Northern California Bankruptcy Lawyer

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About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Is It Too Late For Bankruptcy?

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file bankruptcy`You’ve put off considering bankruptcy, hoping to tough it out, or hoping for a miracle.

But at some point, time runs out:  you’ve been served with a lawsuit;  judgment has been entered against you; or even, a garnishment appears on your paycheck.

Is it too late? Have you’ve waited too long for bankruptcy to help?

While I don’t recommend procrastination,  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.

Garnishment survival guide

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.

More

The advice you need before making changes

Spending money before you file bankruptcy

When it’s smart to wait to file

 

Image courtesy of Flickr and openDemocracy

Incorporating Your Business Has Surprise Benefit

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fence-145622_1280_optIncorporate to protect yourself from the debts of your  business, shriek the ads.

That’s the theory of incorporation:  create a separate legal entity in the form of the corporation.

Let that entity incur debt and expose itself to other risks.  If it fails, the personal holdings of the owners of the corporation are safe.

But, in the real world, most big ticket debts that a corporation might incur require the guarantee of the owner.

So if both corporation and owner are liable for the business debts, what has incorporation gained you?

You’ll be surprised.

Incorporate to protect the business

Consider the same move, incorporation,  for the opposite reason.

Incorporate to protect the business from the owner’s debts.

A sole proprietor and his business are one and the same in the law.

When the proprietor has a tax problem or there’s a judgment outstanding against him, all of the business cash and assets are exposed to that debt.

The business bank account can be levied for the owner’s back child support or a judgment against the owner for unpaid magazine subscriptions.

Most exemption laws found in state statutes protect some part of a wage earners salary.  The working man needs some part of his paycheck to put food on the table and gas in the car.

But a proprietor isn’t an employee of his business:  he and the business are one.

The debts of the businessman can put his business out of business.

Corporation immune to shareholder debts

It’s a different story if the business is owned and run by a corporation.

The corporation is a legal entity separate from the shareholder.  The shareholder’s creditors can’t take the corporation’s money to satisfy the owner’s debts.

As a shareholder, you don’t have to worry that your personal creditors will garnish the business’s account debtors to collect a personal debt.

The corporation can retain a reserve for its operation without regard to the claims of the shareholder’s creditors.

Get a job

Incorporating the business also allows the business owner to create a distinction between the money necessary to run the business and the money necessary to feed his family.   He can pay himself a salary, and leave the balance of the business assets in the corporation.

His salary is exposed to his debts, but not his livelihood.

State law provides exemptions that protect a portion of the wage earner’s salary from creditors, a protection that a sole proprietor doesn’t get.

So a creditor of the shareholder-employee can garnish the shareholder’s wages, but they only get a fraction of the total paycheck.  Exemption laws protect the balance of the earnings.

Knowledge workers and service businesses incorporate too

It’s not just brick and mortar businesses that can use protection from its owners.

Realtor and consultants who are not incorporated expose their business cash flow to their creditors.

Nothing is quite so devastating as having your clients served with legal process requiring them to pay the sheriff on your debts rather than paying you.  Or close a big transaction as a realtor and have the tax authorities levy your entire commission.

Incorporation is a powerful tool.  Its principal benefit is, however,  just the opposite of the conventional thinking.

Image courtesy of Wikimedia.

V Is For Value In Bankruptcy Alphabet

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Bankrutpcy Alphabet: V is for Value

 

The Letter V is for Value in my bankruptcy alphabet.

The value of one’s assets drives exemptions and the question of what you get to keep through bankruptcy.

The value of  your assets that are subject to liens also determines whether you can void liens on those assets.

I’m fond of saying that bankruptcy is a snapshot of what you own and what you owe on the day you file bankruptcy.  The workings of a bankruptcy case revolve around what your assets were worth on the day you filed bankruptcy.

It’s sometimes hard for families to realize (and write down on their bankruptcy schedules)  that the value of their personal property is very little, since value for these purposes is what you could sell the stuff in question for.  Particularly in today’s distressed economy, that may be a disappointing number.

What’s it worth

I have strange conversations with clients about the value of their assets.

Asked what their household goods are worth, they give me a substantial number.  Skeptical, I ask  “Could you sell them now for that?”.  “Oh, no,” comes the reply, “but that’s what they’re worth.”

Sorry to say, but the value of  assets in bankruptcy is what they can be sold for, today.

Value critical to exemption law

Many exemptions are capped at a certain dollar value.

In California, for instance, you can exempt $7,175 in jewelry, heirlooms and works of art. So the fact that things you bought for much more are saleable today for far less works in your favor if you want to keep the asset.

Your treasures are more likely to fit within the exemption at the lower value.

Another way a lower value at filing works in the client’s favor involves assets that are encumbered by voluntary or involuntary liens.  The lower the value of home, business, or timeshares, the greater the chance the debtor can strip off liens that don’t really attach to  equity in the asset.

A lien that is stripped off is gone forever, so you reap dividends into the future because of that lower value.

This valuable stuff  has been brought to you by the letter V.

V can also stand for Vehicles in bankruptcy and for Vesting,

More on value

Valuing homes and stripping mortgages

Cutting tax liens down to size

All about exemptions

Image courtesy of Leo Reynolds.

Get Annual Credit Report For Free

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free credit report bandWhen is FREE not FREE?

In a world seemingly driven in all matters by credit reports, getting that report for nothing ought to be a good thing,

But the commercial entities beat the federal government to the web address freecreditreport.com.

And they also got a better ad agency that wrote catchy tunes promoting their product, under the guise of free credit report.

But freecreditreport.com provides you a free credit report only if you surrender personal information, wait for it to come by snail-mail  and sign up for a monthly service billed to your credit card.

They bank on you not cancelling that subscription.

Cha ching!

It’s not really free.

Free credit report

The three big credit reporting agencies do provide a no-strings attached credit report  free to everyone, once a year.

Unfortunately, the URL doesn’t mention free, and doesn’t come with a catchy, banjo driven jingle;

Annualcreditreport.com

But it does provide simple, and free, access to your credit file.

The right to know

Federal law enacted in 2003 gives everyone the right to request a free credit report each year from each of the three national credit reporting agencies:  Experian, Equifax, and Transunion.

For nothing (that is: free) you can examine your credit report once every four months, if you request your free report sequentially from the CRA’s.

Repeat after me:  annualcreditreport.com.

What to do if you find errors

The Federal Trade Commission website walks you through how to challenge inaccurate information on your credit report.  They’ve even included a sample dispute letter.

ConsumerHelpCentral.com  sorts out your remedies if the CRA doesn’t correct the information.

Sing the chorus

Here’s the game plan:

  • Click on www.annualcreditreport.com
  • Order a copy of your report from one agency
  • Look for errors and inaccuracies
  • Challenge bad information
  • Mark your calendar for 4 months to order a report from one of the other national CRA’s

Then, how about I offer a free subscription to BankruptcySoapbox to the best jingle submitted for ANNUALCREDITREPORT.COM. 

I talk about credit after bankruptcy at Bankruptcy in Brief and what your credit report should show after bankruptcy discharge.

Bankruptcy Questions Have Few Quick Answers

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The caller to my law office kept telling my assistant: I just want to ask  Cathy a question.

To which my assistant replied:  you need to first fill out our questionnaire and make an appointment.

But I don’t want a meeting, I just want to ask a question.

At which point, both sides of the call are frustrated.

The caller thinks he has a reasonable request.  The law office isn’t getting through to the caller that a quick answer isn’t possible.

And that’s because:  there are no quick answers to bankruptcy questions.

Or rather, there are no reliable quick answers about bankruptcy.

Bankruptcy answers depend on your facts

To provide an answer that is any good, a bankruptcy lawyer needs to get a bunch of facts about your situation.

Have you filed bankruptcy before?

Did you get a discharge?

How long have you lived in this district?  Where did you live before?

What do you own?  What’s the form of title?

How much money do you make?  How many people do you support?

Do you owe taxes or child support?

The list goes on.

A quick answer is risky

Good lawyering is about applying the law to the client’s facts.  Without facts, my advice is likely useless.

Or worse, dangerous.

It’s dangerous to the caller, because the answer, without all the facts, may not be right.

It’s dangerous to the lawyer, who has a legal responsibility to you to provide competent advice.  Even if the advice is free and even if you don’t hire the lawyer to represent you.

The undisclosed facts may lead to an entirely different conclusion.  And I don’t know the facts until I’ve asked a BUNCH of questions.

If I get it wrong, you may be able to sue me.

Legal advice online

Why you don’t want a bankruptcy lawyer who’ll fight for you

The importance of the facts is why relying on the internet for legal advice hold huge dangers.

Post a question to an online forum, and you select the facts that you think are important.  Or as much of the facts as you are willing to disclose in public.

Those facts may not be the ones that are critical to the answer.  And even if you provide good facts about some aspect of your situation, other facts may counteract the result.

Use the internet to get some legal education about bankruptcy as a whole.  Learn the bankruptcy vocabulary.  Figure out what documents a lawyer will need to provide good advice.

But take no action until you’ve laid those facts before a competent bankruptcy lawyer and answered a bunch of questions.

More

Questions to ask a bankruptcy lawyer

Free bankruptcy advice

Considering bankruptcy

 

 

California Homestead Works In Other States, Too

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California homestead law drives bankruptcy exemptions even for those who no longer live in California.

Strange, when the homestead statute was state law originally written for Californians.

Two things have expanded its reach:  bankruptcy “reform” and the concept of extraterritoriality.

The third driver, of course, is mobility:  we seem much more likely these days to have moved between states.

I was reminded of the long reach of the homestead last week by a call from a couple in Colorado.

They used to live here,  were filing bankruptcy in Colorado, and wondered if they could use the California homestead to protect their Colorado home.

The answer, on their facts, is YES.

So here’s how that works.

California exemptions for former residents

The 2005 amendments to bankruptcy law tried to limit debtors from moving to a state with more generous exemptions before filing bankruptcy.

Several states, most notably Texas and Florida, have an unlimited exemption for the value of your home. Shack or Taj Mahal, if you live there, it’s protected from creditors.

So the Congressional “fix” was to say that if you hadn’t lived for two years in the state where you filed bankruptcy,  you must use the exemptions from the state in which you lived two years ago.  (It has a few more wrinkles, but broadly, that’s the new law.)

The folks on the phone were California residents two years ago.  They “must” use California exemptions to protect their home in Colorado, where they will file.

Instead of the $75,000 homestead in Colorado, they can claim the $100,000 exemption provided in California law.

Neat.

Homestead beyond California

Extraterritorial is a long word for the idea that the state law in question applies to property outside the territory of the state.

The concept gained importance with the 2005 changes to bankruptcy law.  What if the state you lived in two years ago doesn’t allow extraterritoriality?

Some states hold their exemptions have extraterritorial effect;  other deny extraterritoriality.

North Carolina, for example, limits use of its state exemptions to residents of North Carolina.  See the lawyerly piece by my friend Billy Brewer.

By contrast, California’s exemption laws are available for property  outside the state.  The 9th Circuit case of Arrol, decided long before bankruptcy “reform”, allowed the debtor who had just moved back to Minnesota to claim a homestead the Michigan house in which he lived in a bankruptcy filed in California.

More on where you file and what you claim exempt

Bankruptcy law required that he file in California, having just moved back to Michigan less than six months ago.  The appeals court said that California law, where his case was filed, applied to the home he was living in when he filed, even if it was outside the state of California.

California allowed extraterritorial application of its exemptions.

If Arrol had moved from North Carolina to California, he couldn’t use North Carolina exemptions because they don’t apply to non residents.  The laws of North Carolina aren’t extraterritorial.

In that case, the debtor can use the federal bankruptcy exemptions if the exemptions of the required state aren’t available.

Home truths

The moral of this piece is bankruptcy can be complicated for the well-traveled debtor.

Choose an experienced bankruptcy lawyer; share the tale of your travels; and explore your exemption options.

More

California homestead is a superpower

A homestead isn’t what you think

Secret bankruptcy exemptions

 

 

Bankruptcy Schedules Are More Than Just Paperwork

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Filing bankruptcy can make you feel like you are drowning in paper.

There’s your paper; there’s the paper your lawyer needs.  And there’s the paper the court insists on.

Why bankruptcy schedules worth the work

It’s easy to try to skate. To cut corners.  To shut down.

But that paper is critical.

Nearly every question, benefit, or dispute in an individual’s bankruptcy case starts with the bankruptcy papers.

Those papers are called the schedules.  The schedules form the heart of a bankruptcy case.  They lay out what the person filing the case owns, owes, and spends.

And most debtors (those who file bankruptcy) have little idea how much paper is involved til they see the schedules and sign them in their lawyer’s office.

Before they get to the signing, debtors chafe at the endless questions from their attorney about the nature of the debt, who is liable, and whether the debt is disputed.

Is all this effort really needed?

Bankruptcy paperwork matters

Your schedules constitute  the trustee’s first look at you. Well-done schedules project engagement with the process and they tend to limit digging by the trustee.

The creditor schedules control who gets notice of your case and notice of the automatic stay.

Notice to all affected assures that anyone with a right to challenge the discharge of your debt to them is bound by the timelines of the Bankruptcy Code.

Creditors who don’t get notice may reopen the bankruptcy case later to assert that their debt isn’t dischargeable.

Omit assets and you may lose them, as case law limits your right to claim an exemption in an asset you didn’t disclose in the first place.

List it or lose it

Leave out a legal right or pending lawsuit and the defendant in that suit can have your lawsuit dismissed.

Then, there’s the matter of perjury:  the law provides for fines and imprisonment for deliberate untruths on the bankruptcy schedules.  Not something you want to expose yourself to.

What the schedules contain

Seen broadly, bankruptcy schedules list the debtor’s assets; debts; projected budget; and recent financial history.

Asset forms

Secured creditor form

Priority & unsecured creditor form

Since 2005, there’s a schedule for the means test.

You file proof of having taken prebankruptcy credit counseling and statement of your intentions with respect to debts secured by personal property, like your car.

Helping you get them right is part of the job of a bankruptcy attorney.

New bankruptcy forms

The courts are rolling out new versions of the bankruptcy forms which claim to be more “modern” and user friendly.

I find them verbose and impossible to scan easily to get the big picture in a bankruptcy filing.

The new forms read like tax forms and they suggest that you could competently file bankruptcy without a lawyer.  My experience is that, since 2005, it is the rare individual who can correctly file out the forms, much less understand the implications of those forms.

Enlist a professional to assess whether bankruptcy is right for you and whether now is the right time, before you file.  Afterward, it may be too late.

More

How to find the right bankruptcy lawyer

Understand exemptions

What debts don’t get wiped out

Image:  weatbix

Keep Your Tax Refund Through Your Bankruptcy

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5642525578_b521dedaab_bFor most of us, finding out that we are getting a sizable tax refund is great news.

But if you’ve recently filed a Chapter 7 bankruptcy, hold your celebration.

That refund may not be yours.

You have a bankruptcy estate

When you file bankruptcy, all of your assets become a “bankruptcy estate”.  The estate includes your real estate; tangible things like cars and household goods; bank accounts; and legal rights.

Those legal rights might include the right to file a lawsuit;  your share of a class action suit; an interest in the estate of someone who has died; or your right to get back money you overpaid in taxes.

It’s not possession of the asset on the day your bankruptcy case that counts.  It’s whether the facts that entitle you to money have taken place.

So the refund is part of the estate even if you don’t receive it for months after your bankruptcy case is filed.

Tax refunds for closed tax years

If the tax year has ended when you file a bankruptcy case, any refund that follows from filing the tax return is property of the bankruptcy estate.

You may be able to claim an exemption in the refund.  An exemption removes the exempt asset from the estate and thus from the control of the bankruptcy trustee.

You get to keep your exempt assets.

If there are no exemptions available to protect the refund, the trustee will likely demand the turnover of the money.

When you file mid year

A tax refund for the year in which you filed your bankruptcy case is a bit different.  Only a fraction of the tax year ran before you filed.

Most trustees want the turnover of a fraction of the tax refund when you actually receive it.  If you file your bankruptcy case on April 1, 2017, one quarter of the 2017 tax year has run.

The trustee will want one quarter of your refund.

Do some simple tax planning

Let’s start with the mid year bankruptcy filing, where a fraction of the current year’s tax refund will be forfeit to the bankruptcy trustee.

You can fix that: see that there is no tax refund next spring.

Reduce your withholding after the bankruptcy is filed to eliminate the refund. You don’t have to continue to overpay.

A tax refund, after all, is just tangible evidence that you are paying too much tax each paycheck.  It may seem like found money when the refund check arrives, but it’s really just a loan you make to the government.  And you’re earning no interest on the loan.

File after refund spent

If you haven’t filed a bankruptcy case yet, consider waiting until after you have received the refund.

Once it’s paid to you, the refund is just money, money that you can spend on things that are either necessary or are exempt.

My favorite use of a pre filing refund is to fund your contributions to this year’s IRA.  Most people who need bankruptcy relief also need to get serious about retirement savings, too.

The only limits on what you can do with a refund you get before you file are the same as the rules about other transfers:  you can’t give money or things away to frustrate your creditors.

Or, as any experienced bankruptcy lawyer will tell you, you can use your refund to pay for the bankruptcy case.

The sooner you get out of debt, the sooner your financial life starts to make sense.

 

Image courtesy of Flickr and Great Beyond

The Secret Bankruptcy Discharge For Community Property

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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.

7 Essential things about community property

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.

The creditors who are affected are the creditors who had claims against the community property when the bankruptcy was filed.  Not just creditors of the debtor, the person who filed bankruptcy.   The creditor’s claim could be one against the non-filing spouse, and the discharge protects the non filer’s community property.

It doesn’t surprise us that the spouse who elects bankruptcy is protected.  What is mind blowing is that the creditors of the non filer are equally barred, after the discharge, from reaching the couple’s community property on account of the non filer’s debts.

Post bankruptcy wages are immune

It’s worth repeating this because 1) it’s so important, and 2) it is so hard for creditors to grasp:

the paycheck of the married person is protected from garnishment for that person’s own debts incurred before the bankruptcy,  for all time during the marriage, by reason of their spouse’s bankruptcy discharge.

For most couples, their paychecks are their most important asset outside their homes.  Paychecks are the most easily garnished by a creditor with a judgment.

And the community property discharge protects those wages for so long as there is a marital community.

What is left for creditors of non filer

A legitimate creditor of a non filing spouse, after a bankruptcy discharge, can effectively only enforce its debt against the separate property of the non filer.

Separate property in California includes

  • acquired before marriage
  • acquired by gift during marriage
  • inherited during marriage

The community ceases to exist at divorce or death.  Whatever a spouse is awarded in the division of property is that person’s separate property.

So, after divorce, the non filer’s separate property could be vulnerable to claims that were discharged against the community, assuming that the passage of time hasn’t invoked the statute of limitations on collection suits.

The community property discharge doesn’t prevent a creditor from suing the spouse who didn’t file bankruptcy.  It just limits the assets from which that debt can be collected.

So your creditors can only collect what you owe them from your separate property, if you have any.

Pretty neat, eh?

More

When the bankruptcy trustee asks about your missing spouse

Image courtesy of Openclipart.com

Not All Liens Are Created Equal In Bankruptcy

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Each of them is a lien, but all liens are not the same in bankruptcy.

And the difference between them drives how you can reduce or eliminate the lien.

A lien gives the creditor holding the lien an interest in the debtor’s property, real or personal.  Ordinarily, the lien must be paid off before any of the value in the collateral goes to the owner of the property.

Liens come in three varieties:  voluntary, judicial, and statutory.

While you’re stuck with some liens, some can be whittled down to size, and some can be eliminated altogether when you file bankruptcy.

First, we’ve got to know which kind of lien we’re dealing with.

Voluntary liens

Voluntary liens are ones that you agree to create in favor of a creditor.  A mortgage is a classic example, as is the lender’s lien on your car.

In business, a lender often insists on a lien on business assets to secure repayment of a loan.  The lien puts the lender ahead of other creditors in the fight to be paid.

Judicial liens

Judicial liens are, not surprisingly, created by judges.  They result from court judgments or orders creating temporary liens during the course of a lawsuit.

State law determines whether a judgment automatically becomes a judicial lien.  In California, the winning party must take an additional step of recording an abstract of judgment to create a lien on real estate in that county.

Statutory liens

Statutory liens are created by law.  Tax liens are ones we encounter most frequently.

Provisions of the tax statutes say that unpaid taxes become a lien on all the taxpayer’s assets.

Bankruptcy changes the rules

A cornerstone proposition in bankruptcy law says that a lien is only a “secured claim” to the extent that there is value in the asset for the lien to attach to.

A creditor may have a lien with a face value of $100,000.  But if the property it attaches to had only $15,000 of available equity, the lien holder has a secured claim for $15,000 and an unsecured claim for $85,000.

Another cornerstone of bankruptcy law says that, without additional proceedings in bankruptcy court, liens survive bankruptcy as a charge on the property they attach to.

So, we really want to know which liens are vulnerable to being voided or whittled down by a proceeding in bankruptcy and in which chapter of bankruptcy those proceedings can be brought.

Judicial liens lose to exemptions

In any chapter of bankruptcy, the debtor can avoid (invalidate) a judicial lien that impairs an exemption to which the debtor is entitled.  11 USC 522(f).

Depending on the numbers, the lien can be eliminated altogether if there is not enough value in the asset to pay the exemption and have anything left for the lien.  Or, the judicial lien may be reduced as required so there is value to fund the exemption.

This works only for judicial liens.  Exemptions don’t protect assets from voluntary or statutory liens.

Chapter 13 smites worthless liens

Lienholders are at risk in Chapter 13, where the debtor is reorganizing his financial affairs.

Liens that aren’t secured claims ( that is, that don’t attach to value equal to the lien) can be voided at the completion of the payment plan.

With two exceptions, even voluntary liens, which are usually beyond altering, can be stripped down to collateral value.  The exceptions are

  • voluntary liens on a principal residence where the lien attaches to some value, and
  • purchase money liens created within 910 days of a bankruptcy filing to buy a vehicle.

In all other situations, a lien is worth only the value of the collateral that secures it.

So, huge tax liens get cut down to the value of the available collateral, and wiped out at plan’s end.  Totally unsecured deeds of trust or mortgages can be avoided.

You gotta appreciate the power of Chapter 13.

More

How Chapter 13 works

Understand tax liens in bankruptcy

Cutting the car loan down to size

 

 

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Phone: (650) 694-4700

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