statement and a escrow analysis statement are a starting point.

Consider as well whether the same problem exists in prior years and if an amended tax return is worthwhile.

Lupe_MännchenTax sleuthing

In the meantime, I’m going to read the note and deed of trust that governs how the lender is supposed to credit payments.  Most security instruments set out the order in which payments are applied to amounts the borrower owes.

I’m hitting the RESPA regulations on suspense accounts and their use and misuse.

And then we’ll spring a Request for Information and a Notice of Error on the servicer.

I wonder how many other servicers will be outed when they produce palpably erroneous tax documents.

Related

Cancellation of debt and taxes

Tax deductions hidden in Chapter 13

Image of boxed money courtesy of Locomomo and Flickr

Why What You Think About Chapter 13 Is Dead Wrong

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bankruptcy misunderstanding

The difference between bankruptcy’s Chapter 7 and Chapter 13 is often expressed this way:   

Liquidation: the process of turning assets into cash

Chapter 7 is a liquidation proceeding

Chapter 13 is a repayment plan

 

And therein lies the biggest misconception about Chapter 13: 

13 does not repay everything you owe.

It’s a repayment plan alright, but not necessarily a 100% repayment .

You may not pay much at all, to any creditor.  It depends.

How much you repay

The amount you repay to creditors through your plan is determined by comparing

Rough and dirty, you calculate the number for each of these factors, and your plan must pay the largest of the three tests.  That payment is spread over 3 to 5 years.

Which creditor gets 100%

Bankruptcy law gives special standing for repayment to two common kinds of creditors.

  • Family support (alimony, child support, or other Domestic Support Obligations)
  • Recent income taxes or payroll taxes

These creditors have a priority for payment,  ahead of all other unsecured creditors.  They get paid in full.  The interest that accrues on family support obligations even survives the Chapter 13 discharge.

Therefore, to get court approval of a plan, the plan payments must be sufficient to make these payments, along with any fees of the Chapter 13 trustee and any of your attorneys fees to be paid through the plan.

Unsecured creditors out of luck

The brutal truth is that general unsecured creditors holding medical bills, personal loans, judgments for money, and credit card debt may get nothing in Chapter 13.

That’s because the available money is paid first to priority claims and the costs of administration of the case.  So a debtor with little disposable income may propose a plan that pays only the costs of the plan and the priority creditors.

Chapter 13 makes creditors face reality

The strength of Chapter 13 is that it often forces unsecured creditors to accept that there simply isn’t enough money to pay their claim.

The bankruptcy schedules show it, and the bankruptcy judge enforces it.

It is that coercive effect that makes Chapter 13 so much more effective than debt settlement:  if the numbers support it, the plan can pay them little or nothing.

So, don’t be put off by the phrase “repayment plan”.

Chapter 13 pays creditors only what you can afford, over a limited period of time, in the order of the importance of the debt.

That’s why I love Chapter 13.

More

Debt settlement is a dud

How secured debt can scuttle a Chapter 13

What bankruptcy should cost

 

 

 

 

 

 

 

Avoid Paying Taxes On That 1099 Form, Legally

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IRS form 1099tax magnifiedIt’s tax time and the mails are full of IRS form 1099.

If you managed a short sale of your property; suffered a foreclosure; filed bankruptcy; or settled your debt for less than you owed, you probably got a 1099.

But that’s not the end of the tax story.

Receipt of the form does not mean  that you must include the reported sum as income.

Please repeat:

mere receipt of the form does not mean you are necessarily paying taxes on that money.

Form 1099 is an informational form.  It is sent out routinely and without much thought on the creditor’s part.

When real property changes hands or when a debt is forgiven,  the creditor involved is required to report the transaction to the IRS.  You,  the potentially affected taxpayer, get a copy.

Here’s the action plan to avoid paying more tax.

Claim the exceptions to the rule

The Internal Revenue Code starts with the proposition that debts that are forgiven increase your net worth.  In IRS-think, there must be a tax due.

But there are exceptions.  The three most important exceptions for my clients:

  1. Bankruptcy
  2. Insolvency
  3. Qualified mortgage indebtedness

Fit in one of these exceptions and the cancelled debt does not get added to your taxable income.

To establish your right to exclude the money shown on the 1099, you have to file IRS form 982.

If you don’t file the form and claim the exception, the IRS has no way to know that, despite the debt forgiveness, there is no tax payable.

Form 982 tax-avoiding choices

Form 982 lays out the possible reasons forgiven debt might not be taxable.

Bankruptcy–  A discharge in bankruptcy forgives the debt without tax consequences.  It’s the first exception found on Form 982.  Bankruptcy law is found in Title 11 of the United States Code. The tax exception applies to the discharge of debt in any chapter of bankruptcy.

Insolvency–  Perhaps,when the debt in question was forgiven, you still owed more to other creditors than the value of your assets.  You don’t have to include the forgiven debt in your income.  You were insolvent.  Note, however, that the solvency calculation here includes the value of retirement assets that your creditors can’t reach.  Many people who have little net worth outside of retirement savings are actually solvent when you add in pensions, etc.

Qualified mortgage indebtedness-  With the Great Recession and a slew of foreclosures, Congress enacted a short term safe harbor for the debt forgiven on a principal residence.  The loan must have been was used to buy or improve the home.  The law was recently extended to include tax year 2016.

In case of mistake

Another situation where you might get a 1099 but not owe tax is where you had no personal liability for the debt;  that is, the debt forgiven was a non recourse debt.  The foreclosure agent probably has no way to know whether the lender had a right to sue you.

When your debt wasn’t really cancelled

If none of the other exceptions to inclusion in income apply, make sure you consider whether you had personal liability for the debt.  If not, seek to have the 1099 corrected, or attach an explanation to your tax return with the facts of your situation.

Remember, just because they sent you the form doesn’t mean you owe the tax.

More on tax return issues

Mortgage interest missing from Form 1098

Tax deductions hidden in Chapter 13

Tax question roundup

Are you insolvent for cancellation of debt purposes

Consequences of unfiled returns

Image courtesy of IRS EIN

 

New Law Protects Californians From Debt Buyers

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debt tilesZombie debt may have met its match.

California law prohibits a debt buyer from bringing suit on a claim that is barred by the statute of limitations. Civil Code § 1788.56.  That’s been the law since January, 2014.

Up until this law was enacted, a creditor was free to sue on a debt that was older than the statute of limitations.  The burden was on the person sued to claim the protection of the statute.

Too often, the debtor didn’t know that and the collector got a judgment on debt that should have been unenforceable.

No longer, as to purchased, charged-off debt.

And a check of reported appellate cases in California in the five years since shows no cases appealed under this statute.  What it doesn’t tell us is what’s happening at the trial court level.

This statute was intended to deal with the kind of suit where the consumer never answered and the debt-buyer won by default. So there’s not likely to be an easily located record.

There’s more to the law than just a bar to filing suit.

Required information about debt

A debt buyer may not even contact a person about a consumer debt unless the debt buyer has in its possession

  1. Proof that it is the sole owner of the debt
  2. Balance of the debt at charge off and a breakdown of charges added since charge off
  3. Date of default or last payment
  4. Name, address and account number used by the original creditor
  5. Name and address of the account debtor from the original creditor’s records
  6. Name and address of all entities that purchased the debt after charge off

Scope of consumer protection

These new provisions became part of California’s Rosenthal Fair Debt Collection Act.  These additions are to be called the Fair Debt Buying Practices Act.

Effective January 1, 2014, they apply to debt bought or sold after that date.  At first, you may be left to guess whether a debt buyer calling about old debt is subject to these restrictions.

To be covered by the FDBPA, the debt must be part of a package of charged-off debt.  Old debt that slips into a portfolio of largely claims that have not been charged off is not subject to this act.

That mystery term, charged-off, gets a statutory definition:

"Charged-off consumer debt" means a consumer debt that has
been removed from a creditor's books as an asset and treated as a
loss or expense.

A debt may be charged off of the original creditor’s books and still be legally enforceable, if the statute of limitations hasn’t run.

Courts must demand proof

Another ground breaking provision requires that no judgment be entered, even if the debtor didn’t answer the complaint, unless the collector has supplied a sworn statement as to compliance with the elements of the FDBPA. Civ. Code 1788.60.

The collector must also provide a copy of the contract sued on, authenticated by a sworn statement.

This will be interesting to watch as, often, even the original creditor can’t produce a copy of the contract.  Who will be available to the debt buyer to vouch for the contract? And will the courts monitor robo signed affidavits?  And impose consequences for lying?

Damages for violation

A debt buyer who violates the statute is liable for actual damages caused by the violation, including the amount of any judgment obtained against the individual;  statutory damages of no less than $100 and no more than $1000; and reasonable attorneys fees and the costs of the suit to enforce these rights.

The debt buying trade press forecasts that the California standards will be applied to all portfolios of old debt sold by businesses.  No more, they say, of getting just the account debtor’s name, address, Social Security number, balance and account number on a computer disk.

Brave new world

The Fair Debt Buying Practices Act is a worthy step forward in preventing abuse by purchasers of zombie debt.

I’m particularly encouraged by the provision outlawing filing suit on debt that is time barred.  I hope to see a like provision applied to debts still in the hands of the original creditor.  Otherwise, the application of the statute of limitations are restricted to those individuals savvy enough to file an answer to the suit.

More

Zombie debt

Action plan if you are sued

When discharged debts rise from the dead

Image courtesy of Flickr and Lendingmemo.com

 

10 Things Tax Professionals Need To Know About Bankruptcy

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accountant-flickr-charlywkarlTax season approaches.

Tax preparers stand a good chance of encountering clients who either have filed bankruptcy, or who may benefit from a bankruptcy filing.

Here’s my list of bankruptcy nuggets that a good tax professional should have at hand.

Debts discharged in bankruptcy don’t trigger cancellation of debt income–

One of bankruptcy’s compelling features is that the debts cancelled by reason of the bankruptcy discharge don’t get included in the debtor’s income.  Bankruptcy, found in Title 11 of the U.S. Code, is the first exception on Form 982 to inclusion of forgiven debt in gross income.

IRS and state tax entities subject to the automatic stay  

A bankruptcy filing enjoins tax authorities from continuing collection action.  Thus the stay terminates garnishments and prohibits levies of the debtor’s assets.  It doesn’t, however, prohibit tax audits.

Bankruptcy can discharge income tax debt three years after return due

Taxes can be wiped out in bankruptcy if the return was due, including extensions, three years  or more before the bankruptcy is filed; any late filed return has been on file for 2 years; and the taxes were assessed more than 240 days before the commencement of the case.  More on overview of taxes in bankruptcy.

Chapter 13 is a quick and certain alternative to an OIC–

A  Chapter 13 plan is confirmed within weeks and binds the IRS just like any other creditor. The case discharges for all time the scheduled taxes, penalties and interest upon plan completion.  The plan must pay the priority taxes (those tied to returns less than three years old) and the interest on the priority tax as of the filing.  No new interest or penalties accrue during the pendency of the case.

Tax penalties are dischargeable

Penalties associated with dischargeable taxes are dischargeable;  all penalties are dischargeable in Chapter 13, and penalties associated with events more than three years past are dischargeable in Chapter 7 even if the tax isn’t dischargeable.

Chapter  7 estate, but not 13 estate, is a separate taxpayer

A bankruptcy estate owes the feds a return, and perhaps tax on capital gains it realizes by reason of sale or foreclosure.   Property remains property of the bankruptcy estate until the estate is closed or the property abandoned.

Tax attributes of the debtor pass to the bankruptcy estate  

The debtor’s basis, loss carry forwards, and exclusions are available to the Chapter 7 trustee, and revert to the debtor when the bankruptcy estate closes.

Debtor can elect short tax year for the year bankruptcy is filed  

A short year election can make tax attributes available to the debtor when he files the return for the pre bankruptcy portion of the year.  It can also quantify any tax due in the year of filing so that it is a priority claim for payment from the assets to be distributed in the bankruptcy case.

Tax liens generally survive the bankruptcy case

While lien survive as a charge on the assets the debtor owned at the filing of the case, the lien does not attach to assets the debtor acquires after the case is filed.  In Chapter 13, the lien need be paid only to the extent of the actual value of the assets subject to the lien.

Allowable deductions may be found in payments made on debtor’s behalf by Chapter 13 trustee

Chapter 13 plans often pay over time mortgage interest arrears  on the debtor’s home.  State taxes paid through the plan or business expenses including taxes may be deductions the Chapter 13 debtor can claim.

The rules covering federal taxes in bankruptcy are found in Pub. 902.  State taxes are subject to the same treatment in bankruptcy as federal taxes.

For more

For help with strategic use of bankruptcy to solve tax problems, look for a certified bankruptcy specialist in your community.

Some state bar associations and the American Board of Certification  certify lawyers who are specialists in bankruptcy.  Find California bankruptcy specialists by county.

Image courtesy of Flickr and CharlywKarl

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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