Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

What’s So Scary About Bankruptcy?

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killer-scary-public domain_opt (1)

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

In real life,  fear isn’t so fun.

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

I have a theory formed after thirty nine years of talking with people who’d rather be anywhere other than meeting a bankruptcy lawyer.

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.

The trustee never inserts himself in their financial affairs at all.

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

In such cases, a Chapter 13  is the answer.   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.

Credit scores improve immediately after bankruptcy

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 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.

What's so scary about bankruptcy?Not so scary

So, savor the frightful and the scary on Halloween.

Just 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.

More

How to interview a bankruptcy lawyer

Which chapter of bankruptcy is best

Can you spot the myths about bankruptcy?

Image courtesy of insidethemagic.

The Real Threat To Your Retirement Savings Isn’t Bankruptcy

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face in mirrorYour 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.

Stupid Moves Before Seeing A Bankruptcy Lawyer

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before bankruptcy

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.

More

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

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band-24298_1280 (1)_optWill 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.

More

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

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phoenix rising from ashesLife 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

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paying debts

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.

More

Your house as your retirement fund

Retirement funds are safe from creditors

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

Surefire Steps To Avoid Bankruptcy

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Naked_Hike-wikimedia-ebdow-cropped

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…]

California Garnishment Now Provides Greater Protection Of Wages

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california garnishment lawWorkers 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.

More

How to interview a bankruptcy lawyer

Wage garnishment survival guide

   Bankruptcy’s effect on judgments

Bank Account Safe From Credit Card Debt

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credit card offsetPossession is 9/10th of the the law, we’ve always been told.

With overdue Bank of America credit cards, my client worried that her new deposit at B of A would be seized by the bank to pay the cards.

After all, the bank would have possession of the commission check and a common law right to set off the deposit against the credit card debt.

Not to worry.  There’s a federal law  that protects bank accounts from credit card debt.

Credit cards can not offset

Federal Truth in Lending regulations explicitly prohibit a bank who is a card issuer from appropriating your deposit account to pay your debt on a card it issued.

(d)Offsets by card issuer prohibited.

(1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder‘s indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.

All you need to know about judgments

12 CFR 1026.12 goes on to make clear that if the card issuer gets a judgment, this provision doesn’t insulate a deposit account from a judgment levy.

Nor does it keep the bank from depleting your account if you’ve agreed to pay the card automatically by electronic transfer.

Credit cards exception to common law rule

Offset, or setoff, (they seem to be interchangeable terms) means to net out what one party owes another against a debt that runs in the other direction.

Merriam Webster defines it  this way:

the reduction or discharge of a debt or claim by setting against it a distinct claim in favor of the debtor or party who is the object of the first claim (as in a lawsuit)

This principle is a mainstay of common law.

So, the Truth in Lending provision creates a statutory exception.

Bankruptcy discharge prohibits set off

At the end of a bankruptcy case, the provisions of the bankruptcy discharge prohibit a creditor from offsetting a pre bankruptcy debt against money the creditor owes you.

Section 524 of the Bankruptcy Code reads

(a)A discharge in a case under this title—

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived;

So, if you discharged a personal loan from Bank of America, say, the bank cannot take your post bankruptcy deposits into your account to pay for the discharged debt.

All’s well

With federal law in mind, my client was able to deposit her check into her bank account, secure in knowing the bank couldn’t apply the money she needed to live on next week to pay overdue bank-issued cards.

And her bankruptcy case will wipe out the credit card debt altogether.

Is Your Choice Of Bankruptcy Chapters Really Dictated By Your Stuff?

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Through my Twitter feed came a link to the pro’s and con’s of filing bankruptcy from the business section of the Chicago Tribune.

Good chance to see how non lawyers see my world, I thought.

Bankruptcy was all about protecting “stuff”, said the writer, and the choice of chapters is driven by the kind of “stuff” you had.

Chapter 13 is for people who have equity in their property;  Chapter 7 is for people who have little and can’t meet their basic expenses, the article went on.

I could quibble about the dichotomy that’s set up that Chapter 7 filers have nothing and Chapter 13 filers have more. (Often, it’s the other way around).

I  further contest  the implied suggestion that the Chapter 7 discharge is broader than Chapter 13.  (It’s not.  In fact, the Chapter 7 discharge is a bit narrower.  It’s just quicker.)

But my real beef is the characterization that bankruptcy is about your stuff and how to keep it.

Not so, in my view.

Bankruptcy is about people, not possessions

Bankruptcy is all about protecting lives.  Sometimes it’s about giving up “stuff” and getting back your life.

Your old age is strongest reason to file bankruptcy

It’s about not paying forever for bad luck or bad choices.  It’s about freeing up money to provide for your future.  It’s  about freeing up mental energy to do something beyond juggle too-little money, subject to too many creditor claims.

Considering bankruptcy is a chance to evaluate what’s really important and what’s possible.

Sometimes, stepping back tells you the house is worth struggling for.  Sometimes, in the big picture, the house is really a dead weight on the important parts of your life.

Bankruptcy is about starting over, or reorganizing.  It’s about recognizing reality and doing something about it.  It’s about being an activist to take back your financial life.

Stuff be damned.

More

Hold or fold?  is bankruptcy the right choice?

Life after bankruptcy

 

@cathymoran

Image courtesy of mojmir_ch.

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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