Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

What Everyone Knows About Bankruptcy: Not

By

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. [Read more…]

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

By

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?

By

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

By

4094481144_053cd31005_z

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?

By

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…]

Living With Debt: Better Than Bankruptcy?

By

living in debt

 

Locked up in debt?

What are your choices?

Is it better to live with your debt and keep making minimum payments?

Or, is life worse if you file bankruptcy?

That question sums up most people’s fears about shedding their debt through bankruptcy.

What will life be like, after bankruptcy?

Good questions.  And I applaud people who realize that debt and debt relief each have future consequences.  I’ve talked about it before.

Clients fear the “bankruptcy unknown”, closing their eyes to the precariousness of their current situation as though doing nothing is a worthy choice.

But let’s turn the question around:  what will life be like if you continue on as you’re doing now?

Life in debt

Servicing debt from the past cuts down your future options.  Your paycheck is already committed before it hits the bank.

Whether it’s payday loans or credit cards for this month’s necessities, you’re locked in.

A slight bump in the road, and you’re really in the soup.  Most Americans say they couldn’t handle a $500 emergency without borrowing.

But absolutely most compelling for me, you’re probably making no provisions for your old age.

Lots of folk tell me they don’t think they’ll ever retire. Some say it because they enjoy work;  most say it because they can’t make ends meet without a job.

But they will get old, working or not.  The job choices will contract, and their ability to be productive will diminish.  I see it personally with the elders I’m caring for now;  they can’t handle the mental or the physical sides of a job.

Of course, the stress of being in debt may shorten your life.  Stress impairs your decision making.  That’s a terrible way to meet the challenges of funding your old age.

After bankruptcy

So, what if you broke out of debt by filing bankruptcy.  What happens in the real world?

Let’s list the negatives of filing for bankruptcy.

  • Credit in the immediate future is more expensive
  • Bankruptcy shows up on your credit report
  • If you are a renter, some landlords are uncomfortable
  • Some new employers are put off

These negatives fade in importance over time.

They need to be weighed against the equally real consequences of not solving a debt problem.

For most considering bankruptcy, their credit record is already blotched; a bankruptcy filing is not going to be the first adverse entry on their credit report.

Your credit heals over time

But credit scores, the predictive formula, rather than the history that’s a credit report, may improve instantly:  your debt to income ratio gets better.

Bankruptcy might be the first step to improved financial health.

Bankruptcy may even be a step in better physical health. Stress is a killer.

Bankruptcy enables saving.  You’ve proved you can live on what’s left after minimum payments.

Use that same discipline to set money aside for the unexpected, and for the inevitable old age.

Live long and prosper.

More

Keeping the house for the kids

What you need to ask a bankruptcy lawyer

What should bankruptcy cost

Bankruptcy terms, simplified

Who Profits When Money Trouble Is Shameful?

By

money troubles taboo

Talking about our financial difficulties is taboo in this society.

We lionize those who make a fortune.  Everyone expects to live the middle class life.  What’s wrong with you if you aren’t making it?

We are more willing to talk about our sex lives than our money troubles.

Most of those meeting with a bankruptcy lawyer for the first time manifest some kind of shame, the sense that their financial hole is the sign of a moral as well as financial failure.

And as long as no one will talk about money troubles outside of a lawyer’s office, each person imagines that they are the only one with this sort of problem.

They imagine that they will have to justify their situation to the bankruptcy judge in order to get a discharge. They see themselves alone and exposed.

The profit in cultivating shame

The cult of silence may be why the debt settlement/debt management businesses do so well.

For a price, you are told, you can hire someone to get you out of the hole without declaring bankruptcy and therefore declaring failure.

Only those models seldom work.

Writing one check for the same amount as you wrote a bunch of smaller checks is still the same amount of money. It’s not the number of checks that is the problem, it’s the amount of money necessary to retire that debt, even over time.

The debt settlement model fails because creditors don’t stop trying to collect when contacted by one of these for profit outfits. The first money paid by the consumer goes to the company, not the creditors.  No one but the debt settlement folks get paid while you build up money in their hands.  The some portion of the creditors getting nothing get fed up and sue you.

The business model works only for the debt settlement folks.

And as long as they can convince you that bankruptcy is an unacceptable choice, they prosper.

Bankruptcy neither shameful nor rare

Over the past five years, an average of 1.3 million consumer bankruptcy cases have been filed.  One study of American families done before the Great Recession said one in seven families would be better off if they filed bankruptcy.

It’s probably more today.

Three life events are closely tied to the need for bankruptcy:  job loss, divorce, and illness.  Hardly a cause for shame in that list.

The “typical” bankruptcy filer is married, middle aged, white, working, and college educated.  Doesn’t sound like a pariah class, there.

Tom Friedman, columnist for the New York Times, names generous bankruptcy laws as a necessary feature for a country that wants to thrive in the global economy.   People can take economic risks when failure isn’t a life sentence.

Let’s give a shout out for bankruptcy as a vital reset for families burdened with debt they can’t reasonably pay.

More about making the decision to file bankruptcy

One test for whether you need bankruptcy

Six rotten reasons not to file bankruptcy

Which California seniors don’t need bankruptcy

Image:  © Farina3000 – Fotolia.com

Tax Trap When You Settle Debts Outside Of Bankruptcy

By

4226218448_849b2121b0_z

Trying to decide between bankruptcy and debt settlement as the better path to financial health?

Own a home?

Here’s the killer reason why bankruptcy alone protects you from a serious 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.

Here’s the backstory and the low down on the exception to the exception that protects your home from a tax hit in the future.

Tax consequences of forgiven debt

When choosing between bankruptcy and settling your debts outside of the bankruptcy court, an advantage to bankruptcy has always been the favorable tax treatment of forgiven debt.

Debt forgiven or cancelled in bankruptcy is not added to taxable income. IRC 108

You may receive a 1099 form showing the forgiven debt, but by filing Form 982, you claim your right to exclude the forgiven debt from your income.

By contrast, make a deal with your creditors to take, say,  1/3 of what you owe in full settlement, and Uncle Sam treats the 2/3 of the debt that was cancelled as if you received it as income.  Taxable income. Ouch!

Insolvency is another way around including cancelled debt in taxable income for the year it’s forgiven.  If you are insolvent (your debts exceed your assets), then you don’t have to include cancelled debt in your taxable income.  Again, you file Form 982 and demonstrate insolvency.

Just like the bankruptcy exception.

BUT, both methods of avoiding an immediate tax consequence require that you reduce tax attributes like basis by the amount of the forgiven debt.

So, there’s no immediate tax hit, but your basis in your assets (usually, purchase price and cost of improvements less depreciation) shrinks by the amount of debt cancelled.

Why basis is important

Your basis in your assets becomes critical when you sell.

The biggest asset affected is real estate.  (Much to many people’s surprise, the tax code no longer provides for a tax free rollover of gain on a principal residence.)  Your taxable gain is, roughly, the difference between the sales price and your basis in the house.

After an exclusion of gain if the property is your principal residence, the balance of the gain is taxable.

So the immediate tax relief of not recognizing cancelled debt in income is off set by a sort of recapture on sale of appreciated assets.

Special bankruptcy tax rule for homes

But wait! Wait!  There’s an exception to the reduction of basis rule that shields your principal residence if claimed exempt in bankruptcy.

Discharge debt in bankruptcy, rather than by settlement with the creditor, and claim an exemption in your property, even if it had no equity when you filed, and your basis in your home is unaffected by the reduction in tax attributes.  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.

Get professional tax advice if the reduction of tax attributes when cancelled debt income is excluded from income affects you.

More on cancellation of debt issues

Your 1099 may be wrong

Tax issues when you settle guarantor liability

 

Image courtesy of Flickr and Antony Theobald. 

 

Bankruptcy Statistics Are Always Singular

By

Bankruptcy trends meaninglessWho cares whether bankruptcy filings are up or down?

Bankruptcy professionals, certainly.

Economists, probably.

But if it’s you and your checkbook, you take little comfort that lots of others are filing.  Nor when everyone else seems to be making it OK  while you flounder are you reassured.

My friend Wendell Sherk is right about bankruptcy following economic expansion.  Some expansion always falls flat.  Bankruptcy is the remedy.

And for the society, bankruptcy is a powerful remedy.  It allows risk taking without live altering consequences.  It allows those who’ve made bad decisions or simply had bad luck to start over.

Bankruptcy evens the odds in  the eternal tension between borrowers and lenders, debtors and creditors.

Bankruptcy keeps people in the above ground economy, allowing a legal and effective protection for future earnings.

Look backward or forward

But bankruptcy statistics are the sum of individual decisions.

Parents who have to decide whether being bound to past commitments is the best choice for their family.  Whether putting off providing for retirement, or even a cash reserve for emergencies is wise.  Elders who are saddled with credit cards they can never repay.  The underemployed balancing old debts and new needs.

It takes some courage to admit to yourself, and then to others, that you can’t do what you’d rather do:  pay everyone what you promised.

But, in the real world,  you are your harshest critic.

Few others sit in judgment of those who file bankruptcy.  If they notice at all, it’s with a sense of “there but for the grace of God...”

Better off with bankruptcy

A university study several decades ago concluded that one in seven American families would be better off if they filed bankruptcy.  It tried to explain why far fewer than that were doing what was in their best interest,  but instead struggled on with their debts.

The number who would be better off if they filed bankruptcy cannot be lower now.

In the end, it’s about what makes you more self sufficient going forward.

Image courtesy of Pixabay.

 

Stressed Families Can Take A Card From Trump Casino

By

file bankruptcyDonald Trump’s Atlantic City casino operation filed bankruptcy, following in the steps of his other entities.

What does that mean to ordinary folk here on the West Coast struggling with bills and the grind of staying afloat month to month?

Why does this bit of news show up here on a site devoted to consumer and small business issues?

It’s this:  Trump’s empire is run by highly paid, highly educated business people, who, even backed by Trump’s name and draw, can’t make a go of this business.

That team of management professionals couldn’t keep the casino out of bankruptcy.

Then why is it that ordinary families agonize about filing bankruptcy?

Excuses not to file bankruptcy

Why do they think that it’s a blot on their honor or their intelligence when their finances get away from them?

Why average folks file bankruptcy

Is it really smart to ignore the gravity of your financial situation and make minimum monthly payments forever?

Being in debt leads to bad decisions

You tell me.

Image used courtesy of Flickr and jamvitter.

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

Categories