Considering Bankruptcy Archives - Northern California Bankruptcy Lawyer

Stupid Moves Before Seeing A Bankruptcy Lawyer

Don’t tidy up your financial affairs before consulting a bankruptcy lawyer.

Your current mess may present opportunities to plan your bankruptcy for a better outcome.

You may waste money or lose bankruptcy options when you make last minute changes to your situation without understanding how that situation plays out in bankruptcy.

You’ll have the widest set of options for a fresh start if your lawyer sees the situation as it is today.

What looks to you like complexity and disorder may look to your bankruptcy lawyer as opportunity and advantage.

The high cost of financial housecleaning

My heart sinks when a new client tells me that they’ve just paid off the loan their parents made them before seeing me.

Why your bankruptcy lawyer shouldn’t fight for you

Or borrowed against their retirement to fund debt management.

Or paid off the taxes so that all the remaining debt is credit cards.

For different reasons in each instance, those actions complicate a bankruptcy or squander assets that could have been saved in bankruptcy.

Payments to family

Paying off a loan from family seems instinctive.

We want to take care of those closest to us. Sometimes, paying off help from family is driven by the desire to hide a bankruptcy from them. Sometimes, it’s the desire to make sure they get whatever assets you have before you submit to the scrutiny of a bankruptcy trustee.

But more likely, paying off a debt to an insider (that’s bankruptcy lingo for close relatives, real or business related) hurts more than helps. The bankruptcy trustee in a Chapter 7 can sue insiders who get paid during the 12 months before the bankruptcy filing to recover the money.

The theory of recovering preferences is to make a fair distribution of your assets to all creditors, not just the ones you favor.

Often, the exemptions that are available in bankruptcy will allow you to keep more money than you expect. You can repay that debt to Mom after the filing, when it has no adverse consequences to Mom. The California grubstake (or wild card exemption) protects about $28,000 in any kind of property, in addition to other exemptions for specific kinds of property.

So, hold on to your checkbook, until we’ve talked.

Settlements before bankruptcy are wasted

The saddest thing I’ve seen recently was the family that soldiered through a five year debt settlement program before we met. They had paid tens of thousands of dollars to creditors, but didn’t realize that not all their debts were included in the plan.

We had to file bankruptcy for them despite their heroic efforts to pay their debts. They got no credit or advantage from the money they spent retiring credit cards while their property taxes and student loan debts fell into default.

The better situations are when clients ask if they should accept a settlement offer from a collector before filing. There, at least, I get to ask what benefit they get from paying that money, money that could otherwise go to funding an IRA or paying down student loans?

In general, your bankruptcy is no simpler or cheaper or less damaging if you have a few creditors as opposed to many creditors. If the situation requires bankruptcy, reducing the number of creditors or amount of the debt doesn’t benefit you at all.

Tax debt has its uses

While it isn’t generally thought to be a good thing to owe money to the tax collector, it may be an asset if your income is above the median for your state.

The means test is a formula that is supposed to weed out those families who make too much money to file Chapter 7. One of the ironies is that one of the allowed deductions in figuring whether you have too much income to file Chapter 7 is that you can deduct taxes you owe from the income.

It’s the same with mortgage arrearages and property taxes on your home.

These debts are useful deductions in getting a client into the bankruptcy chapter of their choice.

Pay it off before we meet and I have fewer tools to shape the means test.

Put down that broom

So, resist the temptation to clean up your finances before you meet with a bankruptcy lawyer. Don’t sweep debts under the carpet or out the door before you understand the bigger picture.

Make any advantageous changes in consultation with your lawyer.

What your lawyer can’t tell you

The secret alternative to bankruptcy

Cheat sheet for interviewing a bankruptcy lawyer

Image courtesy of Flickr and Spengy.

Credit Reports Heal

By Cathy Moran

Will filing bankruptcy hurt my credit? Probably.

Should that hit to your credit keep from filing bankruptcy? Not by a long shot.

Incredibly, I encounter people drowning in debt who think their credit report is more important than their financial health.

Their thinking seems to be that credit, once damaged, is never the same.

It’s not so.

A blow to your credit is not permanent nor even long lasting.

Your “credit”, or really, your worthiness for new credit, is almost a living, breathing thing. It can suffer a blow and recover.

Credit hit is like a cut

Whether you choose debt settlement, debt management or bankruptcy, the solution will damage your credit, in the short run.

Think of the damage like a wound.

The wound bleeds, it exposes the rest of your body to infection. It hurts.

Think of bankruptcy as antiseptic. Douse the wound with antiseptic to kill infection and promote healing and it hurts…but the hurt fades.

Over time, the wound closes and scabs over. It isn’t painful most of the time.

When it’s healed, there’s a bit of a scar.

Over time, even the scar fades.

Debt is chronic disease

When your debts are beyond paying off in the normal course, it’s like a disease you can’t beat. Persistent symptoms, sometimes progressively worse, other times just ever-present.

Debt saps your energy, consumes your thinking and limits your opportunities.

If your debts are such that you’ve considered bankruptcy, your credit worthiness is probably already compromised. Would any creditor lend you more money at a reasonable rate?

If not, your credit may not be doing you any good at present.

Your balance sheet is what counts

A credit report is a limited history. As time passes, the oldest history falls off the report to be replaced with the snapshot of today’s finances.

If you use bankruptcy to wipe away your old debts, your balance sheet (assets minus liabilities) improves on the spot.

The bankruptcy filing shows on your credit report, in the rear view mirror, for some time. But its significance to lenders fades the farther down the road you get from filing.

But with your old debts gone, even right after you file, you no long look like someone who already has as much debt as they can handle or more.

Take steps to get financially healthy and your credit will recover too.

Your right to credit reporting after bankruptcy

Tips for real estate loans after bankruptcy

Life after bankruptcy

Image courtesy of Flickr and RambergMedia Images under a Creative Commons license.

Rising From The Ashes Of Financial Disaster

By Cathy Moran

Life doesn’t end with bankruptcy.

Bankruptcy doesn’t mean that the good times are all in the past.

There’s the future, too.

Both the individual and society reap benefits from bankruptcy in ways that you may have missed.

So, in my view, Jay Fleichman’s analysis of the bankruptcy of Halsey Minor, the founder of CNET and once a very rich man, didn’t go far enough.

Win some, lose some, said Minor.

Jay added, Don’t lose sight of the benefits to the society that preceded Minor’s crash.

The good before the crash

Minor’s ideas and entrepreneurship created jobs, technology, and wealth.

And then the fruits of the first success soured. Minor’s subsequent ventures failed.

He filed Chapter 7 and tossed in the towel on this chapter of his business life.

The good to come

But that won’t be the end of the story nor the end of the benefits to the country as a whole.

I’ll bet dollars to doughnuts that Minor starts another business, invests in a success, or shares his knowledge with others, after the bankruptcy.

That, for me, is the priceless consequence of bankruptcy.

The person who has filed bankruptcy and discharged his debts is freed up from the shackles of a financial disaster. They don’t have to lurk in the underground economy, dodging creditors, hiding money, and laying low.

Their economic energy is liberated. We all benefit.

The possibility that someone won’t be able to pay their bills is built into the price of commercial products. It doesn’t come as a surprise to an astute manager that there will be some failures. ( Non commercial transactions like loans within families and personal injury suits don’t do so well in bankruptcy because they’re not market driven).

Business cycles, bad luck,or bad judgment can generate a personal financial crisis.

But like the Phoenix rising from the ashes of its own funeral pyre, bankruptcy debtors live to be be productive again.

Image in the public domain via Wikimedia.

Why File Bankruptcy? It’s Your Life Expectancy

By Cathy Moran

Old debt has a way of sucking the air out of today’s budget.

You can’t make repairs to your car or see to needed health care or accumulate an emergency cushion because you’re still paying for stuff you bought long ago.

Worse, old debt blights your old age.

Few of us have sufficient income to both pay off the old debts and set aside money for our old age.

It comes down to a choice, for many of my clients facing a budget that doesn’t work: pay the old debt over a long time or get a fresh start that enables saving for retirement.

Ditching the debt

As a culture, we are committed to keeping our personal promises to pay. Promises matter.

Clients find the thought of bankruptcy painful; they have usually worked very hard to make the minimum payments and feel profound responsible for repaying their debt.

“It’s my debt and I want to repay it,” is a frequent refrain.

My retort is: how much do you have saved for retirement?

All too often, the answer is “Nothing”.

I think the conclusion from that question and answer is obvious, and becomes more obvious the larger the debts and the older the speaker.

Time is short, life is uncertain, and old age is costly.

The choice comes down to: pay off debt as you promised, or provide for your old age.

How your choices add up

Assume that your credit card debt is $20,000, the interest rate on the card is 18%, and the minimum payment is 2.5%. (For most people meeting with a bankruptcy lawyer, both the total debt and the interest rate I’ve used here are low, but they’ll do for this exercise.)

Paying the minimum payment and adding nothing to the balance in the way of new purchases or penalty fees, it will take 37.5 years to pay the balance down to zero.

Interest over the life of the repayment period would be nearly $30,000 .

What you have at the end of 37 years is a warm glow of self satisfaction and a paid-off debt.

Fund your old age

If, instead, you made the same payments required to pay off that credit card (approximately $50,000) into retirement savings at 6% for 37 years, you would have $315,874 in cash to fund retirement.

So which would you rather have after 37 years of paying: nothing or $315,874?

I honor the instincts of the client who wants to repay their debts; I simply challenge the wisdom and feasibility of doing so.

Not all of my clients have 37 more years of working life. Few of them can expect a future free of job loss, ill health, divorce, or other bumps in their financial lives that may interrupt their ability to make the payment every month.

When bankruptcy law was changed in 2005 to make it more complicated and more expensive for consumers, there was lots of pontificating about average folks taking “personal responsibility” for their debts.

I suggest that perhaps taking “personal responsibility” means saving to be financially self sustaining at the end of one’s working life.

Your house as your retirement fund

Retirement funds are safe from creditors

Image courtesy of Sally and Flickr under a Creative Commons license.

Debt Settlement Is A Dud

By Cathy Moran

Making a deal with your creditors has enormous appeal when there isn’t enough money to pay what you owe.

Their pitch for “settling your debts” touches a nerve. Almost everyone WANTS to pay their debts.

But the truth is : Debt settlement companies rarely deliver what they promise.

Their pitch shouts that debt settlement is superior to bankruptcy.

It just ain’t so.

All too often, the client of the debt settlement company is exposed to continuing collection calls, lawsuits, plumeting credit scores, and garnishments while the company is attempting to settle the debt.

And in the end, many dollars later, debt settlement delivers neither a debt free life nor an undamaged credit report.

The appeal of debt settlement

What is it that makes a chancy, drawn out, expensive relationship with one of these debt settlement companies seem attractive to the financially overwhelmed?

I’d suggest:

Enrollment appears to offload the problem on someone working for you
High profile media types like Suze Orman and Dave Ramsey badmouth bankruptcy
Promoters suggest that there is a “secret” to settling your debt for pennies on the dollar
Paying some part of debt is morally satisfying

As long as the public buys the idea that bankruptcy is akin to leprosy, those who, for a fee, offer the secret, non bankruptcy solution get rich.

Settlement company gets theirs first

The truth is that most debt settlement companies get their money upfront. The first several months of payments don’t go to creditors or to building a settlement kitty, they go to the debt settlement company.

When the consumer figures out that paying the debt settlement people for months on end has not resolved any of the life-sapping incidents that come with being in debt: collection calls, law suits, levies, the debt settlement folks can move on to the next troubled consumer, with money in their pocket.

Bankruptcy works

By contrast, bankruptcy is available for a flat filing fee of around $300 to the court, plus attorneys fees.

It costs the same whether you have modest debt or huge debt.

It is instantly effective to stop collections.

Creditors can’t opt out, like they can with debt settlement. All creditors are bound by the automatic stay and ultimately by the discharge.

And, the rules are enforced by a judge, with powers of sanctions and even incarceration.

What a bankruptcy judge does

The cherry on the top is that bankruptcy doesn’t generate cancellation of debt income issues. There are no negative tax consequences from discharging debt in bankruptcy.

The long-term tax advantage for homeowners in bankruptcy over debt settlement

Bankruptcy bashes debt, for certain and for all time.

Pay off credit cards with no interest

Make no changes til you see a bankruptcy lawyer

What to ask a bankruptcy lawyer before signing up

Image courtesy of derekbruff.

Surefire Steps To Avoid Bankruptcy

By Cathy Moran

Most people would rather parade naked down Main Street than file bankruptcy.

Bankruptcy makes them feel exposed, defeated, ashamed.

If you don’t want to go there, you can order your life so you don’t ever need bankruptcy relief from debts you can’t pay.

I’ve figured out the formula that assures that you’ll never met me in my professional capacity.

My five easy steps to avoid bankruptcy [Read more…]

The Only 3 Times Filing Bankruptcy Is Worth It

By Cathy Moran

Facing financial trouble, there are only three times when it makes sense to file bankruptcy.

None of them is labeled “last resort”.

Yet financial-advice gurus keep saying, bankruptcy should be your last resort.

That kind of thinking keeps people suffering too long, risking worse than financial embarrassment, and wasting money when repayment is a lost cause.

Putting emotions to the side, let’s walk through those three situations when filing bankruptcy is the right choice.

1. You have a crisis

Foreclosure, repossession, or wage garnishment threaten the foundation of your finances. Without a house, a car, and a paycheck, not much about day-to-day life is manageable.

Bankruptcy is may allow you to keep something that you would otherwise lose to creditors without bankruptcy.

Bankruptcy provides the “time-out” that stops all collection action.

The automatic stay triggered by filing bankruptcy has the force of law to make everyone stop in their tracks and move the action to bankruptcy court.

Sometimes, just getting served with a collection lawsuit seems like a crisis.

10 things to know about judgments

A lawsuit, after all, is the precursor to a judgment that leads to garnishment, liens, or levies on your assets.

Service of the complaint isn’t really a crisis, but it’s a wake-up call that trouble looms ahead.

Usually, actually getting sued is often just a symptom of a much larger problem: it’s not just the creditor who filed this suit, but the bunch of other creditors who aren’t getting paid either.

Bankruptcy gets you a moment to consider the big picture, and provides the legal forgiveness of most unsecured debts. It’s the long term effect of the discharge that is precious.

2. You see the big picture

It doesn’t require a crisis to look at your balance sheet and realize you can’t dig your way out of a financial hole.

A lifetime of minimum payments on suffocating debt is no life. Keep making minimum payments and the debt doesn’t even die of old age, because payments extend the statute of limitations.

Healthy finances include a reserve for emergencies and serious savings for your old age. Keep feeding VISA and AMEX and you’ll be eating cat food at 70.

Bankruptcy exists because lawmakers understood that the economy is better off when people aren’t driven into the economic underground, and when families have the chance to be self sufficient.

It doesn’t matter how got you into debt: most bankruptcies result from events the individual didn’t control, like job loss, illness, or divorce.

Whether you’re in financial trouble because of bad luck or bad judgment, a fresh financial start is energizing.

3. You’re worrying yourself sick

How we feel about owing money has a huge impact on physical and mental health.

It’s unfortunate in a way that our societal tendency to lionize those who doggedly pay off their debts: the heroic story of slaying debts blinds us to the fact that stress kills.

True story of retired couple who made wrong choices about who to pay

And stress makes us stupid: actually, measurably less likely to make good decisions going forward. Collection pressures force too many folks make foolish choices about which creditor to pay.

So, when money worries interfere with sleep, digestion, work or relationships, it’s worth considering whether a bankruptcy discharge would improve the situation.

Even elders and the disabled, who are often legally protected from collection by non bankruptcy laws, decide to discharge debts so the bills are gone legally, for all time. And they enjoy peace at home.

Reasons to file overlap

These three reasons for filing bankruptcy aren’t mutually exclusive: you can have a crisis and see the big picture.

But the idea that bankruptcy is only a last resort, when you’ve exhausted all other avenues, is just flat wrong.

Bankruptcy should not be taken lightly, but neither should it be the last option.

The sooner you look at the big picture provided by bankruptcy, the less likely you are to waste money trying to pay impossible debts or make catastrophic decisions like invading retirement or borrowing against your house to pay dischargeable debts.

Does debt settlement work?

The real causes of bankruptcy

Why bankruptcy seems scary

California Garnishment Now Provides Greater Protection Of Wages

By Cathy Moran

california garnishment law Workers making close to the California minimum wage got additional protection from wage garnishments under a change in the law effective in 2013.

With the annual increases in the state minimum wage, in 2019 California law now protects an employee’s weekly net wages up to 40 times the state minimum wage, currently $11 to $12 per hour.

The prior formula limiting a judgment creditor to 25% of a debtor’s after tax wages remains. But the amended law caps a wage garnishment at the lesser of the two calculations.

A judgment creditor isn’t absolutely entitled to the amount figured under these formulas, however.

If the judgment being collected is for a debt other than support, a judgment debtor can seek a reduction in the amount of the garnishment from each paycheck to the extent necessary for his support. CCP 706.051.

Garnished-now what?

The only run of the mill creditor who can garnish your wages is a creditor who has already sued you and won a judgment. That judgment entitles the creditor to levy bank accounts and garnish wages for 10 years or until the judgment is paid in full. More about judgments.

The judgment accrues interest at 10% simple interest per year.

Two questions arise:

1. Can you meet your current living expenses on the money left after a garnishment?

2. Is this judgment just one part of a bigger debt problem?

The dangers of doing nothing are greater than just the other bills that don’t get paid while your wages are garnished.

Too often, the reduction in available cash puts your car or housing payments in jeopardy. And, it probably pays a debt that is dischargeable in bankruptcy, as most unsecured debts are, while non dischargeable debts like taxes, student loans or child support go unpaid.

Here are some ideas on who to pay with the money remaining.

Your wage garnishment action items

See an experienced bankruptcy lawyer. You want to know two things.

Can you petition the state court for a smaller garnishment? and,
Does bankruptcy make sense in light of the bigger picture of your income and expenses?

A bankruptcy will stop a wage garnishment. And, you may be able to recover the money taken from your check from the creditor as a preference.

If bankruptcy is an appropriate response, there is no point in paying the judgment creditor for another pay period. Pick up the phone and get some advice.

How to interview a bankruptcy lawyer

Wage garnishment survival guide

Bankruptcy’s effect on judgments

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

Should You Pay Your Creditors Rather Than File Bankruptcy?

By Cathy Moran

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

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

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

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

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

Cost of paying off debt

What do you forgo in that scenario?

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

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

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

Make good decisions about your future

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

Studies prove being in debt makes you stupid

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

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

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

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

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

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

Secret alternative to bankruptcy

How to evaluate your choices about debt

Leave a legacy not a pile of debt

What you keep despite bankruptcy

The high cost of financial housecleaning

Payments to family

Settlements before bankruptcy are wasted

Tax debt has its uses

Put down that broom

More

Credit hit is like a cut

Debt is chronic disease

Your balance sheet is what counts

More

The good before the crash

The good to come

Ditching the debt

How your choices add up

Fund your old age

More

The appeal of debt settlement

Settlement company gets theirs first

Bankruptcy works

More

1. You have a crisis

2. You see the big picture

3. You’re worrying yourself sick

Reasons to file overlap

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Garnished-now what?

Your wage garnishment action items

More

Fearmongers hope to profit

No one sits in judgment

More

Cost of paying off debt

Make good decisions about your future

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