Considering Bankruptcy Archives - Northern California Bankruptcy Lawyer

Stupid Moves Before Seeing A Bankruptcy Lawyer

By Cathy Moran Leave a Comment

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

You may waste money or lose bankruptcy options when you make last minute changes to your situation.

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.

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. [Read more…]

What Causes Bankruptcy?

By Cathy Moran 1 Comment

I was playing in my head with a piece I was writing for consumers about the bankruptcy decision.

I caught myself thinking about “whether the bankruptcy was caused by mortgage debt or ….” .

And I hauled myself to a halt.

How did the words “bankruptcy” and “cause” get linked in my head?

In my head, for Pete’s sake?

Bankruptcy is not caused by insolvency, it’s a cure for insolvency.

Debt in excess of assets, particularly liquid assets, causes insolvency.

Where debts come from

The real question should be: how did the debts arise?

The trite explanation for debt is irresponsible spending and lack of financial self control.

Not in my experiences of the past two decades.

Instead, financial distress most often comes from job loss; ill health; divorce; and multigenerational family issues.

Add to that, the ridiculous cost of housing where I practice in the Bay Area. Too many folks subscribed to the idea that home ownership is an essential to be really middle class.

Bankruptcy is a cure

If inability to pay your debts is the disease, bankruptcy is the remedy.

The question for families is whether they avail themselves of a freely available, legal remedy for that situation.

Or, do they continuing treading water with respect to their debts until there is a further crisis.

So, for purposes of the blog I was constructing, the correct construction juxtaposes whether the financial distress was caused by mortgage debt or some other cause.

My message is that bankruptcy is as much a beginning as an end.

It ends the distress of being financially incapable.

It is the beginning of an opportunity to realign spending, to move beyond the misfortunes of the past, and to address the challenges of the present and the future.

Families need cash reserves; they need retirement savings. Families with children need to save for college if they are to escape a further round of incapacitating debt.

My mantra becomes: clear thinking and emotional courage cause bankruptcy. And the debtor is better for it.

Is bankruptcy right for you?

Life after bankruptcy

What should bankruptcy cost

Image courtesy of openclipart.org

California Garnishment Law Amended For 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. 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.

Do California Seniors Need to File Bankruptcy?

By Cathy Moran

California, it turns out, is a great place to retire.

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

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

Those exemptions effectively make many indebted seniors collection-proof.

How exemptions protect seniors

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

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

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

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

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

Is bankruptcy necessary

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

If the answer is yes, bankruptcy may be appropriate.

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

You’re safe from your creditors.

Is bankruptcy helpful

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

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

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

Bankruptcy and the next generation

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

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

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

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

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

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

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

Not a bad thing, perhaps.

Passing a home to kids without probate or risk

Image courtesy of Ed Yourdon and Flickr.

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 a decade or more.

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

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

What’s So Scary About Bankruptcy?

By Cathy Moran

It’s Halloween and we indulge in make-believe scary moments and call it fun.

In real life, even people up to their eyeballs in debt are scared witless by the thought of filing bankruptcy.

It frightens them more than haunted houses, ghouls, and blood-soaked bodies.

So really: what’s so scary about filing bankruptcy?

Three unspoken fears about bankruptcy

Thirty eight years of talking with people who’d rather be anywhere other than meeting a bankruptcy lawyer lead me to a theory.

I think they fear

loss of control over financial affairs
the future with bankruptcy on their record
public exposure as a financial failure

Let’s look at each one, in broad daylight, and see if there is anything worthy of fright.

Loss of control

Filing bankruptcy passes nominal ownership of everything you have, outside of some kinds of retirement assets, to the Chapter 7 trustee for the benefit of your creditors. Not really reassuring on its face.

But in the real world, nearly 98% of Chapter 7 cases are no asset cases. That means that the debtor loses nothing to the bankruptcy trustee on behalf of creditors.

Either their possessions have little net value or an exemption protects the asset for the debtor’s benefit.

In some situations, it may be hard to tell what assets are worth or whether they are saleable. The uncertainty makes it unpredicable to pass control to a trustee.

More about how Chapter 13 works

That’s a case for a Chapter 13. In Chapter 13, the debtor keeps everything he wants to keep, and pays some fraction of their value to creditors, in cash, over time.

Stay in control of your assets in Chapter 13

The debtor proposes the plan, the debtor suggests the values, and the debtor can get out of bankruptcy if the case should take an unexpected and unwanted turn.

Debtor in control: nothing to fear.

Future credit in doubt

The commercials that try to sell you some for-profit solution to your debt problem peddle fear. They want you to think that you’ll never get credit again if you wipe out your debts in bankruptcy.

Or, they tell you, it will be 10 years before you can get credit.

Nonsense.

Bankruptcy makes you almost instantly a better credit risk than you were before you filed. Huh? It’s because there are fewer demands on your income.

Bankruptcy impacts the cost of credit. Close in time to your filing, credit is more expensive. All other things being equal, the increased cost of borrowing goes down as you get farther from the bankruptcy.

Credit heals with time

The availability of credit and its cost depends on many factors and no one can predict all of them for some unknown point in the future.

What is almost universally true is that, loaded with debt, you probably couldn’t get more credit now even if you didn’t file for bankruptcy.

Public exposure

Bankruptcy can seem like the modern day equivalent of the public stocks, where those who misbehaved were exposed to public ridicule. That view of bankruptcy is mostly in your imagination.

Bankruptcy cases are in the public record, and anyone who wants to find out can find out.

But tell me, how much time do you spend figuring out which of your neighbors and coworkers have filed bankruptcy?

You would also be surprised at how many people, famous and anonymous, have filed bankruptcy. They still have friends, homes, cars, jobs, and community respect.

Studies show that job loss, divorce, and illness account for a large percentage of debts leading to bankruptcy.

You won’t find yourself alone if you take the step to do something about your debt problem.

Not so scary

So, savor the frightful and the scary on Halloween.

Don’t carry that false fear over into your financial life.

Bankruptcy is nothing to be afraid of.

Instead, be afraid of not fixing a problem that has a solution.

How to interview a bankruptcy lawyer

Which chapter of bankruptcy is best

Can you spot the myths about bankruptcy?

Image courtesy of insidethemagic.

The Worst Reason To Settle Debts Rather Than File Bankruptcy

By Cathy Moran

The guy with an old debt asked if bankruptcy or debt settlement would cause greater damage to his “credit”.

The money advice columnist gave the right answer to the wrong question.

She got it backwards. So did the man with the question.

She advised that bankruptcy was more damaging given that the nagging debts were already three years old and would drop off his credit report in four years, whereas bankruptcy would show for seven to ten years from the bankruptcy filing.

Right, assuming that your credit history is the important issue.

But your credit record is a sideshow in life.

Dealing with old debt

I would challenge the question the way the guy phrased the question in the first place.

When you look at the alternatives to debts you can’t pay, I think the first concern should be for your balance sheet.

Which of the alternatives makes you better off NOW, not when you want to incur more debt in the future.

For the man writing in about settling a $13,000 debt for $5,000, I would have a series of questions that didn’t center on his ability to get new credit.

How old are you?
Do you support others?
Do you have any emergency savings?
How are you doing on retirement savings?
Got health insurance?

If he is young, single, and employed with a bit of money in the bank, perhaps paying $5,000 to make eliminate a $13,000 debt is a good deal.

If he’s middle aged, supporting children or aged parents, and living paycheck to paycheck, I would be inclined to suggest there are better uses for $5000. At the most basic level, put it in an IRA, and your creditors can’t take it.

If he’s approaching retirement and looking at a future of reduced income and with little need for future credit, chances are that there are crying needs for that $5000 other than dealing with an old debt.

It’s not about the credit score

As you can see,settlement versus bankruptcy is not just a matter of which impacts your credit record more negatively.

The decision needs to take in your ability to spend money on old debts when faced with current and future demands on your assets.

It’s all backwards to think that protecting your credit record is the central issue..

Credit heals

Better to keep paying or file bankruptcy

Shore up your defenses against debt collectors

Image courtesy of Flickr and Luke Montague.

Does Bankruptcy Discharge A Judgment In California?

By Cathy Moran

Nothing gets someone into a bankruptcy lawyer’s office quicker than the prospect of losing a lawsuit and having a judgment entered against them.

Callers are frantic to see if they can file bankruptcy before judgment is entered.

They worry that once a judgment is entered, their options in bankruptcy vanish.

Not so.

The debt underlying a California judgment remains just as dischargeable as it was before the case was filed.

And, a judgment in California does not automatically become a lien on the defendant’s property.

It takes another step in California for a money judgment to become a lien. And as long as there is no lien, the debt is unsecured and potentially dischargeable in bankruptcy.

Discharge turns on kind of debt

Contrary to what some dishonest debt collectors will tell you, judgments are just as dischargeable in bankruptcy as the underlying debt is.

Whether an unsecured debt can be discharged in bankruptcy looks at the nature of the debt, not whether a court has ruled on the merits of the claim.

So,

Child support is non dischargeable, whether or not there is a judgment.
Debts incurred by fraud are non dischargeable in bankruptcy, if the creditor can prove fraud to bankruptcy standards.
Credit card debts honestly incurred are dischargeable, judgment or no.

Liens change everything

What does change the dynamic is an abstract of judgment or a notice of judgment lien.

These documents do create a lien on the judgment debtor’s assets.

Recording an abstract of judgment creates a lien on real property in the county in which it is filed. A notice of judgment filed with the California Secretary of State creates a judgment lien on personal property located in the state.

If the lien cannot be avoided in bankruptcy, the judgment creditor has obtained an advantage.

What my friend Jay Fleischman’s post about civil judgments in New York and their bankruptcy implications points out is the way state law impacts the operation of federal bankruptcy law.

The rights that each party in a bankruptcy case brings to the bankruptcy case originate in state law.

It also demonstrates why lawyers are licensed in each state and why my California law license does not entitle me to practice bankruptcy law in New York.

And why bankruptcy is not a do-it-yourself project.

When you’re served with a lawsuit

Three debts bankruptcy doesn’t discharge

Everything you need to know about judgments

Wage garnishment survival guide

Who are the really scary creditors

Image in the public domain, courtesy of Wikimedia.

The Real Threat To Your Retirement Savings Isn’t Bankruptcy

By Cathy Moran

Your retirement accounts are safe from your creditors.

California state law and federal bankruptcy law protect your savings for retirement held in recognized retirement vehicles from levy or lien.

But retirement savings are at risk.

Look in the mirror.

The biggest threat to your retirement account isn’t your creditors, it’s you.

You are usually the only person who can withdraw money from an IRA or take a loan against your 401(k).

And your creditors would be happy to press you until you think that’s a good way out of a financial bind.

It is almost always a wretched idea.

M.O. of a debt collector

Debt collection through the courts is relatively inefficient and costly to the creditor.

Law suits require lawyers, filing fees, and a chance for the person sued to fight back. And even with a judgment, exemptions protect some assets from lien or levy by the creditor with a judgment.

How judgments work

How much better and cheaper if the creditor can “persuade” you to dip into an account that a creditor with a judgment couldn’t get to in order to pay the bill.

Toward that end, the debt collector will try

annoyance,
shame, or
fear

Whatever the method, they ratchet up the pressure until you think it’s smart to rob your retirement funds to solve today’s problem.

Are retirement savings ever the right answer

My instinctual answer is “no”.

But individuals and their situations are so varied that a flat no is probably too broad.

But only a bit.

The questions I’d ask myself before raiding retirement savings include

How much working life do I have left to replenish my retirement
Do I have an employer retirement plan to rely on
Do I have other assets with equity to supplement retirement
Is the bill to be paid with retirement savings just part of a bigger problem

The last question is probably the most important. Is resort to retirement savings a one time solution, or is it just the first, or the most recent, indicator that your bills are bigger than your ability to repay them?

If so, it’s time to talk with a bankruptcy lawyer. Understand what your options are. Look at the big picture that includes all of your debts and all of your assets.

You can probably find a better solution.

Image courtesy of Steve Calcott.

My thanks to Peter Mullison, whose post on retirement savings and bankruptcy sparked this perspective on the problem.

The high cost of financial housecleaning

Where debts come from

Bankruptcy is a cure

More

Garnished-now what?

Your wage garnishment action items

How exemptions protect seniors

Is bankruptcy necessary

Is bankruptcy helpful

Bankruptcy and the next generation

More

Cost of paying off debt

Make good decisions about your future

More

Fearmongers hope to profit

No one sits in judgment

More

Three unspoken fears about bankruptcy

Loss of control

Future credit in doubt

Public exposure

Not so scary

More

Dealing with old debt

It’s not about the credit score

More

Discharge turns on kind of debt

Liens change everything

The rights that each party in a bankruptcy case brings to the bankruptcy case originate in state law.

More

M.O. of a debt collector

Are retirement savings ever the right answer

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