Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

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

 

California Statute of Limitations Gets Teeth

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law has teeth

California law on debt collection finally has teeth.

Recent changes to California law say that a debt collector must allege that the statute of limitations has not run when it files a lawsuit.

No more suing on long-dead debt and winning unless the consumer files an answer and pleads the statute of limitations.

No more collectors relying on consumers being broke, scared, or ignorant of the legal facts about the timeliness of a lawsuit.

The timeliness of the lawsuit has gone from being matter of defense to an element of the cause of action.

Score one for consumers.

California statute of limitations on debt

The law on when you can sue someone on a contract, like a credit card, a medical bill, or a personal loan, lives in the Code of Civil Procedure.

AB 1526 added to the statute of limitations in § 337 the following:

(d) When the period in which an action must be commenced under this section has run, a person shall not bring suit or initiate an arbitration or other legal proceeding to collect the debt. The period in which an action may be commenced under this section shall only be extended pursuant to Section 360.

Before the 2019 change

Used to be, a creditor was free to sue on a debt, even if the creditor knew that the four year California statute of limitations was long past.

The burden to assert the statute was on the defendant to raise the statute as an affirmative defense.

An affirmative defense operates to say, in the pleadings, that even if everything you claim is true, you don’t win because….

As a result, the issue of whether a debt was too old to be enforced through the courts was seldom considered by the judge because the consumer-defendant never filed an answer.

If no answer is filed, the judge effectively never considers the merits of the lawsuit.  The system assumes that if a lawsuit is defective, the defendant being sued will answer and point it out.

But that’s not how most collection actions go.  The overwhelming number of collection actions go to judgment by default, because the defendant never spoke up.

New law in action

As of now, Spring 2020, there don’t seem to be reported cases applying the new rule.

Over time, it will be worth looking at whether the number of collection actions goes down.  That may be hard to discern if we hit a period of further economic distress.

More

What to do when you are sued

All about California judgments

Will bankruptcy wipe out a judgment

 

 

 

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

 

Free Bankruptcy Advice: Consider The Source

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big golden dollar symbol with apple. business success

Who gets their legal advice from their adversary?

My client did.

Get your legal advice from your adversary, your brother in law, or the internet and be prepared to get a surprise.  Often, not a pleasant surprise.

My client insisted that his tenant’s debt to him survived the tenant’s bankruptcy “because it was listed on Schedule G“.

The tenant had “explained” to my client that Schedule G was the list of debts the debtor didn’t seek to discharge.  So, my client continued, he was legally free to collect the back rent from the debtor after bankruptcy.

I had to explain it wasn’t so.

Schedule G is not a list of debts the debtor wants to continue paying on; it’s a list of executory contracts and unexpired leases.  The debtor’s obligation for each of those debts is discharged just as the debts listed on Schedule F.

How reaffirmation works

Reaffirmation is the only way that a dischargeable debt survives the discharge.  Reaffirmation requires a timely written agreement made after the bankruptcy is filed and approved by the bankruptcy judge.

None of that had happened in this case.

Law in the information age

The fund of information in our world is immense, and more accessible with the advent of the internet.

Not all of that information , however, is equally reliable.

The law is often complicated and dependent on the facts.  Information gets stale.  Not all bloggers know what they’re talking about.

I cringe when a client tells me that he’s “researched bankruptcy on the internet“.  Too often, the client’s full of misinformation complicated by erroneous assumptions.

I applaud the proactive consumer. Just take what you read on the internet with a grain of salt.  There’s a reason that lawyers go to school for three years before they can even take the bar exam.

If anything important to you rides on the information you seek, seek out a lawyer for some input.

Free legal advice can be really costly, and the cost of a lawyer to fix the situation is usually far greater than the cost of getting it right the first time.

More

Do it yourself bankruptcy

How to interview a lawyer

What should you pay a lawyer

Are you stuck with your current lawyer

Image:  ©VERSUS studio

Is It Too Late For Bankruptcy?

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file bankruptcy`You’ve put off considering bankruptcy, hoping to tough it out, or hoping for a miracle.

But at some point, time runs out:  you’ve been served with a lawsuit;  judgment has been entered against you; or even, a garnishment appears on your paycheck.

Is it too late? Have you’ve waited too long for bankruptcy to help?

While I don’t recommend procrastination,  at almost every stage of debt collection, bankruptcy can save your bacon, or at least what’s left of your bacon.

Served with a lawsuit

When a summons and complaint lands on your doorstep, the clock starts ticking on the time you have to file a written answer to the complaint.

Skip filing an answer and the outfit suing you wins whatever the complaint prays for.

Filing bankruptcy at this point stops the lawsuit in its tracks.  The automatic stay that comes, automatically(!), with the bankruptcy case forbids further action in that suit without express court permission.

Assuming the debt doesn’t involve dishonesty or family support, any liability you have on the debt is discharged at the end of your bankruptcy case.  End of story.

It’s not to late to file.

You lose a lawsuit

Once a judgment is entered against you, bankruptcy can still help. Just because a court has determined that you owe the money and the creditor is entitled to all the legal remedies to get its money, the debt may still be discharged in bankruptcy.

The kinds of debts that can’t be discharged are based on the nature of the debt, not where the debt is in the collection process.  Bankruptcy law says that you can’t escape your obligation to support your family or pay your recent taxes, or escape debts created by fraud or other serious dishonesty.  But garden variety credit cards, loans and medical bills can be discharged, even after there is a judgment entered for the debt.

Wait until judgment is entered and there are some consequences that might limit relief in bankruptcy.

Chapter 13 has limits on the amount of debt you can owe and qualify for Chapter 13.  Once a judgment is entered, the amount of the debt is fixed and it might put you over the debt limits.

Another limiting consequence of waiting til judgment is entered is that a finding by a court that you committed fraud or misrepresentation may require a bankruptcy court to make the same finding.  The debt may then be excluded from the discharge.

With those exceptions, it’s not too late to file bankruptcy if a judgment has been entered against you.

Creditor gets a judgment lien

Bankruptcy can change the balance of power even if you’ve waited til the creditor with a judgment has perfected a judgment lien against your assets.  How much change is possible depends on the exemptions available when you file bankruptcy.

One of the basic principles of bankruptcy is that the bankruptcy discharge eliminates your personal liability, but liens survive the bankruptcy attached to the assets you had when your filed.

But there’s hope:  you are permitted to avoid judgment liens that interfere with any exemptions you could claim in an asset.  It doesn’t matter how fresh, or how old, the lien is.  If it prevents you from getting the benefit of an exemption, you can avoid it.

Avoiding a lien requires filing a motion in your bankruptcy case.  It doesn’t happen automatically.  And if you forget to do it in your bankruptcy, you can reopen the bankruptcy case in the future to file the motion.

It’s not too late to discharge your personal liability for a judgment and eliminate the judgment lien as well in bankruptcy.

Your wages are garnished

By the time your wages are threatened with garnishment, your creditor has a judgment.  That judgment brings with it the power allowed by state law to collect that judgment.

But just like each scenario we’ve discussed here, a garnishment can be stopped by filing bankruptcy and getting the automatic stay in place.

Your creditor may be entitled to what ever wages you have earned between the time the garnishment was served on your employer and the day you file bankruptcy.  But gong forward, your wages are yours.

Garnishment survival guide

Bankruptcy law also lets you recover amounts your creditor got in the 90 days before you filed bankruptcy.  Wait longer than 90 days, and you lose the right to reclaim the garnished funds.

Bankruptcy stops garnishments.

Timing is up to you

At almost every point in a collection suit, filing bankruptcy can stop the bleeding and allow you to eliminate your debt.  The discharge makes that debt forever uncollectible from you and your assets.

There is some damage to your finances that bankruptcy can’t undo.  Borrow against your home or invade your retirement assets to pay bills that you ultimately discharge in bankruptcy, and you have no legal ways to get that money back.

If you’re facing debts you can’t pay, make a plan.  Early is better than late.

More

The advice you need before making changes

Spending money before you file bankruptcy

When it’s smart to wait to file

 

Image courtesy of Flickr and openDemocracy

Incorporating Your Business Has Surprise Benefit

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fence-145622_1280_optIncorporate to protect yourself from the debts of your  business, shriek the ads.

That’s the theory of incorporation:  create a separate legal entity in the form of the corporation.

Let that entity incur debt and expose itself to other risks.  If it fails, the personal holdings of the owners of the corporation are safe.

But, in the real world, most big ticket debts that a corporation might incur require the guarantee of the owner.

So if both corporation and owner are liable for the business debts, what has incorporation gained you?

You’ll be surprised.

Incorporate to protect the business

Consider the same move, incorporation,  for the opposite reason.

Incorporate to protect the business from the owner’s debts.

A sole proprietor and his business are one and the same in the law.

When the proprietor has a tax problem or there’s a judgment outstanding against him, all of the business cash and assets are exposed to that debt.

The business bank account can be levied for the owner’s back child support or a judgment against the owner for unpaid magazine subscriptions.

Most exemption laws found in state statutes protect some part of a wage earners salary.  The working man needs some part of his paycheck to put food on the table and gas in the car.

But a proprietor isn’t an employee of his business:  he and the business are one.

The debts of the businessman can put his business out of business.

Corporation immune to shareholder debts

It’s a different story if the business is owned and run by a corporation.

The corporation is a legal entity separate from the shareholder.  The shareholder’s creditors can’t take the corporation’s money to satisfy the owner’s debts.

As a shareholder, you don’t have to worry that your personal creditors will garnish the business’s account debtors to collect a personal debt.

The corporation can retain a reserve for its operation without regard to the claims of the shareholder’s creditors.

Get a job

Incorporating the business also allows the business owner to create a distinction between the money necessary to run the business and the money necessary to feed his family.   He can pay himself a salary, and leave the balance of the business assets in the corporation.

His salary is exposed to his debts, but not his livelihood.

State law provides exemptions that protect a portion of the wage earner’s salary from creditors, a protection that a sole proprietor doesn’t get.

So a creditor of the shareholder-employee can garnish the shareholder’s wages, but they only get a fraction of the total paycheck.  Exemption laws protect the balance of the earnings.

Knowledge workers and service businesses incorporate too

It’s not just brick and mortar businesses that can use protection from its owners.

Realtor and consultants who are not incorporated expose their business cash flow to their creditors.

Nothing is quite so devastating as having your clients served with legal process requiring them to pay the sheriff on your debts rather than paying you.  Or close a big transaction as a realtor and have the tax authorities levy your entire commission.

Incorporation is a powerful tool.  Its principal benefit is, however,  just the opposite of the conventional thinking.

Image courtesy of Wikimedia.

V Is For Value In Bankruptcy Alphabet

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Bankrutpcy Alphabet: V is for Value

 

The Letter V is for Value in my bankruptcy alphabet.

The value of one’s assets drives exemptions and the question of what you get to keep through bankruptcy.

The value of  your assets that are subject to liens also determines whether you can void liens on those assets.

I’m fond of saying that bankruptcy is a snapshot of what you own and what you owe on the day you file bankruptcy.  The workings of a bankruptcy case revolve around what your assets were worth on the day you filed bankruptcy.

It’s sometimes hard for families to realize (and write down on their bankruptcy schedules)  that the value of their personal property is very little, since value for these purposes is what you could sell the stuff in question for.  Particularly in today’s distressed economy, that may be a disappointing number.

What’s it worth

I have strange conversations with clients about the value of their assets.

Asked what their household goods are worth, they give me a substantial number.  Skeptical, I ask  “Could you sell them now for that?”.  “Oh, no,” comes the reply, “but that’s what they’re worth.”

Sorry to say, but the value of  assets in bankruptcy is what they can be sold for, today.

Value critical to exemption law

Many exemptions are capped at a certain dollar value.

In California, for instance, you can exempt $7,175 in jewelry, heirlooms and works of art. So the fact that things you bought for much more are saleable today for far less works in your favor if you want to keep the asset.

Your treasures are more likely to fit within the exemption at the lower value.

Another way a lower value at filing works in the client’s favor involves assets that are encumbered by voluntary or involuntary liens.  The lower the value of home, business, or timeshares, the greater the chance the debtor can strip off liens that don’t really attach to  equity in the asset.

A lien that is stripped off is gone forever, so you reap dividends into the future because of that lower value.

This valuable stuff  has been brought to you by the letter V.

V can also stand for Vehicles in bankruptcy and for Vesting,

More on value

Valuing homes and stripping mortgages

Cutting tax liens down to size

All about exemptions

Image courtesy of Leo Reynolds.

Get Annual Credit Report For Free

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free credit report bandWhen is FREE not FREE?

In a world seemingly driven in all matters by credit reports, getting that report for nothing ought to be a good thing,

But the commercial entities beat the federal government to the web address freecreditreport.com.

And they also got a better ad agency that wrote catchy tunes promoting their product, under the guise of free credit report.

But freecreditreport.com provides you a free credit report only if you surrender personal information, wait for it to come by snail-mail  and sign up for a monthly service billed to your credit card.

They bank on you not cancelling that subscription.

Cha ching!

It’s not really free.

Free credit report

The three big credit reporting agencies do provide a no-strings attached credit report  free to everyone, once a year.

Unfortunately, the URL doesn’t mention free, and doesn’t come with a catchy, banjo driven jingle;

Annualcreditreport.com

But it does provide simple, and free, access to your credit file.

The right to know

Federal law enacted in 2003 gives everyone the right to request a free credit report each year from each of the three national credit reporting agencies:  Experian, Equifax, and Transunion.

For nothing (that is: free) you can examine your credit report once every four months, if you request your free report sequentially from the CRA’s.

Repeat after me:  annualcreditreport.com.

What to do if you find errors

The Federal Trade Commission website walks you through how to challenge inaccurate information on your credit report.  They’ve even included a sample dispute letter.

ConsumerHelpCentral.com  sorts out your remedies if the CRA doesn’t correct the information.

Sing the chorus

Here’s the game plan:

  • Click on www.annualcreditreport.com
  • Order a copy of your report from one agency
  • Look for errors and inaccuracies
  • Challenge bad information
  • Mark your calendar for 4 months to order a report from one of the other national CRA’s

Then, how about I offer a free subscription to BankruptcySoapbox to the best jingle submitted for ANNUALCREDITREPORT.COM. 

I talk about credit after bankruptcy at Bankruptcy in Brief and what your credit report should show after bankruptcy discharge.

Bankruptcy Questions Have Few Quick Answers

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The caller to my law office kept telling my assistant: I just want to ask  Cathy a question.

To which my assistant replied:  you need to first fill out our questionnaire and make an appointment.

But I don’t want a meeting, I just want to ask a question.

At which point, both sides of the call are frustrated.

The caller thinks he has a reasonable request.  The law office isn’t getting through to the caller that a quick answer isn’t possible.

And that’s because:  there are no quick answers to bankruptcy questions.

Or rather, there are no reliable quick answers about bankruptcy.

Bankruptcy answers depend on your facts

To provide an answer that is any good, a bankruptcy lawyer needs to get a bunch of facts about your situation.

Have you filed bankruptcy before?

Did you get a discharge?

How long have you lived in this district?  Where did you live before?

What do you own?  What’s the form of title?

How much money do you make?  How many people do you support?

Do you owe taxes or child support?

The list goes on.

A quick answer is risky

Good lawyering is about applying the law to the client’s facts.  Without facts, my advice is likely useless.

Or worse, dangerous.

It’s dangerous to the caller, because the answer, without all the facts, may not be right.

It’s dangerous to the lawyer, who has a legal responsibility to you to provide competent advice.  Even if the advice is free and even if you don’t hire the lawyer to represent you.

The undisclosed facts may lead to an entirely different conclusion.  And I don’t know the facts until I’ve asked a BUNCH of questions.

If I get it wrong, you may be able to sue me.

Legal advice online

Why you don’t want a bankruptcy lawyer who’ll fight for you

The importance of the facts is why relying on the internet for legal advice hold huge dangers.

Post a question to an online forum, and you select the facts that you think are important.  Or as much of the facts as you are willing to disclose in public.

Those facts may not be the ones that are critical to the answer.  And even if you provide good facts about some aspect of your situation, other facts may counteract the result.

Use the internet to get some legal education about bankruptcy as a whole.  Learn the bankruptcy vocabulary.  Figure out what documents a lawyer will need to provide good advice.

But take no action until you’ve laid those facts before a competent bankruptcy lawyer and answered a bunch of questions.

More

Questions to ask a bankruptcy lawyer

Free bankruptcy advice

Considering bankruptcy

 

 

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

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