Blog - Northern California Bankruptcy Lawyer

The Most Powerful Debt Management Tool

By Cathy Moran

The most powerful debt management tool isn’t a software program.

It isn’t a website, nor a consulting firm.

It isn’t even a calculator.

The most powerful debt management tool is a letter opener.

If you don’t open the mail, you don’t really know where you stand with your creditors.
If you don’t open the mail, you don’t know that your lender has instituted foreclosure proceedings.
If you don’t open the mail, you don’t know that you’re overdrawn at the bank or over limit on your credit card.

Or, less threateningly, the lender has transferred the servicing of your loan.

You don’t know anything about your situation except that you are in trouble, if you don’t open the mail.

Now, there is another step: you need to read what’s in the envelope.

The envelope, please

I know confronting what you owe and your sense that there’s little you can do about it increases your stress.

But, the dunning letter or the lawsuit isn’t itself dangerous.

Creditors don’t lace their missives with ricin or anthrax. They need you alive to pay them! They hope, anyway.

What you’re trying to avoid by not opening the mail, or worse, tossing it out, is confronting your situation.

What you don’t know can hurt

Ignoring what’s in the mail can make the situation worse.

The only situation in which we throw people in jail for not paying their ordinary bills is when they’ve gotten a court order requiring their appearance and they ignore it.

My friend Jay Fleischman tells a marvelous story of a doctor and the doctor’s lawyers who didn’t open the mail nor read what was inside. Instead of collecting money from Jay’s client, they ended up paying Jay’s client $20,000 for ignoring the court-ordered bankruptcy stay.

Fight or flee

Whether the solution to your debt problems is a payment plan or a bankruptcy filing, you need to know who you owe money to and where they get their mail.

All that’s contained in your mail.

So, open the mail, know whether there’s a situation that requires your attention. Then if you want to put the opened mail in a shopping bag to bring to your bankruptcy attorney, that works.

Just don’t show up in my office, deep in debt, and not be able to tell me who to notify about your bankruptcy case.

How to weigh whether to file bankruptcy

How to interview a bankruptcy lawyer

The life-threatening cost of stress

Image of black box courtesy of Thierry Ehrmann and Flickr.

Image of letter opener courtesy of tobyotter and Flickr.

Does Marriage Make Me Liable For My Spouse’s Debts

By Cathy Moran

Countless times, a client announces that he won’t marry the love of his life until he’s fixed his debt problems.

Noble thought, but unnecessary in California. Even though we have a community property system of marital property.

His bride will not become liable for the debts he brings to the marriage.

If the newlyweds elect to have community property, then the community property is liable for the baggage he brings, but those debts will not follow his spouse.

Personal liability

A basic principle of law is that each person is only personally liable for debts they create: marriage does not automatically make the spouses liable for each others debts. An exception is debts for necessities of life.

In California, a marriage can be seen as comprising three entities (wouldn’t you know it in California):

husband,
wife, and
the community property.

California law assumes that assets acquired during marriage are community property. The entirety of the community property is liable for the debts of either spouse.

Under this system, then, if husband contracts a debt, husband’s creditor can reach both halves of the community property to satisfy that debt.

If the parties don’t have community property, as by reason of a pre nuptial agreement, then the creditor can reach only the husband’s earnings and assets for debts he incurs.

If the spouses divorce, the community is terminated. Once the community property is divided in the divorce, that former community property becomes the separate property of the recipient spouse.

Bringing debts to the marriage

Because community property is liable for the debts incurred by both spouses, before and after they marry, those debts can certainly impact the household finances.

Bankruptcy may be one way to wipe the slate clean. One spouse can file bankruptcy even during the marriage and get a discharge of that spouse’s debts. The community property is freed of claims against it for debts discharged in the bankruptcy.

Except for joint debt included in the bankruptcy case, one spouse’s bankruptcy filing doesn’t impact the other spouse’s credit record.

The other approach to an indebted spouse is to make an agreement, preferably before wedding, that limits or negates the acquisition of community property. That’s a prenuptial agreement.

A debt free spouse with a prenuptial agreement is insulated from loss of wages or property in their name to their spouse’s creditors.

More about community property in bankruptcy.

Smoke, Mirrors, And Budgets: Are You Missing Where Your Money Goes

By Cathy Moran

In honor of Financial Literacy month, we’re pulling out some vintage posts on financial basics.

I can’t save anything because it takes every dollar I make just to get by.

Sound like a description of your budget?

For some folks, that is absolutely true.

But for another slice of working folks, there’s some black magic budgeting going on that hides what’s really afoot.

These voodoo budgets look rational, but only on the surface. If there were two budget line items: 1) food, and 2) groceries, you’d see the duplication.

But what often happens is more subtle. Meet the twins of budget self deceptions.

Budget Blunder #1: Electronic entertainment

Got cable? More than basic cable? Do you also budget for entertainment, eating out, vacations?

Whoa!

What is premium cable if not entertainment? You can probably say the same thing about data on smart phones.

These services make our days brighter. But the cost has to be counted against the same budget category as other non essential pleasures.

Somehow, smart phones and HBO have become, in our minds, utilities or basics, rather than embellishments. Once you count them as a given expense, then it’s easy to say, I have nothing left to save for the unexpected emergency or the absolutely expected old age.

Put digital diversion in the entertainment category when you lay out your budget. Putting like with like, you can assess whether the allocation of income makes sense.

Then you can ask whether you can get what you’d like for less, or, whether you’re paying for more than you use.

Budget Blunder #2: Credit card payments

Credit card debt service is the second twin in the world of smoke-and-mirrors budgeting.

Monthly payments on credit cards now rate their own line in most budgets. If you’re carrying a balance, some part of this month’s income is going to pay for last month’s spending.

But what did you buy with your credit card? It’s not as though those purchases are distinguishable from the rest of the categories in your budget.

You probably bought gas, clothes, movie tickets, meals out.

By creating a separate cubby in your mental budget for payments on your credit card, you’ve hidden some part of what you spend on transportation, clothes, and entertainment.

Cut through the smoke and mirrors

So, banish voodoo budgeting from your life.

Pull out your cable and wireless bills. Read through where you used your credit cards last month. Push those purchases into the right categories.

See if your spending is skewed in a way you didn’t see before.

Image courtesy of Theilr

Who Gets Grannie’s Cash – Grannie Or The Bankruptcy Trustee?

By Cathy Moran

Good intentions can go wrong in a hurry when there’s a joint bank account and a bankruptcy.

The bankruptcy trustee sees a pile of money in the bank to which the debtor has access, even though the account also bears the name of someone not in bankruptcy.

If the debtor can get the money, the trustee contends, so can a bankruptcy trustee for the benefit of creditors.

Well and good, if the money belongs to the debtor. But what if it’s really someone else’s money?

Do it yourself elder care

Who doesn’t have a joint bank account with someone they care about?

Most often, it’s the adult child’s name on an elder’s bank account. It’s simple, convenient, and reassuring that if the elder loses capacity, a trusted party has access to pay the elder’s bills.

But if the trusted party loses a lawsuit, or files bankruptcy, all bets are off. The elder’s money in a joint account looks like money that belongs to the child.

And the elder’s funds are at risk of being seized to pay someone else’s debts.

Who gets the cash?

The answer lies in state law, since state law determines what the debtor owns, while bankruptcy law determines what happens to that property.

In California, the answer lies in Probate Code 5100 and the statutes following.

“[a]n account belongs, during the lifetime of all parties, to the parties in proportion to the net

contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.” (Cal Probate Code, § 5301, subd. (a))1

“In the absence of proof otherwise” the net contribution of each of the parties is deemed to be an equal

amount. § 5134, subd. (b)(2).

That’s a vast improvement over the prior law that presumed that the people named on the account owned the money equally.

California’s statute is based on the Uniform Probate Code, which drafts laws for adoption by the states to make law more uniform.

So, the result of the “joint account in bankruptcy” issue may be different in other states.

Avoid a fight with the trustee

More important than who wins a legal battle is the chance to skip the fight altogether.

Debtors need to disclose joint accounts to their attorneys. Don’t fall into the “it’s not my money” trap and keep quiet about it. As I said, that’s a trap.

Attorneys need to quiz their clients about such arrangements and get all the bank account statements. See what the situation will look like to the trustee.

Know what state law says on the subject.

Consider, if the money in fact is traceable to someone other than the debtor, having that person withdraw it from the joint account before filing.

Make it your goal not to have someone else’s money in an bank account to which the bankruptcy debtor has access.

All involved might consider use of a revocable trust as a vehicle for the elder to empower another to manage their money in the face of incapacity.

This post draws on the always-comprehensive observations of Oakland bankruptcy attorney Larry Szabo. Thanks, Larry, for your boundless willingness to share.

Image courtesy of Flickr & Duncan Hull

Fearmongering and The Decision to File Bankruptcy

By Cathy Moran

The unknown is often fearful.

My colleague Peter Orville wrote

It is natural to be afraid of doing something you’ve never done before, like filing for bankruptcy protection. This is especially true if you’ve heard stories about why you shouldn’t file bankruptcy.

Peter has it right. Some trepidation is natural.

My beef is that the fear of bankruptcy is promoted by those with something to gain by demonizing bankruptcy.

Fearmongers hope to profit

The stories about why you shouldn’t file are plants.

Not growing plants, but like planted evidence: something intended to trap, decoy, or lure, as criminals.

It’s the creditors, their cohorts, the credit scoring folks, and the debt settlement companies who want you to think that filing bankruptcy is the end of life as we know it.

You know why they do it?

Each of those sources profit if consumers are scared off from filing bankruptcy.

If they can keep you paying the debt, whether or not you can ever pay it off, or keep you scared enough to pay them to make it go away, they prosper.

No one sits in judgment

My charge to clients is that bankruptcy is not painful. Or at least, any pain you experience is self inflicted.

You can make yourself (or allow yourself) to feel as miserable and worthless as you choose to do so. No one associated with the courts, including trustees, is judgmental.

A debtor does not have to justify his choice of bankruptcy relief and does not have to prove he is “worthy” of a discharge. Eligibility for a discharge, even after bankruptcy reform, is presumed.

I have a perverse admiration for clients who have endured the pain and despair of financial distress for as long as most of them have before seeking me out.

But life does not have to be that way; bankruptcy is an honest and effective choice.

There is nothing to be afraid of.

How debt makes you stupid

What should bankruptcy cost

Credit reports heal

Chapter 13: Know Who Gets Paid First Under Your Plan

By Cathy Moran

Reality exists outside of television shows.

And when real-world reality hits some debtors, it’s a trainwreck.

It comes up for me when Chapter 13 clients and I sit down to write the plan for the case.

The plan will set out which classes of creditors get paid over the five year life of the plan.

Too often, my ever-optimistic client wants to keep all of his assets with secured debts AND pay off the must-pay back support or non dishchargeable taxes.

The Problem

Secured debts are things like car loans, home mortgages , and property taxes.

If you don’t pay a secured debt, the creditor has the right to take the asset that is the collateral.

Over optimism

So here’s the dilemma. It’s hard to decide to give up houses and cars. You’ve usually got some part of yourself invested in the choice.

Even if the car is a gas guzzler or the house burdened with a bad loan or too little value, it’s tempting to assume you can gut it out. Make up the back payments over five years and have something at the end.

When the collateral is a toy, a boat or bike, or a rental home, you spin yourself messages of entitlement or future appreciation.

You commit in your plan to pay both the secured claims and the priority claims within the five year limit of a chapter 13 plan.

You look at your budget and it works, barely. You can project enough money to do it all within five years.

Hit a bump

But then, mid plan, life intervenes. Your work hours are reduced. The car breaks down. A family member gets sick.

And all of a sudden, there isn’t enough money to make the plan payments that get you everything.

Worse, what you’ve paid into the plan has gone for things you didn’t have to pay for: the Harley, the underwater rental, the house that’s too expensive. The trustee’s order of distribution puts the debts that won’t go away behind the options you chose.

Depending on how significant the loss of income or increased expenses, you may be able to recover.

But maybe not.

Plan for the unexpected

When making choices at the beginning of a Chapter 13, don’t assume that everything in your financial life going forward will be uniformly stable or improving.

Where you will be if there is a major negative event in your life? Have you taken care of the most important debts first?

Or does the overly optimistic plan you propose have you continuing to live on the financial edge?

Image courtesy of Flickr and bwats2.

Bankruptcy and “Ruining your credit score”

By Cathy Moran

No matter how precarious their financial situation, almost every client I meet thinks bankruptcy will ruin their credit score.

Not only ruin it, but damage it for all time, precluding normal life after bankruptcy.

Some resolve to stagger along, burdened with their debt and the fear of escaping debt.

So, my encounter with a financial columnist was on point.

Liz Weston, L.A. Times financial writer, lead a room full of bankruptcy attorneys through the impact of various life events on one’s credit score.

She recounted how, after meeting some debtors as she worked on stories, she no longer saw debtors as deadbeats.

She saw the challenges in their lives and the soundness of electing bankruptcy. Her candor about the change in her world view was refreshing.

Having written a book on credit scoring, she naturally was caught up in the interface with bankruptcy.

But as one who is frustrated by the fixation of those drowning in debt on their credit score, I wanted to stand up and shout:

Ruin your credit score, not your life!

The financial media sounds a drum beat that one’s life and worth is wrapped up in that credit score. All the while, that score is something we don’t fully understand and is based on credit reports which are notoriously inaccurate.

Life will end, we’re told, if our credit score declines.

Poppycock!

That fear keeps American consumers struggling to pay debt that they can never repay, in this life or the next. In order to preserve their credit score, they appear resigned to a lifetime of minimum payments rather than a fresh start in bankruptcy

As Liz pointed out, the credit score is dynamic: it is constantly changing, and heals over time.

My call is to fix your balance sheet.

Get rid of dischargeable debts.
Save for retirement.
Live beneath your means.
Have some reserves.

Don’t walk the financial tightrope.

Image courtesy of terwilliger911,? pursuant to a Creative Commons license.

5 Things To Do When You Have Been Sued

By Cathy Moran

The ring on the doorbell was a process server.

Bingo! You’ve been sued.

Now what?

Breathe deeply and work your way through this five step check list. Then I’ll suggest some options.

Scout the territory

1. Look at the caption: It identifies the parties to the suit. It’s right below the centered name of the court involved. The Plaintiff is the person filing the suit: they have a comPLAINT for which they want the court’s help.

Do you recognize the plaintiff as one of your creditors? If you don’t recognize the plaintiff, does the complaint explain how the plaintiff comes to assert someone else’s claim against you?

2. Find any verification: Attached to the end of the complaint may be a verification. This is a sworn statement by someone with personal knowledge of the facts that the facts set out in the complaint are true. If there is no verification, you can file a simple form called a general denial if you want to contest the suit.

3. Mark your calendar: In California, you have 30 days from service of the complaint to file an answer. If you don’t file an answer, you are sure to lose the suit.

4. Check whether suit is timely: The statute of limitations in California is four years. The four-year clock begins tickling when there was last activity on the account, a purchase or a payment. If it’s been more than four years since you either paid or charged on a credit card, you can win the suit simply, if you file an answer.

5. Read the prayer: The prayer is at the end of the complaint, though maybe not the last page. Determine how much money is at stake, and whether there is any claim that you have committed fraud. The consequences of letting a fraud complaint go to judgment are much more serious than just a suit for money.

Plan of attack

Once you’ve taken those five steps to figure out who is suing you and what it takes to oppose the suit, you need to decide what to do.

Do nothing

If you do nothing, chances are real good that the plaintiff will ask the judge to enter your default, stating that you haven’t answered.

When you don’t answer a properly served complaint, the court system assumes you agree that you owe the money. Sooner or later, the court will enter a judgment against you.

Everything you need to know about judgments

A judgment entitles the creditor to use the power of the government to get its money. In the Golden State, it means the creditor can levy bank accounts, file a judgment lien, and garnish wages.

A judgment is enforceable for 10 years.

File an answer

If you contest the suit by answering, you at least slow the creditor’s march to getting a judgment. If you have a good defense, you may actually win.

The California court system provides information and resources for those representing themselves without a lawyer. But as the Alameda County court’s site says: You cannot come to Court and tell the judge that you are not a lawyer and do not understand what you are supposed to do.

If you are going to be your own lawyer, you are charged with knowing what a lawyer knows.

Filing an answer at least gives you a position from which you can negotiate a settlement. Consider whether you have any resources with which to fund a settlement. How is it possible to pay the debt now when you couldn’t pay before?

Find global debt solution

Whether or not you have a defense to this suit, the filing of a lawsuit should be a red flag for you.

Is this suit the tip of the iceberg?
Is this creditor just one of many who are poised to sue you?
Will a piecemeal approach to your debts really get you anywhere?

It may be time to see a financial counselor or a bankruptcy attorney. Even if you don’t expect to file a bankruptcy case, a bankruptcy lawyer deals with debt issues all the time and can help you assess your options.

Look at your calendar: you have 30 days in which to plot your course before you are at risk of having a judgment entered.

Make a plan, now, before the 30th day.

California protections from debt buyers

Wage garnishments in California

Are California judgments dischargeable in bankruptcy

Image courtesy of nles.com.

Bankruptcy No Place For DIY

By Cathy Moran

The do- it- yourself spirit seems especially strong in bankruptcy courts these days.

Only it often comes with a big price tag.

Nearly 45% of the Central District CA Chapter 7 cases were filed by individuals doing it themselves. The national rules committee drafted the new bankruptcy forms with the unrepresented in mind.

Why do people take such a momentous step as filing bankruptcy without an attorney?

They go it alone, without a lawyer, for three reasons:

They assume they can’t afford a lawyer.
They assume that there are no consequences for doing it badly.
They assume it’s “just filing out forms”.

All of these assumptions are wrong. But let’s look at the third assumption, that it’s “just filling out forms”.

What bankruptcy filing entails

Southern California bankruptcy lawyer Jay Fleischman outlined the steps in a bankruptcy case. Each of those decisions is one a pro per ( a person representing themselves in court) has to make to file their own bankruptcy case.

It’s a pretty daunting list.

You have to

decide if bankruptcy is the best choice;
choose a chapter;
list all your tangible and intangible assets and your property transfers
get the right credit counseling

An industry has sprung up to “serve” those bankruptcy filers who don’t want to do it entirely alone, but think they don’t need, or can’t afford a bankruptcy lawyer. They’re called petition preparers.

Enter the petition preparer

It takes no training or competence to hang out a shingle as a petition preparer. Anyone can call themselves a bankruptcy petition preparer.

A petition preparer is supposed to do nothing but type up the information provided by the debtor. They are not supposed to explain the forms or the choices those forms require. To do more than type is the unauthorized practice of law.

The wide spread harm that untrained preparers caused to their customers triggered special provisions in the 2005 bankruptcy “reform” law. At least now they have to disclose their involvement in drafting the bankruptcy schedules.

Special local rules limit what a preparer can charge and require that they identify themselves on the cases they handle or, more often, mishandle.

Sometimes, to avoid exposure, they coach their clients to lie about their involvement in the case.

Just for the record: lying in a bankruptcy case is never a good thing.

Exposed in public

So I get a really mixed feeling when a debtor appears at a 341 meeting in Oakland without a lawyer.

What happens when you go to court for bankruptcy

The trustees there ask the debtor to turn to Schedule C, read the code sections from the California Code of Civil Procedure beside each asset they’ve claimed exempt and tell him how they chose that exemption.

The trustee usually gets a blank stare or some confused stammering. The debtor has no idea how to answer.

Most people who have filed bankruptcy are scared to death about the first meeting of creditors anyway. But this question from the trustee is designed to flush out the fact that either, the debtor had “help” with their petition that wasn’t disclosed, or that the preparer did more than they are legally allowed to.

The preparer obviously told the debtor what exemption choices there were, and selected exemptions for the client.

This scene is particularly painful, since badly done exemptions may cause unrecoverable damage to the debtor.

While it’s the petition preparer who has broken the law, it’s the debtor who may pay for the bad advice.

My advice: confine your do-it-yourself inclinations to craft projects. Get competent legal help before filing bankruptcy.

Without a lawyer you may find you can’t get out of bankruptcy, no matter the cost of remaining.

Botch your bankruptcy and lose your house

Questions to ask a bankruptcy lawyer

What should bankruptcy cost

Should you wait to file bankruptcy

Image courtesy of Crisg and OpenClipArt

The Tax Deduction No One Tells You About

By Cathy Moran

Did you file Chapter 13 to save your house from foreclosure?

Making payments to the trustee to catch up on the mortgage?

If you haven’t claimed a tax deduction for the plan payments that go to the lender, you’re leaving money on the table.

That’s money that fattens Uncle Sam’s coffers at the expense of your own.

You don’t really want to do that, do you?

Mortgage interest deduction

If your Chapter 13 plan is getting you current on your home mortgage, the plan is funneling a part of each month’s Chapter 13 payment to the lender.

Missed mortgage payment are largely interest, unless you are years in to a fully amortized loan. So when your Chapter 13 plan proposes to get current on the loan through payments to the Chapter 13 plan, you’re proposing to pay the interest due.

The tax benefit in homeownership revolves around the fact that mortgage interest is deductible if you itemize your deductions. Interest paid reduces the income on which you pay tax.

And, you don’t forfeit that tax benefit when you file Chapter 13.

Yet, for reasons I cannot explain, mortgage lenders seem to have gotten a pass on the reporting requirements that govern non bankruptcy payment of interest. They don’t report to the IRS and to you, the ultimate payor, the interest paid through the bankruptcy plan by means of a 1098 form.

Find the deductible interest

To claim your deduction, you’ll have to dig a bit. All Chapter 13 trustees now have websites where you can access a report about distributions made to creditors by the trustee.

You may have to figure out whether the proof of claim for the mortgage loan was filed by the original lender or by the servicer, or sometimes by the trustee of the Wall Street trust that owns the note.

Step by step instructions to calculate mortgage interest paid by the trustee

The claim usually stands out because it will include the total balance owed on the loan.

Buried in that mass of numbers will be the amount paid to the mortgage lender.

Make sure to print out the reports that show the amount. Since the IRS didn’t get a copy of a 1098 showing payment of mortgage interest from the lender, you may have to back it up from your files.

Deadline to amend back returns looms

If you’ve been in your plan for several years, think not just about the return due soon. Consider amending earlier returns to claim the deduction, and get a refund of what you overpaid in taxes.

You get three years from when you filed the tax return to amend it. The IRS has a handy, dandy fact sheet on amending returns.

Don’t leave your money on the table for Uncle Sam. Claim that deduction.

Image courtesy of Flickr and TracyO

The envelope, please

What you don’t know can hurt

Fight or flee

More

Personal liability

Bringing debts to the marriage

Budget Blunder #1: Electronic entertainment

Budget Blunder #2: Credit card payments

Cut through the smoke and mirrors

Do it yourself elder care

Who gets the cash?

Avoid a fight with the trustee

Fearmongers hope to profit

No one sits in judgment

More

The Problem

Over optimism

Hit a bump

Plan for the unexpected

Scout the territory

Plan of attack

Do nothing

File an answer

Find global debt solution

More

What bankruptcy filing entails

Enter the petition preparer

Exposed in public

More

Mortgage interest deduction

Find the deductible interest

Deadline to amend back returns looms

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