Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Six Tips For A Worry-Free Bankruptcy

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question-556104_1280Your bankruptcy case is filed.

But what happens after your bankruptcy is filed?

After you’ve assembled all the paper, after you’ve answered endless lawyer questions, and after you’ve filed all the bankruptcy schedules in your case with the court, what do you need to do now?

Actually, relatively little happens after you’ve filed your bankruptcy.  The heavy lifting is done.

But for a successful outcome to your case, you need to stay engaged.  Bankruptcy is not the kind of law you just hand to your lawyer and bow out.

Here’s what you need to do to as a member of your bankruptcy team.

1.  Open your mail

Read what the court and I send you.  I sent you a copy so you can see what is going on and what I have done on your behalf.

Much of a bankruptcy case plays out in paper generated by my office and the court.  Stay up on the latest.

Make arrangements to appear at the first meeting of creditors.

2.  Review what you have signed

It takes a lot of paper to file a bankruptcy case and you undoubtedly signed lots of schedules.

Go back and review what you signed.  Read the question and your answer.  Is your answer true and complete?

Point out any errors or omissions. Innocent mistakes that the debtor identifies and corrects are seldom a problem in a case.

Mistakes are common and harmless if fixed.

3.  Keep me posted

I need to know about major events in your life: have you moved, changed jobs, become entitled to an inheritance, gotten too sick to work for a while.

Each of these things bears on bankruptcy issues.

4.  Ask me questions

Let me know about things you don’t understand. I can’t tell that you are confused unless you tell me.

There is no reason you should understand bankruptcy the first time through. I’m still seeing subltities in the law after three decades of doing this.

So let me know when you are lost.

At bottom, there are decisions in a bankruptcy case that only the client can make, so you have to have some understanding of the issue to make a good decision.

5.  Respond promptly

When I ask for documents or information, please move quickly.

A bankruptcy case moves on a short timeline and delay can be harmful.

6.  Don’t fret unnecessarily.

Bankruptcy may be new and strange to you, but my staff and I are experienced. Most bankruptcies are routine.

There is no reason to lay awake nights terrified of some horror you’ve dreamed up. If it worries you, ask me about it.

There is more on the statutory duties of a debtor on Bankruptcy in Brief.

More

Going to court in your bankruptcy

Creditors you must pay after bankruptcy

Are discharged debts gone forever?

Bankruptcy terms you need to know

Image courtesy of Pixabay and Geralt.

Who To Pay After Bankruptcy

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bills after bankruptcy

You’ve filed bankruptcy.

Your creditors are stayed.

A bankruptcy discharge is ahead.

You’re out from under unrelenting pressure to pay creditors.

But don’t let your sense of relief keep you from planning:  who should you pay now that you’re in bankruptcy?

Paying bills after filing bankruptcy

Two legal realities drive who needs to be paid going forward:

  1.   Not all debts are discharged in bankruptcy
  2.   Liens survive bankruptcy, unless there’s a court order otherwise.

Is this debt discharged?

The scope of the bankruptcy discharge is different in Chapter 7 and Chapter 13.

The list of exceptions to discharge that apply in Chapter 7 is longer.  Chapter 13 discharges more debts, but the discharge isn’t effective until the last plan payment is made.

Child and spousal support are not dischargeable in any chapter of bankruptcy.  To the extent not paid in the case, your obligation for delinquent and future support continues.

Student loans are the other blockbuster debts that survive a discharge in either 7 or 13.

Recent taxes are the third common debt excluded from the discharge.

Is the debt secured by a lien?

The discharge wipes out your personal liability for dischargeable debts.  But any lien associated with the debt survives as a charge on property you owned before filing.

So, you need to decide whether this is an asset 1) you want to keep, and 2) is the creditor likely to enforce the lien if you don’t pay?

If you are surrendering real property or a car you can’t really afford, don’t pay because you don’t intend to retain the asset.  If it’s a tax lien that attaches only to your household goods, it’s probably safe to not pay.  The IRS isn’t interested in your dirty socks.

However, if it’s your home or the car that gets you to work every day, then you want to stay current or get current, lest the creditor enforce the lien.

More money, less information

One of the exceptionally frustrating things about filing bankruptcy is that even when you want to keep paying on your home or your car, the creditor doesn’t send a statement so you know when and how much to pay.

While I rail about the insanity of the situation, the creditor who stops sending statements is generally just playing it safe.  Send a statement and you can be accused of violating the automatic stay or the discharge injunction.

Ask the creditor to send statements.  Ask your bankruptcy attorney to get court permission for the sending of statements.

And even if the creditor doesn’t make it easy, be persistent.  You care about keeping your stuff far more than the creditor cares about your convenience.

Most banks terminate automatic payment arrangements or even access to online banking when you file.  Make sure that you are watching your accounts and monitor whether things you want paid are getting paid.

Make and keep a record of having paid;  creditors are notorious for misapplying or not applying payments.

Being “in bankruptcy”

If you filed Chapter 7, I gotta tell you :  there’s no “there there” in bankruptcy.  Chapter 7 is more like an event than like a place.

You file your case:  it affects those you owe when you file, and encompasses what you own at the moment when you file.

There are a couple more steps to take between filing and getting your discharge.  You must appear at the first meeting of creditors; cooperate with the trustee in your case; and complete debtor education.

The trustee may be the nominal owner of your assets until your exemptions become final.  But most Chapter 7 cases are no asset cases where the trustee never takes possession of a single asset.

And whatever you earn after the day on which you file is yours to spend however you choose.

For the vast majority of debtors, life is largely unaltered by filing.  You aren’t really “in” anything.

So, you are both free to, and expected to, continue to make payments on secured debts where you’re keeping the collateral.  If you need to reaffirm a car loan, one of the first questions the judge often asks is whether you are current on payments.  If you want the judge’s approval of the reaffirmation, your answer needs to be “yes”.

You likely want to keep making payments on support obligations and student loans.  If you have taxes that will survive the bankruptcy, nothing prevents you from making payments that chip away at the non dischargeable taxes.

Paying in Chapter 13

Who to pay in Chapter 13 is more complicated.  You start by reading and understanding the plan that you have filed in your case.

It will tell you whether you pay your mortgage directly yourself or pay it through the Chapter 13 trustee.

If you’re in doubt, ask your attorney.

Nothing good happens when you ignore your plan

I’ve encountered more than a couple of Chapter 13 debtors recently who didn’t understand how the mortgage was to be paid, going forward.  A couple of others assumed that in the absence of monthly statements, it was being taken care of.

Not so.

Unless, of course, your plan provides for stripping off a lien.  If a lien is stripped, at best that creditor is treated as a general unsecured creditor.

If in doubt, ask your attorney.

Your plan undoubtedly provides for payment by the trustee of any amounts you owe for taxes as of the filing of your case.  ‘

But your plan deals only with tax years that are complete when you file.  You are expected to pay directly and in full any taxes that come due in the year in which you file your case and years after.

Using taxes to pass the means test

Failure to stay current on taxes is grounds for dismissal of your Chapter 13 case, even if your payments to the trustee are fully current.

Pay yourself after bankruptcy

For me, one of the most compelling reasons to file bankruptcy, even when there is no crisis, is to free up money to provide for your old age.

You do expect to live to a ripe old age, don’t you?

To age in comfort and independence, it requires money.  And Social Security won’t do it:  the average Social Security check is under $1300/month.

Start immediately after filing setting aside money from each paycheck.  Save before you pay anyone else, not after.

Empowering retirement savings is the unsung benefits of bankruptcy.

4 Rules For Testifying At Your Bankruptcy Hearing

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BusinesswomanGoing to court for your first meeting of creditors?

What are they going to ask me?, you wonder.

My bankruptcy clients imagine a quiz on the contents of their bankruptcy papers.

Or worse, an inquisition on why they needed to file bankruptcy.

That’s not likely.  The first meeting of creditors is much more likely to be a snooze.

Jay Fleischman set out a very comprehensive list of questions a Chapter 7 trustee might ask at your bankruptcy hearing.

Let me add my rules for answering those questions.

1.  Listen to the question

Just because you’ve read Jay’s list and think you know what’s coming, listen to the trustee’s question, all the way to the end.

First of all, it’s only polite.  Second, you want to make sure that you know what the trustee wants to know.

Your answer is being recorded.  You want to make sure you are answering the question that the trustee asked.

2.  Answer truthfully

Honest disclosure is the price of getting a bankruptcy discharge.  This is not the time to be cute or tell anything less than the truth.

You are answering under oath.  You are subject to the penalties of perjury if you are intentionally are less than honest.

3.  Be brief

Answer the question that the trustee has asked, truthfully, in as few words as possible.

Don’t explain, don’t justify, don’t ramble.

Just answer the question.

If the trustee needs to know more, he can ask a follow up question.

Usually, the trustee is just trying to make a record that he has done his job.

He has a list of cases he has complete.  Don’t make his day any longer by volunteering more than he wants to know.

4.  Don’t guess

If you don’t know the answer to a question, say so.  If the answer is honest, it’s perfectly OK.

Perhaps your counsel can help.  Maybe there are documents that provide the information.

Don’t pretend to a level of certainty if you don’t really know.

All’s well

If you’ve been diligent about getting your attorney all the requested information, chances are the first meeting of creditors will be the last, and you’ll be on your way to a fresh start.

More

How to review your bankruptcy papers

What happens to your car in bankruptcy

Who to pay after you’ve filed bankruptcy

Image:  © Innovated Captures – Fotolia.com

7 Essentials To Keep Your House In Chapter 13 Bankruptcy

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Saving your home ranks high on the list of reasons people file Chapter 13.

The automatic stay stops foreclosures; Chapter 13 gives you time to fix the problem.

Powerful stuff.

But the stay and more time alone isn’t enough to save the day if you run afoul of other rules, written and unwritten, about homeownership in Chapter 13.

So, here’s your manual for Keeping Your Home Through Bankruptcy.

Read your Chapter 13 plan

The basic premise of Chapter 13 is that you continue making payments on your home loan during the plan.  Typically, you make the payments that come due after you file, plus catch up on any missed payments via your payments to the Chapter 13 trustee.

In the Bay Area, debtors can choose direct payment or a conduit plan

Every Chapter 13 district does things a little differently  but they all treat post filing payments in one of two ways:  either the homeowner makes the payments directly to the mortgage servicer, just as if there were no bankruptcy.  Or, the on going payments are made to the Chapter 13 trustee, who in turn pays the mortgage servicer. (Those are called conduit payments.)

Make sure you know how it works in your district,  and when your first payment after filing bankruptcy is due.

Keep track of payments you make

Future disputes about whether you made payments directly to the servicer are virtually certain.  Arm yourself with a paper record.

You want your paper trail to be complete and retrievable.  Chances are, the servicer’s records won’t be as good.

I suggest clients pay by personal check (so you get a cancelled check) and transmit that payment by a means that gets you a receipt showing delivery.  With a receipt, you can monitor whether the servicer is promptly crediting your payment, as they are required to do.

Any automatic payments from your bank account or even your ability to pay electronically will undoubtedly be canceled by the servicer.

Compare monthly statements

A new federal rule requires servicers to continue sending you monthly mortgage statements.  That’s a welcome change.

More on the new mortgage statement format

The rule breaks out what is happening with your loan, both as to any pre-bankruptcy default and as to the post-filing payments.

Check out the statements to see if they are consistent, and save them for support in case there’s a dispute in the future.

Watch for payment changes

Your monthly payment on your home loan may change during the Chapter 13.  Escrow amounts for taxes or insurance may change; your loan may have an adjustable rate, or a time-limited interest only feature.

Bankruptcy rule 3002.1 now requires the servicer to give you advance notice of any change in the monthly payment you must make.  If you are in a conduit district, where the trustee makes the on-going payment, ask your attorney how increases in payments are handled.

The rule also requires the servicer to disclose any fees, expenses or charges that it adds to the loan balance during your case.  The disclosure must be made to you, your attorney and the court within 180 days of the expense being incurred.  You have the right to challenge the expense and have a hearing on whether it’s truly owed.

Pay your property taxes

Depending on your loan terms, you may pay property taxes directly to the local taxing authority.  Staying current on property taxes is a condition of being in good standing on your loan.

Know whether your property taxes are escrowed and thus included in your monthly payment, or whether you pay them directly.

Make it a habit to set aside 1/12th of your annual property taxes when you make your mortgage payment, so you don’t fall behind.

Avoid suffering a motion for relief from stay

The automatic stay is automatic, but it’s not necessarily forever.

If you fail to make required ongoing payments or fail to keep the property insured, the servicer can file a motion asking the court to lift the stay and allow it to foreclose.

More about motions for relief from the stay

Even if you manage to get a deal to cure any defaults, a motion to lift the stay will add to the lender’s attorneys fees, which they will want to collect from you.  And that’s on top of whatever you have to pay your own attorney to protect your property.

Don’t go there:  stay current.

Deduct the mortgage interest you pay

A large part of most mortgage payments is made up of interest on the loan balance.  That interest and any property taxes you pay to the lender are probably tax deductible.  But for reasons I can’t explain, servicers don’t give you a tax form 1098 showing the deductible payments you’ve made or the trustee has made on your behalf.

Follow our how-to on calculating your deduction and assembling the records to support your claimed deduction.  If you don’t do it, you can be sure the IRS won’t do it for you.

Reducing your income tax bill frees up money to make your plan payments.

Heads up and keep your house

This post bankruptcy to-do list isn’t complicated but it is important.  Armed with knowledge of the possible pitfalls, you can head off trouble and sail through Chapter 13.

More

Mistakes that crater Chapter 13 plans

If you can’t make your plan payments

Why discharge gets snatched away at plan’s end

How Chapter 13 Saves You Money

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chapter 13Why should I file Chapter 13  if I have to pay all my creditors in full?

Because, I said, even a 100% repayment plan under Chapter 13 saves you money.

This client had a fistful of equity in a home;  that equity made a Chapter 13 the required choice of chapter for the man.

But he struggled with finding the benefit of using Chapter 13 to manage his debt.

I never would have filed bankruptcy if I realized I had to pay everyone 100%.

So I fired up Excel and crunched numbers to quantify the answer to “why file“.  In this client’s case, the answer was $20,000. 

When asset value drives Chapter 13 payment

Chapter 13 saved $20,000 over 5 years when compared to paying all the creditors what they were owed outside of bankruptcy.

It’s all about the interest rate

At base, the $20,000 bankruptcy savings for this client flowed from the difference between the interest rate in bankruptcy compared to the interest rates on taxes and credit cards in the non-bankruptcy world.

When creditors are entitled to get interest on their claims in bankruptcy, the interest rate that applies is the federal judgment rate.  When I did this exercise, the federal interest rate was 2.35%.  Find today’s judgment rate.

By contrast, I assumed credit card interest rate of 23% and the IRS interest rate to be 6%.

13 crushes credit card debt

Paying the approximately $39,000 in credit cards in 5 years (the same duration as the Chapter 13 plan)  according to contract terms netted the credit card issuers $27,000 in interest!  The total cost to pay off those cards was roughly $69,000.

The cost to pay off the same $39,000 in cards in Chapter 13 was $2250 in interest and $4121 in Chapter 13 trustee commission (assuming the maximum allowed rate of 10% of dollars the trustee receives.)

So, which would you rather pay to keep your house and get rid of your credit cards:  $27,000 or $6365?

Point: Chapter 13

Taxes score a draw

The savings on paying off taxes through Chapter 13 was less dramatic.

We were looking at $46,000 in taxes, some priority, some older than that.  To pay them off outside of bankruptcy would run up about $7300 in interest.

Paying those same taxes in Chapter 13 incurred $2550 in interest. But when you added the trustee’s commission to the bankruptcy interest, the transaction costs essentially equaled the cost of paying the taxes outside of bankruptcy.

Point: neither side

Snoozing creditors lose

The unpredictable further savings may lie in creditor ineptitude.  That’s because only creditors who file a timely proof of claim in a bankruptcy case share in the payments.

In my experience, it’s the rare case when every creditor follows through and files a claim.

So my client will get a discharge of all his liability to creditors who don’t file claims, without paying them a cent.

Point: too soon to tell

Non economic benefits

Here, we looked only at the dollars and cents differences between paying everyone in bankruptcy or outside of bankruptcy.

Not visible in a spreadsheet is the reduced stress that Chapter 13 brings, by corralling all creditors in a single proceeding and having the law to back you up on the schedule on which they are paid.

Stress kills

Chapter 13 keeps you in control of your assets, protected by law, while you pay off what you owe.

 

 

 

 

Filling Out The Bankruptcy Papers

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Filing bankruptcy can make you feel like you are drowning in paper.

There’s your paper; there’s the paper your lawyer needs.  And there’s the paper the court insists on.

It’s easy to try to skate. To cut corners.  To shut down.

But that paper is critical.

Nearly every question, benefit, or dispute in an individual’s bankruptcy case starts with the bankruptcy papers.

Those papers are called the schedules.  The schedules form the heart of a bankruptcy case.  They lay out what the person filing the case owns, owes, and spends.

And most debtors (those who file bankruptcy) have little idea how much paper is involved til they see the schedules and sign them in their lawyer’s office.

Before they get to the signing, debtors chafe at the endless questions from their attorney about the nature of the debt, who is liable, and whether the debt is disputed.

Is all this effort really needed?

Bankruptcy schedules matter

Your schedules constitute  the trustee’s first look at you. Well-done schedules project engagement with the process and they tend to limit digging by the trustee.

The creditor schedules control who gets notice of your case and notice of the automatic stay.

Notice to all affected assures that anyone with a right to challenge the discharge of your debt to them is bound by the timelines of the Bankruptcy Code.

Creditors who don’t get notice may reopen the bankruptcy case later to assert that their debt isn’t dischargeable.

Omit assets and you may lose them, as case law limits your right to claim an exemption in an asset you didn’t disclose in the first place.

List it or lose it

Leave out a legal right or pending lawsuit and the defendant in that suit can have your lawsuit dismissed.

Then, there’s the matter of perjury:  the law provides for fines and imprisonment for deliberate untruths on the bankruptcy schedules.  Not something you want to expose yourself to.

What the schedules contain

Seen broadly, bankruptcy schedules list the debtor’s assets; debts; projected budget; and recent financial history.

Asset forms

Secured creditor form

Priority & unsecured creditor form

Since 2005, there’s a schedule for the means test.

You file proof of having taken prebankruptcy credit counseling and statement of your intentions with respect to debts secured by personal property, like your car.

Helping you get them right is part of the job of a bankruptcy attorney.

New bankruptcy forms

The courts are rolling out new versions of the bankruptcy forms which claim to be more “modern” and user friendly.

I find them verbose and impossible to scan easily to get the big picture in a bankruptcy filing.

The new forms read like tax forms and they suggest that you could competently file bankruptcy without a lawyer.  My experience is that, since 2005, it is the rare individual who can correctly file out the forms, much less understand the implications of those forms.

Enlist a professional to assess whether bankruptcy is right for you and whether now is the right time, before you file.  Afterward, it may be too late.

More

How to find the right bankruptcy lawyer

Understand exemptions

What debts don’t get wiped out

Image:  weatbix

The Most Powerful Debt Management Tool

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black box croppedThe 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.

  • letteropener_tobyotter_FlickrIf 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, that 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 facing 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.

You’ve got to open up the mail to know if you are at risk.

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.

More

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.

How Chapter 13 Cuts Car Loan Down To Size

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car in bankruptcy

Car lenders who make new car loans with an underwater trade-in will face the music in Chapter 13.

The Supreme Court declined to review a 9th Circuit decision that stripped car loans of their protected specially protected status in bankruptcy; as a result, Californians will continue to benefit from the debtor-friendly decision in Penrod, rising out of a San Francisco bankruptcy case.

The question in Penrod

At issue was whether the prohibition on cramming down the debt on a vehicle purchased within 910 days of a bankruptcy filing protected “negative equity” financed in the car purchase.

“Negative equity” is the debt in excess of the trade in’s value. That left-over debt is added to the total of the new car loan and is unrelated to the value of the purchased vehicle.

And BAPCPA, the bankruptcy “reform” act of 2005 prohibited reducing a secured claim on a vehicle purchased within 910 days of the bankruptcy.  But did it similarly protect that part of the loan that wasn’t really related to the cost of the vehicle purchased?

Penrod facts

In Penrod, the Redwood City resident had traded in a car worth $6,000 on which she owed $13,000.  The new car loan included $7000 necessary to pay off the debt on the trade in.

The legal issue is whether that left over debt should enjoy the projections extended car sellers in BAPCPA for purchase money loans on the debtor’s car.

Every other circuit that addressed the question has given purchase money protection to the entire debt including the negative equity portion of the new loan.

The 9th Circuit held the negative equity was not purchase money as to the current car.  The appeals court remanded the case for the bankruptcy court to figure out how to apportion the payments made before bankruptcy between the purchase money element and the leftover debt element.

It’s surprising to me that SCOTUS didn’t accept cert on Penrod, since there is clearly a split among the circuits and it seems to this California bankruptcy lawyer that the Supremes take great pleasure in overturning the 9th Circuit.

But I’ll take a victory however it presents itself and await a decision on how to calculate what can be trimmed from a debtor’s car loan in bankruptcy.

More

How Chapter 13 thwarts repossession

Keeping your car after Chapter 7

10 ways bankruptcy makes you better off

Image  Snackariah under a Creative Commons license

No Foreclosure If Loan Modification In Process

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foreclosure roofline 650 taberandrew

The cruelest trick played on homeowners trying to modify their mortgage was dual tracking.

One side of the bank assured the borrower that their loan modification application was being considered and they didn’t need to worry.

All the while, the other side of the bank was conducting a foreclosure sale.

The borrower wakes up to find that they are no longer homeowners.

No more.

New federal rules prohibit dual tracking

Mortgage lenders are now prohibited by federal law from conducting a foreclosure while a mortgage modification application is under consideration.

Regulation X – Real Estate Settlement Procedures Act

Before a foreclosure is begun, the lender or their servicer must take steps to let the borrower know what options exist to keep the house.  The mandated timeline creates a four month interval between delinquency and starting the foreclosure in which alternatives can be explored.

Live contact with borrower

Mortgage servicers must attempt to make live contact with borrowers who become delinquent within 36 days of the delinquency.  A voicemail message doesn’t cut it.  Reg. X §1024.39

The servicer must describe the kinds of loss mitigation options that are available and they must establish a single point of contact for the borrower with the servicer.  Reg. X § 1024.40

No foreclosure can be instituted until 120 days have passed from the first delinquency.  More importantly, if a complete loan modification application has been submitted to the the servicer by the 120 day point, no foreclosure can be begun.  Reg. X §1024.41

Last minute help

If the borrower misses the 120 day deadline for submitting a loan modification application, there’s still protection in the new rules.

If a loan mod application is made more than 37 days before the foreclosure sale, the servicer cannot conduct a foreclosure sale until it issues a decision on the application.

The new rules deal with a myriad of variations on these timelines.  The theme in the rules is consistent:  federal law requires a decision on a loan modification application before the foreclosure train chugs down that track.

If the servicer breaks the rules

The new rules have teeth.

Borrowers who believe their servicer has failed to follow the rules can sue the servicer.  If you can prove your case, you can collect your actual damages as a result of the violation; your costs of suit; and your attorneys’ fees.

These regulations implement provisions of the Dodd Frank legislation; they became effective January 10, 2014.

Another arrow in homeowner’s quiver

These rules do not preempt other rights that homeowner’s have in this arena that give them greater rights.

Like any new law, we will have to see how they work over time.

While the rules don’t require servicers to modify loans, they do require servicers to refrain from foreclosing while a loan modification application is pending.

Image courtesy flickr and taberandrew.

Who Owns Your Business When You File Bankruptcy?

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business bankruptcy

The bankruptcy trustee’s question was straightforward (if inartful) yet the business owner nearly blew the answer.

The trustee asked:  are you the sole owner of your business?

When my client hesitated, she followed up:  are you a sole proprietor?

Focusing on the fact that he was the only person with an interest in the business, he said yes.

Wait a minute, was my response. That’s not so.

It took several minutes of sworn testimony at the first meeting of creditors to sort the matter out.

Who owns the corporate business

We were once again experiencing the phenomenon of the shape-shifting business owner.  The businessman had, in his mind, morphed into a sole proprietor rather than a stockholder.

The debtor was the sole owner of the corporation that owned and operated the failed business.

He was correct that no one else had an interest.  He skipped over the part that it was another legal entity, his corporation, that actually owned the assets and owed the debts of the business.

He owned the corporation that owned the business.

Why it matters

A sole proprietor owns a business as a personal asset.  In law, he owns the assets of the business and is liable for its debts.

A sole proprietorship has no legal existence separate from the owner.  The proprietorship may adopt a fictitious business name, but behind that dba is the individual who owns and operates the business.

So, if my client were a sole proprietor, the inventory of the business would have been an asset of the bankruptcy estate created when he filed bankruptcy.  The business bank accounts would fall to the control of the trustee.

When a corporation is created, it becomes a legal entity distinct from the individuals who own the shares in the corporation.  The corporation can have its own debts and its own funds that don’t belong directly to the shareholders.

That’s why business people incorporate:  to create a legal “person” that can take risks without exposing the shareholder’s other assets to that risk.

When my client filed his Chapter 7 case, his stock in the corporation was an asset of the bankruptcy estate, but not the business itself.  The business was owned and operated by the corporation.

Since the corporation had tons of debts, the stock that the bankruptcy trustee could administer had no net value.  That’s because, equity holders get money when a corporation liquidates only after creditors of the corporation have been paid off.

The takeaway

The first meeting of creditors in a bankruptcy case is the trustee’s opportunity to gather more information about what the debtor owns and owes.

Once you focus on what the trustee needs to get from the meeting, it’s easier to answer correctly and avoid the confusion that happened in my case.

When confusion ensues, it’s important to sort it out on the spot.

And that’s how I earned my keep in this case.

More

Rules for testifying at a bankruptcy hearing

How corporate officers can avoid personal liability

When a business needs to wind down

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

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