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.

How To Save Your House With Chapter 13 Bankruptcy

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Saving your house 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.

More

Mistakes that crater Chapter 13 plans

If you can’t make your plan payments

Why discharge gets snatched away at plan’s end

Tax Deductions Hide In Chapter 13

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tax deductions bankruptcy

It’s tax time: don’t overlook tax deductions in Chapter 13 bankruptcy case.

Tax deductions lurk in the most unlikely places.

If your Chapter 13 plan is catching up home loan arrears, there’s a deduction hiding in the trustee’s disbursement records.

Most likely, the lender’s filed proof of claim in the bankruptcy case is full of interest on the loan which accrued but was not paid before the case was filed.

Lender’s claim loaded with interest

A substantial amount of each monthly  payment on your home loan  is interest.  That mortgage interest can be deducted if you itemize deductions.

For reasons that I can’t explain, mortgage lenders do not seem to provide a 1098 for mortgage interest paid through the trustee.  But then, the whole business of accounting for mortgage payments made through Chapter 13 seems to be beyond most loan servicers.

Getting the straight story from mortgage lenders

How to find the deductible amount

All Chapter 13 trustees have information available on line for debtors whose cases they are administering.  Usually, the instructions for how to access the information about your case are provided at the 341 meeting.

Find the section of the trustee’s site that shows disbursements or payments.  Locate the claim filed by your lender, or its servicer.  The report will show how much has been disbursed on that claim.  You’ll have to isolate what’s been paid in the last tax year.

Here’s how to calculate the interest portion of trustee payment.

If you can’t sort the information for disbursements in a given period, you can look at the ledger of all disbursements;  flag and total the payments to your lender.

Support tax deduction with proof

The IRS relies on 1099 forms sent to them, with copies to the taxpayer, to verify your right to the deduction.  Since the lenders don’t seem to acknowledge Chapter 13 payments as interest, you’re on your own to back up your claim for a tax deduction.

I suggest that you get a copy of the bank’s proof of claim, print off the trustee’s disbursement records, and save them along with a copy of your plan with your supporting tax documents.  You’ll want to be able to back up your tax deduction should the IRS inquire.

Other deductions hiding in the plan

The same principle, that payments by the trustee are really payments attributable to you, the tax payer, applies to any deductible taxes or business expenses that the trustee has disbursed.

There is no reason to let those tax deductions in bankruptcy go to waste.

Set your cap for tax deductions in Chapter 13 disbursements.

Happy hunting.

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When the 1099 is wrong

Does This Struggling Business Have A Future?

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virus damaged business

Long after the human patients recover from the coronavirus, small businesses will still be struggling.

And long nights will be spent deciding whether to try to stay in business.

Here are some things to weigh as you consider the future of a struggling small business.

The desire to continue

The most important part of most small businesses is the owner. The owner supplies the vision and the drive that makes the business run.

If you are drained of vision and drive, then allow yourself to exit. Soldiering on just so you don’t have to admit you’re done is unlikely to have a good result.

If you’re game to continue, there are more questions.

Is the business viable

When the lock-down is over, and we creep back to the new “normal”, the next gating question is whether there’s a post pandemic market for the business’s product .

And if there is continuing demand for the product, how long is the ramp up?  What financial resources does it take to survive the ramp up? And what’s the likely volume of business to be expected over the short run? The longer run?

Reorganize for survival

The pandemic has forced change and re evaluation on all of us.  When things are already disrupted, considering change seems less overwhelming. And more essential.

Could the business continue with

  • fewer owners
  • fewer employees
  • no brick and mortar premises
  • narrower market
  • broader market
  • partnered with others

Embrace the disruption and move the pieces around the board, at least in your mind.

New debt and lingering death

Business loans seem to be at the center of the government’s recovery strategy. Distressingly, the rules about when/if those loans need to be repaid are unclear, incomplete, and subject to change.

It’s worth some thought as to whether the business can handle more debt. What is the current debt structure, and were you paying that debt down before the pandemic?

Another way to think about more borrowing is that it may be essential as a short term strategy to keep food on the table until you have more options outside of the current business.

Wind down and move on

Writing the existing  business off as a lost cause isn’t necessarily an all or nothing choice.

Perhaps you fold the existing business but remain in the same industry, as a proprietor rather than an entity, or as an entity after a personal bankruptcy.

Dangers inherent in corporate Chapter 7

Maybe, this is the time to change industries, take a salaried job, return to school, or ????

Challenges for all

The issues are complex and intertwined. And with the virus still shadowing our lives, uncertainty abounds. Allow yourself some time to consider how you move forward.

More

Collected posts on coronavirus impact on personal finances

Separating yourself from your business

File bankruptcy tomorrow?

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alarm clock flickr jonathan bliss_opt

It’s happened again: there’s an email in Monday morning’s inbox from a client whom I first met weeks ago.

He tells me they want to file before Wednesday’s mediation in state court!

I have no creditor information, representation agreement, money, or credit counseling certificate.

Just as inconvenient, I’m not sure I have staff who can drop everything (related to clients who planned ahead and played by our rules) to make this happen.

Clearly I’m not communicating to clients what is involved in getting even a skeleton petition on file.  

What’s required to file bankruptcy

Lots of clients seem to think that I may be able to file the petition without any involvement on their part beyond providing the decision to file and money.

Wrong.

The bankruptcy paperwork is filed with both the client’s signature and my signature We are both attesting to the accuracy of the information and the debtor’s eligibility for bankruptcy relief.

What your signature means on bankruptcy schedules

The full filing is even more information intense: budgets looking forward and backward; recent financial history; intentions with respect to secured debts. All of it is doable, just not with a snap of the fingers.

More on bankruptcy schedules

Got to go: got a skeleton to assemble before Wednesday.

Image courtesy of Jonathan Bliss and Flickr.

Before You List Your Home For Sale: The Essential First Task

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Selling your home?  

  • Before you list your home,
  • before you interview a realtor,
  • before you lift a paint brush, or clean a closet, you need to write a letter.

A letter to the servicer of your mortgage.

You want full disclosure of what charges, fees, expenses and other “stuff” they want to collect from you when your sale closes.

For all you know, they’ve stuffed your loan full of fees, not authorized by law or agreement,  that pad their bottom line, and suck money out of your pocket.

Or, they’ve misapplied your payments or failed to note a mortgage modification.

So, your first step in selling your home is to get a handle on the loan payoff, while there’s still time to strip the mistakes and the junk fees from the payoff demand.

Why tackle your loan first?

Is it really necessary to explore your existing loan before you list your home for sale.  Yup.  You start with the existing lender because getting informatin takes time. Federal law requires them to make full disclosure if you ask, but they get 30 business days to do so.

So it may be a month and a half before you have their first response.  And if you don’t agree with the figures they produce, it takes longer still to resolve the dispute.

All too often, the inflated payoff demand doesn’t surface until your sale is about to close.  Maybe the payoff demand from the servicer bears little relation to the mortgage statement you’ve been receiving monthly.

And with a sales contract in place, a deadline for closing, and a buyer’s loan commitment about to expire, too many sellers are forced to accept the servicer’s numbers or lose the sale.

They end up paying too much because there’s no time.

Since good information takes time, start here first.

How to make a Request For Information

The Dodd Frank Act beefed up your rights as a home loan borrower to get information from the servicer of your loan.  Time lines were shortened;  broader inquiries were permitted.  And some consequences created for failure to respond.

Here are the essentials of a Request for Information under Reg. X 1024.36

An enforceable request must

  • Be in writing
  • Identify the borrower, the loan and the property address
  • Indicate that the property is your principal residence
  • Set out the information you seek
  • Be sent to the specially designated address of the servicer for RIF’s

The last requirement, delivery to the servicer’s designated address, that trips people up.  The magic address is often found on the back of the monthly mortgage statement.

Sometimes the address designated uses the previous name for the kind of request we’re talking about: Qualified Written Request.  Servicers usually have the address on their website, tho it may require digging to find it.

Don’t send an RFI with your payment.  Don’t ask for it over the phone.  You have a right to good answers only if you follow the procedures in the regulation.

What to ask the servicer

If you are selling your home, you want a payoff figure, itemized.

RFI example

Chances are you know what the principal balance is.  It’s the other stuff that doesn’t necessarily appear on your statement that you want to flush out.

Are there late fees, escrow deficiencies, non-interest bearing balances, inspection fees, appraisal fees, processing fees.

You get the picture.  Fees, fees, fees.  For too many servicers, their profit is all in the fees.  Find out ahead of time what you are facing.

Heading to sale

With your RFI in the mail, you’re ready to list your home for sale and turn to the myriad of other things to do to get your house on the market.

Mark your calendar for 30 business days so you know when to expect good information.

What if you get a response and you don’t agree with it.

Call the servicer.  Complain to the CFPB.  Ask a HUD certified housing counselor for help.  Get an attorney.

Consumer rights are only meaningful if they are used.

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How Much Cash Can You Keep In Bankruptcy?

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coins in a stack

How much money can you keep when you file bankruptcy?

It’s not as though you won’t have living expenses after you file bankruptcy.

You need to know how you’ll manage and what you’ll have to manage with.

Funding that fresh start is what exemptions are all about.

We are talking here about California because exemptions, the laws that govern what you can keep for your fresh start., are unique to each state.

Exemptions are the one part of bankruptcy that is explicitly different from state to state.  So, recognize that the rules we’re talking about here apply in California.

California exemption systems

California has two distinct exemption schemes that you can choose from.  And you have to choose one scheme or the other.

You can’t take one exemption from one set and another exemption from the other set.

The exemptions originally enacted in California were big on protecting homes, so we have generous homestead exemption (which gets bigger January 1, 2021) under generally applicable state law.  That system is found in California Code of Civil Procedure 704 and the statutes that follow it.

All about the California homestead

California also has a second system of exemptions available only for its residents who file bankruptcy.  These are found in CCP 703.140.

We’re going to look closely at the California bankruptcy exemptions (CCP 703.140)  on the question of how much cash you can protect.  Here’s an online summary of these exemptions.

Cash to start over

The big money for exemptions is found in the grubstake provision:  §703.140(b)(5).

If you haven’t elected to protect equity in real property, you can combine the dollar amount of the homestead  in subsection (1) with the “wild card” amount in subsection (5) for  total of $28,225..

That’s a pretty good nest egg.

Money traceable to exempt source

You may be holding money that comes from an exempt source.  If the money you hold is traceable to its source, it may be exempt in addition to money claimed exempt as a grubstake.

Personal injury  Funds that you can trace to a personal injury recovery can be claimed exempt.  CCP 703.140(b)(11)(D) limits the exempt portion to damages for bodily injury (not property damage).

The money needs to be traceable to its source.  And it has to be still in the form of money.  If you spend the exempt money on a car, the car isn’t exempt as the proceeds of a personal injury recovery.

This exemption currently protects up to $26,800.

Insurance proceeds or wrongful death award  If someone on whom you were dependent dies or was killed, any award you receive as a result is exempt to the extent necessary for your support.

It gets a little messier, since a judge may have to decide what’s “necessary” for your support.  But for an elderly or disabled individual, that amount could be considerable.

Public benefits    Social Security, unemployment, workers compensation, and veterans benefits are protected from creditors.  Though the words of the statute protect your “right to receive” these benefits, case law in the 9th Circuit protects any sums paid out that are traceable to the exempt source.

Retirement or profit sharing payments  Payments on account of old age, length of service or disability under a contract are exempt, again, to the extent necessary for your support.  The precise amount you can protect is unstated but the protection is whatever is “necessary” for support.

IRA’s

The only good thing to come out of bankruptcy “reform” in 2005, in my opinion, was a universal bankruptcy exemption for IRA’s.  The cap started at 1 million dollars, and is adjusted every three years.

If you are lucky or hard working enough to have a substantial IRA, neither your creditors nor a bankruptcy trustee can reach it by reason of 11 USC 522(n).

Trusts

Trusts that have a specific provision that makes them non transferable are not even property of the bankruptcy estate.  The provision is sometimes called an anti-alienation provision or a spendthrift provision.

It’s this kind of provision that takes most pension plans and 401(k) arrangements out of the reach of creditors.

A trust you create for your own benefit or a revocable living trust doesn’t fall within this provision.  But a spendthrift trust created by a parent or grandparent with you as the beneficiary might qualify.

When something isn’t “property of the estate”, an exemption isn’t necessary to protect it in bankruptcy.

Once you move beyond the grubstake, or wild card exemption we looked at first, application of the exemption laws gets a little more complex.   If one of these other exemptions for cash might apply to you, get help from an experienced bankruptcy attorney.

The single biggest mistake that people representing themselves in a bankruptcy case make involves botching claims of exemption.

More

New California exemption for cash

Interviewing a bankruptcy lawyer

Secret exemptions

What you keep in Chapter 13

California bankruptcy law

Image courtesy of Flickr and Bookis

Pay No Tax On Discharged Debt

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1099 tax

When it’s tax time,  questions about forgiveness-of-debt income are everywhere.

Questions start when you receive a Form 1099 from a creditor.

But for my bankruptcy clients, the answer is simple:

Debt discharged in bankruptcy is not taxable.

Tax on cancelled debt

Debt may get cancelled in lots of ways:

  • in a short sale;
  • by compromising a debt
  • by lender compliance with a settlement agreement with the feds;
  • in a bankruptcy; or
  • in a foreclosure.

Lenders and debt collectors believe themselves bound to send out a 1099 whenever they handle a transaction that may implicate cancellation of debt.   They aren’t rendering an opinion on the tax treatment of the event.  They are just reporting it to the IRS.

Receipt of a 1099 is not the final word on the topic; it’s only notice that the transaction in question has been reported to the IRS.

Bankruptcy is an exception

The standard rule is that debt that is cancelled is treated as though you had received that much cash, and that pseudo-cash is treated as income.  And, if it’s income, the IRS thinks it’s taxable.

The exceptions to recognizing that transaction as income  found in IRC 108 include

  • insolvency at the time, and
  • discharge of the debt in bankruptcy.

Claiming the exception

To avoid including the total on a 1099, you can’t count on the IRS knowing about your bankruptcy discharge.

You have to file an IRS form to rebut the 1099.  It’s form 982 and right at the top are the boxes to check to invoke the exceptions.

The form also includes a worksheet to see if you are insolvent for the purposes of this provision of law.

If the 1099 got the facts wrong

Remember, too, that if you did not have personal liability for the debt, the cancellation of that debt is not even forgiven debt.  There was no debt.

You may have no personal liability because of a previous bankruptcy or by reason of California’s anti deficiency laws.

Also, there is special legislation dealing with cancellation of debt upon loss of a primary residence, excluding phantom income from qualifying transactions.

Here’s the IRS on the subject:  http://www.irs.gov/taxtopics/tc431.html

More

Deductions hidden in Chapter 13

File even if you can’t pay

Discharging taxes in bankruptcy

The Means Test: Badly Mangled

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411px-MSH80_st_helens_eruption_plume_07-22-80

Another purported financial professional has confidently and conclusively gotten the bankruptcy means test absolutely dead wrong.

And used that wrong conclusion to steer someone away from bankruptcy.

Mt. St. Helens has nothing on me in terms of venting.

How can financial professionals get this so wrong, more than a decade after the means test was enacted?

Mangling the law

It started off innocently enough when a reader asked financial columnist Jane McNamara on FoxBusiness about the impact of settling an old debt  versus filing bankruptcy.

She noted the possible tax consequences of a settlement and asked whether the money was really available to fund the settlement.

So far, so good.

But then she blew it, big time.

To qualify for a Chapter 7 filing in most cases your income must be lower than the median income for your state

Wrong, wrong, wrong.

An income over the median income for your state just means you have to complete the means test.  It’s largely another form requiring more figures about your income and your projected expenses.

The means test is another hoop to jump through.  It is not a barricade.

The vast majority of above median income debtors pass the means test and successfully file Chapter 7.

In my view, this misstatement is unforgivable.  If you hold yourself out to offer financial advice, you at least should have mastered the basics.

Then you wonder about the independence of the piece when you note a connection to creditcards.com. Who benefits if cardholders don’t file bankruptcy? Card issuers.

Bankruptcy means test in the real world

The man in my office recently made me worry about the means test.

Because passing the means test often relies on deducting certain living expenses from their income such as payments on back taxes and secured debts, this man appeared exposed.

His car was paid for, he had no dependents, he rented, paid his taxes, and had no toys bought on credit.  All of the usual deductions that get people with high incomes through the means test and into bankruptcy were missing.

But it didn’t matter.

Even with an annual income of $7000 above the median California income for a single person, he qualified for Chapter 7, just based on the standard expense allowances provided for in the means test.  In fact, he qualified with $650 a month cushion.

The means test wasn’t even close to knocking him out of bankruptcy.

He’s living proof that McNamara’s statement that you have to have a below median income to file bankruptcy is just plain wrong.

Just because someone wrote it

The internet is marvelous for making information easily available.  But just because it’s in print, it isn’t necessarily correct.

Unfortunately, lots of people will read the FoxBusiness article and conclude that they aren’t eligible for bankruptcy.

They’ll struggle on unnecessarily at financial and personal cost because some writer got it wrong, and they believed.

You can read more about how the means test in bankruptcy really works here:

Image courtesy of Wikimedia and USGS

Bail Yourself Out Of Payroll Tax Trouble

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parachute-851318_640 (1)

Business owners with unpaid payroll taxes are in deep trouble.

Even if the employer is a corporation, the corporation’s managers are personally liable for the trust fund portion of unpaid payroll taxes. There’s no corporate shield when it comes to payroll taxes.

The trust fund portion of the tax (the amount withheld from employees’ checks) can be assessed against anyone  who could have paid that money  to the IRS.

You are in the IRS’s cross hairs, personally, if the business hands out “net” checks to employees without sending the withheld money in.  A bankruptcy discharge is no help here.

What’s the payroll tax

What we refer to as “payroll tax” is really a combination of two elements:  the employee’s income and FICA taxes that the employer has withheld and the employer’s share of FICA  (Social Security) tax.

The portion of the “payroll tax” withheld from the employee’s check are the “trust fund” portion of the payroll tax. Usually, trust funds make up about 2/3rds of the payroll tax.  The balance is the business’s matching contribution to Social Security.

The liability of corporate officers or LLC managers for the business’s trust fund liability is not dischargeable in bankruptcy.  Like other federal taxes, the statute of limitations is 10 years and the IRS is a fearsome creditor.

Earmark tax payments

If you find yourself in this pickle, you, and the business itself, can bail yourself out of trouble with an earmark of any payment you make toward Form 941 liability.

A taxpayer  who makes voluntary payments to the IRS has the right to designate to which liability the payment will be applied.  In re Ribs-R-Us, Inc., 828 F.2d 199, 201 (3rd Cir. 1987).

Cooper-AZ-brand-cropped

An earmark allows the IRS to distinguish your payment from others, like a cropped ear lets a cattleman tell his cows from his neighbors.

It is simply a direction to the IRS as to how the payment is to be credited.  Pay voluntarily and you have the right to tell the IRS what to do with the money.

Without instructions, the IRS is free to apply payment it receives on the tax debt as it chooses.  And it chooses the manner of application that benefits it best.

Send a check for payroll taxes and if the check is not enough to pay the entire liability, the IRS applies it first to the dischargeable portion of the tax first, preserving the personal liability of the business owners for the remaining tax.

Likewise, if the IRS levies an account, they may apply the levied funds as they wish.

How to earmark

If the business finds itself with insufficient funds to pay the entire tax owed, you can reduce your personal liability for the unpaid tax by earmarking the payment.

Write directions on the check specifying how the payment is to be applied like this:  Trust Fund liability, 4th Quarter 2015 941.  Send a cover letter with the check with the same instructions.  Keep a copy of the letter for your records.

Of course, the better course of action is to remain current on payroll taxes.

Use a payroll service that won’t cut the checks unless the taxes are paid, or make a tax  deposit  with each payroll.

Dip into the money withheld from employees and you’ve taken a “loan” that lives very nearly forever.

More

The easiest business loan in town-not

Is it safe to file a corporate bankruptcy

Reorganize or wind down?

When Your STBX Files Bankruptcy: An Action Plan

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stbx bankruptcy

Whether the news comes by phone or mail, the notice that your soon-to-be-ex spouse has filed bankruptcy can bring fear and confusion.

You need some facts and a plan, now.

So let’s look at how bankruptcy affects a non filing spouse and how to chart a course through a STBX bankruptcy case.

Child support safe from bankruptcy

Regardless of the bankruptcy chapter, the debtor’s obligation for child support, spousal support or family support cannot be discharged in bankruptcy. When the bankruptcy is over, unpaid debts for support live on.

Not only is support non dischargeable, it has the first priority for payment from any funds distributed to creditors in bankruptcy.

In bankruptcy lingo, support is called a “domestic support obligation”. Whatever it’s called, it can’t be wiped out in bankruptcy.

Automatic stay halts only some proceedings

When a person files bankruptcy, an injunction against collection of existing debts automatically takes effect. But there are exceptions to many kinds of actions arising in family law.

Not affected by the stay are proceedings

  • to establish or modify support
  • touching custody or visitation
  • to dissolve the marriage
  • to address domestic violence
  • to collect support from funds not property of the estate.

So, effectively the division of property becomes the biggest issue affected by the automatic stay is . Proceedings in family court touching property must halt, until either the bankruptcy is closed or you get relief from the stay from the bankruptcy judge to go forward.

Community property in a one-spouse bankruptcy

Filing bankruptcy brings all of the filer’s assets, tangible and intangible, into the bankruptcy estate, potentially to pay creditors.

community property states map

The real surprise for a non-debtor spouse in a community property state, shown here in red.

Bankruptcy law brings all of the community property of the couple into the estate. Not just the half of the community that is allocated to the spouse that filed bankruptcy, but all of the community.

In return for inclusion of all of the community property in the estate, all of the creditors who could have satisfied their claim from community property can be paid through the bankruptcy.

Community claims that aren’t paid in full in bankruptcy are discharged as to the debtor and any future community property. If you are separated when your spouse files bankruptcy, what you acquire after separation is not community property under California law.

Effect of discharge on your debts

Debts that you incurred in your own name (not jointly with your spouse) are not wiped out as a personal liability of yours.

So, after your spouse’s discharge, your creditor can’t collect from community property; the non exempt community property has already been applied to debts. But your creditor can get a judgment and collect from any other assets you have.

As a matter of contract law, your separate property is not liable to a creditor for a debt standing only in the name of your STBX.

Your credit report after your spouse files

By federal law, each individual is supposed to have his or her own, separate credit file. A bankruptcy filing by your spouse should not show as a bankruptcy on your file.

credit report

However, debts for which you are jointly liable for, by contract, may have a note in the credit report that the debt was “included in bankruptcy.”

Monitor your credit report so you can challenge any erroneous reporting.

Bankruptcy and the division of property

While all the debtor’s assets come into the bankruptcy estate, exemptions allow debtors to keep certain assets to fund their fresh start. California has two, alternative, sets of exemptions that are comparatively generous.

If your STBX wants to elect the California bankruptcy exemptions rather than the standard California exemptions including the homestead, you need to agree to that choice. Without your agreement, a bankruptcy debtor in this state must choose the standard exemptions.

California law wants to protect the family home above all else, unless the spouses agree that the alternative exemption system is a better deal for the family.

property division

Your rights to a share of exempt property isn’t cut off by bankruptcy. The division of the exempt property remains the job of the family court.

Some assets, like retirement accounts, simply aren’t included in bankruptcy by law. Those assets need to divided in the dissolution.

Your action items for STBX’s bankruptcy

Most bankruptcy filings are straightforward and most debtors do their best to play by the bankruptcy rules. If you are concerned or curious about your STBX’s case, here’s a list of possible to-do’s for you, the non filing spouse.

Get copy of bankruptcy schedules

The schedules should list all the debtor’s assets and all of their debts. They are signed under penalty of perjury, so they may be of future use in family court if there are debts you didn’t know about or assets that are omitted.

Confirm you’re on the mailing list

The court will send notices about significant activity in the case, including entry of a discharge. Make sure you and your family lawyer are on the list.

Let your family lawyer know about the case

Parts of your lawyer’s work is covered by the automatic stay. Make sure to share the news. The schedules are filed under penalty of perjury. If the schedules paint a picture different than the one you know, there may be legal consequences in the divorce.

Review the schedules

Look for any assets that are missing from the schedules. See what exemptions have been claimed. You can notify the bankruptcy trustee or the United States Trustee about significant discrepancies in the schedules.

Check for missing creditors

Bankruptcy discharges only debts of creditors who get notice of the case. Make sure that all the creditors you know about are there on the schedules.

File a claim

If you are owed any support that is unpaid as of the date of filing, file a proof of claim with the court. Only creditors who file a claim can be paid through the bankruptcy. Payment is generally months or more after the case is filed.

Do you need a bankruptcy lawyer

Most likely, you have no need for a bankruptcy lawyer. However, if you are worried, or see major issues with the debt and assets listed in the case, get some input from an experienced bankruptcy lawyer. Timelines are short in bankruptcy cases and good advice can help you see your way forward.

More

How to interview a bankruptcy lawyer

Debts that survive a bankruptcy discharge

Basics of bankruptcy and the available chapters

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Phone: (650) 694-4700

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