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.

How to Screw Up Your Bankruptcy

By Cathy Moran 287 Comments

If an asset isn’t titled to you, it does not have to be disclosed in a bankruptcy filing.

I hear it and see it in action again and again.

If it isn’t titled to you, it will be “safe” from the bankruptcy trustee and from creditors.

And yet it is wrong.

Wrong, wrong, wrong.

Still, people transfer titles to cars and cash and quitclaim their homes to friends before bankruptcy, thinking that’s smart.

No. It’s both dumb and dangerous.

Not only does putting your assets in the names of friends and family expose them to a lawsuit to recover the property, in extreme situations it puts your bankruptcy discharge at risk.

Actions taken to “hinder, delay or defraud” creditors are grounds for denial of discharge under 11 U.S.C. 727.

What could delay your creditors more than shedding assets without getting anything in return?

Transferring asset unlawful since Elizabeth I

For well more than four hundred years, the law has contained prohibitions on fraudulent transfers.

A transfer of an asset by one who has debts constitutes a fraud on creditors if

1) the transfer is for less that fair consideration; or

2) was made for the purpose of putting the asset beyond the reach of creditors; or

3) leaves the person transferring the asset with less capital than reasonably necessary to conduct their business.

So, a transfer is actionable if it’s a gift; you intended to hide the asset; or the transfer left you broke.

Consequences of fraudulent transfer

The usual remedy against the person who gets the asset is an order requiring the return of the asset or a money judgment in the amount of its value.

The bankruptcy code has a statute empowering the recapture of transfers made within two years of filing.

In addition, the bankruptcy trustee has the rights of the debtor’s creditors under state law to recovery any property that the debtor wrongfully transferred. In California, creditors have four years to recover fraudulent transfers.

Putting your assets in someone else’s name

So, a really quick and effective way to screw up your bankruptcy is to put your assets in the name of your mother, your kids, or your buddy, and conceal the fact from your attorney.

Sign the statement of affairs under penalty of perjury, hiding the transfer, and you are a long way toward making a real muck of things.

Yet people again and again ask “what if I put it in someone else’s name?”.

As long as they ask me, I get a chance to say “Don’t do it”.

And they have a chance to get a discharge.

What your bankruptcy lawyer can’t tell you

Bankruptcy’s 90 day rule

Do it yourself bankruptcy

Queen E. The First courtesy of Wellcome and Wikimedia.

Credit Reporting Agency Is All Wrong About Bankruptcy

By Cathy Moran

Found a mistake in your credit report after bankruptcy?

Happens all too frequently.

But a major credit reporting agency is flat wrong on its advice on how to debts discharged in bankruptcy reported properly.

The cynical side of me is not surprised.

They get so little else right, why do I expect them to write truthfully about bankruptcy and credit reporting?

Credit report after bankruptcy

The “Experian Team” answered a question from a reader asking how to get a bankruptcy discharge shown in a credit report.

The “team” correctly said that a credit report should show that a debt was discharged in bankruptcy. They were correct to say the consumer needed to challenge the incomplete information and provide the correct information.

But, their solution to a credit reporting problem was laughably off base.

Here’s what they said about getting a credit report to show that debts are discharged:

Your bankruptcy records should include a schedule “A” that lists all of the debts included in the bankruptcy filing. Simply send to the address on your report a copy of the schedule “A” and a copy of documentation that the bankruptcy has been discharged, along with a statement explaining that the bankruptcy information should be updated. If necessary, the court also will be contacted and asked to verify the information in your dispute.

Two things are glaringly wrong with this advice.

One, Schedule A is not a list of all the debts included in the bankruptcy. It’s a schedule of real property assets, not liabilities.

Second, not every debt listed in the bankruptcy case is discharged.

We can pretend that Experian is really going to attempt to verify the challenged information. (Studies say they don’t).

But a bankruptcy court is highly unlikely to verify the disputed information. The bankruptcy documents are found online on PACER. No court clerk is going to tell a CRA what debts were discharged.

So, let’s hope the Experian Team gets some higher round draft picks next time around. These team members are woefully inadequate.

Where to find discharge information

The answer about debts “included in bankruptcy” is found in two places in the bankruptcy schedules. One place is schedules D, E, and F , which list secured debts, priority debts, and general unsecured debts like credit cards.

The second source of creditors affected by the bankruptcy is the mailing matrix or master address list. It’s online on the court’s electronic docket as well.

The tricky thing about all of this is that not all debts listed in the bankruptcy case are necessarily discharged.

Some debts, like child support, recent taxes, and student loans, simply aren’t dischargeable.

But for most folks, trying to get their credit report to be accurate, it’s the general unsecured debts that are reported by the CRA, and often reported incorrectly.

So, don’t send schedule A with your credit report dispute. Send schedules D, E, and F along with a copy of your discharge.

Stay on top of it until the credit report is right.

What was discharged in my case

Does bankruptcy fatally damage my credit?

Life after bankruptcy

Get Tax Credit For Mortgage Interest Paid In Bankruptcy

By Cathy Moran

Is your Chapter 13 plan paying back mortgage payments that were delinquent when you filed bankruptcy?

If so, a tax deduction lurks, unclaimed, in the trustee’s records.

Track down that tax deduction and you reduce your federal income tax burden.

But it’s difficult because, for reasons I have not been able to figure out, the lenders don’t send IRS form 1098’s to either you or the trustee for mortgage interest paid through the plan.

So you don’t have proof that mortgage interest was paid, and neither does the IRS.

But, we can fix that. I recently had occasion to walk a client through the process of figuring out the mortgage interest paid by the trustee.

I’ll retrace my steps and you can see how I figured out that he’d paid some $50,000 in mortgage interest over the years of his plan that he hadn’t yet claimed on his taxes.

1. Find the interest element in the lender’s proof of claim.

To be paid through a Chapter 13 plan, the lender must file a proof of claim on official form B410. The mortgage attachment to that form, B410A has a line in Part 2 for “interest due”.

That line shows us what part of the missed payments, as of the filing of the bankruptcy case, was made up of mortgage interest.

2. Calculate what percentage of the arrears is mortgage interest.

Part 3 of the mortgage attachment form breaks out the elements in the lender’s claim in the bankruptcy. We need to know what fraction of the total claim the trustee will be paying is interest.

Take the “interest due” amount you located in Step 1 and divide it by the total at the foot of Part 3.

That’s the percentage of the total claim of the lender that’s interest.

3. Access the Chapter 13 trustee’s site for payments to mortgage creditor

Chapter 13 trustees use different software to account for their operations. You should have received information at the beginning of your case on accessing information about your payments and the trustee’s disbursements.

If you need help with the trustee’s web site, call the trustee’s office for help.

On the trustee’s site for your case, find the claim filed by the mortgage lender. There should be a list of the date and amount of each payment made to the creditor on account of your mortgage arrears.

Total the payments for the last calendar year and multiple that total by the percentage of the claim that is interest, from Step 2 above.

Bingo! you have the number that represents what the trustee paid your creditor in mortgage interest for that calendar year.

Tax accounting rough and dirty

Your figure for mortgage interest paid in a year is an approximation. By the end of the plan, the amount of interest paid will equal the amounts you’ve calculated this way.

The creditor may have applied it to your account differently. Mortgage loan servicing is so erratic and inaccurate these days that it’s hard to tell.

If this calculation is off, it probably underestimates the amount of interest in the early payments from the trustee. Most mortgages require the lender to apply payments first to interest, then to principal, then to expenses. My experience is that they seldom follow the rules.

If anyone objects to your calculation, make them propose a better one. Or make the recipient of the mortgage interest account for it in the usual way.

Save your work

Outside of bankruptcy, the lender would send you and the IRS a copy of their report on Form 1098 for mortgage interest you paid during the tax year.

We’ve done this sleuthing because they didn’t tell either the IRS or you what you paid in mortgage interest.

So, you may have to show the IRS how you got to a deduction that doesn’t appear in their records.

Print or save to pdf each of the documents you used to make your calculation. You want to be able to support the deduction if challenged.

Another path to tax deduction

Alternatively, you could use the Request for Information process found in RESPA to ask the servicer of your loan how much interest you paid in a calendar year.

Servicers are required to provide answers about loan servicing within 30 business days of your request. Requests must be in writing and contain identifying information. More on how to make a Request for Information.

When tax professionals aren’t busy, see about amending prior returns.

Amend earlier returns

Federal tax law allows you to amend tax returns for three years from filing. There’s an IRS publication for amending returns.

You can calculate what you paid through the Chapter 13 plan for prior tax years and amend those returns to claim this deduction.

Gather your calculator and get on the trail of these illusive, but valuable, mortgage interest deductions.

Get A Bankruptcy Discharge Even Without Making All Your Payments

By Cathy Moran

You can get a Chapter 13 discharge even without making all the plan payments you promised.

There are hoops to jump through and facts to marshal to get that discharge, but it’s possible.

The Bankruptcy Code provides for a hardship discharge in Chapter 13 to those whose failure to complete their plan is due to circumstances for which they should not be held accountable.

Those circumstances, in my practice, have included illness, job loss, advancing age, and even tax debt arising after the case was filed from the sale of property.

Requirements for hardship discharge

Three conditions have to be met to get a discharge without paying as promised.

Unsecured creditors must have received at least as much as they would have if the case had been a Chapter 7.
Modification of the plan isn’t possible.
The inability to make payments is traceable to events out of the debtor’s control.

The debtor must file a motion for a hardship discharge and provide evidence that shows each of those factors are present in the case.

The motion can be brought anytime after confirmation.

Hardship discharge has limits

Certain debts that would be dischargeable in a fully completed Chapter 13 are not wiped out by the hardship discharge, including priority taxes or debts incurred by fraud, dishonest behavior, or intentional acts. The complete list is found in §523.

Importantly for lots of debtors is that liens determined to be worthless at the beginning of the case still get stripped.

How lien stripping works

You’ve got to jump through the paper hoops to get the lien voided, but you are entitled to have it wiped out even with a hardship discharge.

Why not just convert?

Converting a Chapter 13 case to Chapter 7 is another alternative when you can’t complete the Chapter 13 plan or modify the plan to one you can complete. The case remains the same case (no new filing fee, though you need to pay a few bucks to the clerk on conversion).

Three reasons stick out for getting the Chapter 13 discharge rather than converting.

A discharge in the Chapter 7 won’t happen for months; there’s another first meeting of creditors, and a requirement to amend schedules to bring them up to date.
If you wanted to stay in control of assets or keep a Chapter 7 trustee from messing around in your finances when you first filed, those reasons probably continue.
A Chapter 13 discharge makes you eligible for bankruptcy relief in the future in the shortest time possible.

All good reasons to get a Chapter 13 discharge if you can.

The range of options when 13 flounders

Why I love Chapter 13

Keys to Chapter 13 success

Take The Long View : Money For A Lifetime

By Cathy Moran

The financially literate manage their money for the long haul.

In a world of biweekly paychecks and monthly billing cycles, it’s easy to let your perspective shrink to 30 day increments.

Mortgages are paid monthly
Utilities bill every 30 days
Credit cards come due 12 times a year

The monthly bank statement tells you how you did that month.

But that view is incredibly short-sighted.

Your working life isn’t everything

Most of us don’t work for our entire lifetimes. Your financially productive years may be only half of your lifespan.

There’s growing up and getting an education; there’s a working life; then there’s old age.

And the money we manage in that middle slice of life usually determines how well we live at the end of our lives.

If you expect to inherit a fortune from short-lived relatives, you can stop reading here.

For the rest of us, let’s keep thinking. [Read more…]

Financial Lessons From Furloughed Federal Workers

By Cathy Moran

The plight of workers going without pay because of the government shut down looms over our news.

If our incomes haven’t been affected, it’s easy to see this as someone else’s problem.

But are the rest of us really immune to the same financial straight?

Over and over again, we hear that most U.S. families couldn’t pay an unexpected $400 bill without borrowing money.

The current problem is a lot bigger than $400.

Effectively out of work, federal workers face weeks with nothing coming in, and too little set aside. It’s notable now because there are so many families affected.

But ending up with no income isn’t unique to the governmental workforce.

To paraphrase the credit card ad, what’s in your savings account?

Image courtesy of DavityDave and Flickr under a CC license.

4 Rules For Testifying At Your Bankruptcy Hearing

By Cathy Moran Leave a Comment

Going to court for your first meeting of creditors?

What are they going to ask me?, you wonder.

My bankruptcy clients imagine a quiz on the contents of their bankruptcy papers.

Or worse, an inquisition on why they needed to file bankruptcy.

That’s not likely. The first meeting of creditors is much more likely to be a snooze.

Jay Fleischman set out a very comprehensive list of questions a Chapter 7 trustee might ask at your bankruptcy hearing.

Let me add my rules for answering those questions.

1. Listen to the question

Just because you’ve read Jay’s list and think you know what’s coming, listen to the trustee’s question, all the way to the end.

First of all, it’s only polite. Second, you want to make sure that you know what the trustee wants to know.

Your answer is being recorded. You want to make sure you are answering the question that the trustee asked.

2. Answer truthfully

Honest disclosure is the price of getting a bankruptcy discharge. This is not the time to be cute or tell anything less than the truth.

You are answering under oath. You are subject to the penalties of perjury if you are intentionally are less than honest.

3. Be brief

Answer the question that the trustee has asked, truthfully, in as few words as possible.

Don’t explain, don’t justify, don’t ramble.

Just answer the question.

If the trustee needs to know more, he can ask a follow up question.

Usually, the trustee is just trying to make a record that he has done his job.

He has a list of cases he has complete. Don’t make his day any longer by volunteering more than he wants to know.

4. Don’t guess

If you don’t know the answer to a question, say so. If the answer is honest, it’s perfectly OK.

Perhaps your counsel can help. Maybe there are documents that provide the information.

Don’t pretend to a level of certainty if you don’t really know.

All’s well

If you’ve been diligent about getting your attorney all the requested information, chances are the first meeting of creditors will be the last, and you’ll be on your way to a fresh start.

How to review your bankruptcy papers

What happens to your car in bankruptcy

Who to pay after you’ve filed bankruptcy

Image: © Innovated Captures – Fotolia.com

Stop Making Quarterly Tax Deposits

By Cathy Moran Leave a Comment

We never make tax deposits for our small business because we don’t know what we’ll owe.

We just wait til the return is prepared and try to pay then, he explained.

But, again this year, he couldn’t write a tax check for a year’s worth of income.

So the client sitting across the table from me had an $8,000 tax bill for last year, and in mid October, had made no deposits toward this year’s taxes.

Waiting for certainty about what he’d owe, he racked up penalties for not making advance deposits, penalties for not paying when the return was filed, and interest on the unpaid tax.

And he was positioned to do it again this year.

Ouch!

Quarterly tax deposit trap

I’m sure the provision that the self employed make quarterly deposits, rather than more frequently, for the current year taxes was thought to be a convenience for small business.

Instead, in my opinion, it is a trap.

It calls on entrepreneurs to estimate what they’ll owe, set money aside as it comes in, and, every three months, have enough money on hand to cover the check for the taxes.

That’s often a tall order for the self employed, who wear lots of hats and juggle lots of responsibilities in their business.

And it’s costly and uncomfortable when you don’t manage to do it.

Replace the quarterly tax deposit

Discard the quarterly tax deposit. Instead, make a monthly tax deposit.

Treat income taxes as one more regular, monthly expense of being in business.

Deal with current year taxes each month so you don’t have to save up the money to cover the tax bill.

How much to pay

Start with your tax liability for last year. Deposit 1/12 of that amount each month toward your current year taxes.

Write on the check your tax ID number, and a notation that the check represents estimated [current year] tax liability.

As the year goes on, you can estimate how this year’s income compares to last year and adjust that monthly check up or down as the facts suggest.

Breaking the tax delinquency cycle

For the man in my office, I had this suggestion: rather than paying $1000 for last year, when you’ve paid in nothing for this year, split up the money available for taxes.

Make a smaller payment toward the already delinquent taxes, say $250; pay $750 toward the current years taxes.

It’s already October, so he probably can’t pay in enough to avoid all penalties for being underwithheld for this year, but it’s a start on changing his ways and paying less in tax penalties in the future.

More on taxes

When taxes are dischargeable in bankruptcy

Tax question round up

If you haven’t filed returns

Image courtesy of Flickr and 401(k) 2013

Is Home Equity A Substitute For Retirement Savings

By Cathy Moran

My house is my retirement plan.

If I had a dollar for every time a client said that, I could retire today.

But that approach to funding your old age only works if….

Sell your house to retire

The value in your house makes your balance sheet strong, but doesn’t put food on the table or gas in the car.

That home equity is illiquid. You can’t write a check against it for the other necessities of life.

To get at that equity, you need to sell the house, or borrow against it.

A traditional loan requires that you have cash to cover the monthly loan payments. But hey, you’re not working. Where does that money come from?

Reverse mortgage

The reverse mortgage was invented to allow seniors who can’t make monthly payments on a conventional loan to access the equity in their home.

But the fact that a reverse mortgage has no monthly payments does not mean that it’s cost free.

No, the interest on the money borrowed accumulates over the life of the borrower. And the unpaid interest itself earns interest. The cost is steep.

Dangers in reverse mortgages

Reverse mortgages top list of older consumer complaints

And a condition of a reverse mortgage is that you keep up insurance and property taxes.

Real property has carrying costs

Whether encumbered or owned free and clear, real property has its own set of expenses. Hazard insurance, property taxes, repair and upkeep.

Gotta have cash for those things. The average Social Security check is about $1300.

Where do you live if you sell

If you’ve benefited from rising home values over your lifetime as a homeowner, the cost to replace the house you’re selling has risen as well.

And buying less house in your community still has the carrying costs we talked about above.

Or you rent. So housing still has a cost.

Or you move out of the community you live in to somewhere where your sale proceeds go further.

You move away from friends and support systems. Or maybe you move back to somewhere where you have a support system. It can work both ways.

Taxes shrink your equity

Capital gain taxes are triggered if you sell your home. Current tax law excludes from taxable income $250,000 in gain for a single person and $500,000 for a married couple. (Watch for changes, here).

So taxation will deplete your sales proceeds only if you have experienced a lot of appreciation over your lifetime. But if you’re sitting on lots and lots of equity, count on it shrinking if you sell.

Don’t hide behind your house

There are no easy or universal answers here. Our lives are longer and our preparation for old age is woefully incomplete.

For too many people I meet, the “home is my retirement account” is an excuse for overpaying for housing at the expense of retirement savings. It provides cover for failure to set aside any money now.

Diversification of your retirement assets is clearly best. Have cash and home equity as you age.

But however you are situated, give some clear thought as to how you fund those decades of life when you aren’t working.

Do California seniors need bankruptcy

What it costs to retire here

California homestead and senior debt

Speak Fluent Bankruptcy

By Cathy Moran

Bankruptcy has its own language. If you are considering filing bankruptcy, it helps to know the language spoken there.

Master just a couple of words and phrases, and input from a bankruptcy lawyer starts to make sense.

So, in our continuing campaign for better understanding of bankruptcy, here’s a dozen phrases from the language of Bankruptcy for your meeting with a bankruptcy lawyer.

Essential bankruptcy terms

Petition – the first paper filed in a bankruptcy case that initiates the case. It invokes the automatic stay.

Automatic stay – an injunction against creditors that halts collection and foreclosure just because the petition has been filed.

Schedules = the balance of the papers filed after the petition to flesh out your bankruptcy case.

Trustee – the individual appointed by the Department of Justice to oversee your filing and to represent the interests of creditors as a whole.

U.S. Trustee – an employee of the Department of Justice who supervises trustees and monitors Chapter 11 cases with no creditors committee

Means test – a form and a formula added to consumer bankruptcy cases supposedly to ferret out bankruptcy filers who are really able to pay creditors without bankruptcy.

Discharge – the court order that makes your dischargeable unsecured debts unenforceable

Dischargeable – debts that may be wiped out in bankruptcy

Non dischargeable debts that are excluded from the discharge by the terms of the Bankruptcy Code.

Reaffirm – an agreement made after filing to waive the discharge as to a particular debt. Reaffirmation requires court approval

Transfer – any act that changes ownership or title to an asset, or creates a lien on an asset.

Post petition – events that happen after the petition for bankruptcy is filed.

Add some numbers to your list

Because bankruptcy is based on the Bankruptcy Code, bankruptcy types tend to use the number of some important statutes as shorthand.

341 – Section 341 requires a first meeting of creditors in every bankruptcy case. We call that the 341 meeting.

523 – This is the section that lists the debts that are non-dischargeable. Several subsections require an affected creditor to prove his debt is non dischargeable.

727 – This section sets out the circumstances when a discharge can be denied altogether. It can be brought by a creditor or the trustee for the benefit of all creditors.

Bankruptcy chapters come next

Different chapters of the Bankruptcy Code provide for different kinds of bankruptcy cases that may be filed.

Chapter 7 – a liquidation bankruptcy case available to individuals and business entities, but not trusts or estates.

Chapter 13 – a reorganization case for individuals with debts under certain limits.

Chapter 11 – a more complex reorganization case for individuals and business entities without debt limits

Chapter 12 – a simplified reorganization proceeding for family farmers

Use your words

Now that you have a working bankruptcy vocabulary, start talking to a bankruptcy lawyer to find out how these concepts work in real life.

Don’t be afraid to ask questions. There is no reason why you should immediately understand this very specialized area of law.

Even when you understand the concepts, how those concepts apply to your situation, and how they interact with each other is what’s really important.

Make sure you pick a bankruptcy lawyer willing to take your questions and to deliver answers that you can understand.

Questions to ask a bankruptcy lawyer

What makes a bankruptcy lawyer great

What should bankruptcy cost?

About Cathy Moran

Transferring asset unlawful since Elizabeth I

Consequences of fraudulent transfer

Putting your assets in someone else’s name

More

Credit report after bankruptcy

Where to find discharge information

More

1. Find the interest element in the lender’s proof of claim.

2. Calculate what percentage of the arrears is mortgage interest.

3. Access the Chapter 13 trustee’s site for payments to mortgage creditor

Tax accounting rough and dirty

Save your work

Another path to tax deduction

Amend earlier returns

Requirements for hardship discharge

Hardship discharge has limits

Why not just convert?

More

Your working life isn’t everything

1. Listen to the question

2. Answer truthfully

3. Be brief

4. Don’t guess

All’s well

More

Quarterly tax deposit trap

Replace the quarterly tax deposit

How much to pay

Breaking the tax delinquency cycle

More on taxes

Sell your house to retire

Reverse mortgage

Real property has carrying costs

Where do you live if you sell

Taxes shrink your equity

Don’t hide behind your house

More

Essential bankruptcy terms

Add some numbers to your list

Bankruptcy chapters come next

Use your words

More

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