Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Bankruptcy Means Test: New Numbers, Little Impact For Bay Area

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We have new numbers! The new income figures for California bankruptcy cases used in bankruptcy’s means test are out.

They become effective for cases filed after April 1, 2020.

The new median income numbers won’t create the same stir as the Powerball jackpot, but they are the starting place for people in need of relief from bills they can’t pay.

The means test divides debtors (the people who need debt relief) into two groups.

Those below the median state income get to file bankruptcy, no questions asked.

Those above the median income have to jump through another hoop, the means test, to determine if a government watchdog will claim their filing is “abusive”.

People above the median still get to file bankruptcy.

The means test just influences which chapters are available and what the debtor has to pay if they elect Chapter 13.

In our experience, a high percentage of people over the median income still qualify for Chapter 7 after they calculate their living expenses.

Bay Area median income

The means test looks at the median income by family size.  The median for families in San Mateo, Santa Clara, Alameda, and Santa Cruz counties is

  • $60,360 for a family of one
  • $79,271  for a family of two
  • $88,235  for a family of three
  • $101,315 for a family of four

For families larger than four, the median is increased by $9000 for each member above four.

While the median income figures are the same for all Bay Area counties, the deduction allowed for housing varies from county to county.  This table shows county by county how much a California debtor can deduct from their income for the cost of housing a family of their size.

If you are above median

Lots of people above the median income pass the second part of the means test with flying colors.

Why it’s a mistake to do the means test yourself

It’s just another form to fill out.  As I explained in another means test post,  the high cost of housing in the Bay Area makes it relatively easy to pass the test.

All Congress managed to do by imposing a means test on bankruptcy is to drive up the cost to debtors for filling out a tedious form.

More

How the means test works

Cheat sheet for passing the means test

Figuring what you pay in Chapter 13

If You Can’t Make Your Car Payment During The Virus Shutdown

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car payments coronavirus

How am I going to keep my wheels while the coronavirus looms?

The fight against the coronavirus has cut off income for millions.  While there’s been broad discussion about mortgages and student loans,  there’s less discussion about rent.

So far, I’ve heard no governmental discussion about how to proceed if you can’t make car payments.

Car loans present particular, prickly problems, distinct from home mortgages and student loans:  the car creditor has a lien and the right to repossess the car if you don’t pay.

The closing of the courts and the lack of paychecks to garnish, which limit other creditors, doesn’t protect the car buyer.

And, there’s no governmental protection (yet) from repossession.

Hurray for Edmonds

Edmonds has assembled information on the announced policy of a long list of car lenders.

Check it out.

As of this writing, their page is dated March 17, with a promise to update it as time goes on.

Universal best practices

Anytime that you’re told to “contact your creditor” during this crisis, don’t rely solely on the phone.

The phone is easy, but I have no confidence in the ability of the lender to track those phone calls or retrieve them when necessary.

Follow up every phone call with a short, written letter, identifying yourself and your loan number, along with the meat of your message.

Keep a copy.

We don’t know how governmental and institutional policies will develop, but you want to be able to prove that you reached out as requested.

What’s to come

What’s different in the coronavirus crisis from other financial downturns is that the pain is huge and widespread.

Creditors and the government will have to develop mitigation strategies that preserve people’s mobility and make it worthwhile to keep paying on existing loans.

We’ll just have to stand by to see what they are.

My expectation is that lenders do not want to repossess a fleet of cars, and they don’t want to further tank their cash flow.

And, where I am, the repo guys are quarantined too.

More as news develops.

When you can’t pay your bills because of the virus

Protections for California homeowners during times of pandemic

California renters get protection from eviction

Tax season postponed

 

When You Can’t Pay Your Bills Because Of The Virus

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virus and money

 

The coronavirus has us locked at home where the  worry demons play unrestrained in our heads.

Money troubles cause us worry, in “good” times.  These are hardly good times.

As more and more of us are hit with shelter-in-place orders that keep us from work and our kids from school, we have even more time to worry about money.

And worry is debilitating.  In normal times, stress kills and the stress of COVID-19 dwarfs our usual worries.

I live and practice bankruptcy law in the San Francisco Bay Area: here,  we’ve been subject to social distancing, strategic shutdowns, and now, shelter-in-place orders for longer than most areas.

So here’s what I know and what I expect as a bankruptcy lawyer about the economic spillover from the fight against this virus.

Focus on the here and now

Staying safe and healthy right now is all that really matters.  Set aside issues of paying existing bills and long term commitments.  Those can wait.

Make food, medicine, and mental health your first concern.

If in doubt about your readiness for a jobless stretch, set aside, for the moment, payments on credit cards, medical bills, and student loans.

If possible, consider paying insurance premiums and car loans.

The very crisis that keeps you from your job keeps your creditors from their jobs, too.  While we’re still getting collection calls at my office, like most collector calls, they are toothless.

You are not alone

We see the usual money troubles as unique to ourselves:  shameful, defeating, personal.

Well hello, this time that isn’t so.  (It wasn’t so before, but that’s another rant.)  Millions of people in this country are facing the same situation.

Which is what feeds my expectation that government will craft remedies that mitigate the damage the country faces. And once those remedies start rolling out, we’ll all have opinions about the fairness and the adequacy of the remedy.

That grousing will give us something more to do.

But collectively, we all see the problem.  The problem is shared.  Your financial struggles will not stand out.

The help that’s coming

Lots of ideas are circulating about protecting families financially and pasting the economy back together.

California reopens signups for affordable health insurance

Right now, most of the solid action I see is at the state and local level.  Most pertinent for my clients, California state courts are closed except for the most essential health, safety and criminal issues.  So there’s not even a court available for creditors to sue you in.

For the longer haul, remedies under discussion include

  • Bans on evictions, foreclosures, and utility shutoffs
  • Restrictions on negative credit reporting
  • Mandated extensions of repayment on existing debt
  • Partial or total forgiveness of student loan debt
  • Low cost loans or grants for small businesses
  • Penalty-free late payment of income and employment taxes

Individual companies have offered free or reduced rate internet access; free online books and courses; on line exercise classes; and the list goes on.

Time will tell just what the collective remedies look like.  But, rest assured,  the crisis demands a fix.

And an election upcoming provides a feedback mechanism if the fix is slow, skimpy or spotty.

Law lumbers

In the best of times, legal actions take time.  So there is little immediate danger to you and yours in holding off payment on unsecured debts.  Don’t worry that the legal ax is about to fall if you miss a payment.

Law suits are expensive for the creditor and are typically the last resort of collectors.  Don’t fret that your unpaid bills will find you in court in the short run.  Where I am, the courts are barely open for much at all.

More concerning are the secured creditors with collection options that don’t require a judge’s involvement.  Think car repossessions and non judicial foreclosures.

If you can’t make your car payment, call AND write the lender and tell them how you are affected by the COVID-19 crisis and ask for relief.  I seriously doubt that, at the moment, creditors have a corporate answer to your request, but ask anyway.

And I never count on a phone call alone to make a record, much less make a difference to a creditor corporation.  Send a letter too and keep a copy.

I expect, but have not seen yet, a policy of tolerance on the part of car creditors.  What would they do with a fleet of repossessed cars? We can hope their repo guys are subject to stay at home orders, too.

As to foreclosures, there are glimmers of action to bar foreclosures while we are fighting the virus.  Residential lenders with loans guaranteed through Fannie Mae and Freddie Mac have been ordered to offer borrowers flexibility.  Stay tuned to see how that works out.

If your loan is not Fannie/Freddie, write the lender seeking relief, and stay watchful for developments.  Again, I don’t think lenders want to end up owning gobs of foreclosed homes.

Reach out and band together

It’s ironic that,  in a time when we’re told to practice social distancing, togetherness is critical.  It may be virtual togetherness, but it is good for our individual health and the strength of our communities.  Take care of your neighbors.

Stay strong, healthy, and hopeful.

More on the coronavirus crisis and money

Mortgage payments during the pandemic

Car payments while sheltering in place

Tax season postponed

California protects renters if…..

 

 

 

Explaining The Increase In Monthly Mortgage Payments On Long Established Loans

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mortgage payments jump

Lots of my clients lately are asking the same question:  why has my mortgage payment increased so much?

Interest rates are creeping up on variable rate loans, but not dramatically.

For most of those asking, it’s because the interest-only period of their home loan has run.

Borrowers forgot that lots of loans were written 10 years ago that promised low initial payments of interest only.

While it wasn’t a free ride,  it was cheaper than a fully amortized, 30 year loan.

Appealing, and the interest-only feature probably allowed borrowers to believe that they could afford the house they were buying.

But, time’s up on many of these loans.

And math tells us that when 10 years have passed and the remaining life of the loan is 20 years, it will take larger monthly payments to retire the amount borrowed.

Understanding your loan

The easiest way to see if the loan terms explains the payment increase is to pull out the promissory note.

Many of these notes have some description of unusual terms on the first page of the note, right under the heading “NOTE”.

It may say explicitly, “10 year interest only” or “interest fixed” or “variable interest”.  All of those are among the products peddled before the Great Recession.

The note should tell you when the “change date” on the loan is, and if variable, what index is used as a base for the interest rate calculation.

If you can’t find your note, you can ask the servicer for a copy using a Request for Information under RESPA.  Here’s a how-to for making a request.

Alternatively, you can ask your questions about loan terms directly from the servicer, again, using a Request for Information.

There’s no charge to make such a request, but the timeline for getting an answer can be as much as 30 business days.

If you can’t make the increased payment

If the increased payment is unmanageable, consider seeking a loan modification from the existing lender.

An alternative is to see what your options are to refinance the loan with a new lender, a new loan, and another 30 years to pay.

Be proactive.  The further behind you get on the existing loan, the less attractive you are as a borrower on a new loan.

Cutting The Car Loan Down To Size

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The car loan balance was grossly inflated;  my client owed twice the value of  her car, bought just a year ago.

Before bankruptcy “reform”, she could have stripped the loan balance down to what the car was actually worth.  In essence, the old bankruptcy law gave the lender what it would have gotten by repossession.

But not today.

Bankruptcy “reform” of a decade ago prohibits stripping down the loan balance on cars bought in the past 2+years.

What can Chapter 13 bankruptcy do?

Now that bankruptcy “reform” has shielded the car lender from the real world consequences of the car’s depreciation, the choices seem to be pay or surrender the car.

But not so fast.

Here in Silicon Valley we often retort: RTFM.  In a bankruptcy case, it’s read the underlying contract.

When I did, I found thousands of dollars worth of financed “stuff” that even bankruptcy reform didn’t require the buyer to pay in full.

Ride along as we point out all the excess expense that Chapter 13 carves out of the car loan.

The underwater trade-in

It seems that my client had traded in her previous car  when she still owed $9,000 on it.  The trade-in value (at least in this deal) was $5,000.

So the loan for the new wheels included the $4,000 difference between the old loan and the trade-in credit.  In bankruptcy circles, we call that “negative equity”.

The amount needed to pay off the old car, after credit for the trade-in allowance, was added to the price of the new car, in calculating the new car loan.

And thanks to a 9th Circuit decision called Penrod,  the negative equity portion of the car loan wasn’t entitled to protection from strip-down.

So, we’ve wiped out $4000 of the loan balance, or at least booted it out of the “must pay” category of debts in her Chapter 13, to the “maybe they get something” category of general unsecured creditors.

Gap insurance inflates the balance

As I read on, I found $900 worth of “gap insurance”.  This is extra insurance that covers the gap between the insured value of the car and the loan  balance in the early years of the loan.

Even in car loans not larded with all the add ons and extras found in this deal, once you drive the car off the lot, it is worth less than the purchase price and therefore, usually worth less than the balance on the loan.

If you total the car at the first stop light after leaving the dealership, regular insurance pays what the car was worth just before the accident.  Gap insurance will pay you the difference between the car’s insured value and the loan balance.

Without gap insurance, the car buyer gets a check for the car’s value and still owes the car lender.

But in Chapter 13, the car buyer is protected from that liability by bankruptcy law.

So, my client doesn’t need gap insurance, and we’ve reduced the must-pay portion of the loan by $900.

Service contract is extra

Last on the list of extras plumping the balance of the car loan was a $2000 service contract good for 75,000 miles.

My sense is that the terms of a service contract bought from the manufacturer of the car is carefully calculated to be profitable to the manufacturer.

After discussion, the client decided to reject the service contract and pay for repairs as needed.

We reduced the must-pay balance by another $2000.

Calculating the protected balance

When I added up the extras we carved out of the original loan balance, those extras were 30% of the loan amount.

So, we reduced the car lender’s secured claim that just recited the loan balance on its books  by 30% and got the amount of the loan that was really the purchase-money portion of the deal.  That will be paid in full through the Chapter 13 plan, regardless of what the collateral is now worth.

The car lender still gets a better deal in bankruptcy than it would if they repoed the car in the real world, but then, the car creditors had crafty lobbyists when bankruptcy “reform” was enacted.

Wait, there’s more

We aren’t done whittling this debt down to size, because Chapter 13 allows us reduce the interest rate paid on car loans to today’s market rate.

My client was paying a bit over 10% per year on the car loan.  In Chapter 13, she’ll pay 4-5%.

The ability to change the interest rate on loans secured by personal property, as opposed to real property, was not changed by bankruptcy amendments of 2005.

And this is just one reason I love Chapter 13.

Image courtesy of Daniel Olnes & Flickr.

Tax Deductions Hidden In Chapter 13

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taxesDon’t miss the tax deductions hiding in your Chapter 13 plan payments.

The same, very important debts that your Chapter 13 plan pays are often tax deductible.

And you are still the person who’s paying, even if the trustee writes the check.

Deductions in bankruptcy

Let’s look at some common deductions lurking in the Chapter 13 disbursements.

Mortgage interest  If your Chapter 13 plan is catching up on delinquent mortgage payments, the claim of the lender is probably mostly interest.

Taxes  Property taxes paid through the plan should be deductible.  Likewise, state income taxes paid by the trustee are deductible.

 Business expenses  If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.

Get the info you need

In my experience, you have to dig out the information on deductible payments;  I have not seen lenders sending 1098’s reporting mortgage interest paid to debtors when the checks come from the trustee.

Step by step to claiming the mortgage interest deduction

But most if not all Chapter 13 trustees are on the web, and debtors can access the trustees reports of which creditors have been paid this year.

Pull up the report of last year’s disbursements and flag the payments that are deductible.

Save the printout of the trustee’s report in case of question  by the taxing authority.  The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

How to treat 1099’s on foreclosures and short sales

Go back to prior tax years

If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports.  Overlooked deductions might justify going back to amend a prior return.

Tax returns are generally amendable for three years.

Check it out

Take this post with a grain of salt, or rather, take it to a tax professional.

I am a bankruptcy lawyer and what I know about taxes, I’ve learned on the job.  But I am convinced that Chapter 13 debtors are missing legitimate tax deductions by overlooking what the Chapter 13 trustee has paid on their behalf.

More

How to find the mortgage interest paid by Chapter 13 trustee

What your tax professional should know about tax and bankruptcy

When your Chapter 13 plan struggles

Image courtesy of 401(k)calculator.org

Debt Settlement Is A Dud

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debt settlementMaking a deal with your creditors has enormous appeal when you can’t pay all that you owe.

Debt settlement companies count on it.

The pitch for “settling your debts” touches a nerve.  Almost everyone WANTS to pay their debts.

But the truth is :  Debt settlement companies rarely deliver what they promise.

Their pitch shouts that debt settlement is superior to bankruptcy.

It just ain’t so.

All too often, the client of the debt settlement company is exposed to continuing collection calls, lawsuits, plumeting credit scores, and garnishments while the company is attempting to settle the debt.

And in the end, many dollars later,  debt settlement delivers neither a debt free life nor an undamaged credit report.

The appeal of debt settlement

What is it that makes a chancy, drawn out, expensive relationship with one of these debt settlement companies seem attractive to the financially overwhelmed?

I’d suggest:

  • Enrollment  appears to offload the problem on someone working for you
  • High profile media types like Suze Orman and Dave Ramsey badmouth bankruptcy
  • Promoters suggest that there is a “secret” to settling your debt for pennies on the dollar
  • Paying some part of debt is morally satisfying

As long as the public buys the idea that bankruptcy is akin to leprosy, those who, for a fee, offer the secret, non bankruptcy solution get rich.

Settlement company gets theirs first

The truth is that most debt settlement companies get their money upfront.  The first several months of payments don’t go to creditors or to building a settlement kitty, they go to the debt settlement company.

When the consumer figures out that paying the debt settlement people for months on end has not resolved any of the life-sapping incidents that come with being in debt: collection calls, law suits, levies, the debt settlement folks can move on to the next troubled consumer, with money in their pocket.

Bankruptcy works

By contrast, bankruptcy is available for a flat filing fee of around $300 to the court, plus attorneys fees.

It costs the same whether you have modest debt or huge debt.

It is instantly effective to stop collections.

Creditors can’t opt out, like they can with debt settlement.  All creditors are bound by the automatic stay and ultimately by the discharge.

And, the rules are enforced by a judge, with powers of sanctions and even incarceration.

What a bankruptcy judge does

The cherry on the top is that bankruptcy doesn’t generate cancellation of debt income issues. like debt settlement does. By law, debt cancelled in bankruptcy isn’t taxable income.

The long-term tax advantage for homeowners in bankruptcy over debt settlement

Bankruptcy bashes debt, for certain and for all time.

More

Pay off credit cards with no interest

Make no changes til you see a bankruptcy lawyer

What to ask a bankruptcy lawyer before signing up

Image courtesy of derekbruff.

Bankruptcy Alphabet: Q is for Questions

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The letter Q stands for Questions in my bankruptcy alphabet.

Like the storied Light Brigade, “stormed at with shot and shell” , we in bankruptcy are peppered with questions, not cannons.

Those considering bankruptcy have the profound questions:will bankruptcy improve my situation?

Bankruptcy attorneys in turn have questions of the client:

  • what do you own?
  • who do you owe?
  • what has recently changed about your finances?

Then, the bankruptcy trustee has questions:

  • did you read these documents before you signed them?
  • is everything true, correct, and complete?
  • do you owe any domestic support to anyone?

All three players, debtor, attorney, and trustee need to have their questions answered for the system to work.

Have the answers

When it’s your turn to provide answers, it can be make or break time. Get sloppy, indifferent or inattentive, and one or more of the central players in the bankruptcy triad gets less than is necessary to assure a good outcome.

Let me suggest that one of the most important qualities in a superior bankruptcy lawyer is the ability to answer client questions simply and directly.

The companion quality is the ability to make the client feel comfortable enough to ask the perplexing or distressing questions. If client questions are not met with respect and openness, then find another lawyer.

The person who gets a smooth and predictable bankruptcy filing is the one who takes his lawyer’s questions seriously.

Don’t just tell me about the obvious; engage and tell me about everything, whether YOU think it important or whether you believe it has value or not.

I ask for a reason.

Questions and their answers are at the heart of the bankruptcy filing process.

This post has been brought to you by the letter Q.

While I think Q is for Questions in the Bankruptcy Alphabet, consumer protection lawyer Jay Fleischman proposes Q stands for Quiet.

More

Questions you should ask a bankruptcy lawyer

Going to court in your bankruptcy case

Getting the bankruptcy papers right

Image courtesy of Leo Reynolds.

 

The Real Causes of Bankruptcy

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The commentator who equated debt problems with irresponsibility nearly caused me to melt down, right in my office.

Irresponsibility, he said!

The idea that people who find themselves with bills they can’t pay got in that mess through flighty behavior  or self absorption is sooooo wrong.

Mindless spending is seldom the cause of bankruptcy in my experience.  Occasionally, yes;  routinely, no.

The need for bankruptcy is more often tied to

  • Job loss
  • Ill health
  • Business failure
  • Supporting multiple generations of family
  • Divorce

Credit card balances  are usually tied to basic living expenses, recent studies show.

The gig economy hasn’t helped.  Without employee benefits and regular work hours, workers find themselves responsible for providing insurance, tax withholding and without sick days or retirement plans.  And gig earnings seldom cut it for very long in the Bay Area.

The real cause of bankruptcy

In fact, I see people in my bankruptcy office because they followed the time-honored advice we give to each other.

They bought a house.

They started a business.

They cared for their extended family.

They robbed Peter to pay Paul rather than renege on their debts.

And, at some point, it all caught up with them.

Often, the problem looks like a tax problem and it’s IRS collection action that brings them to bankruptcy.

But the more likely cause is the fact they reduced their tax withholding to create cash to meet other obligations.  Or they paid their employees with “net checks” and didn’t pay over the employee’s tax withholding in order to nurse the business along a bit more.

Or, they are supporting  both adult, underemployed children and aged parents.

Then there’s the curse of home ownership.  During the Great Recession, created by manic buying of homes made possible by toxic loans, I often advocated for letting the house go as being an impossible financial burden.

But 10 years later, with home prices recovered and then some, I’m starting to see the up side of struggling to keep a home.

Rents are increasing as fast as home prices:  let the house go and you’ll pay nearly as much in rent, get none of the tax advantages of home ownership, and have no protection against continuing increases in rent.

Renters are even more vulnerable than those with overly costly homes.

It’s complicated

It’s cliche, but it’s true.

Every story is a bit different, but from where I sit, too many of us are just plain lucky that our economic fragility hasn’t caught up with us.

More

Debt settlement is a fraud

The three times when bankruptcy is justified

Credit heals

 

Bankruptcy Discharge Slays IRS Form 1099

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In a duel between a Form 1099 and a bankruptcy discharge, bankruptcy wins every time.

The prize?  no tax on debt discharged in bankruptcy.

So, if you’ve already gotten your discharge, the creditor’s 1099, with your social security number on it, is no threat.

But you do need to file another form to secure the prize.

Bankruptcy is exception to tax

Normally, when an obligation is forgiven, the tax code treats the amount of forgiveness as if it were income.  And income is exposed to tax.

Insolvency is another exception to tax on forgiven debt

But forgiveness in bankruptcy in the first exception to the rule.

Debt forgiven in bankruptcy is not treated as income.

Creditor is clueless

So, if bankruptcy is outside the IRS rule, why are you getting a form 1099?

Because there’s another rule, requiring creditors to report to the IRS, just the way your employer is required to send the IRS your W-2.

And seemingly, the creditor can’t figure out that the reason its claim is worthless is because of the bankruptcy discharge.  So it’s easier for the creditor to just send out Form 1099, and make it your problem.

Fixing the 1099 problem

The solution is simple:  file IRS form 982.

Title 11 is the part of the United States Code on bankruptcy.  Cases are filed under different chapters of that title

Form 982 is your rebuttal to the report that you have taxable income because your debt was forgiven.  Check the very first box on the form claiming the bankruptcy exception.

This debt is excluded from income because of  Discharge of indebtedness in a title 11 case 

The IRS provides a set of instructions for filing  your “get out of tax” form.  Form  982 Instructions.

Other tax consequences of discharge

If you have real property, you may have to reduce your basis in assets by the amount of debt discharged in your bankruptcy.

But thankfully, there is an exception to this rule too:  no reduction in basis is required with respect to your principal residence claimed exempt in your bankruptcy case.  IRC 1017(c).

Tax action plan

So there you have the skinny on form 1099 and your bankruptcy discharge.

Bankruptcy has other tax implications:

Taxes dischargeable in bankruptcy

Unfiled tax years are never dischargeable

Chapter 13 gets an interest-free tax repayment plan

Your accountant needs to know about your bankruptcy

What to do with a flat-wrong 1099

 

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Phone: (650) 694-4700

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