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 Secret Alternative To Bankruptcy

By Cathy Moran

Looking for the secret alternative to bankruptcy which will solve your debt problems without filing?

Why not?

Ads for debt settlement companies and do-it-yourself books always promise to reveal the tricks to make your bills vanish for pennies, without resort to bankruptcy.

(Isn’t it interesting that these “secrets” are known only by people who want to sell you something? A book, a debt settlement plan, a seminar?)

I’m tempted to ask clients who ask about the secret bankruptcy alternatives: do you also believe in the tooth fairy, Santa Claus, and leprechauns with pots of gold?

Unkind, I know.

But in the information age, it ought to be obvious: There are no painless, quick fixes.

Settle your debts for pennies

Yes, it is theoretically possible to get a settlement of each of your debts that gives you the same result as bankruptcy.

But it is seldom a realistic option because

It requires cash to pay each settlement
It requires 100% of your creditors to agree to terms
It takes time and effort to negotiate deals
Not all creditors are prepared to deal
It’s dependent on no negative financial changes in the future

And in the meantime, your credit report gets trashed. Often, the unpaid creditor sues.

What to do when you’re sued

Then there’s the nasty tax consequence of settling debt. Forgiven debt is treated like cash income. And income is subject to tax.

The debt settlement folks have no power to make it otherwise.

Why bankruptcy works

Bankruptcy works because it binds all creditors. All creditors, even the IRS, have to stop collection action.

If they don’t, a federal judge is available to make them stop, and pay for having violated the automatic stay.

Bankruptcy limits any payment to creditors to the value of your assets today, after giving you credit for exemptions.

After the bankruptcy discharge, the debt that is wiped out is gone forever.

The bankruptcy discharge generates no tax consequences.

Get on with life

People in debt need relief from the stress that debt brings with it.

Stress actually makes you stupid

They need to save for retirement. They need to create an emergency fund.

They need these things NOW.

Bankruptcy does that. No secrets; no magic, no kidding.

Questions to ask a bankruptcy lawyer

How much should bankruptcy cost

What you keep after bankruptcy

Protecting Your Co signor When You Can’t Pay

By Cathy Moran

Cosigning a loan links you and your cosignor together for the life of the debt.

If you get in financial trouble, your troubles are your co signor’s troubles too.

If you can’t pay your debts, the standard bankruptcy discharge will get rid of your debt, but it doesn’t help your co signor.

Even while you are protected in bankruptcy by the automatic stay, keeping collectors at bay, and by the discharge at the end of the case, anyone who cosigned for you is exposed.

But Chapter 13 isn’t the “standard” bankruptcy. It has a special protection for people whose debts are co signed.

Automatic stay covers co signors

Unique to Chapter 13, Section 1301 of the Bankruptcy Code extends the protection of the automatic stay to those who are jointly liable with the debtor on consumer debts.

To qualify, the debt must be for a personal or household purpose.

So a cosigned car loan is covered;

A cosigned business lease is not.

The benefits of the loan must have flowed to the person who filed bankruptcy. If you co signed a loan made to a friend, your friend isn’t protected by your Chapter 13 stay.

Finally, to keep the stay in place, the Chapter 13 plan must provide for payment in full of the debt.

Co signed debts get preference

Chapter 13 plans are normally required to treat all unsecured, non priority debts the same. Each of the general unsecured claims gets the same percentage payment through the plan.

But cosigned debts are excepted.

The debtor can treat the cosigned debt differently and better than other debts.

It’s OK to separately classify a co signed debt and pay it in full, while other debts get little or nothing in Chapter 13.

So your plan can say: pay 100% of the allowed claim on the joint credit card claim of BIG BANK, and far less to everyone else.

After the plan is over

The only sticky point for the co signor, who is protected from collection on the co signed debt during the plan, is that interest that may accrue on the debt over the life of the plan.

At the end of the plan, the principal on the debt and any interest owed when the case was filed, will have been paid. But the bankruptcy case doesn’t stop the accrual of interest at the contract rate during the plan.

The cosignor will remain liable for that interest despite the bankruptcy.

Power of Chapter 13

The co debtor stay and the ability to separately classify co signed debts is just another reason why, as a bankruptcy attorney, I love Chapter 13.

Consider

The secrets of successful Chapter 13 plans

Interviewing a bankruptcy lawyer

Wipe out tax penalties in Chapter 13

Bankruptcy and “Ruining your credit score”

By Cathy Moran Leave a Comment

No matter how precarious their financial situation, almost every client I meet thinks bankruptcy will ruin their credit score.

Not only ruin it, but damage it for all time, precluding normal life after bankruptcy.

Some resolve to stagger along, burdened with their debt and the fear of escaping debt.

So, my encounter with a financial columnist was on point.

Liz Weston, L.A. Times financial writer, lead a room full of bankruptcy attorneys through the impact of various life events on one’s credit score.

She recounted how, after meeting some debtors as she worked on stories, she no longer saw debtors as deadbeats.

She saw the challenges in their lives and the soundness of electing bankruptcy. Her candor about the change in her world view was refreshing.

Having written a book on credit scoring, she naturally was caught up in the interface with bankruptcy.

But as one who is frustrated by the fixation of those drowning in debt on their credit score, I wanted to stand up and shout:

Ruin your credit score, not your life!

The financial media sounds a drum beat that one’s life and worth is wrapped up in that credit score. All the while, that score is something we don’t fully understand and is based on credit reports which are notoriously inaccurate.

Life will end, we’re told, if our credit score declines.

Poppycock!

That fear keeps American consumers struggling to pay debt that they can never repay, in this life or the next. In order to preserve their credit score, they appear resigned to a lifetime of minimum payments rather than a fresh start in bankruptcy

As Liz pointed out, the credit score is dynamic: it is constantly changing, and heals over time.

My call is to fix your balance sheet.

Get rid of dischargeable debts.
Save for retirement.
Live beneath your means.
Have some reserves.

Don’t walk the financial tightrope.

Image courtesy of terwilliger911,? pursuant to a Creative Commons license.

V Is For Value In Bankruptcy Alphabet

By Cathy Moran 2 Comments

The Letter V is for Value in my bankruptcy alphabet.

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

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

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

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

What’s it worth

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

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

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

Value critical to exemption law

Many exemptions are capped at a certain dollar value.

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

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

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

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

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

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

Image courtesy of Leo Reynolds.

What Should Bankruptcy Cost?

By Cathy Moran 1 Comment

Pick the cheapest bankruptcy lawyer and it could really cost you.

How much time and skill does the cut-rate lawyer invest in your case? Often, not enough to do the case right.

And the extra cost of getting another lawyer to repair a case gone bad is only half the problem. Not all the problems created by the bargain basement lawyer can be fixed.

Even when the case can be saved, the clients will end up paying twice: one to the cheapo lawyer, and again to competent counsel to clean it up.

Undoubtedly, they’ll pay more than if they’d paid a good lawyer to do it right the first time.

Bankruptcy mistakes

Right now, in my office we have three conversions from Chapter 11 to Chapter 7 involving significant real estate assets.

We have cases where big ticket assets were omitted. We have cases where the initial attorney just didn’t persist with the debtor to get the schedules right, and ones where counsel didn’t explore the choice of chapter.

Almost without exception, the debtors chose counsel based on price. They went with the lower price for their bankruptcy case, and they bought a rat’s nest.

Cost conscious only at the end

Why is it that notions of economy only surface after a client has wracked up tens of thousands of dollars in debt?

Many of the debtors gave more thought to credit card expenditures or purchases of investment real estate during the boom than they give to picking a bankruptcy lawyer.

The influx of lawyers to this field and the prevalence of lawyer advertising suggest bankruptcy law is a commodity.

Lawyers with no track record to tout or past clients to spread the word compete on price. If you can buy a $15 toaster, why pay $30? goes the thinking.

What a lawyer adds

The existence of non lawyer petition preparers and do-it-yourself books reinforce the idea that bankruptcy is more like playing Go Fish than contract bridge.

Bankruptcy no place for do-it-yourself

Then, there are the official forms, suggesting that filing bankruptcy is all about the paper and not about the disclosure the paper requires.

What the bankruptcy papers require

And disclosure is what the forms are all about, and the system wants disclosure because there may be consequences to the stuff disclosed.

Quality of counsel is not reliably correlated with price: I’ve seen some utter newbie lawyers charging more than highly skilled veterans for an inferior product. But capable counsel is seldom the cheapest.

So, my charge to those needing bankruptcy relief is to consider that hiring the least expensive lawyer is a poor bargain.

Figure how much should you pay for bankruptcy

Another time, I’ll talk about how to assess a lawyer’s suitability for your case.

Questions to ask a bankruptcy lawyer before you file

Image courtesy of purpleslog.

Don’t Trust Anything Your Lender Says On The Phone

By Cathy Moran

Don’t trust the loan servicer for a moment, was my advice to the client who was trying to track payments he’d made on his home mortgage .

The mortgage industry has created an inhabited accounting swamp around your home; the lender’s representative lives in that swamp.

Don’t turn your back on a carnivorous predator.

I’m sad to foster cynicism and us-them ways of looking at the world. But that’s my best legal advice.

Don’t rely on anything the loan servicer tells you on the phone. Nothing.

Use what you gather on the phone as clues, but draw no conclusions from what you’re told.

Why customer service can’t be trusted

Money lies at the heart of the loan servicing problem. Good customer service is expensive.

The outfits who are contracted to collect the payments on your home loan operate on narrow margins in a competitive business. Cheaper is better (for them).

People: The obvious place to reduce your costs and make more money is to hire the cheapest employees you can get. Short their training, and give them no flexibility in handling their jobs.

So, the voice on the phone trying to answer your questions is probably not up to the job.

Procedures: When you get a written copy of how your payments have been credited to your loan balance, you often see payments posted, then reversed, then reapplied differently.

One of my colleagues reports a loan history where the servicer made SIXTY FOUR entries on the loan ledger in a single day.

One payment and they tried 64 different ways to credit it to the loan.

Handoffs: The same servicer seldom handles a loan for the life of that loan. Instead, the servicing rights are handed off from one servicer to another, presumably someone who will charge the owner of the loan even less to pretend to do the job.

Usually, what the new servicer gets doesn’t include any loan history that you could audit; the new guy just gets a series of single numbers representing, supposedly, the bottom line number in each column.

Phone calls don’t make good evidence

The fundamental problem with relying on what the servicer says is the phone: How do you prove what was said on the phone?

Words are fleeting and misunderstandings are easy. If there’s trouble, and there often is, there’s no paper record.

Oral agreements aren’t worth the paper they’re written on, goes the old saw.

Customer service leads to foreclosure

One recent client was dealing with “customer service” trying to determine how much money was required to bring the loan current before the foreclosure sale five days off.

Three days from the foreclosure sale, they admitted that the servicing had been transferred and they had no authority.

Worse, the new servicer said the loan isn’t in our system yet, so we can’t tell you.

When you’re in default

First off, don’t wait til the last minute. Foreclosure is serious stuff and it deserves your full attention when you see the problem.

Use federal law to get the accounting and answers you are entitled to.

Don’t trust anything you’re told on the phone. If it’s important, get it in writing.

If you need legal protection, start interviewing bankruptcy lawyers early. Arrive at the last minute, and many lawyers assume you’ll be a rotten client.

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

By Cathy Moran

Selling 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?

Start with your loan because, while federal law requires them to make full disclosure if you ask, 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, the money is all in the fees. Find out ahead of time what you are facing.

Heading to sale

With your RFI in the mail, you can 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.

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.

Collection law suits in California

By Cathy Moran

A prospective bankruptcy client often arrives in my office because a creditor is hot on their heels.

A lawsuit has been filed, suing them for unpaid debt and they’re panicked.

Almost invariably, the client has leapt to two incorrect assumptions:

the world as they know it is coming to an end; and
they don’t have to do anything until the date set for the case management conference, months down the road.

Wrong on both counts.

Judgments take time

The filing of a lawsuit is a step toward a judgment in favor of the creditor. A judgment is a determination that the debtor owes the amount of the debt and usually the creditor’s expenses to get the judgment.

A judgment entitles the judgment creditor to enlist the coercive power of the state to collect that judgment by levy, lien or garnishment.

All about California judgments

Judgment liens

A judgment in California does not automatically constitute a lien on the debtor’s assets, as it does in some states.

In California a creditor with a judgment must take an additional step to create a judgment lien.

A judgment lien on real estate is created when an abstract of judgment, issued by the court after entry of judgment, is recorded in the records of the county recorder.

A judgment lien on personal property is created by filing a notice of judgment with the Secretary of State.

A judgment lien allows a creditor to execute on that lien through the courts. In that process, even outside of bankruptcy, the judgment debtor may claim an exemption in certain kinds of property.

California state exemptions are set out in Bankruptcy in Brief.

In short, getting a judgment is just a step toward actually taking something from the judgment debtor. All these steps take time and cost the creditor something.

Time to consider your options

The filing of a suit may be a good indicator that you need to do something proactive about your financial situation but it is not an emergency.

About that second assumption, that you don’t need to act before the court date, you must read this.

California judgments are dischargeable in bankruptcy

Avoiding liens in bankruptcy

Do you need to file bankruptcy

What’s the difference between a good bankruptcy lawyer and a great one?

Two Strikes & You’re Out (Of Your Home)

By Cathy Moran

Three strikes and you’re out. Anyone familiar with baseball knows that one.

The rules are different in bankruptcy.

Two strikes and you’re out.

And for one couple, they’re not only out of bankruptcy, they’re out of their house.

Foreclosed the day after they filed bankruptcy number three.

Because, what they didn’t know is that there is no automatic stay of foreclosure in a third bankruptcy filing.

Without a lawyer, they gambled and lost.

Bankruptcy reform is cruel

When Congress “reformed” bankruptcy law a decade ago, it limited the availability of the automatic stay in cases where the filer had had prior cases dismissed during the year.

Under the new law, the stay is automatic in a first case; lasts for 30 days in a second case; and doesn’t exist at all in a third case. See 11 U.S.C. 362(c)(3).

The rule looks at cases pending during the year and dismissed in the twelve months before the case at hand.

The change was intended to stop abuse of bankruptcy law by folks who filed bankruptcy only to get the stay of collection, folks who didn’t intend to follow through with a complete filing in accordance with the rules.

And certainly, there are a few examples of deliberate abuse of the law.

What you don’t know

The elderly couple in this story wanted to put off the foreclosure long enough to sell their home. For reasons I haven’t figured out, with their house on the line, they opted to file a Chapter 13 without the help of a lawyer.

In each case, they filed a “skeleton” case, the bare bones necessary to initiate a bankruptcy case.

And in each case, they failed to file the balance of the schedules within the two week extension provided by the rules.

Under the “reformed” statute, the filing of their third case within the last 12 months didn’t trigger a stay against foreclosure.

So, when the lender foreclosed the day after they filed the third case, the lender was good under the law.

And the house was gone.

Do it yourself is dangerous

Usually, we admire the independent, the tenacious, the resourceful. We applaud the d0-it-yourself ethic.

But law is not like carpentry or car maintenance.

Like it or not, law is complicated, rule-driven, and often inflexible.

Hiring a lawyer seems particularly painful when the problem you need to solve is not enough money.

But the pain of paying for help is minor next to losing your house, unnecessarily.

Bankruptcy lawyers are used to clients with few funds. Chapter 13 provides a way to legally pay your lawyer after you file your case. We can often find a way to make it work.

In many ways, bankruptcy is a team sport: you and your lawyer. Victory is unlikely when you take the field short-handed.

How much should bankruptcy cost?

Timeline for foreclosure in California

How to interview a bankruptcy lawyer

At Risk of Repossession? How To Keep The Car & Pay Less

By Cathy Moran

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

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

No car, no way to work.

No work, no income.

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

Stop repossession

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

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

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

Spread out car payments

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

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

Reduce interest rate

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

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

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

Strip out loan add ons

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

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

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

Deal with other debts

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

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

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

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

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

Your car in Chapter 7 bankruptcy

Is bankruptcy the right choice for you

Interviewing a bankruptcy lawyer

About Cathy Moran

Settle your debts for pennies

Why bankruptcy works

Get on with life

More

Automatic stay covers co signors

Co signed debts get preference

After the plan is over

Power of Chapter 13

Consider

What’s it worth

Value critical to exemption law

Bankruptcy mistakes

Cost conscious only at the end

What a lawyer adds

Why customer service can’t be trusted

Phone calls don’t make good evidence

Customer service leads to foreclosure

When you’re in default

Why tackle your loan first?

How to make a Request For Information

What to ask the servicer

Heading to sale

Judgments take time

Judgment liens

Time to consider your options

More

Bankruptcy reform is cruel

What you don’t know

Do it yourself is dangerous

More

Stop repossession

Spread out car payments

Reduce interest rate

Strip out loan add ons

Deal with other debts

More

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