Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Five Tax Tips For Two Cents

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8328967338_37e260ff6b_h_optTax season approaches.

There’s a surprising degree of overlap between bankruptcy and tax I’ve found over three decades as a bankruptcy lawyer.

Here’s my two cents on what I know about taxes.  It’s not a lot, but what I know is both simple and critical.

File those tax returns

Lots of folks who end up in my office discussing bankruptcy held off filing their returns because they figured they couldn’t pay the tax that would be due.

Bad decision.

Without a return, taxes never die

The IRS will not descend on you the week after you file a return with tax due.  They’re still opening envelops.

But filing a return gets all kinds of time periods running that may benefit you:  the 3 years til the taxes are dischargeable in bankruptcy;  the 10 years til the tax collection statute runs.

Don’t pay tax on discharged debt

If your debts were discharged in bankruptcy last year, that discharge has no tax consequences.

The Internal Revenue Code specifically excludes from taxable income any debts forgiven in bankruptcy.

Cancellation of debt is tax free

You may get a 1099 reporting the cancelled debt.  The creditor whose debt is forgiven is required to do so.

It’s up to you to assert that there’s an exception to tax.  And there’s an IRS form to rebut any tax consequences.  Get it and file it.

Claim deductions for Chapter 13 payments

If you’re in a Chapter 13 that catches up arrearages on real property loans, claim those payments as deductions of your own.  Just because the trustee writes the check, it’s still you paying the mortgage interest in that payment.

How to find and claim the deduction

The concept here goes beyond mortgage interest.  If the expense was deductible had you written the check, it’s deductible if the trustee pays it.

Get the trustee’s disbursement records in your case from  the trustee’s web site and get to deducting.

If you owe tax, fix your withholding

The return to be filed this spring can tell you if you are withholding enough money to pay your taxes.

If there’s a big number on the bottom line of the return for last year, and this year looks similar, increase your withholding now.

What Goldilocks knew about taxes

And if you think you can’t pay taxes as you go and support the rest of your living expenses, you need to look hard at the big picture.

It’s generally a poor decision to short the feds so you can pay AmEx or Visa.

Amend old returns if you missed something

If you missed a deduction or otherwise overpaid your taxes in a previous year, you have only three years to amend that return and claim a refund.

Time running out to claim prior year tax breaks

Lower income families often miss the fact that they get a tax credit (that’s real money, not just a deduction) under the Earned Income Tax Credit.  Find out if you are eligible.

Mortgage Lenders Stop Lurking And Start Foreclosing

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old mortgage defaults

 

I’m re-upping this post from nearly two years ago because I’ve seen a surge in foreclosure notices on old and irregular home loans.  There is equity now in those homes, so they are at risk of  foreclosure.

They hadn’t paid the line of credit loan on their home for seven years.

All was quiet for the longest time until a notice of impending foreclosure was served last week.

How foreclosure works in California

In a rational world, you’d think the lender would have noticed some time over those seven years that there were no monthly payments.

You’d also think this was an aberration.

But last month, in another of my cases,  a lender moved for relief from the automatic stay in a pending Chapter 13, citing missed payments from four years ago.  The default was $38,000 before the lender took action.

Time doesn’t heal this wound

Unlike credit card debts or unsecured loans, debts secured by your home don’t hit the statute of limitations quickly.  In California, the statute on a mortgage is 30 years.

So all that ignoring this debt and hoping it would go away has done is increase the fees and expenses that the lender is legitimately due.  And unless the loan is brought current or modified, these homeowners face foreclosure.  Or expensive litigation about defects in the underlying loan.

What’s with mortgage servicing

When you get a notice from your lender to make payments to a different company, it’s easy to conclude that your loan has been sold to a new owner

Probably not.

More likely, the owner of the note has contracted with a different outfit to manage collection on the note.  The servicer gets a slice of the fees for itself out of the deal.

My take is that mortgage servicing is a sorely troubled industry.

The CFPB continues to try to improve performance of those who hold our homes in their hands.  Prosecutors continue to achieve large settlements with servicers on account of their misdeeds.

In just the bankruptcy context, I see servicers day after day whose numbers never match.  The story their numbers tell is wildly different in the proof of claim from the motion for relief from stay.

And try to refinance or sell and you’ll get another set of numbers that don’t add up.

When the lender comes out of hiding

No matter how great the sins and inadequacies of the loan servicer, you still have a serious problem if you haven’t paid for a long while on your mortgage.

California is a non-judicial foreclosure state.  That means that the lender or the servicer doesn’t have to prove up the correctness of its numbers to sell your house at a foreclosure sale.

Your options include:

  • Pay the back payments
  • Seek a loan modification
  • Use Chapter 13 to catch up over time

What you can’t do, if you expect to keep the house, is wait til the last minute to look for a solution.

More

The slumbering second mortgage awakes

California foreclosure

Getting real information from the servicer

How Chapter 13 works to save homes

Your Bankruptcy Discharge Has Teeth: Bite Back

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bankruptcy discharge has teeth

Your bankruptcy discharge is more than a piece of paper.  It’s a federal court order prohibiting action to collect the discharged debt from you.

And it has teeth.

When creditors ignore a federal court order, it has unpleasant consequences.  Or should have consequences.

So, my call to debtors is to stop being prey to unscrupulous debt collectors.

Bite back.

Discharge binds all creditors

All creditors who got notice of your bankruptcy are subject to the discharge injunction, with a few exceptions.

That’s why it’s so important to list everyone who thinks you owe them money in your bankruptcy schedules. Getting your schedules right.

The discharge is a public record, retrievable on PACER  by anyone who is interested.

In short, there is no excuse for the creditor (or anyone who bought the debt from your creditor) to attempt collection of debts predating your bankruptcy.

And creditors who try to collect have effectively given you the right to sue them at their expense.

Here’s hoping that more debtors harassed by creditors after their bankruptcy will march into court for enforcement of their right to a fresh start.

When collector calls after bankruptcy

Whether it’s a debt buyer or the original creditor, it seems to be inevitable that you will encounter a collector after your bankruptcy case is over.

When that happens, make sure you tell the collector about your bankruptcy discharge.  To have a legal remedy for the violation of the discharge, you will need to prove that the collector knows about the discharge.

  • Tell them.
  • Make notes that you’ve told them.
  • Write them.
  • Keep a copy of your letter.

They’ve had their one cost-free mistake. The next contact will cost them.

The debt buyer can’t hide behind the fact that it wasn’t the listed creditor in your schedules.  If the debt buyer bought a discharged debt, he’s gotten nothing of value.

But again, you need to point out to the collector that the debt is gone by reason of the bankruptcy discharge.

Any further collection after learning of the bankruptcy spells trouble for the collector.

Suing to enforce the discharge

The doors to the bankruptcy court are always open to debtors whose discharge is being ignored.  And at the end of the day, prove your case and the collector pays your attorney’s fees.

How much more than your attorneys’ fees you recover depends on your ability to show how the discharge violation hurt you.

  • Lose sleep
  • Get turned down for a loan
  • End up in the doctor’s office
  • Take a credit report hit
  • Feel helpless and hounded

Those are just some examples of the damages you might experience.

9th circuit bankruptcyThe discharge is enforced by motion here in the 9th Circuit, which means you can get a hearing before the judge much faster than if you’d filed an adversary complaint.

The motion is a contested matter under bankruptcy rules.   That entitles you to discovery from the other side if you want or need it.

Most motions are heard and decided on the written pleadings and declarations. Nothing prevents a bankruptcy judge from taking live testimony.

Stop suffering in silence

If creditors who were discharged in your bankruptcy case continue to hound you, do something.

Tell your bankruptcy attorney.  Bring in the evidence about your contacts with the creditor.

If your bankruptcy attorney doesn’t handle contested matters, ask for a referral to an attorney who does or shop for a local attorney willing to enforce your rights.

It’s my conviction that until it costs creditors to ignore the discharge, they will continue to do so.

And judges don’t know this is a problem until we tell the story in their courtrooms.

So, make them toe the line or pay for the failure to do so.

Debtors beat big banks in California case

What to do after your bankruptcy discharge

Debts that survive the discharge

 

 

 

 

Doing The Means Test Yourself

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test-361512_1280_optI keep encountering posts on internet bankruptcy boards from individuals who have “filled out the means test” and then proceed to announce their conclusions.

Given the uncertainties in the legal community about how to apply the means test, I can’t imagine a non lawyer learning anything reliable from trying to do this themselves.  As a certified bankruptcy specialist, I end up thinking, and rethinking, treatment of income and expenses on the means test.

Yet the results of the means test determine whether you get to choose which chapter of bankruptcy you want to file, or how much you have to pay if you file Chapter 13.

Means test rat’s nests

The tricky issues include how to deal with income from non filing spouses; from roommates or extended family members; shared custody situations; changing income issues, and how to handle business expenses for the self employed.

One bankruptcy appellate panel recently decided that the judges who drew up the form did it wrong!  That really helps.

You have to parse out income “received” but not “derived” during the look-back period and figure out how to report children where custody is shared.

Then there is the dispute on the deduction side about ownership allowances for paid-for cars; operating allowances for older cars; debts associated with property you’re surrendering, and just what part of your telecommunication expenses go on the form.

And how do you treat the costs of delayed health care needed in the future?  Do you divide that cost over the life of a Chapter 13 plan, or over 12 months, or….?

Can you swear to that?

I cringe when I ask a client to sign this form, as they cannot possibly validate all of the entries on the form, given the complexities of the law.

While I won’t say “don’t try this at home”, I am certain you should draw no conclusions about the means test and your eligibility for Chapter 7 based on your efforts to take the test.

Get an experienced bankruptcy lawyer involved.

Read more

Means Test Misunderstood

Means Test Is Paper Tiger Here

Means Test In Chapter 13

Image courtesy of Pixabay.

What Causes Bankruptcy?

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Cure TargetI was playing in my head with a piece I was writing for consumers about the bankruptcy decision.

I caught myself thinking about “whether the bankruptcy was caused by mortgage debt or ….” .

And I hauled myself to a halt.

How did the words “bankruptcy” and “cause” get linked in my head?

In my head, for Pete’s sake?

Bankruptcy is not caused by insolvency, it’s a cure for insolvency.

Debt in excess of assets, particularly liquid assets, causes insolvency.

Where debts come from

The real question should be:  how did the debts arise?

The trite explanation for debt is irresponsible spending and lack of financial self control.

Not in my experiences of the past two decades.

Instead, financial distress most often comes from job loss; ill health; divorce; and multigenerational family issues.

Add to that, the ridiculous cost of housing where I practice in the Bay Area.  Too many folks subscribed to the idea that home ownership is an essential to be really middle class.

Bankruptcy is a cure

If inability to pay your debts is the disease, bankruptcy is the remedy.

The question for families is whether they avail themselves of a freely available, legal remedy for that situation.

Or, do they continuing treading water with respect to their debts until there is a further crisis.

So, for purposes of the blog I was constructing, the  correct construction juxtaposes whether the financial distress was caused by mortgage debt or some other cause.

My message is that bankruptcy is as much a beginning as an end.

It ends the distress of being financially incapable.

It is the beginning of an opportunity to realign spending, to move beyond the misfortunes of the past, and to address the challenges of the present and the future.

Families need cash reserves; they need retirement savings.  Families with children need to save for college if they are to escape a further round of incapacitating debt.

My mantra becomes:  clear thinking and emotional courage cause bankruptcy.  And the debtor is better for it.

More

Is bankruptcy right for you?

Life after bankruptcy

What should bankruptcy cost

Image courtesy of openclipart.org

The One Person You Must Tell About Your Bankruptcy

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Spill the beans concept.Most people who file bankruptcy don’t want anyone else to know.

Some of my clients try to hide their break for financial freedom from friends and neighbors.

Others are worried about their boss finding out.

Occasionally, someone will try to keep it from their mate.

But trying to hide his bankruptcy nearly cost one client $103,000!

Because he hid his bankruptcy filing from his accountant. [Read more…]

Sign Your Corporation’s Name So You Aren’t On The Hook

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John_Hancock_Signature-wikimedia-public-domain

John Hancock knew how to sign his name- so large that King George could read it without his glasses.

But most small business folks who do business as a corporation are clueless when it comes to signing contracts on behalf of their corporation.

When they sign their name, without more, on the line that says “Owner”, they may have made themselves personally liable for the obligations in the contract.

Signing just your name likely defeats the very reason that you incorporated your business.  You’ve just put yourself personally on the hook.Fish-hook-green background-wikimedia-cropped

Why your business is a corporation

In the law, a corporation is a legal person, separate from the individuals or other entities who own its stock.  Despite how invested, financially and emotionally,  you are in your business, you and the business are really two separate entities.

The invention of the corporation made it possible for business people to limit their risk in an incorporated business to the amount they paid for their stock.  The creditors of the corporation couldn’t collect their claims from the stock holder.

That ability to limit your risk, to keep your business creditors away from your personal assets, probably figured large in your decision to incorporate.

How a corporation gets things done

Because a corporation is a “person” without any fleshy substance, it needs people to act for it.

Those people are its employees, managers, or its officers.  They can wield a pen and sign for the corporation.

A signature on a contract serves as proof that the signatories take on the benefits and burdens described in the written documents.  Physically, a real, live person has to sign.

But how do you sign for the corporation?

Acting for the corporation

Let’s assume that the document in question is an order for the design of a new website for your business and a year’s worth of maintenance.

You are the stockholder, president, and the manager of  My Business, Inc.  (For most of us small business folks, we are also the secretary, janitor, bookkeeper for the business as well.)

If this deal goes south, you don’t want the service provider suing you, liening your house, and garnishing your wages.  This is a corporate deal.

So, here’s how you sign the contract on behalf of your corporation:

MY BUSINESS, INC.

___________________

By  Your Name, President

You sign your name as you always do, but in your capacity as an agent of the corporation.  

Contracts don’t have to be signed by the president.  They can be signed by any party the corporation has authorized to act for it.  You could be, just as legally, the vice president, the CFO, or the general manager.

By adding your role in the corporation, you have signaled that the party to the agreement is the corporation, not you personally.  The entity making the promise to pay is the corporation, My Business, Inc.

Your signature as a representative of the corporation doesn’t put you personally on the hook for payment.

Good work, Mr. President!

More

Write a contract without a lawyer

Essential habits for entrepreneurs

Myth of the corporate credit card

 

Fish hook image:  © johnsroad7

Debt Collectors Distort Community Property Law

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distorted lawCalifornia community property law is complicated.

I get it.

It shouldn’t surprise me that debt collectors don’t understand community property.

Or maybe, they find it inconvenient to understand.  Or deliberately distort the law.

Collector expands spousal liability

A client reported that her ex husband had been told by a debt collector that the former marriage made him personally liable for his exwife’s debts.

There must be an emphatic, yet polite, word for b***s****.

Wish I knew the word… “Balderdash” seems so weak.

In my most generous view, this could be debt collectors from outside of California who are clueless about community property law. Or, more realistically, they’ll say whatever they think will scare a payment out of someone.

What California spouses owe

For the record, living in a community property state such as California does not make each spouse personally liable for the contractual debts incurred by their spouse.

If your spouse in California takes out a credit card and runs up a balance, you are not liable to the card issuer for the debt. The community property is liable for the debt, but you are not liable.

Community property law in a nutshell

During the marriage, property that a married couple acquires is presumed to be community property.  That community property includes your earnings as well as those of your spouse.

It may feel like community property law makes you personally liable, but the liability doesn’t follow you out of the marriage.

Death, divorce or a post post nuptial agreement with your spouse not to have community property ends whatever exposure you, personally, have for your spouse’s debts.

If there is no community property, then only the person who contracted the debt is liable for it.

Don’t take legal advice from debt collectors

My client’s encounter with the all-knowing debt collector is all too typical of collectors.

This is but one of the “whoppers” told by debt collectors.

Engage skepticism when dealing with this breed.

Or take notes, and check out the requirement that collectors tell the truth found in the Fair Debt Collection Practices Act and California’s Rosenthal Act.

More

Make debt collectors pay you

How debt collector nearly cost elders their home

When filing bankruptcy is the right move

 

How Chapter 13 Cuts Car Loan Down To Size

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car in bankruptcy

Car lenders who make new car loans with an underwater trade-in will face the music in Chapter 13.

The Supreme Court declined to review a 9th Circuit decision that stripped car loans of their protected specially protected status in bankruptcy; as a result, Californians will continue to benefit from the debtor-friendly decision in Penrod, rising out of a San Francisco bankruptcy case.

The question in Penrod

At issue was whether the prohibition on cramming down the debt on a vehicle purchased within 910 days of a bankruptcy filing protected “negative equity” financed in the car purchase.

“Negative equity” is the debt in excess of the trade in’s value. That left-over debt is added to the total of the new car loan and is unrelated to the value of the purchased vehicle.

And BAPCPA, the bankruptcy “reform” act of 2005 prohibited reducing a secured claim on a vehicle purchased within 910 days of the bankruptcy.  But did it similarly protect that part of the loan that wasn’t really related to the cost of the vehicle purchased?

Penrod facts

In Penrod, the Redwood City resident had traded in a car worth $6,000 on which she owed $13,000.  The new car loan included $7000 necessary to pay off the debt on the trade in.

The legal issue is whether that left over debt should enjoy the projections extended car sellers in BAPCPA for purchase money loans on the debtor’s car.

Every other circuit that addressed the question has given purchase money protection to the entire debt including the negative equity portion of the new loan.

The 9th Circuit held the negative equity was not purchase money as to the current car.  The appeals court remanded the case for the bankruptcy court to figure out how to apportion the payments made before bankruptcy between the purchase money element and the leftover debt element.

It’s surprising to me that SCOTUS didn’t accept cert on Penrod, since there is clearly a split among the circuits and it seems to this California bankruptcy lawyer that the Supremes take great pleasure in overturning the 9th Circuit.

But I’ll take a victory however it presents itself and await a decision on how to calculate what can be trimmed from a debtor’s car loan in bankruptcy.

Image  Snackariah under a Creative Commons license

Pay No Tax On Forgiven 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 forgiven 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.

Cancellation of debt “income”

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.

Qualified principal residence exclusion available for tax year 2017

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

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Phone: (650) 694-4700

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