Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Do California Seniors Need to File Bankruptcy?

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Rocking chair on the deck - Antigua, Mar 2010California, 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.

More

Passing a home to kids without probate or risk

Image courtesy of Ed Yourdon and Flickr.

The Worst Reason To Settle Debts Rather Than File Bankruptcy

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settle or file bankruptcyThe 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..

More

Credit heals

Better to keep paying or file bankruptcy

Shore up your defenses against debt collectors

Image courtesy of Flickr and Luke Montague. 

 

 

 

When to file bankruptcy

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when to file bankruptcyShould I wait until all of my savings are gone to file bankruptcy?, the caller asked.

And he didn’t mean, until my net worth is greatly reduced; he meant, until my bank balance is zero.

One has to admire the resolve of those who propose to pay on debts that they can never repay up to the point where they literally have nothing.

My advice, of course, is “no”.

There is no point in making further payments when you can see you’re heading for bankruptcy.

Bankruptcy exemptions allow you to keep a collection of assets necessary for a fresh start.  In California, we have exemptions that will even shelter meaningful cash in the bank.

In Chapter 13, you can keep everything you own.

There is not even a requirement  that you be destitute or even insolvent to file bankruptcy.  You simply need to be willing to play by the rules of the bankruptcy chapter you choose.

Those rules are centered on making full financial disclosure.

When to consider bankruptcy

The short answer is probably now.  If you are reading this, you probably wonder if bankruptcy could help you out of a hole.  Instead of wondering, see a bankruptcy lawyer. (I’ll tell you a secret:  bankruptcy lawyers don’t bite.)

So often I wish clients had come to me earlier: before they borrowed against their retirement to pay credit cards; before they took bad home loans that imperil their home; before they borrowed from one credit card to pay on another.

Don’t take big financial steps til you see a lawyer

The right time to consider bankruptcy is when you suspect that you can’t really repay your debts in full in 3-5 years, on your own.

Or, when the stress of being in debt interferes with your health or your relationships.  Or, when you have no reserves should things get worse. 

Stress kills

Seeing a bankruptcy lawyer doesn’t commit you to filing.  It just arms you with information about what your options are.

Most people who see a good bankruptcy lawyer are surprised that bankruptcy relief is relatively simply and very effective for almost everyone.

Information is power….become more powerful.

Read on

Picking a bankruptcy lawyer

Alternatives to bankruptcy

What you keep through bankruptcy

 

 

 

Debt Actually Makes You Stupid

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5175015713_3641d60dde_zIt’s easy to tell ourselves that getting into debt was stupid.

Maybe, maybe not.

Lots of debt happens without making bad decisions.  Think of medical bills. Natural disasters.  Divorce.

But regardless of how you got in debt, there’s more bad news.

Just being in debt makes you stupid.

Stupid, as in, your IQ goes down under the stress of being in debt.

Stupid, as in, you are likely to make poor choices about other life choices in addition to money.

Stress suppresses intelligence

Researchers at Harvard, Princeton and the University of Warwick found that financial worries impeded not just thinking about money issues, but also spatial and cognitive tests.

People worrying about having enough money to pay their bills tend to lose temporarily the equivalent of 13 IQ points, scientists found when they gave intelligence tests to shoppers at a New Jersey mall and farmers in India.

Image courtesy of Flickr and Manuel Scheikl.

Fear keeps folks from bankruptcy relief

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filing bankruptcy

Those who aren’t living the American dream of upward mobility and financial security seem to think that’s a matter for shame.

Perhaps the second most frequent question would-be clients ask me is whether the fact that they filed bankruptcy will be

  • in the paper,
  • disclosed to their employer, or
  • discovered by their family or friends.

[The answer is that it’s unlikely.]

They are paralyzed by what they perceive as shame in not being a financial success in a world that too often confuses money with virtue.

The bankrupt are better off

A couple of objective observations are in order.

  • A university study of some years ago found that one in seven American families would be better off if they would file bankruptcy.
  • Second, millions American families have filed bankruptcy.

Chances are very good that several of the families around my petrified client have filed bankruptcy, unbeknownst to them.

The study about being “better off” resonates particularly with me, as I see individuals struggling to pay credit card debt, where the interest has tripled when a payment was late, while at the same time, they have no emergency cash reserves, no retirement savings, and no health insurance.

While their choices are noble, they aren’t wise.

These people live on the financial edge so that the credit card companies get their minimum payment.  They go without health care, an emergency fund, and even without food to honor their commitments.

I tell my questioner that bankruptcy is a matter of public record, so anyone who wants to find out who has filed can do so.

But, I ask, have you recently read the news of individual bankruptcy filings?

Such is not the fare of papers where I practice.  With some thought, they begin to realize how insignificant the fear of exposure is next to the financial realities of their situation.

The human creature is pretty amazing that it will live with the constant stress of overwhelming indebtedness rather than risk that others learn of its pain.

It doesn’t have to be that way.

More

Debt is unhealthy

Debt makes you stupid

What’s life really like after bankruptcy

 

 

What Everyone Knows About Bankruptcy: Not

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torture deviceOther professionals should know better than to advise people about the workings of bankruptcy.

And if they don’t know better, they should be made to pay, in some exquisitely painful way, for the harm they inflict.

The rack seems good to me.

The terrified client in my office was told by her accountant that if she filed Chapter 13 to save her home, the court would not allow her to buy prescription dog food for an ailing 16 year old pet!

Further, the accountant went on to declare that in Chapter 13, the debtor could pay only for housing, food and gas: nothing more. No maintenance for the house, no insurance, no clothes, no medical care.

Of course, the accountant was dead wrong. Articulate but wrong.

Means test and budgets in Chapter 13

So I explained the operation of Chapter 13, how the means test works, and the balance between the debtor’s reasonable living expenses and the claims of creditors. And assured the client that she can provide for her treasured pet for the balance of its life.

Then I fumed.

I’m resigned in the age of the internet that new clients have encountered lots of bad information on the web. There is no competency examination before anyone with a browser and an internet connection can opine on any subject.

The most trusted advice on a criminal law site recently turned out to be from a 15 year old whose knowledge came from TV!

But the source of this utterly distorted information holds a professional license in another field; that license gave apparent authority to the tales of horror she told my client.

How was the client to know it was tripe, pure tripe?

It took me two hours to find and eradicate the externally caused fears in my client and the self-generated terrors she’d nurtured based on bad information.

Can I count on my readership to bail me out of jail if I find the accountant providing worthless and harmful bankruptcy advice?

Image courtesy of Sandeep Thukral

Long Term Tax Savings When You File Bankruptcy Rather Than Settle Debts

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tax biteSettle your debts outside of bankruptcy and you may be bitten by taxes you didn’t expect years later.

Everyone I talk to would rather cut a deal with their creditors than file bankruptcy.  It’s universal.

But here’s the killer reason why bankruptcy alone protects homeowners from a unexpected  tax consequence down the road.

Debt forgiven outside of bankruptcy gets deducted from the basis of your home.   Result:  more potentially taxable capital gains on sale.

It works like this.

Tax treatment of cancelled debt

Debt forgiven in bankruptcy or while insolvent gets an exception from the standard tax rule that cancelled debt is taxable as income.  IRC 108.

But that tax benefit comes with a delayed cost.  The amount of the debt forgiven is deducted from the basis of your assets.

So if the tax basis in your home was $200,000 and the debt that was discharged or settled was $200,000, you end up with a house with zero basis.

Sell that house and every dollar you receive is capital gain.  Ouch!

Special tax rule for homes in bankruptcy

But wait! Wait!  There’s an exception to the reduction of basis rule that shields your principal residence from reduction in basis.  But that exemption applies only if  your debt was cancelled in bankruptcy and you claimed your home as exempt.

So, the basis in your home is not reduced if the debt was forgiven in bankruptcy, rather than an out-of-court settlement, and you claimed an exemption.   IRC 1017(c),

So, when you consider your alternatives for getting yourself out of debt, homeowners need to look beyond this year’s tax return to the point at which they may sell their house.  Every dollar in basis excludes that dollar from being taxed as capital gain.

More

How tax exception for forgiven debt works

The ugly truth about debt settlement

How bankruptcy deals with taxes

What Game Are We Scoring?

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score card flickr yoppyGetting credit after bankruptcy is the most frequent search term that bring visitors to Bankruptcy in Brief, my encyclopedic sister site on bankruptcy.

In these visitors’ minds, their credit score is a central concern.

It’s ironic that readers, saddled with enough debt to consider bankruptcy, ask about the impact of a bankruptcy on their credit score.

It’s the same face to face. …often in the first 5 minutes of our meeting.

Others  proudly tell me that they have “perfect credit”: that translates as “never having missed a minimum payment.”

Some follow with a declaration that they won’t file bankruptcy if it will hurt their credit score.

Huh?

What they miss in their decision making process is that they can never pay off the credit they have! And their first concern seems to be how soon they can get back into the credit market.

Hype about credit scores

Identity theft and the misuse of credit scores for employment and insurance purposes have heightened our awareness of credit reports and credit scores.

This legitimate concern is hyped by those who, having created the credit scoring “game” and cemented their lock on the rules of the game, then want to sell us services to protect us from damage to our scores.

What most consumers don’t understand is that credit scoring is a purely arbitrary analysis. The rules are controlled by each score provider.  They can change without notice or review.

Credit scoring is not regulated, objective, or transparent. It seems your score can suffer from having too much credit, too little credit, or even for astutely shopping for better interest rates on purchases.

Refocus on net worth

Let’s focus on our personal balance sheet, rather than our ability to acquire more debt, as a salutary exercise.

Let’s look at our savings, our preparation for retirement, the adequacy of our insurance protection as the measure of our financial health.

Let’s ask ourselves first how long it will take us to repay the debt we already have . What would we save if we weren’t paying interest on credit card debt?

Let’s learn to find our self worth in something other than the kind of credit card we carry or the credit score someone else assigns us

Image courtesy of Flickr and Yoppy.

Four Factors Drive The Cost Of Bankruptcy

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When you’re flat broke and thinking about bankruptcy, cheaper sure looks better.

If a lawyer will do your Chapter 7 for $600, what’s the point of paying $1000? Or even $2000?

Like answers to many legal questions, it depends.

Bankruptcy relief depends on your facts

Whether to file bankruptcy, or whether to file now, rather than later, depends on how the facts of your financial situation interact with bankruptcy law.

Your bankruptcy lawyer is charged with gathering those facts and analyzing them so that you get the most debt relief the system can offer.

If your bankruptcy lawyer doesn’t dig deep enough, or think broadly enough, you may hit avoidable snags in your case.

With the caveat that there is no direct and sure-fire connection between cost and quality, let’s talk about what it costs to escape from broke. [Read more…]

Is There Life After Bankruptcy?

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multiple questions-grisel d'an flicker_opt

Is bankruptcy worth it?

Those who see the decision to file bankruptcy to get a fresh start as painful or less than honorable wonder what life is like, on the other side of bankruptcy.

I got a report from the other side this week from a Chapter 7 client from 3 years ago.

Single, well past middle age, a renter, and dead broke when she’d filed, she’d retired, moved, and bought a house!

Her email was entitled:  “A Happy Ending”. [Read more…]

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