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.

The Parent School Loan

By Cathy Moran

Take a good look at the result of the parent loan for college.

Tied up, captive, grimacing.

That’s what my client’s situation looks like to me:

Mid sixties
Kids just graduated
Parents liable for $250,000 in loans

If college makes the life of the kids, it stands to ruin the lives of the parents.

What kind of educational system not only tolerates, but facilitates such madness?

Parent loan trap

This story gets worse, unfortunately. The kids have their own student loans for which they are liable. The kids have no legal liability for the parent loans. And probably little capacity to pay their loans and their parents’ loans if they tried.

But because one of the parents was unemployed when the loans were taken out, the lender required the guarantee of one parent’s sibling.

Bingo!

Now the entire older generation is snagged owing a quarter of million dollars at the end of their working lives for an education provided to others.

Debt that isn’t routinely dischargeable in bankruptcy.

Debt that entitles the feds to take part of the retiree’s Social Security every month to repay.

Debt in an amount that even a younger parent isn’t likely to be able to pay off.

What are we thinking?

The system is shameful.

And there’s shame for all involved.

Colleges for selling their product as essential, then pricing it to ruin the very families it benefits.

Students for selecting a college priced so absurdly, then asking someone else to put their financial future on the line for you.

Parents for going along with the deal.

I am profoundly offended by a system that puts parents in the crosshairs for funding college. Say no and you seem less than supportive, hypocritical in touting college but unwilling to pay the cost.

I wonder at kids willing to expose their parents to ruin.

And I wonder at our society who has tolerated the student loan system. And the Congress who makes it neigh on to impossible to discharge student loans.

This has got to change.

California Community Property Creates A Marital Threesome

By Cathy Moran Leave a Comment

Sounds kinky, doesn’t it?

Three players in a marriage.

Sharing.

Everything.

Only this is something you can talk about openly, without blushing: community property.

Community property is the default property arrangement in California for a married couple.

Yet it is poorly understood by those affected by it and it isn’t inevitable.

How community property works

The community property system provides that everything acquired during marriage is equally owned by the spouses, regardless of which spouse acquired it.

Property owned before marriage or acquired by gift or inheritance is the separate property of the spouse who acquired it. It retains that separate property character as long as it isn’t comingled with community property.

The most vivid way to imagine the community property system is to see marriage as comprised (for financial issues) of three players:

husband,
wife, and
the community property.

Each of the three may have different exposure to debts.

Both same sex couples and registered domestic partners fall under the California community property system

Only the person who contracts for a debt is personally liable.

That personal liability will outlast the marriage. It’s your responsibility, whatever your marital status.

The community, however, is liable, regardless of who incurred the debt.

All of the community property is liable for the debts of either spouse. There’s no halvsies here: no “my half of the community is liable for my debts”.

On money issues, the community is all in.

And that’s not all: the community property is liable for the debts of either spouse incurred before marriage.

Liable for my spouse’s debts?

You don’t become personally liable for your spouse’s debts by reason of living in a community property state.

That means that the credit card company can’t sue you for a debt contracted by your spouse. So, no judgment against you for his debts.

But a judgment against your spouse can be collected from the community property, including your wages! But it can’t be collected from your separate property.

Community property can be avoided

Spouses in California are free to agree that they won’t have community property.

That’s what a pre nuptial agreement is often about. Spouses can agree that their accumulations during marriage will be the separate property of each spouse.

If you are already a married Californian, maybe the three of you want to talk about this.

New community property case shakes things up

Community property in bankruptcy

The Foreclosure That Was Longer Than War & Peace

By Cathy Moran

Foreclosure is coming. Whether by choice or circumstances, you know the bank will take the house.

Should you start packing immediately?

The way banks are currently operating, the answer is: not yet, not soon, not for a long time.

For one of my clients, the answer to how long was well more than 735 days. And they did nothing to delay the inevitable.

Here’s the foreclosure timeline for this California couple.

A year of missed payments

When they filed bankruptcy in June, 2013, they were 13 months behind on their mortgage. That’s 390 days without paying.

The house was waaaaay underwater and they decided upfront to let it go. And said so in the Chapter 13 plan.

From bankruptcy filing to relief from stay

It took 477 days from the commencement of the bankruptcy case for the lender to request and get an order from the bankruptcy court permitting them to foreclose.

Court order til foreclosure

It took another 180 days to actually conduct a sale. At that point, the lender owned the house, but the couple was still living there.

Sale to eviction

Then, remarkably, another 271 days went by before the bank took steps to evict the former owners from the house that it had owned for more than 8 months. And the bank paid the former owners some cash to move out voluntarily.

Your mileage may vary

The experience of this couple doesn’t assure you of a mortgage servicer with a similarly lackadaisical approach. But it is consistent with the data on California foreclosure.

The takeaway is: don’t move out until you absolutely have to.

Living rent free til the foreclosure allows you to build up a kitty to finance the move. Or feed your retirement fund. Or start saving for a new house.

Get paid to surrender possession

Your rights while you’re in foreclosure

Buying a house after foreclosure

Basics of California foreclosure

Bankruptcy Discharge vs. Dismissal

By Cathy Moran

Dismissed and discharged.

In a bankruptcy case, these two terms are at the opposite ends of the scale of results in bankruptcy.

Yet they are often confused.

A discharge is a win! The bankruptcy discharge order wipes out your personal legal liability to pay a debt.

A dismissal is usually a loss. It means the bankruptcy case was closed before a discharge was entered.

When cases are dismissed

A dismissal could be at the request of the debtor when bankruptcy protection or a discharge is no longer needed.

Sometimes, we file a Chapter 13 to buy enough time to complete the sale of an endangered home. Once the sale is complete, there may be no further need for the automatic stay.

Generally a debtor can’t voluntarily dismiss a Chapter 7 case. The debtor can convert the case to another chapter, but the debtor can’t usually change his mind and escape bankruptcy.

By contrast, the debtor has an almost absolute right to dismiss a Chapter 13 case. That’s why Chapter 13 is my go-to chapter when the situation is fluid or there are major unknowns. If things go really sideways, we can dismiss the case.

Why I love Chapter 13

More often, dismissal comes on the motion of the trustee or the court, often for failure to timely file a document or for abuse of the system.

But dismissed means that the case has been closed without a discharge.

Closed without a discharge

There’s a third outcome for cases that involves neither discharge nor dismissal: closed without a discharge.

Chapter 13 cases that follow a Chapter 7 too close in time to be entitled to a discharged are “closed” at the completion of the plan. That’s a Chapter 20.

Cases are also closed without a discharge when the debtor fails to complete the required debtor education course that is a condition to a discharge.

The bankruptcy ticket to ride

Sometimes, having your case closed without a discharge represents a failure: all that effort to file and you failed the last little step to getting rid of your debts.

Sometimes, however, it’s a deliberate strategy to get out of an bankruptcy that was filed untimely, without using up one’s right to a discharge. But that’s a story for another day.

Choosing the bankruptcy chapter for you

Why Chapter 13 cases fail

Can you change lawyers mid stream

Image courtesy of Nemo and Pixabay.

What’s Wrong With Most Get-Out-Of-Debt Advice

By Cathy Moran

Get-out-of-debt gurus too often miss the essential truth known to every carpenter.

Measure twice, cut once

Too many trite lists of tips to help you get out of debt miss the vital first step.

Before you choose a get-out-of-debt path, assess your situation.

When you put bankruptcy at the bottom of the list, to be chosen only after everything else has failed, you may spend a lot of time hopelessly floundering. A lot of stress. A lot of cash spent without achieving your goal.

Instead

Measure the size of your problem.

Inventory the tools you have available.

Know how long you have to get the job done.

There’s little point in attacking substantial tax debt by cutting out Starbucks. Nor is bankruptcy the right tool for a couple thousand dollars in credit card debt.

There’s no one-size-fits-all when it comes to debt. Whip out your financial tape measure, and check the factors that make a difference here.

How To Keep Your House In Chapter 13 Bankruptcy

By Cathy Moran

Saving your home ranks high on the list of reasons people file Chapter 13.

The automatic stay stops foreclosures; Chapter 13 gives you time to fix the problem.

Powerful stuff.

But the stay and more time, alone, isn’t enough to save the day if you run afoul of other rules, written and unwritten, about homeownership in Chapter 13.

So, here’s your manual for Keeping Your Home Through Bankruptcy.

Read your Chapter 13 plan

The basic premise of Chapter 13 is that you continue making payments on your home loan during the plan. Typically, you make the payments that come due after you file, plus catch up on any missed payments via your payments to the Chapter 13 trustee.

In the Bay Area, debtors can choose direct payment or a conduit plan

Every Chapter 13 district does things a little differently but they all treat post filing payments in one of two ways:

either the homeowner makes the payments directly to the mortgage servicer, just as if there were no bankruptcy.
or, the on going payments are made to the Chapter 13 trustee, who in turn pays the mortgage servicer. (Those are called conduit payments.)

Make sure you know how it works in your district, and when your first payment after filing bankruptcy is due.

Keep track of payments you make

Future disputes about whether you made payments directly to the servicer are virtually certain. Arm yourself with a paper record.

You want your paper trail to be complete and retrievable. Chances are, the servicer’s records won’t be as good.

I suggest clients pay by personal check (so you get a cancelled check) and transmit that payment by a means that gets you a receipt showing delivery. With a receipt, you can monitor whether the servicer is promptly crediting your payment, as they are required to do.

Any automatic payments from your bank account or even your ability to pay electronically will undoubtedly be canceled by the servicer.

Compare monthly statements

A new federal rule requires servicers to continue sending you monthly mortgage statements. That’s a welcome change.

More on the new mortgage statement format

The rule breaks out what is happening with your loan, both as to any pre-bankruptcy default and as to the post-filing payments.

Check out the statements to see if they are consistent, and save them for support in case there’s a dispute in the future.

Watch for payment changes

Your monthly payment on your home loan may change during the Chapter 13. Escrow amounts for taxes or insurance may change; your loan may have an adjustable rate, or a time-limited interest only feature.

Bankruptcy rule 3002.1 now requires the servicer to give you advance notice of any change in the monthly payment you must make. If you are in a conduit district, where the trustee makes the on-going payment, ask your attorney how increases in payments are handled.

The rule also requires the servicer to disclose any fees, expenses or charges that it adds to the loan balance during your case. The disclosure must be made to you, your attorney and the court within 180 days of the expense being incurred. You have the right to challenge the expense and have a hearing on whether it’s truly owed.

Pay your property taxes

Depending on your loan terms, you may pay property taxes directly to the local taxing authority. Staying current on property taxes is a condition of being in good standing on your loan.

Know whether your property taxes are escrowed and thus included in your monthly payment, or whether you pay them directly.

If you pay property taxes directly, make it a habit to set aside 1/12th of your annual property taxes when you make your mortgage payment, so you don’t fall behind.

Avoid suffering a motion for relief from stay

The automatic stay is automatic, but it’s not necessarily forever.

If you fail to make required ongoing payments or fail to keep the property insured, the servicer can file a motion asking the court to lift the stay and allow it to foreclose.

More about motions for relief from the stay

Even if you manage to get a deal to cure any defaults, a motion to lift the stay will add to the lender’s attorneys fees, which they will want to collect from you. And that’s on top of whatever you have to pay your own attorney to protect your property.

Don’t go there: stay current.

Deduct the mortgage interest you pay

A large part of most mortgage payments is made up of interest on the loan balance. That interest and any property taxes you pay to the lender are probably tax deductible. But for reasons I can’t explain, servicers don’t give you a tax form 1098 showing the deductible payments you’ve made or the trustee has made on your behalf.

Follow our how-to on calculating your deduction and assembling the records to support your claimed deduction. If you don’t do it, you can be sure the IRS won’t do it for you.

Reducing your income tax bill frees up money to make your plan payments.

Heads up and keep your house

This post bankruptcy to-do list isn’t complicated but it is important. Armed with knowledge of the possible pitfalls, you can head off trouble and sail through Chapter 13.

Mistakes that crater Chapter 13 plans

If you can’t make your plan payments

Why discharge gets snatched away at plan’s end

File Bankruptcy And Leave A Legacy

By Cathy Moran

Elders in California enjoy enhanced state exemptions that protect them from debt collectors.

Those protections often make it unnecessary for a debt-laden senior to file bankruptcy.

But no one talks about one consequence of relying on exemption law to fend off creditors.

California exemption laws that fully protect the assets of seniors provide no protection to the heirs.

The elder who elects to rely on state law exemptions during his lifetime may be leaving his estate , in effect, to his creditors.

Probate pays creditors

Probate is a proceeding to assure that the property of the decedent (the person who has passed away) goes to the correct parties.

Payment of the decedent’s debts comes before payment to heirs.

In probate, creditors have a short period to file their claims.

Once the allowed claims are paid, the heirs have no liability to the decedent’s creditors, even those who didn’t file a claim.

Exemptions in probate

Probate law provides for a homestead exemption, giving the surviving spouse and any minor children a place to live. Cal. Probate C. 6520 and following.

The protection of the probate homestead lasts only as long as the probate administration and the property remains liable for the debts of the debtor. Probate C. 6526.

The probate court can likewise set aside other assets for payment of a family allowance for a surviving spouse, minor children and adult children who are incapacitated and dependent on the decedent.

The family allowance also ends with the final order in the probate.

Revocable trusts expose heirs

The revocable trust, or living trust, is a popular way around the expense and delay of probate. But it comes with a little discussed exposure to creditors.

When the trustor (the person who creates the trust) dies, the assets of the trust are distributed by the successor trustee as the document provides. No probate is required for trust assets.

But, unless the successor trustee opens a court proceeding to administer the trust estate and gives notice to creditors, any gift to heirs from the trust comes with personal liability for the debts of the decedent. Probate C. 19400. That liability is capped by the amount of the gift.

Creditors have one year from the death of the trustor to file suit against the heirs to collect the debt. Cal. C. Civ. Pro. 366.2.

Ouch!

Bankruptcy eliminates the debts

If the senior elects during his lifetime to file a bankruptcy case, he can use the generous bankruptcy exemptions available to Californians to protect the assets he has, including up to $175,000 in equity in his residence.

Most unsecured debts are wiped out for all time. Any accumulations after bankruptcy are free from the claims of the pre bankruptcy creditors.

And, at the senior’s passing, discharged creditors have no claim against the estate or the trust heirs. Whatever assets the senior has flow to those of his choosing, rather than the creditors eliminated in bankruptcy.

That point, alone, might tip the scales in favor of a bankruptcy filing even for the collection-proof senior.

Exemptions at work

More about homesteads

Going to court in your bankruptcy case.

Debt Can Kill You

By Cathy Moran

Money is the single larg est source of stress in the US.

Other potent sources of stress include work, the economy, family and relationships. As a bankrutptcy lawyer, I can’t offer a remedy for these stressors.

But I do have a cure for debt troubles.

On National Stress Awareness Day, the connection between money, stress and bankruptcy merits some thought.

The debt plan that scares me

Of all the chilling things my clients say to me, the pronouncement that they will just continue to juggle their money worries rather than file bankruptcy is the worst.

Scared of taking steps to get rid of debt, they consign themselves to worry, sleepless nights, and constant tension over their money problems.

What they don’t understand is that serious debt is not just a financial problem, it’s a health problem.

Stress kills

Stress is debilitating, at best, and lethal, at worst.

When stress doesn’t kill outright, it increases the risk of heart attack, high blood pressure, depression, infertility, and premature aging.

It interferes with family life.

Stress makes you stupid. Really!

Stress isn’t just an emotion that you can endure with fortitude and strength of character. It has physical consequences.

To choose to enduring constant money stress is to make a potentially disastrous health choice.

Yet I encounter far too many people who underrate the physical cost of remaining in debt.

Whether they fear the future, damage to their self image, or anxiety about public exposure, they shoulder the continuing stress rather than consider bankruptcy.

Emotional barriers to a fresh start

Bankruptcy is a remedy

Available without a prescription, bankruptcy provides relief from the stress of overwhelming debt. It doesn’t require diet, exercise, or pills.

And yet it works quickly and reliably.

It’s sanctioned in the Bible and in the US Constitution.

It’s invoked by big corporations, big cities, and big name celebrities.

It works for individuals and families.

Eliminate debt as source of stress

Make the right health choice: consider whether bankruptcy would take avoidable stress out of your life.

What’s so scary about bankruptcy

How bankruptcy works

How to interview a bankruptcy lawyer

Images courtesy of Marsmett Tallahassee and Wikimedia: Gdudycha

How To Spend Money Before Filing Bankruptcy

By Cathy Moran

Trying to spend down cash before filing bankruptcy?

It’s time to talk about the float.

Not the root beer float, though that would be more fun.

The bank “float”: the period between writing a check and it clearing your bank.

(We’ll talk about what to spend on before filing bankruptcy, too).

When you file bankruptcy, your schedules are supposed to show what you own on that day. For checking accounts, that’s the balance that the bank shows.

If you’ve written a bunch of checks right before filing, checks still floating out there on their way to the bank make your bank balance higher than the balance in your checkbook.

Why does the float matter

The money in your bank account on the day you file belongs to your bankruptcy estate.

Now, it may be fully exempt or it may be too little to interest a trustee in administering it, but that’s another story.

In the eyes of the law, the money in the bank is yours, even though you’ve written directions to the bank to pay some of it out to the holders of your checks. Those directions (your checks) just haven’t arrived at the bank.

A bankruptcy trustee can demand that you pay him that balance for the benefit of your creditors, even though the money has long since been paid out by the bank, who knew nothing of the bankruptcy case when it honored your check.

Bummer.

Spending before bankruptcy

If you are in the lucky position of having more cash on hand than you can exempt in your bankruptcy case, you may want to spend that money on things you’ll need after bankruptcy.

Can you sell assets before filing?

My list of purchases/expenditures that generally pass muster with bankruptcy trustees include

Stocking your kitchen
Repairing your car
Paying insurance premiums
Refilling prescriptions
Getting needed health or dental care
Replacing aged appliances

But if you pay for them with a check, right on the eve of bankruptcy, you run the risk that the checks haven’t cleared the bank when your case is filed.

More on cleaning up your finances before bankruptcy

Eliminate the float

Instead of paying by personal check, you can pay cash for your purchases. Be sure to keep a record of what you bought so you can trace the money for the trustee.

Or, you can buy cashier’s checks from the bank, and make your purchases with certified funds. The funds to buy a cashier’s check come immediately from your account at the bank.

A cashier’s check is a check on the bank’s checking account, not yours.

By using cashier’s checks, you spend down your funds and eliminate the risk that your bank balance will be artificially high on the day you file your bankruptcy case. And that’s good.

More on planning for bankruptcy

What about the tax refund?

Do you know about the secret bankruptcy exemptions?

What belongs in your bankruptcy schedules

Interviewing a bankruptcy lawyer

Image courtesy of Flickr & boo_licious.

Has Your Social Security Number Been Suspended?

By Cathy Moran

The latest variety of tax scam picked the wrong target when they called my fellow bankruptcy lawyer Wayne Silver.

Your social security number has been suspended, claimed the caller.

Having no identity is scary. What’s a guy to do without a Social Security number?

It’s sad that we are reduced to needing a number to validate who we are. But without a Social Security number, an American is virtually no body.

And that’s what the scammer counted on when he called Wayne, and doubtless thousands of others.

The phone message claimed that because of “suspicious activity” on his Social Security number, it was being “suspended”.

If Wayne wanted to know more about the situation, he could call the number provided.

And the situation must be urgent, because the scammer called 5 times in 24 hours.

Social Security numbers don’t get suspended

None of what the scammer claimed was true. Except that they wanted Wayne to call so they could GET his social security number, or scare him into sending them money directly.

Wayne is hardly your average consumer. He’s a veteran bankruptcy attorney and white collar crime litigator. So, he wasn’t scared.

He called me into his office to listen in and share the joke.

But lots of people are scared by these scam calls.

IRS lists latest identity scams

The IRS put out an update to its list of scams. This supposed “suspension” of your Social Security number topped the list.

My rule of thumb is that no one who calls you claiming to be from the government is real.

The government is essentially wedded to paper. They NEVER make first contact with an individual by phone.

Hang up, confident that your Social Security is safe, at least from someone on the phone.

Elders fall victim to their phone

Pay up or go to jail: another scam

About Cathy Moran

Parent loan trap

What are we thinking?

How community property works

Liable for my spouse’s debts?

Community property can be avoided

More

A year of missed payments

From bankruptcy filing to relief from stay

Court order til foreclosure

Sale to eviction

Your mileage may vary

More:

When cases are dismissed

Closed without a discharge

More

Read your Chapter 13 plan

Keep track of payments you make

Compare monthly statements

Watch for payment changes

Pay your property taxes

Avoid suffering a motion for relief from stay

Deduct the mortgage interest you pay

Heads up and keep your house

More

Probate pays creditors

Exemptions in probate

Revocable trusts expose heirs

Bankruptcy eliminates the debts

More

The debt plan that scares me

Stress kills

Bankruptcy is a remedy

Eliminate debt as source of stress

Why does the float matter

Spending before bankruptcy

Eliminate the float

More on planning for bankruptcy

Social Security numbers don’t get suspended

IRS lists latest identity scams

More

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