Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Don’t Brag About What You Saved Unless It’s True

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saving spending

It’s a mark of our consumer economy that we use the word save in connection with our spending.

I saved $15 on this blouse.

That’s well and good for today.  You bought something you wanted, or maybe even needed.

But unless you put the savings aside for later, you did nothing more than spend somewhat less today, without thought for tomorrow.

Your savings on today’s purchases won’t be available to buy necessities in your old age.  The money you “saved” is gone, spent today on something else.

Our language doesn’t help

We are aided and abetted in our savings mind-game by English usage. Saving is a virtue we applaud.

But “save” has two, almost opposite, meanings.

According to Merriam Webster, save means both

a: to put aside as a store or reserve : accumulate

  • saving money for emergencies

b : to spend less by 

  • save 25 percent

Don’t confuse the two.

The more meaningful savings are when money gets set aside for use later,

-to pay for an emergency

-to fund a big purchase

-to support a comfortable old age

We suck at savings

Actually, lots of us are good at “saving” in the Definition B sense.  We comparison shop, we follow the sales, we use coupons and garner reward points.

It’s the savings as creating a reserve that we flunk. 

Average monthly social security check is $1400.

 Too many Americans couldn’t handle a $400 emergency.  Half of Americans have less than $1000 in savings.  Half of Americans have no retirement savings.

What will we tell ourselves in our old age about our prowess at saving?  Will we have a slick word-game that puts food on the table or gas in the car?

How about making Definition A our go-to plan for savings.

More

The second-best reason to contribute to a retirement plan

But my home is my retirement plan

How to open an IRA account

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.

What Bankruptcy’s Automatic Stay Doesn’t Stop

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bankruptcy stay exceptions

The automatic stay is the signature feature of American bankruptcy.  Just by filing a bankruptcy case, your creditors are instantly prohibited by a federal court injunction from actions to collect a debt from you or your assets.

But, there’s a whole list of actions that aren’t included in the stay;  we forget that some kinds of lawsuits with a financial aspect get excluded from the stay.

The automatic stay applies in all bankruptcy cases (unless you’ve filed more than two bankruptcy cases in the last year).

Instead of the usual rule, outside of bankruptcy, where you have to prove that you are entitled to an injunction, bankruptcy grants the injunction automatically, just for filing.  The burden is on creditors to take action to extract themselves from the stay.

The list of exceptions is long and many of the excluded actions are very specific and technical. See 11 U.S.C. 362(b).  But there are some biggies there too among the exceptions.

Here are the ones of most interest to the typical bankruptcy filer.

Family law issues

Actions to establish or modify support are not stayed.  Neither are proceedings involving custody, marital status or paternity.

Support can be collected from property that isn’t “property of the estate” without violating bankruptcy law.  And state issued licenses can be suspended for failure to pay support.  That’s subsection (b)(2).

Law enforcement

The stay doesn’t stop criminal prosecutions.  Nor does it stop the enforcement of actions grounded in the public health and safety; that’s called the government regulatory exemption.  More about that below.

Tax administration

Your state tax folks and the feds can legally demand the filing of a tax return; audit returns you’ve filed; and assess taxes they claim you owe.

Government can’t, however, record liens or levy assets to collect a tax you owed when you filed bankruptcy.

Private rights

A landlord under a lease that expired according to its terms before the bankruptcy case was filed can proceed to get possession of non residential property.

Civil contempt sanctions

Collection of court-ordered sanctions for misconduct in litigation is not prohibited by the stay.

The 9th Circuit Court of Appeals recently decided that the public’s interest in making parties to a lawsuit play by the rules outweighed the sanctioned party’s interest in getting complete protection from collection action.  The fact that the sanctions might be payable to the other party to the litigation didn’t change the state’s interest in enforcing its sanction for bad behavior in court.  The case is Dingley.

More

Automatic stay in lawsuits

What litigators must know about bankruptcy

When your ex files bankruptcy

Fix Mortgage Troubles After Chapter 13

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mortgage mess

The mortgage servicer took less than 30 days to change its story, big time.

In three weeks time, the servicer went from telling the bankruptcy court, under penalty of perjury, that the loan was current, to telling the homeowner that she was $50,000 behind.

The whole story appears here.

Three weeks!

And there, in a nutshell, you see the utter disarray in mortgage loan accounting when a bankruptcy is involved.  (Actually I doubt the accounting is any better outside of bankruptcy, but that’s another story.)

Home loan after Chapter 13

Trouble with your home mortgage right after you’ve completed a Chapter 13 is a real bummer.

You get current through years in Chapter 13, make the payments after you file, and then are slammed with a statement saying you’re behind. Or worse, you get a foreclosure notice.

The problem was widespread enough that the national bankruptcy rules committee wrote a rule trying to head off the problem. That’s how we got FRBP 3002.1.

The rule requires lenders with a lien on your home to provide notice while you’re in Chapter 13 of changes to your payments and of fees and expenses added to your loan.  Then, at the end of the case, they need to file a response indicating whether they agree that you are current post – filing on the loan.

Yet time after time, mortgage servicers, the folks who are supposed to keep track of your payments on your loan, tell the bankruptcy court that you’re current in a filing signed under penalty of perjury.  Then they turn around within weeks, and sing a different tune.  In one of my cases, weeks after telling the bankruptcy court she was current, Big Bad Bank said she was $50,000 behind.

And it’s happened many times just this year.  The servicers either don’t know, or don’t care, what they tell the court about the loan.

While it’s supremely galling, you are not without power to sort the situation out.  Even though your bankruptcy case is over, you have unexpected friends:  bankruptcy law itself; the bankruptcy judge; and your attorney.

How to make your mortgage loan right

The folks who wrote the rule must have had a premonition that the rule requiring disclosure and transparency wouldn’t alway work.  Here’s what they wrote in the official comments to the Rule.

If, after the chapter 13 debtor has completed payments under the plan and the case has been closed, the holder of a claim secured by the debtor’s principal residence seeks to recover amounts that should have been but were not disclosed under this rule, the debtor may move to have the case reopened in order to seek sanctions against the holder of the claim under subdivision (i).

In short, get the matter back before the bankruptcy judge.

The Bankruptcy Code contemplates that you might need to reopen a closed bankruptcy case to seek relief.  There’s a procedure for reopening the case.  You may have to advance the filing fee, but you should be able to either get it refunded by the court, or collect it from the servicer.

Lender faces trouble in court

In my view, the lender who filed a statement with the court saying the loan was current and then sent a mortgage statement claiming an arrears arising from the period of the bankruptcy has two problems.

One problem is that matter of judicial estoppel, the idea that a party can’t take one position before the bankruptcy court and another in a state law foreclosure action.  If there were unpaid amounts at the end of the bankruptcy case, the Rule 3002.1 procedure was supposed to flush those out before the bankruptcy case was closed, and resolve them.

The second problem is that attempts to collect debts discharged in bankruptcy violates the discharge injunction.  And there are well established remedies for contempt of a federal court order.

It’s tricky when the lender retains its lien on the property.  It’s a central tenet of bankruptcy law that liens pass through bankruptcy unaffected, unless the court takes specific actions to alter the lien.

So, homeowners want monthly statements after their bankruptcy.  New rules even require it.  But those statements have to be correct and consistent with what the lender told the court under Rule 3002.1.

Relief and recompense in court

The bankruptcy court can award an injured debtor  “appropriate relief”.  That certainly includes attorneys fees and costs.  It can include an order determining that the loan balance is what the lender first said, or the court later determined.  It’s unclear whether the debtor can recover damages for emotional distress or other kinds of economic injury.

If the court finds that the servicer violated the discharge injunction, a wider array of sanctions are available.

But to get relief, you have to get to court.  And you have to get there with evidence.

So, save each written communication you get from the servicer after your bankruptcy case closes.

Keep a log of any phone contact with the servicer. Who called you?  What did they say?  Were they trying to get you to pay?

The more detail you capture, the more compelling your story is in court.

If this happens to you, contact your bankruptcy attorney.  If the attorney who handled your case doesn’t feel confident with these kinds of cases, ask for a referral to a lawyer who does.

 

 

 

 

 

 

Creditor Must Pay If It Loses A Bankruptcy Fight

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see saw-pixabay-public_opt

 

The game isn’t very fair when the players are mismatched.

Though bankruptcy court is hardly a game, it’s been unfair when it comes to attorneys fees for the winning party.

California law provides that when a contract allows one party their fees if they prevail, the other party got their fees if they won.  So, even if the contract only provided that you pay my fees if I have to sue you to collect,  the statute made the right to fees reciprocal.

Only, bankruptcy courts have for decades held that the California statute didn’t control if the issue involved bankruptcy.

And then came Penrod in the 9th Circuit.

The firm of bankruptcy icon Ken Klee argued for the consumer that the fight between the car lender and the debtor in the bankruptcy court was “on the contract” and covered by the agreement.  And the 9th Circuit agreed.

A bankruptcy fight over $7000 in negative equity in a Ford ended up with an attorneys fees award for the car buyer of $245,000.

Going forward, when debtors win in fights with creditors in bankruptcy court, they, too, will get the benefit of the contract they made with the creditor.

Chapter 13 Confirmation Fight Covered

The case that lead to a ruling about attorneys fees started out as an objection to confirmation of the Chapter 13 plan.

Prior to filing bankruptcy in 2007,  Marlene Penrod had traded in a car that was worth less than she owed on it for a new Ford Taurus.  The new loan included not only the purchase price of the new wheels but the unpaid balance of her trade in.

When she filed Chapter 13, she proposed to pay in full that part of the new car loan that reflected the purchase price of the new car, but not the part of the loan that payed off her trade in.

That difference, in bankruptcy lingo, was the “negative equity” in the trade in.

The car lender objected to confirmation of the plan, contending that the entire loan taken when the debtor bought the new car was a “purchase money” loan.  Therefore, said the lender, it was protected from cramdown by the”hanging paragraph” added to 1325 by BAPCPA, the mislabeled bankruptcy reform act of 2005.

Several rounds of appeals later, the 9th Circuit held that the “negative equity” portion of the loan was not “purchase money” and therefore, the debtor could confirm a Chapter 13 plan that paid that part of the loan pennies on the dollar.

Who Pays For Debtor’s Win

Winning wasn’t cheap for Marlene.  By the time she got a ruling in her favor from the 9th Circuit in 2011, and beat back the lender’s petition to the Supreme Court, her attorneys fees were $245,000.

Her loan agreement with Americredit said:

“You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts.”

And California’s Civil Code 1717 says:

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

But, said each court considering her request for an award of her fees, the confirmation fight over treatment in bankruptcy of the loan wasn’t an action “to enforce that contract.”  You won, Marlene, but you pay for the victory out of your pocket.

Not so, held the 9th Circuit.  The Supreme Court’s decision in Traveler’s held that nothing in the Bankruptcy Code expressly disallows claims for attorney’s fees simply because the fees are incurred litigating questions of federal bankruptcy law.

Under the language of the attorneys fees provision in the contract, Americredit would have been entitled to its fees had it won on the issue of plan confirmation.  Accordingly, when the bankrupt borrower prevails, that borrower gets an award of attorneys fees.

Attorneys Fees For Winner, Period

The implications of this second Penrod decision are substantial.  It becomes possible for the debtor to challenge creditor actions in the bankruptcy forum and recover the cost of the challenge, if they prevail.

I see it most important in bankruptcy litigation about the amount of mortgage arrearage claims and in relief from stay actions.

Any number of times, I’ve defeated motions for relief from stay, where the lender’s declaration about my client’s alleged defaults were simply untrue.  But because we were in bankruptcy court, fighting over bankruptcy’s automatic stay, my client had to pay the cost of the fight.

To benefit from the newest Penrod holding, debtor’s counsel may need to get a determination from the court that the debtor is the prevailing party.  But the possibility of such may make it possible to negotiate payment of the debtor’s fees without the necessity of trial.

The fruits of victory are now available to both players.

Audited? Did You Tell The State Tax Authorities?

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tax audit

We’re all about sharing these days, aren’t we?  So, did you share with the state tax authorities the outcome of your IRS audit?

While telling the Franchise Tax Board that you owe more taxes to the feds may seem like inviting trouble, you gain by doing so.

How?

You set those taxes owed to California up for discharge in bankruptcy.

And that’s a nice card to have up your sleeve.

Here’s why.

Taxes discharged in bankruptcy

A central requirement to wipe out tax liability in bankruptcy is the filing of a return.  Bankruptcy Code 523(a).

Taxes that are unassessed but still legally assessable when you file your bankruptcy case don’t get discharged.

If you owe more taxes as a result of an IRS audit, bankruptcy law treats any resulting increase in your state tax liability as one for which you haven’t filed a return.  That is, unless you have made a report or filed an amended tax return with the state.

No return or report, no discharge of the state tax increase.

Tax exposure under California law

California law requires that you share the results of a tax audit that increases your taxes to the Franchise Tax Board.

Edited for clarity, Revenue & Taxation Code 18622 provides:

(a) If any item required to be shown on a federal tax return, including any gross income, deduction, penalty, credit, or tax for any year of any taxpayer is changed or corrected by the Commissioner of Internal Revenue …, that taxpayer shall report each change or correction…, within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous. For any individual …changes or corrections need not be reported unless they increase the amount of tax payable …for any year.

(b) Any taxpayer filing an amended return with the Commissioner of Internal Revenue shall also file within six months thereafter an amended return with the Franchise Tax Board…  For any individual …, an amended return need not be filed unless the change therein would increase the amount of tax payable…

So, if changes to elements of your return by reason of an IRS audit would result in you owing more state tax, you have to report that change to the FTB.  If you are required to file an amended federal return, you have six months to file an amended state tax return if you owe more state tax as a result of the audit.

Reporting requirement in other states

California isn’t alone in requiring you to share the audit bad news with the state.  The AICPA organization of CPA’s put out this summary of tax audit reporting requirements nationwide.

More on taxes in bankruptcy

Timing is everything when discharging taxes

Tax liens after bankruptcy

Chapter 13 is a tax tool

Don’t Fall For Your Mortgage Lender’s Insurance

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lender home insuranceIf the mortgage company provides your property insurance, you are not in good hands.

No matter how much time it saves you.

Your lender is not a good neighbor when it comes to insurance.

When your insurance lapses

Somehow my client let her homeowners insurance lapse.  She wasn’t worried about it, she told me, because the mortgage lender had gotten insurance on her home.

She was content, she said, to let the lender take care of that complication in her life.

Only the complication wasn’t being “taken care of” because the lender’s force-placed insurance didn’t protect my client or her interest in her home. [Read more…]

I’m Done Talking About Importance of Retirement Savings

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retirement planning

Shedding debt so you can save for retirement is the most compelling reason to file bankruptcy in my book.

Get rid of the debt that’s dischargeable so you can fund your retirement, I exhort.

Between the crippling cost of housing in the Bay Area and parent loans for college, there is so little margin for discretionary spending that I begrudge every dollar my clients spend on credit card debt.

I cringe when I see families paying American Express instead of their IRA.  I acknowledge the reality of the obligation to the credit card folks.  But the consequences of not paying are vastly different for an individual than they are for credit card issuers.

American Express, and every other consumer lender, built into its pricing model the fact that not everyone who borrowed money on their plastic card would repay.  They still make money whether you pay off your card or not.

American Express doesn’t have to retire, and you do.

With few exceptions, every client I meet without an employer funded or sponsored retirement program has only pennies set aside for retirement.

All that said, when I ask about what the client has saved for retirement, I’m met with one of two retorts:

My house is my retirement is one, superficially convincing in the land of runaway home values.  (Houses don’t make good retirement plans, however.)

But the second is:  I don’t plan to ever retire.

Sometimes the “I won’t retire” is an acknowledgment that they can’t support themselves without a job.  Other times, they are indulging in magical thinking that they will always be capable and valuable to an employer.

The facts of aging, of course, are different.  We’re living longer, markedly longer.  Dementia is on the rise.  The average Social Security check is around $1300.

No more pretty talk

old ageSo, I’ve had it with serving up polite talk about “retirement.”  In this era of blunt speaking, let’s take off the gloves:

My question to clients henceforth is “how are you going to pay for old age?’

We can dance around whether we’re ever going to “retire”; but presumably, we’d all like a long stretch before we die.

And that long stretch requires funds if old age is going to be comfortable.

So, my mantra going forward is discussion of funding old age.

The ugly truth is that savings for old age requires discipline and some degree of self denial.  And many of my clients demonstrate enormous amounts of discipline in making minimum payments and keeping all the financial balls in the air.

Yet none of that discipline is exerted to provide for their old age.

The images of impoverished elders are not pretty.  Don’t find yourself supplying another heartbreaking picture of failure to plan for old age.

 

 

 

 

 

Homestead Exemptions: The Truth Isn’t What You Think

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patchwork

“They can’t take my house, whatever happens.  Right?”

The young man in my office “knew” that the substantial equity in his home was exempt as a homestead, even if he filed bankruptcy.

He “knew” that credit card debt was dischargeable.

And that “knowledge” lead to his conviction that , in bankruptcy, he could keep the house and ditch the credit card debt without payment.

Wrong.

In his mind, bits of legal truth got stitched together into a bankruptcy myth.  Let’s unravel the truth.

California homestead

True:  every California homeowner can claim a homestead in their principal residence.  CCP 704.720

But:  the homestead is limited to a certain amount of value.  For the single guy sitting across my desk, that amount was $75,000.  Equity in his condo in excess of that isn’t protected by the homestead.

Worse, the homestead is only effective against certain kinds of creditors.  The tax liens that were of record for old tax years aren’t defeated by a state law homestead.   So the tax liens remain enforceable. *

Credit card debt is dischargeable

True:  unsecured credit card debt (not incurred by fraud) can be wiped out in bankruptcy.

But: the discharge speaks to whether the debt survives the bankruptcy and is enforceable afterwards.  Being dischargeable doesn’t mean that creditors don’t share in the bankruptcy distribution.

Asset value matters in bankruptcy

True:  every debtor can claim exemptions that protect the exempt amount from being paid out to creditors in the bankruptcy case.

But:  the asset value not protected by an exemption is available to pay the claims of creditors, as far as that value goes.  For most unsecured creditors, all they get from the debtor is their pro rata share of the non exempt property of the estate.   Any unpaid balance is discharged.

Bankruptcy truths

So when the bits of the law my client got right are expanded and seen as a whole,  any bankruptcy discharge was unlikely to result in paying less to his creditors, because his house represented far more value than the debts, dischargeable and non dischargeable, that he owed.

Likely, in either Chapter 7 or Chapter 13, his creditors would get 100% of their claims.  In my view, any amount he might save in reducing the interest accruing on those claims to the bankruptcy interest rate would be eaten up by the legal fees to file the case, and the credit hit he would incur.

True story of huge savings on credit card debt

The one critical bankruptcy advantage might be the power of the automatic stay:  if the mortgage lender threatened a foreclosure before he could cure the secured arrears, bankruptcy could stop foreclosure long enough to either propose a Chapter 13 plan, or arrange family help to keep the house.

* In Chapter 13, the homeowner could strip a tax lien down to the value of the home after all senior liens were subtracted.  The stripped down lien would have to be paid in full through the plan.  The balance of the tax lien would be treated as an unsecured claim.

More

Bankruptcy myths abound

Everything you need to know about the California homestead exemption

Who gets paid first in bankruptcy

 

 

Should You Pay Your Creditors Rather Than File Bankruptcy?

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bankruptcy alternative

Is there an alternative to bankruptcy, my clients often ask. Can I realistically avoid filing bankruptcy?

A fellow bankruptcy lawyer outlined what it takes to get out of debt without bankruptcy.

  • make more money;
  • spend less on today’s expenses; and
  • use all your savings to pay off debt.

If you could do all three,  for long enough, and, your debt isn’t too large, it probably works.

I want to pose the question: even if that’s possible, is it smart?

Cost of paying off debt

What do you forgo in that scenario?

If it’s travel; lattes; and premium cable that go, I’m OK with that.

But, what if the things you do without are emergency reserves; health insurance; and retirement savings?  I think that continuing to live on the financial edge is a poor choice.

One small glitch, car trouble, ill health, or fewer hours at work, and your fine and honorable plan to pay comes unraveled.

Make good decisions about your future

Whether your financial difficulty was caused by bad luck or bad choices, don’t make a bad decision, driven by pride, to compound the trouble by living without a safety net.

Studies prove being in debt makes you stupid

Too many of my clients arrive in my office with the conviction that they incurred this debt and, by damn, they want to repay it.

At some level, I applaud that desire. But what are the likely consequences of repaying that debt if it means making no provision for financial stability now and in the future?

Have you just traded one sort of bad situation for another?

Part of reforming your financial situation involves looking beyond this month’s bills to the needs of the next decade and beyond.

Lots of folks got into credit card debt focusing on their ability to make the monthly minimums, rather than on their ultimate ability to pay the debt off.  They forget that minimum payments on most credit cards are set to keep you in debt for a decade or more.

Particularly in times of profound economic uncertainty, consider the merits of a fresh start and a make a plan for financial self sufficiency.

More

Secret alternative to bankruptcy

How to evaluate your choices about debt

Leave a legacy not a pile of debt

What you keep despite bankruptcy

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Suite 140
Mountain View, CA 94043
Phone: (650) 694-4700

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