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10 Things Tax Professionals Need To Know About Bankruptcy

By Cathy Moran Leave a Comment

accountant-flickr-charlywkarl

Tax season approaches.

Tax preparers stand a good chance of encountering clients who either have filed bankruptcy, or who may benefit from a bankruptcy filing.

Here’s my list of bankruptcy nuggets that a good tax professional should have at hand.

Debts discharged in bankruptcy don’t trigger cancellation of debt income–

One of bankruptcy’s compelling features is that the debts cancelled by reason of the bankruptcy discharge don’t get included in the debtor’s income.  Bankruptcy, found in Title 11 of the U.S. Code, is the first exception on Form 982 to inclusion of forgiven debt in gross income.

IRS and state tax entities subject to the automatic stay  

A bankruptcy filing enjoins tax authorities from continuing collection action.  Thus the stay terminates garnishments and prohibits levies of the debtor’s assets.  It doesn’t, however, prohibit tax audits.

Bankruptcy can discharge income tax debt three years after return due

Taxes can be wiped out in bankruptcy if the return was due, including extensions, three years  or more before the bankruptcy is filed; any late filed return has been on file for 2 years; and the taxes were assessed more than 240 days before the commencement of the case.  More on overview of taxes in bankruptcy.

Chapter 13 is a quick and certain alternative to an OIC–

A  Chapter 13 plan is confirmed within weeks and binds the IRS just like any other creditor. The case discharges for all time the scheduled taxes, penalties and interest upon plan completion.  The plan must pay the priority taxes (those tied to returns less than three years old) and the interest on the priority tax as of the filing.  No new interest or penalties accrue during the pendency of the case.

Tax penalties are dischargeable

Penalties associated with dischargeable taxes are dischargeable;  all penalties are dischargeable in Chapter 13, and penalties associated with events more than three years past are dischargeable in Chapter 7 even if the tax isn’t dischargeable.

Chapter  7 estate, but not 13 estate, is a separate taxpayer

A bankruptcy estate owes the feds a return, and perhaps tax on capital gains it realizes by reason of sale or foreclosure.   Property remains property of the bankruptcy estate until the estate is closed or the property abandoned.

Tax attributes of the debtor pass to the bankruptcy estate  

The debtor’s basis, loss carry forwards, and exclusions are available to the Chapter 7 trustee, and  unused NOL’s revert to the debtor when the bankruptcy estate closes.

Debtor can elect short tax year for the year bankruptcy is filed  

A short year election can make tax attributes available to the debtor when he files the return for the pre bankruptcy portion of the year.  It can also quantify any tax due in the year of filing so that it is a priority claim for payment from the assets to be distributed in the bankruptcy case.

Tax liens generally survive the bankruptcy case

While lien survive as a charge on the assets the debtor owned at the filing of the case, the lien does not attach to assets the debtor acquires after the case is filed.  In Chapter 13, the lien need be paid only to the extent of the actual value of the assets subject to the lien.

Allowable deductions may be found in payments made on debtor’s behalf by Chapter 13 trustee

Chapter 13 plans often pay over time mortgage interest arrears  on the debtor’s home.  State taxes paid through the plan or business expenses including taxes may be deductions the Chapter 13 debtor can claim.

The rules covering federal taxes in bankruptcy are found in Pub. 902.  State taxes are subject to the same treatment in bankruptcy as federal taxes.

For more

For help with strategic use of bankruptcy to solve tax problems, look for a certified bankruptcy specialist in your community.

Some state bar associations and the American Board of Certification  certify lawyers who are specialists in bankruptcy.  Find California bankruptcy specialists by county.

Image courtesy of Flickr and CharlywKarl

Filed Under: Featured, Taxes Tagged With: accontants, tax preparers

Can Your Business Survive The Pandemic?

By Cathy Moran

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

New laws reacting to COVID

Filed Under: Consumer Rights, Small business

How To Save Your House With Chapter 13 Bankruptcy

By Cathy Moran

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, aren’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

Filed Under: Chapter 13, Real property & mortgages Tagged With: 2018

Can You Be Arrested For Not Paying Your Debts?

By Cathy Moran

jail-983153_640Despite the story spread all over about federal marshals arresting a man for an unpaid student loan, we don’t arrest people for not paying their debts.

And Fox News got the story wrong.  The man was not arrested because he owed money he hadn’t paid.

He was arrested for blowing off a court order that he appear in court.

Ignore a judge who orders you to show up and bad things happen.

But it’s important to get the story straight.

Had the borrower appeared in court as ordered, he would not have been arrested, whether or not he could pay the judgment.

And the fact that the debt was a student loan didn’t drive the outcome.  It would have been the same if the judgment arose from an unpaid dental bill.

What happens when there’s a judgment

Judgments have consequences.  The man in the story had a judgment entered against him when he failed to pay his student loan. [Read more…]

Filed Under: Consumer Rights, Student loans Tagged With: 2016

What’s New In Bankruptcy Law in 2021

By Cathy Moran

new in bankruptcy

The new year of 2021 brings us face to face with a desolate economic landscape and the hope of better things to come. For some significant slice of Americans, bankruptcy will be a consideration.

You’ll want to know what’s new in 2021 in the array of bankruptcy options and alternatives. I’m writing after passage of the national CAA 2021 bill that provided $600 relief payments to many Americans and before a new Congress is sworn in. It’s likely that the landscape will further change, perhaps soon.

Home

Keeping their home is high on every distressed debtor’s list of concerns. Whether you rent or own, there’s news here.

Renters

Bankruptcy currently offers slim protections for renters intent on maintaining their current digs if an eviction judgment has been entered. Waiting to file bankruptcy until the sheriff is at the door is usually fruitless.

The most recent COVID relief bill extends the national moratorium on evictions to January 31, 2021. States and localities have enacted a patchwork of local and regional bars to evictions. For most folks, the threat of homelessness has been pushed back, but only a little way.

Homeowners

California homeowners can claim a homestead exemption in their home of a minimum of $300,000 and perhaps as much as $600,000, effective January 1, 2021.

That expanded exemption, available to Californians filing bankruptcy, should widen the group of individuals who can file Chapter 7 bankruptcy without fear of sale of the family home by the trustee.

Individuals choosing Chapter 13 will find it easier to pass the “best interests of creditors” test which looks at the value of their non exempt assets to determine how much they must pay creditors through their plan . Bigger homestead exemption, less home equity exposed to creditors.

Orders of federal agencies have directed lenders servicing federally owned or guaranteed home loans to offer forbearance options to borrowers. California law has been amended to include notices of forbearance options as part of the state’s non judicial foreclosure process.

The law on mortgage defaults at this point is ragged, uncertain, and patchwork as to the ultimate path to curing mortgage defaults. Legislators are clearly concerned about the issue and the automatic stay in bankruptcy will still stop foreclosures while the parties assess the situation.

Options in bankruptcy

Business reorganizations

Subchapter V was added to the Bankruptcy Code in February, 2019, creating a streamlined Chapter 11 reorganization procedure for entities and for individuals with primarily business debts. The debt limits for Subchapter V eligibility are $2,725,625, but that limit was almost tripled in the CARES act, with the increased debt limit to $7.5M until March 27, 2021.

Chapter 13 changes

The Consolidated Appropriations Act of 2021, enacted December 27, 2020, created an opportunity for individuals to obtain a full-performance Chapter 13 discharge if they 1) have a residential mortgage, and 2) haven’t made all the payments called for by their plan. Chapter 13 gift to homeowners. It is effective for 12 months from enactment.

That joins an amendment to the Bankruptcy Code created by the CARES Act that allows Chapter 13 debtors with confirmed plans to extend the duration of their plans to as long as 84 months, two years beyond the current term limit of 60 months.

Utility shutoff protections

CAA 2021 created another short lived protection for bankruptcy debtors who owe pre filing utility bills. Debtors who pay for the utility service provided in the 20 days after filing bankruptcy are excused from putting up a security deposit so long as they pay for post filing service.

Assorted other relief

Congress has clarified that the forgiveness of PPP loans does not create taxable cancellation of debt income under 26 USC 108. That’s a boon to those who won’t need bankruptcy. It makes little difference to those discharging debts in bankruptcy where none of the forgiven debt triggers tax.

Relief payments under either of the existing COVID bills will be excluded from the calculation of disposable income in the means test. Should debtors still have any of the relief payments under the CAA-2021 when they file bankruptcy, that money is not property of the estate.

The latest COVID relief provisions make it illegal to discriminate against those in bankruptcy in connection with PPP loans. And in the broader context, PPP and EIDL loans are dischargeable in bankruptcy.

Going forward

We can expect, I think, that some of the temporary measures set to expire in the next couple of months will be extended and that further relief measures will be enacted. Stay tuned, things are in flux.

Filed Under: Featured

Is Bankruptcy In Your Future?

By Cathy Moran

Tough economic times make us think about escape by filing bankruptcy. Bankruptcy offers a straight forward, predictable and immediate solution.

But to get full measure of bankruptcy relief, you need to know which problems bankruptcy solves and when the time is best to file.

Which problems bankruptcy solves

Bankruptcy deals with debt, with the outflow side of the financial equation. It provides little help if the more fundamental problem is insufficient income.

Bankruptcy’s greatest impact is to reduce the number of creditors holding old claims against you who get a piece of today’s income.

aautomatic stay

Bankruptcy’s other “superpower” is the automatic stay. It brings to a halt almost all collection actions. It stops foreclosures, levies, garnishments, and even collection calls.

And upon entry of the bankruptcy discharge, those collection actions are permanently stopped. The exception is possibly debts where the creditor has a lien you gave the creditor, like mortgages and car loans.

Timing bankruptcy is everything

The most frequent mistakes made in filing bankruptcy revolve around the timing of the filing. File too soon, or too late, and you lose advantages to maximize the benefits of bankruptcy.

File too soon

when to file bankruptcy

Instances of filing too soon include filing too close in time to a prior bankruptcy case that was dismissed. Filing right after a previous case was tossed out of bankruptcy court may limit or even preclude a stay in the new case. More.

The ability to discharge taxes is tied to the age of the tax debt and when the return was filed. Just a few days too soon and the tax survives the bankruptcy.

Your eligibility for a discharge in a new case is dependent on how long ago you got an earlier bankruptcy discharge and what chapter each case is filed under. While you can always file a case, whether you get a discharge in that case depends on timing.

If you’ve moved from state to state in the past three years, your choices for which state’s exemption system you can use turns on where you lived two years ago. Once you know which set of exemptions is better, you can time your filing to your advantage.

Filing too late

Filing bankruptcy after a foreclosure or eviction judgment provides no relief to the person filing. Bankruptcy protects what you own or have legal rights to on the day you file.

after eviction

After foreclosure or eviction, you have nothing to protect other perhaps that the naked right to possession, which won’t last long.

Wait until after your wages or bank account have been garnished and you may have lost money that could have been protected in a case filed earlier. While the law allows you to recover money taken by legal process that would have been exempt, that process is expensive and time consuming.

Liquidating retirement assets to pay unsecured debts is another painful example to waiting too long to choose bankruptcy. Retirement assets are almost always 100% exempt, protected from your creditors. Using that hard-won money for your old age on today’s debts is usually unnecessary and ill advised.

Get professional help with timing

Most people’s circumstances include some of the “file now” elements AND some “wait awhile” ones. The stress of being in debt makes it harder to think through the various scenarios.

Enlist a bankruptcy lawyer to assess your situation and to help you measure the urgency of your problems. Even within the world of lawyers, bankruptcy is a specialty; there’s no reason to think that you ought to be able to work it out on your own.

When the time is right, bankruptcy relief is available.

More

Who to pay when you can’t pay everyone

How to interview a bankruptcy lawyer

What should bankruptcy cost

Filed Under: Consumer Rights

California Only Middling In Protecting Families From Debt Collectors

By Cathy Moran

California's report card

When it comes to protecting working families from debt collectors, California gets a B, according to a study of state exemption laws conducted by NCLC.

That’s up from the C it got in the last survey.

No state got an A in the study: Utah, Alabama, New Jersey, Tennessee and Michigan rated F’s.

State exemption laws control what assets and income a creditor with a judgment can seize to pay its judgment.  Without adequate protections for earnings, household goods, and a car to get to work, a family can be pushed into poverty or joblessness.

California wage garnishment

The Golden State improved on its protection of a judgment debtor’s wages, drawing a B. That’s up from a D last time.

State law protects from garnishment 40 times the state’s minimum wage of $13/hour per week . 

If you take home over the weekly minimum wage, a judgment creditor can levy 50% of the disposable wages over the minimum wage or 25% of disposable wages, whichever is less.

For most families, such a loss of income will seriously jeopardize their ability to meet their other obligations.

Wheels at risk

California drew a D on its protection of the family car.  At a time when the average used compact car sells at wholesale for a hair over $7000, California’s exemption is well below that.

The irony is that the exemption applies to the equity, over and above any loans secured by the vehicle.  A judgment debtor driving a BMW with a big loan may be more secure in his ability to get to work than the restaurant worker driving a paid-for clunker.

Better grades

We scored better on protection of the family home in light of the increased homestead exemption, household goods, and funds on deposit.  

Self enforcing exemptions lauded

NCLC included in its report  a model family protection act  that attempts to make exemptions, as far as possible self enforcing.

The goal was to minimize the paperwork and court appearances often required under state law to protect wages or funds necessary for the support of the debtor and his family.

The procedure in California for asserting exemptions outside of bankruptcy is found at CCP 703.520.

More

How to cope if your wages are garnished

What to do if you’re sued

Myths about bankruptcy

Image  courtesy of Flickr and marsmet491.

Filed Under: Strictly California

What Your Bankruptcy Lawyer Can’t Tell You

By Cathy Moran

bankruptcy secret about means test

I can share a secret, just between us.

Bankruptcy “reform” in 2005 tried in a number of ways to discredit and gag lawyers from helping debtors.

One of those additions to the Bankruptcy Code prohibits lawyers from advising those filing bankruptcy to incur new debt.  The statute makes no distinction about the kind of debt involved or the purpose served by the loan.

Lawyers are not to advise incurring new debt.

But I’m not your lawyer, so I can tell you what you need to know about cars.  Or really about car loans, since I know nothing about cars beyond that.

Cars and the means test

Car loans are the most frequently found secured debt.  And payments on debts secured by cars are deductible on the means test introduced by bankruptcy “reform”.

The IRS standards, on which the means test is based, allowed a debtor deduct a certain amount per month to acquire a car.  Courts were split on whether you had to have a car payment to get the ownership allowance.

Then the Supreme Court in Ransom said  the debtor with a paid for car gets no ownership deduction.  But if you have some remaining payments on a car loan, you get to claim the full car ownership deduction  of $517 here in California on the means test.

More deductions on the means test, more likely you qualify for Chapter 7, or for a very cheap Chapter 13.

The means test also has a provision for the expenses of operating a car:  gas, insurance, registration and maintenance.

For a time, the debtor with a car with no loan but lots of miles could claim an extra $200/month for the expense of maintaining an older car.

That older car operation allowance was not found in the bankruptcy statute but in the  IRS Manual.  Since many of the standard expense allowances were based on IRS standards, courts often used the manual’s allowance for the extra maintenance of an old car to increase the debtor’s vehicle operation allowance.

IRS manual not part of bankruptcy law

The $200/month clunker adder the the operation deduction was disallowed by the 9th Circuit BAP in April 2014.  The three judge panel held that bankruptcy law does not incorporate all of the provisions of the IRS Manual, just because it uses some part of the IRS standards.

That, I suppose, is the good news.  Some bankruptcy courts have been willing to swallow great hunks of the manual just because Congress used the collection standards in crafting the means test, usually to the debtor’s disadvantage.

The bad news for those needing bankruptcy relief is that you are expected to keep an old car running for no more than it takes to keep a new car running.  Which causes you to ask what planet do Congressmen live on, but that’s another story.

The $200 clunker allowance is now seen, at least in the 9th Circuit, as money that you should be paying  your creditors.

So?

Get new wheels

Meet with a bankruptcy lawyer and that lawyer may not be bold enought to say what I can:    Get a replacement car BEFORE you file bankruptcy.

Go incur some debt to get reliable transportation.

If your income is above the median for families in your state, you need to pass the means test to file Chapter 7. The monthly payment on a new car is deductible on the means test.

If your car is older, it may not last the five year duration of a Chapter 13.  If you had to replace your current car during the Chapter 13, the terms are not usually advantageous.  But my clients have had good success in financing a replacement car before they file bankruptcy.

If  a car is new, or newer than what you currently drive, there’s a better chance you can actually operate it on the IRS allowance for vehicle operation.  Reliable transportation will get you to work and get you along the road to financial recovery.

The consequence of failing the means test is that you must file Chapter 13 for bankruptcy relief.  Chapter 13 may or may not be a good fit for you.  But we all like to have choices.

Just be scrupulous that you tell the truth on the loan application.  Don’t sign it without reading it carefully.

The debt incurred to buy a newer car will survive the Chapter 7 discharge, since to keep the car, you’d have to reaffirm the car loan.  This isn’t a scheme for a free car.

It’s a dose of reality in a bankruptcy world sometimes divorced from reality.

And I can shout this from the roof tops, because I’m not your lawyer, I’m just a bankruptcy blogger and the bankruptcy gag order doesn’t apply here.

More

Means test meaningless in Bay Area

What you must tell your bankruptcy lawyer

Keep your car through bankruptcy

Image courtesy of Flickr and Coolio-Claire.

Filed Under: How bankruptcy works Tagged With: Car, means test

California Gets New Homestead

By Cathy Moran

California homestead

The California Legislature enacted a dramatic increase to the state’s homestead law at the very end of the legislative session in August. It became effective January 1, 2021.

The dollar amount of the homestead increased to a minimum of $300,000 and a maximum of $600,000. Gone is the link between marital status or dependents. Every homeowner is entitled to the homestead amount.

Recognizing that home values vary widely in the state, the new law establishes a homestead greater than $300,000 where the median price of a home in the county exceeds that floor. Regardless of the median price of homes, no one gets a homestead in excess of $600,000.

Finally, the dollar amount of the homestead will be adjusted by inflation, going forward.

The new statute reads:

704.730.  (a) The amount of the homestead exemption isthe greater of the following:

(1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000).

2) Three hundred thousand dollars ($300,000).

b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.

Homestead unknowns

The biggest unknown is what information source will serve as the reference point for the median price of a home in each county.

Much of the discussion among legislators and advocates has looked at the California Association of Realtors data base, but the legislation does not specify a source.

Homestead certainties

What we know about the new homestead is that it protects family homes from forced sale in and out of bankruptcy.

In state courts, the homestead acts as a check on the ability of a creditor to force the sale of a home to collect a judgment. That works by requiring that any forced sale pay the homeowner the homestead amount before taking any sales proceeds to satisfy a judgment.

In bankruptcy, the homeowner can claim the homestead and the same restrictions on sale apply to a Chapter 7 trustee. So now, a far larger swathe of homes are protected from sale by the larger homestead floor.

The homestead also plays a part in Chapter 13. While there are no forced sales of homes in 13, the amount of non exempt equity often determines how large the monthly Chapter 13 payments must be. That’s because one of the “rules” in Chapter 13 is that if the debtor gets to keep his assets, creditors must get as much as they would have if the debtor had filed Chapter 7. We’ve nicknamed the “best interests of creditors” test for plan confirmation.

I’ve often seen homeowners who can’t get relief in bankruptcy without putting their home at risk of forced sale or at risk of a Chapter 13 plan payment that is simply too large to manage.

Homestead updated

The original purpose of the homestead was to protect an amount of money that is required to keep a roof over a family’s head.

Prior to this change, the increase in the cost of homes left the homestead outdated. The homestead before this bill only protected about 15% of the value of the typical California home.

We’re now far closer to achieving that goal and preserving home ownership for everyone.

More on homesteads

How the homestead works

Which chapter is best for me

Why I love Chapter 13

Filed Under: Featured Tagged With: exemptions, homestead

Bankruptcy Alphabet: J For Justify

By Cathy Moran

J stands for Justify in my Bankruptcy Alphabet.  Or rather, it stands for “no need to Justify” your decision to file bankruptcy.

Those considering bankruptcy imagine the first meeting of creditors as an inquisition by the trustee.

They fantasize that they will have to justify their choice of bankruptcy and that the trustee could disallow bankruptcy relief if he isn’t satisfied.

Not so. No one gets to sit in judgment over your decision to file bankruptcy.

There are laws about whether the debtor gets a discharge, and laws about what property the debtor is entitled to keep.

But no laws say you have to be insolvent, or delinquent , or even entitled to a discharge in order to file bankruptcy.

There is no requirement that you be “worthy” or that the decision be sound, or your misery deep enough to file.

It’s Just your call.

Jay Fleischman thinks “J” is reserved for him in the bankruptcy alphabet.

More

The entire Bankruptcy Alphabet

Should bankruptcy be a last resort?

Image courtesy of Muffet.

Filed Under: ABC's of bankruptcy, How bankruptcy works

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About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

How Bankruptcy Works

When Can I File Bankruptcy Again

You can file bankruptcy tomorrow, so long as you don't currently have a bankruptcy case pending. When you can get a discharge in that case is a different story. The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case. My friend Gene Melchionne wrote … Read more

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