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Marital Separation Doesn’t Require Two Homes

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Split the sheets in California, and your wages are no longer community property.

That’s because property acquired during marriage but after a marital separation isn’t community property.

That’s been California law for a long while.

The sticky wicket has been drawing the line when the marriage has broken down and the couple has separated.

“When” they separated determines whether the estranged spouses have to split their earnings with each other.  It determines whether the creditors of one spouse can reach the wages of the other to pay the other’s debts.

Can estranged spouses live under the same roof and be living “separate and apart”?

Supreme Court makes separation expensive

In 2015, the California Supreme Court ruled that a couple isn’t “separated” when they live in the same house.  Even when they  shared little else besides the address.

In the Bay Area,  land of ruinous housing prices, I’ve seen many estranged couples continuing to share a house for a long while because neither can afford to move out.

Yet, according to the Davis decision, a couple is not separated and they continue to acquire community property until they no longer live in the same dwelling.

New law looks beyond common address

The justices kinda invited the legislature to change the law if they didn’t like the Davis result.  And they did.

New California law provides that spouses can live “separate and apart” under the same roof for purposes of California community property law.

Seven things you probably didn’t know about community property

The new law makes determining the date of separation messier, but more in conformity with economic realities.

A court trying to determine whether assets are community property has to look beyond the residence address.  Other indicators, not just where the spouses live, can show that there is no intention to resume the marriage.

Why this matters

Assets acquired during marriage and before separation are community property.  Simplest example is wages.

But suppose one spouse starts a business or writes a best seller when the marriage is rocky.  If there has been no separation, the business or the book royalties must be divided equally.

If STBX files bankruptcy

If the spouses have separated, different result.  The new asset is the sole property of the spouse who created it.

Or, more prosaically, suppose one spouse buys an expensive new car.  If they’ve separated, the debt is exclusively the responsibility that of the borrower.  If they aren’t living “separate and apart”, the debt is payable from the community.

Dividing debts in divorce

The new look at what it means to live “separate and apart” will inject more reality in the the “when” question, at the expense of making the determination more complex.

Image courtesy of  John Getchel  under a Creative Commons license.

Your Right To Credit Reporting After Bankruptcy

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credit report after bankruptcy

You’ve finished your Chapter 13 and emerged from bankruptcy with your home loan current.

But your credit report is a blank page as to your mortgage.

The mortgage servicer isn’t reporting your payments to the credit reporting agencies.  

Nothing. Nada.  Crickets.

So, even though you’re making regular payments, you’re not visibly rebuilding your credit.

Ask the servicer and they’ll tell you that they can’t report your payments “because of your bankruptcy discharge“.

But they are wrong:  a little-discussed provision of Chapter 13 says that long-term mortgage debt is not discharged in 13.

Yup.  The mortgage loan is not discharged as a personal obligation.

And therefore, there is no bar to the servicer reporting your payments, and every danger should they not report.

Servicer’s obligation to report

Put simply, if a creditor reported to credit reporting agencies before the bankruptcy was filed, then there is an obligation to report after the bankruptcy.  The “furnisher”, the creditor who supplies information to the credit reporting agency, has an obligation to make the information on file fully accurate.

In contrast to an unsecured debt like a credit card, which should be reported as having a zero balance after the discharge, the mortgage loan after Chapter 13 has a balance.

Presumably, it is also current.  Both facts which should appear on your credit report.

Mortgages excluded from Chapter 13 discharge

I’m certain you will have to cite to bankruptcy law when you challenge the improper reporting on a mortgage loan after Chapter 13.

Here’s the part of the Bankruptcy Code that excludes long term debt like your mortgage.

Section 1328 says,

(a)… the court shall grant the debtor a discharge of all debts provided for by the plan …, except any debt—

(1)provided for under section 1322(b)(5); 

The section that 1328 incorporates, Section 1322(b), says

(b)Subject to subsections (a) and (c) of this section, the plan may—

(5) … provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

Get mortgage payments reported

If you find that your post discharge payments on your home loan aren’t being reported, challenge the accuracy of what is on your report about that loan with the credit reporting agency.

It is the CRA’s responsibility to see that information in your credit file is accurate.  The CRA is supposed to ask the furnisher to reinvestigate the challenged tradeline.

The Consumer Financial Protection Bureau has a how-to, with a template letter, on how to dispute inaccurate information on your credit report.

Get the good information reported.

More

How to find and fix credit reporting errors

Your post bankruptcy to-do list

Wage Garnishment Survival Guide

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Gavel and money in wallet isolated on white“Your wages have been garnished, ” reads the letter from your employer.

Do nothing and twenty-five percent of your after-tax earnings will be sent to your judgment creditor.

So, do something:  keep reading this action guide for Californians subject to a wage garnishment.

This guide has three parts:

  • the short run guide for minimizing the hit to your income,
  • the medium range attack on the judgment, and
  • the long run look at the bigger picture of your personal finances.

Wage garnishment explained

A wage garnishment is a legal order that a creditor with a judgment against you can obtain from the court to collect on its judgment.

10 things you need to know about judgments

The existence of a judgment means that a court has already issued its order finding that your creditor is entitled to a sum of money from you to satisfy a debt.

If the system has worked as it’s supposed to, you should have been served with a copy of the complaint when it was filed.

Due process requires that before a judgment is entered, you get notice of the lawsuit and a chance to defend against it. Increasingly, these days, that doesn’t happen as it is supposed to.  More about that in our discussion of medium range survival tactics.

California is among the majority of states that allow a judgment creditor to intercept your wages at the source, your employer, to collect on its judgment.  Both federal law and state law impose a cap on how much of each paycheck the creditor gets.  State law can protect more than the federal law does;  it can’t protect less.

Here, we are looking at the garden-variety judgment for credit card debt or medical bills.  There are different rules governing collection of taxes and support that we won’t deal with today.

1.  Protect Your Paycheck From Garnishment

The wage garnishment entitles the judgment creditor to 25% of your paycheck, after mandatory deductions are subtracted.  But that’s the maximum the creditor gets.

You get a chance to show that you need more than 75% of your earnings to support yourself and your dependents. Cal. C. of Civil Procedure 706.051.

But to exercise that chance, you’ve got to fill out a form.  Are you game for that?

Claim exempt funds for support

With the notice of garnishment, you should have been served with a form to claim the exemption for money necessary for support.  To claim the exemption in wages, you need to also complete the form financial statement.

Note that the financial statement asks for your monthly income.  That’s easy if you are paid once a month, or twice a month. Watch out, though, if you are paid weekly or every two weeks.  There are 4.3 weeks in a month.  Figure your weekly income, then multiply by 4.3.

The claim of exemption and the financial statement get sent to the levying officer, not the court, and not your employer.  That information is shown on the notice of levy.    The back of the notice form has instructions for the judgment debtor; read them carefully.

Creditor can agree to allow exemption

The levying officer delivers your claim of exemption to the judgment creditor, who can accept your claim of exemption, or can request a hearing before a judge.

If a hearing is required, you will get a completed copy of the notice with the time and place of the hearing.  It will look like this.

If there will be a hearing, you need to appear, with evidence in hand about other sources of income, if any; proof of your expenses; and any other documents that support your need for all or nearly all of your wages.

You can also negotiate directly with your creditor for some alternative way to pay the judgment.

2.  Attack The Judgment

Wage garnishment is available only if a court has properly determined that you owe the money in question.

If you participated in the lawsuit, lost, and didn’t appeal, the matter is closed.  It’s a done deal.

But if the judgment supporting the wage garnishment was news to you, if it was entered because you didn’t appear in the suit, you may have a chance to fight back.

California law allows you to move to set aside a judgment that was improperly entered.  “Proper” here refers to the procedures involved, not the merits of the claim.

Grounds to set aside a default judgment include excusable neglect, lack of actual notice, or lack of subject matter jurisdiction.

Setting aside a judgment requires an understanding of the issue, attention to detail, and prompt action.  Sit on your hands and you may be barred from available relief because you waited too long.

The Sacramento County Public Law Library has a great guide to setting aside judgments.  If doing it yourself looks too difficult, a lawyer can help you.

Setting aside the judgment is probably only worth the effort if you have a defense to the substance of the lawsuit.  It’s a lot of work if at the end of the day, you are still liable for the debt.

3.  Assess Your Finances As A Whole

Your time and energy are precious commodities and come in limited supply.  Before spending a passel of time and energy defending yourself from this judgment creditor, take a look at all your financial obligations.

Ask yourself: Will managing this debt leave me able to pay everyone else I owe money to?

If not, get some help looking at the big picture.  Reputable credit counselors can help you with alternative payment plans.

I don’t recommend debt settlement schemes, however.  The concept is appealing, but in practice, it seldom works to solve the entire problem.

Bankruptcy lawyers are experienced in looking at debts and assessing whether you can dig yourself out of a financial hole without the help of available bankruptcy laws.  A bankruptcy filing stops a wage garnishment and usually eliminates your liability for the debt for all time.

Read more about bankruptcy and the alternatives.

 

Image:  © Africa Studio – Fotolia.com

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

The Trouble With Your Social Security

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Social Security call

The caller says your Social Security file is incomplete and without more information, your assets, as well as your benefits, will be frozen.

Pretty terrifying if you depend on Social Security checks.

Only, it’s not true.

The caller isn’t from Social Security.

Social Security can’t freeze your assets.

Social Security doesn’t do business by phone.

But scammers love the phone and they love trusting folks and vulnerable elders.

The caller is a thief

The guy, or the automated voice, on the phone really wants you to hand him your information so he can steal money.

It may be your money he wants to steal, if he gets your banking information.  Or, he wants to steal someone else’s money by pretending to be you.

Scammers also use the IRS cover because the IRS is feared;  just another way to get your attention.

The scammers use the Social Security cover story because Social Security impacts almost every American adult.  And, Social Security is trusted.

Through the magic of hacking, they even display the real Social Security phone number.  But it’s only real on your phone’s caller ID.

The other real thing is the threat to your financial wellbeing.

Only scammers make calls

The “fact” that your first contact about a supposedly dire situation comes by phone is a giveaway that the caller is a scammer.

Real government employees write letters.

They write, and write, and write.

They explain the problem.  They suggest what needs to happen next.  And none of their fixes involve providing critical identifying information over the phone.

They make a record that way that they’ve played by the rules.

When scammers call

Your strategy is simple:

clam up,then

hang up.

Tell them nothing.

But do tell the feds.  You can report the crooks online at   https://oig.ssa.gov/report .

If you continue to be worried about your Social Security account, call the real Social Security at 1-800-772-1213 or online at the SSA’s website.

Keep your personal information personal and private.

More

When the IRS is coming to arrest you

Debt collectors exploit elders via phone

Weapons of a debt collector

 

 

 

Three Cheers For Entrepreneurs

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Entrepreneurs

Let’s hear it for entrepreneurs.  Those brave, tireless people with a dream who start or run small businesses.

They possess more energy and perseverance than most of us.  They form the backbone of our economy.

In honor of National Entrepreneurs Day, November 20th, let’s recap Soapbox’s best on being in business for yourself.

It’s probably not surprising that I like entrepreneurs, because I’m  an entrepreneur too.  I opened up my general law practice the day after I was admitted to the California bar.

Over the years, the focus of my law practice has narrowed as I’ve become an insolvency specialist, but I have always worked for myself.

So, small business folk are some of my favorite clients.

Clients I tend to see in my professional role when business struggles.  Here’s what I’ve learned about small businesses and the hardy folk who run them.

business divorceYour business needs a prenup

Anytime you pool your money with someone else, you need a written agreement about how you unwind the joint venture.  Just like marriage, business life changes and today’s partnership may not work at some point in the future.

 

small businessFive mistakes to avoid for success in your business

Culled from my four decades of advising business people, these five things stand out as reasons businesses don’t succeed.  Here’s what NOT to do if you want your business to survive and thrive.

 

incorporation protectsYou’re incorporating for the wrong reason

The best reason to incorporate your business isn’t to protect yourself from the debts of the corporation.  It’s just the opposite: incorporate to protect the business from your debts.

 

How to avoid being on the hook for business debts

You incorporate to limit you exposure to debts of the business.  Don’t throw the benefits of incorporation away by the way you sign corporate contracts.

 

Four essential habits for successful entrepreneurship

Here are four unsexy, but absolutely essential, habits to cultivate in business.  Adopt them from the start of your business:  well begun is half done.

 

Alternatives when the business struggles

closing businessThe hardest choice facing an entrepreneur involves failing.  Take a look at the alternatives available when it seems the business has no future.

 

Here’s hoping we never meet professionally.  Savor National Entrepreneur Day.

 

 

Chapter 13 Doesn’t Need A Discharge To Shine

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13 without discharge

What does a Chapter 13 bankruptcy get you if it doesn’t get you a discharge?

Lots, actually.

It’s complicated.  Powerful, but complicated.

Let’s see how all the parts interact when your Chapter 13 is filed before you’re eligible for a discharge.

Law limits discharge

The bankruptcy code doesn’t limit when you can file bankruptcy;  it limits when you can get a discharge in bankruptcy.  It imposes various interval between discharges in bankruptcy, depending on what kind of a case you filed first.

The nifty, marvelous, no discharge Chapter 7

The discharge is the court order at the end of the case that wipes out debts as a personal liability.  Bankruptcy “reform” in 2005 lengthened the intervals between discharges.

But nothing keeps you from filing a bankruptcy case, even when a prior discharge prevents a discharge in the new case.

More on Chapter 20.

And because not every debt nor every lien is wiped out in Chapter 7, there is often a need for a follow-on Chapter 13 to deal with the debts not discharged.

Automatic stay to the rescue

The debtor’s right to a stay of collection action exists, regardless of whether there will be a discharge at the end of the case.

So even a creditor who holds a debt not discharged in a previous Chapter 7 must cease collection when a new bankruptcy case is filed.

Different rules on automatic stay if the previous case was dismissed short of discharge

Important creditors paid first

Chapter 13 imposes a payment plan on creditors, willing or not.  The plan and the underlying law dictate which creditors get paid first through the plan.

The debts most likely to survive a Chapter 7 are recent taxes, family support and home loan delinquencies.

Bankruptcy law dictates the order in which creditors are paid by the Chapter 13 trustee.  Generally, secured creditors like mortgage lenders and taxing authorities with surviving liens are paid first by the Chapter 13 trustee.

That benefits the debtor who is often trying to hang on to a house or other assets that a secured creditor could otherwise foreclose or auction off.  It keeps the creditor with a non dischargeable debt that is low on the priority list, like a student loan or a restitution order, from garnishing wages or levying bank accounts.

Liens cut down to size

Liens of all kinds are unaffected by the discharge in Chapter 7, with a limited exception.  Avoiding judgment liens.

Chapter 13 lets you eliminate tax liens and judgment liens on any of your assets included in the bankruptcy without depending on your eligibility for a discharge.

Mortgage liens on your home get special protection under bankruptcy law; but a mortgage lien behind a senior lien that exceeds the value of the house can be stripped in 13 and nowhere else in the law.

Judges available for nasty fights

Bankruptcy judges stand by to consider and resolve disputes between creditors and the debtor.  In my world, that’s most often a fight between a mortgage servicer and the homeowner over what’s really owed on a home loan.

Resolution of that dispute doesn’t require a discharge, since the claim is likely secured by collateral.  The issues is how much is owed and can the servicer prove it.

That’s what judges are for.

And at the end of a 13 that cures mortgage default, the homeowner gets a determination about the true state of the debt via Rule 3002.1.

Value beyond discharge

There’s more to Chapter 13 than the discharge and it’s available without reference to prior bankruptcies.

 

 

 

Bankruptcy Changes Your Life, Only Not The Way You Think

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How will filing bankruptcy change my life?

My clients ask all the time.  They imagine the remainder of their life after bankruptcy with neither credit cards nor credit.  Outcasts in our economy.  Shunned by all.  Crippled by bankruptcy.

They can see a scarlet “B” tattooed on their foreheads to mark them forever as Bankrupts.

My short, irreverent answer to that question is that they will sleep better at night.

Other side effects of bankruptcy include a drop off in telephone calls from collectors and shrinkage of the amount of mail they get.

They get smarter; debt makes you dumb.

All true, but probably not the answer they expected from a bankruptcy lawyer.

You drive change

The more serious answer has to reflect what brought them to me to file bankruptcy in the first place.

When the driving force was gambling or some other irresponsible behavior, I tell them that I can dig them out of this hole with bankruptcy relief, but positive change for the future requires that they change their behavior.

When the current crisis is  created by events beyond their control, like job loss, divorce or illness, bankruptcy is likely to put their financial lives back on track.

For those in business,  failure is one of the risks that we take when we sign up to be entrepreneurs.  Bankruptcy clears the financial decks so we can go forward with life.

Life after bankruptcy

At the superficial level, life continues only slightly changed after bankruptcy.

Your credit score probably goes up a bit, in the short run.  Credit is more expensive shortly after bankruptcy, becoming more available and more affordable as time goes on.  With time and a down payment, you can buy a house.

Credit heals

Your ability to borrow too much on student loans endures.

Most important, in my view, is that eliminating debt means that you can take responsibility for providing for your old age.  A frightening slice of Americans have nothing more than Social Security to support themselves as they age.  And age they will, even if they believe they will never “retire”.

An equal number of people couldn’t handle a $400 emergency without borrowing money.

Life after bankruptcy can be what you make it.  Bankruptcy makes it possible;  you fill in the details.

More

3 things that keep you from getting out of debt

Bankruptcy myths

Can A Trust Protect You In Bankruptcy?

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protect assets

Can a trust protect your assets from loss?

According to the lawyer advertising and the self-help books, everyone needs a revocable trust.

The asset protection industry loves irrevocable trusts to get assets out of your name so your creditors can’t reach your wealth.

So, do trusts work in bankruptcy to change the rights of debtors and their creditors?

Not so much.

What’s a revocable trust

A revocable trust is also called a living trust.  It’s created during the lifetime of the person putting their assets in trust.

The settlor, the person creating the trust, can unwind the trust altogether.  Or, the settlor can extract one or more assets from the trust.  It’s revocable.

The appeal of a revocable trust is that assets owned by a trust don’t need to be probated at the settlor’s death.  The terms of the trust determine who gets the trust assets.

I find revocable trusts useful to manage assets of the aging or the incapacitated.

Title to trust assets in a revocable reads:  George Smith, Trustee.  The asset appears to no longer be George’s asset, personally, but the asset of his trust.

Many people would like to think that George’s creditors can’t reach the asset if George doesn’t pay his debts.  Is it so? [Read more…]

Title Isn’t Everything: Watch Out For The Assets In Your Spouse’s Name

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community property surprise

But it belongs to my spouse, sputtered the hapless debtor at the bankruptcy hearing.

Not so, says the bankruptcy trustee.  It was purchased during marriage, wasn’t it?

And so, the trouble begins for those who don’t understand community property.

Turns out the debtor left out of his schedules the bank account in his wife’s name.  Ooops!

Which motivates a trustee to keep digging for what else was left out of the bankruptcy papers.  Not where you want to be.

Property character, community or separate, makes a difference because it determines what assets creditors of the spouses can reach.  And, it determines what property falls under the control of a bankruptcy trustee.

All of the community property of a marriage becomes property of the estate when one spouse files bankruptcy.

So the community or separate distinction matters not just in divorce, but it matters to those Californians who owe debts they can’t pay.

Property title doesn’t control

In a nutshell, if you are a married Californian, it doesn’t matter whose name is on the title.

  • Buy a car.
  • Buy a house.
  • Take out an insurance policy

No matter whose name is on the paper work, chances are it’s still community property of you and your spouse.

Because “stuff” acquired during marriage is presumed to be community property under California law.

A presumption in law means  legal inference that must be made in light of certain facts.  Most presumptions are rebuttable, meaning that they are rejected if proven to be false or at least thrown into sufficient doubt by the evidence.  

The legal inference that acquisitions during marriage are community can be rebutted with sufficient and convincing evidence.  But absent such evidence, the presumption of community stands.

So, the house bought during marriage whose title reads Jane Spouse is community property, not Jane’s separate property.  That means that Jim Spouse’s creditors can reach it to pay Jim’s debts.

Magic words make a difference

The words in the title documents can themselves be evidence of an asset’s character.

If you want an asset acquired during marriage to be the separate property of one spouse, the first step in overcoming the presumption of community is to take title like this:

Jane Spouse, a married woman as her sole and separate property

But courts have made it more difficult, because what if Jane buys something using community property and takes title as her separate property.  Maybe she’s trying to cheat her spouse out of his share of the community that was used to buy the asset.  If she bought it, how does a creditor or a bankruptcy trustee know that Jim Spouse agrees that it’s hers alone?

Changing the character of an asset is called transmutation.  California law requires transmutation to be accomplished in a writing, signed by both spouses.  Then others know that the deviation from the usual is OK with Jim.

Prenuptial agreement can kill community property

An agreement between the spouses made before marriage (a “prenuptial” agreement) defeats the presumption.

A prenuptial agreement often says “we won’t have community property”.  The agreement lays out who is the owner of each kind of asset.  It may reject the legal cases that give the community an interest in property that either spouse brings to the marriage.

Because a properly drafted prenuptial agreement is in writing and signed by the spouses, it passes muster to rebut the presumption of community property.

Then, title plus the prenuptial beats the community property presumption.

Image courtesy of Flickr  & Nathan Pilkington 

 

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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