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Collection Suits and Court Dates

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glasses-983947_1280_opt

Those in financial difficulty are frequently not operating at their peak.  I know that.

But for the life of me, I can’t understand how the recipient of a summons and complaint from a California court can read the papers and absorb only that they have a “court date”.

Arghhh!

How California lawsuit works

The basic outline of a collection suit is that the creditor files a complaint with the court. The court issues its summons, which validates the complaint and puts the defendant on notice that there is a legal suit pending.

The summons tells the person served plainly that they must file a typewritten answer to the complaint within 30 days of service.  Fail to file an answer and the other side may get a judgment for the relief prayed for, which is usually money.

Served along with the complaint is a notice of case management conference on a given date.  The CMC is well after the date on which the answer is due.

At the case management conference, assuming that an answer has been filed, the court will set deadlines, trial dates, etc.

But none of this scheduling is necessary if the defendant has not contested the complaint by filing an answer.

Why is it that a consumer debtor grasps only the date of the case management conference, and absorbs none of the rest of the message that says clearly, in two syllable words, that one must file an answer for there to be anything for a court to decide?

Stress MAKES you stupid

I should have a cassette tape to play to tell clients that the case management conference date is meaningless if you didn’t file an answer.

If you don’t have a defense to the action, that’s fine.

Just don’t obsess about a date that means nothing if you didn’t take the time to read the summons and understand that filing an answer is the price of admission.

Lawsuit is a wake-up call

Often, the filing of a lawsuit is just the most dramatic evidence that your finances are scrambled.

Consider whether you spend your energies fighting this one action, or whether you need a more global remedy like bankruptcy.

Bankruptcy and the alternatives

Image courtesy of Pixabay.

It’s Who You Owe In Bankruptcy

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owl croppedIt’s about WHO you owe,

not so much about HOW MUCH you owe,

when you file bankruptcy.

WHO, WHO, WHO.

If your debt is subject to discharge,  your bankruptcy wipes out all of your debt to a creditor  you’ve listed.  Even if you got the amount wrong or even don’t know how much you owe.

Why we list creditors

It’s all about due process.  Remember from civics class?

Notice of your bankruptcy case is the due process that a creditor must get.

Notice gives the creditor a chance to share in any distribution in a bankruptcy case;  notice gets the creditor gets a chance to contest your right to get a bankruptcy discharge.  A creditor can challenge the discharge of your debt to the creditor if there are legal grounds.

The creditor would lose those rights if he didn’t have notice of the case.

Every creditor listed in your bankruptcy schedules gets notice of the filing of your case from the court clerk.  That same list is used by the court to provide every listed creditor a copy of the order granting your discharge.

Myth

There’s a worry among bankruptcy debtors that only the amount that is listed in the bankruptcy papers will be discharged.

Not so.

The bankruptcy discharge works to discharge all of your obligation to that creditor.  Say you owe the credit union on a personal loan and on a credit card.  Even if you listed only one of those loans, both would be discharged, because the creditor (the credit union) had notice.

Secured liens after bankruptcy

Focus

In preparing to file bankruptcy, spend your energy finding all the entities who might have a legal claim on you.

Don’t limit yourself to the creditors who send you a monthly bill.  Look for debts you’ve guaranteed for others, disputes with business partners or co owners, and even claims by governmental units.

Remember that your credit report does not include all of your creditors

.

It’s OK to estimate what you might owe, or to list an entity and dispute that you owe them anything.

If a creditor gets notice of your bankruptcy filing, they are bound by the resulting discharge.

In the end, it’s all about WHO knows.

More

Why so much paper in bankruptcy

How to interview a bankruptcy lawyer before you hire them

What should bankruptcy cost

Image courtesty of Rronenow and Wikimedia.

Knowing who you are for business bankruptcy

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You wouldn’t think the word “you” would be so challenging.

While knowing who you are may be central to philosophy and mental health, you wouldn’t think it poses a difficult question in a business bankruptcy.

Yet, small business owners find it hard to separate themselves from the business, even when that business is incorporated.

After all, the owner’s financial livelihood rises and falls with the success of the corporation’s business.

Twice in the past two days, I had occasion to point out to clients who own small corporations that when the bankruptcy trustee says “you”, the trustee is talking about you, the individual, not the business that you have been immersed in.

But the distinction is important.   In the law, the corporation that owns the business is a separate legal “person” from the flesh and blood human being who owns the stock in the corporation and serves as its officer and director.

The debts of the corporation are not necessarily the debts of the shareholder. The corporation can file bankruptcy without the shareholder, and conversely, the shareholder can file bankruptcy without impacting the day to day operations of the corporation.

In analyzing a bankruptcy filing or answering questions from a bankruptcy lawyer or bankruptcy trustee, make sure you know who you are.

More about struggling businesses

Individual bankruptcy and business debts

Is it safe to file corporate bankruptcy

The unexpected benefits of incorporating

When your business needs to wind down

 

More on business bankruptcy on Bankruptcy in Brief.

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 on 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

Bankruptcy as a life changing event

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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

Highlighted Tax Tips For Final Week To File Returns

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tax returnsWe talk a lot about taxes here on the Soapbox.  That may seem a strange thing  for a bankruptcy law firm to highlight.

But it’s not strange when you realize that taxes are the cause of many of our clients’ financial problems.

October 15 is barreling down on us, the last day to file a timely tax return if you are on extension.

Here’s a sampler of how we see tax issues, along with tips to stay out of tax trouble.

File the return even if you can’t pay

Taxes remain collectible forever if you don’t file a return.  File the return and you start the clock ticking on the collection statute of limitations.  Discharge of taxes in bankruptcy is only possible when the returns are filed and a couple of years have passed.

debt settlementCalculate the tax so you aren’t short for this tax year

If you are worried about what you owe for last tax year, you’re probably in trouble for the current year, too.  Unless you’ve readjusted your withholding, you’re mired in a cycle of tax debt.  Figure out how much you’re short for the return coming due, and increase your withholding over the next six months so you’re even come next tax year.

 

Claim your right to exclude cancellation of debt income

Uncle Sam wants you to pay tax on money you never saw if your debt was forgiven during the tax year.  You have a 1099 that says so.  Only the tax form isn’t conclusive.  Find out when you can exclude that phantom income from your return.

Dealing with the flat wrong 1099

Most of the entities that issue tax forms for cancellation of debt have no stake in the outcome.  They have a legal obligation and they spit out a piece of paper to meet that obligation.  Here’s what to do if the 1099 is wrong.

 

tax deductions bankruptcyFind the tax deductions in your Chapter 13 payments

Chapter 13 often pay expenses that are deductible on your tax return, but you get no 1098 showing you paid.  We have a guide for flushing out the deductible expenses from the trustee’s records so you can claim every deduction you’re entitled to.

 

late tax returnsStop making quarterly tax payments

The self employed and gigsters don’t have withholding from their paychecks.  They’re expected to estimate their current year taxes and pay every three months.  And there lies the path to tax trouble.  Stop making quarterly payments:  we have a better idea.

 

 

Get Tax Credit For Mortgage Interest Paid In Bankruptcy

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MORTAGE INTEREST DEDUCTION

Is your Chapter 13 plan  paying back mortgage payments that were delinquent when you filed bankruptcy?

If so, a tax deduction lurks, unclaimed, in the trustee’s records.

Track down that tax deduction and you reduce your federal income tax burden.

But it’s difficult because, for reasons I have not been able to figure out, the lenders don’t send IRS form 1098’s to either you or the trustee for mortgage interest paid through the plan.

So you don’t have proof that mortgage interest was paid, and neither does the IRS.

But, we can fix that.  I recently had occasion to walk a client through the process of figuring out the mortgage interest paid by the trustee.

I’ll retrace my steps and you can see how I figured out that he’d paid some $50,000 in mortgage interest  over the years of his plan that he hadn’t yet claimed on his taxes.

1.  Find the interest element in the lender’s proof of claim.

To be paid through a Chapter 13 plan, the lender must file a proof of claim on official form B410.  The mortgage attachment to that form, B410A has a line in Part 2 for “interest due”.

That line shows us what part of the missed payments, as of the filing of the bankruptcy case, was made up of mortgage interest.

2.  Calculate what percentage of the arrears is mortgage interest.

Part 3 of the mortgage attachment form breaks out the elements in the lender’s claim in the bankruptcy.  We need to know what fraction of the total claim the trustee will be paying is interest.

Take the “interest due” amount you located in Step 1 and divide it by the total at the foot of Part 3.

That’s the percentage of the total claim of the lender that’s interest.

3.  Access the Chapter 13 trustee’s site for payments to mortgage creditor

Chapter 13 trustees use different software to account for their operations.  You should have received information at the beginning of your case on accessing information about your payments and the trustee’s disbursements.

If you need help with the trustee’s web site, call the trustee’s office for help.

On the trustee’s site for your case, find the claim filed by the mortgage lender.  There should be a list of the date and amount of each payment made to the creditor on account of your mortgage arrears.

Total the payments for the last calendar year and multiple that total by the percentage of the claim that is interest, from Step 2 above.

Bingo! you have the number that represents what the trustee paid your creditor in mortgage interest for that calendar year.

Tax accounting rough and dirty

Your figure for mortgage interest paid in a year is an approximation.  By the end of the plan, the amount of interest paid will equal the amounts you’ve calculated this way.

The creditor may have applied it to your account differently.  Mortgage loan servicing is so erratic and inaccurate these days that it’s hard to tell.

If this calculation is off, it probably underestimates the amount of interest in the early payments from the trustee.  Most mortgages require the lender to apply payments first to interest, then to principal, then to expenses.  My experience is that they seldom follow the rules.

If anyone objects to your calculation, make them propose a better one.  Or make the recipient of the mortgage interest account for it in the usual way.

Save your work

Outside of bankruptcy, the lender would send you and the IRS a copy of their report on Form 1098 for mortgage interest you paid during the tax year.

We’ve done this sleuthing because they didn’t tell either the IRS or you what you paid in mortgage interest.

So, you may have to show the IRS how you got to a deduction that doesn’t appear in their records.

Print or save to pdf each of the documents you used to make your calculation.  You want to be able to support the deduction if challenged.

Another path to tax deduction

Alternatively, you could use the Request for Information process found in RESPA to ask the servicer of your loan how much interest you paid in a calendar year.

Servicers are required to provide answers about loan servicing within 30 business days of your request.  Requests must be in writing and contain identifying information.  More on how to make a Request for Information.

When tax professionals aren’t busy, see about amending prior returns.

Amend earlier returns

Federal tax law allows you to amend tax returns for three years from filing.  There’s an IRS publication for amending returns.

You can calculate what you paid through the Chapter 13 plan for prior tax years and amend those returns to claim this deduction.

Gather your calculator and get on the trail of these illusive, but valuable, mortgage interest deductions.

$7000 Off The Price Of The Car In Chapter 13

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When the client finally got me a copy of the car finance contract, it saved them $7000 on the price of the car.

They’d tried just giving me the monthly statement.

But that statement on the car loan didn’t show the bombshell that I found when I finally examined the contract:

Included in the loan for the new car was the unpaid balance on their old trade in!

In bankruptcy-speak, that’s negative equity, and negative equity isn’t entitled to payment in full in Chapter 13.

So we can reduce what they  pay for the car by the $7000  of the loan that paid off the trade-in.  It really was worth the effort to find the contract.

Sleuthing in bankruptcy

I know, the amount of paper a diligent bankruptcy lawyer wants from you is daunting.

There’s loan documents, deeds, IRA statements, bank balances, insurance policies, pay stubs, and tax returns.

It can seem overwhelming and sometimes pointless.  I get it.

Some of what we’re gathering is defensive:  to show that the information in your bankruptcy schedules is correct.  After all, disclosure is the price of getting a bankruptcy discharge.

But some of the paper we need supports our offense:  having found the portion of the car loan that related to the trade in rather than the new car, we can slice $7000 off of the debt.

Same thing about getting payroll tax returns.  Not everything a small-business employer owes the IRS is a must-pay.  But we’ve got to get the right paper to figure that out.

Just believe that we are asking for documents for a real reason.  Like reducing the loan by $7000.

Car loans in bankruptcy

The auto side of this story is worth the telling, too.  The ability to manipulate car loans is one of the appealing features of Chapter 13.

Only purchase-money:  After the 2005 bankruptcy amendments, car lenders got a windfall on cars purchased in the three years, more or less, before the bankruptcy.  “Reform” entitled car lenders to more than their collateral was worth. (The lenders had a bigger lobbying budget than consumers when the law was passed).

But the 9th Circuit judges have held that the negative-equity part of a car finance transaction isn’t part of the purchase money loan.  Thus we can strip out the  payoff of the trade-in from the loan balance that must be paid.

Likewise, a debtor can reject gap insurance, maintenance contracts and other add-ons that aren’t part of the value of the car itself.

Interest rate changes:  Regardless of when a car loan was made, Chapter 13 can alter the interest rate that the lender gets on the loan through Chapter 13.  So the 10-15% car loan may pay something closer to 4-5% under the Chapter 13 plan.

Term extended:  A Chapter 13 plan can extend the remaining term of a car loan to match the length of the bankruptcy case.  Spread over more months, the monthly bite of a car loan in your budget can be reduced.

And that’s just a part of the reason that I love Chapter 13.

More

Car loans in Chapter 7

Expert tips on buying a car

Speak fluent bankruptcy

 

Do California Seniors Need to File Bankruptcy?

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Rocking chair on the deck - Antigua, Mar 2010California, it turns out, is a great place to retire.

Not because of the cost of living, certainly.  In spite of the cost of living.

Because California exemptions are very generous to those of retirement age.

Those exemptions effectively make many indebted seniors collection-proof.

How exemptions protect seniors

Exemption laws come from the idea that, even if you owe money to creditors, a certain level of income and assets are protected from collection.

  • If you earn a wage, California law caps the amount of your wages that can be garnished at 25% of your after tax paycheck.
  • Pension income cannot be levied, before or after it’s paid to a retiree.
  • IRA’s are exempt to the extent necessary for support
  • The California homestead is $175,000 for individuals over 65
  • Social Security is exempt everywhere

It’s not hard to see that a California senior with home and retirement income might have nothing that a creditor with a judgment could reach.

That doesn’t mean that creditors will stop trying to collect.  They can bug a retiree, using shame, fear, and annoyance to get them to voluntarily pay a debt they owe.

But there may be no way for the creditor to compel payment of its claim at the present.

Is bankruptcy necessary

So, one of my tests for do you need to file bankruptcy  looks at whether bankruptcy would allow you to keep something that you might otherwise lose to a creditor who gets a judgment against you.

If the answer is yes, bankruptcy may be appropriate.

If the answer is no, it may be different.  If that creditor-with-a-judgment can’t tap your bank account or intercept your pension check, functionally, bankruptcy doesn’t make your situation any better.

You’re safe from your creditors.

Is bankruptcy helpful

But life isn’t all about money.  Peace of mind has a value not measured in dollars and cents.

For some seniors, the fact that they owe money they can’t pay is a source of stress.  Even when they know that the pushy, threatening collector can’t take anything from them, they lose sleep and emotional security.

Bankruptcy might have a benefit to those stressed out seniors, not because it’s necessary to preserve their assets, but because it’s necessary to for their peace of mind.

Bankruptcy and the next generation

Lots of elders are intent on leaving something financial to their heirs.

I hear it repeatedly from those getting along in age:  they want to leave their home to their kids.  They want to keep paying on a life insurance policy, even though no one is dependent on them for their care.  They are stretching themselves financially to give some value to their heirs.

Here’s where bankruptcy makes it possible to leave an inheritance to the next generation.

The exemptions that are available in bankruptcy are not available to a probate estate.  Probate will protect the homestead if there is a surviving spouse.  No surviving spouse who  needs the home to live in, and the home may be sold to pay the elder’s debts before anything goes to the offspring.

Most revocable trusts direct the successor trustee to pay the debts of the person who has passed away before distributing the trust estate to the beneficiaries.

Neither probate nor revocable trusts make it possible to avoid judgment liens that attach to homes.  Bankruptcy does.

So, by eliminating debts and perhaps liens as well, a senior intent on leaving a financial legacy to their survivors maximizes their gift by wiping out their debts during their life time.

Not a bad thing, perhaps.

More

Passing a home to kids without probate or risk

Image courtesy of Ed Yourdon and Flickr.

What To Disclose In Bankruptcy Papers

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gecko-wikimedia-cropped.If the headline drew you in, like the Geico gecko, you can complain you’ve been duped.

In bankruptcy, you disclose everything. Period.

Disclosure is the price of the bankruptcy discharge.

Shortchange the system by leaving out inconvenient facts and you risk both the omitted asset and the discharge.

Understand the difference between discharge and dismissal.

A false oath on the bankruptcy papers or transfers intended to conceal assets from creditors are each grounds on which the discharge of all of your debts can be denied, while the trustee recovers and sells the assets.

It’s nasty and comes at a very high price.

Tell the whole truth

The reason for incomplete bankruptcy schedules is seldom an intention to conceal.  It’s the filer’s failure to take disclosure seriously.

People ready to file bankruptcy don’t want to read the questionnaire that prompts them for various kinds of assets they might have. They don’t commit to thinking about how this question might apply to their situation.

Or they assume because an asset has little market value, it’s excluded from the schedules.

Not so. The schedules don’t ask for your significant assets or things you have with value;  they ask that you list what you own.

You would not believe the number of clients whose completed questionnaires tell me they have no clothes.323171462_9528e70afa_z_opt

Yet I’ve never met with a naked client.  They just perform some sort of mental shortcut when we ask about what they own.

Transparent assets

The hardest kind of things for laypeople to “see” as assets are those that are just legal rights, or even, possible legal rights:

  • the worker’s compensation claim,
  • the claim against the landlord,
  • the participation in a class action.

All of those are assets that need to be listed.

Often a trustee will elect not to administer even non exempt assets, because the effort to pursue them is too great compared to the possible return.

But even if the trustee were to administer the claim for the benefit of creditors, the loss to the debtor is usually far less than the value of the discharge of debts  you get  in bankruptcy.

More

What your signature on your bankruptcy papers says about you

Your court appearance in bankruptcy

Who you need to pay after bankruptcy

Image courtesy of Wikimedia and Frank Wouters.

Woman without clothes:  Gisela Glardino and Flickr

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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