Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

When Is The Time Right To File Bankruptcy

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time to file bankruptcy

Just like stand up comedy and batting in baseball, filing bankruptcy is all about timing.

Timing your bankruptcy filing is no different.

File bankruptcy too early, or too late, and you risk losing assets or advantages that better timing could have assured.

Admittedly, you don’t always have the luxury of filing bankruptcy on your own schedule. But for those who can plan ahead, better bankruptcy outcomes are available.

When IS right time to file bankruptcy

Bankruptcy law measures lots of rights with reference to events occurring before filing. Some of these rights involve you, the debtor. Other rights belong to the bankruptcy trustee, or your creditors.

These time periods affect

  • Exemptions  
  • Discharging taxes  
  • Tax refunds  
  • Clawbacks of money transfers  
  • Eligibility to file bankruptcy  
  • The amount of your Chapter 13 payment  

File bankruptcy before

The most common and avoidable mistake in bankruptcy is waiting too long to file. Filing sooner can avoid

  • Spending money you could keep if you filed bankruptcy  
  • Enduring stress caused by debt  
  • Foreclosure  
  • Creditors get liens you can’t avoid  

File bankruptcy after

Some events you want behind you before you file. Usually, you want to know that the worse of the debt is behind you. File bankruptcy when

  • Finances are improving
  • Tax year is closed
  • Receipt of one time income event
  • Payments to insiders have aged

Juggling timing

It doesn’t take much to realize that each of these timing issues are complicated. And each issue interacts differently with other timing issues.

bankruptcy factors

Sometimes you have to weigh some circumstances that suggest an immediate filing against others suggest waiting.

Weighing those competing factors is what a good bankruptcy attorney does for you.

Nationally recognized financial writer Liz Weston had thoughts about considering bankruptcy. Her thoughts boil down to plan ahead. Get advice early, so you can pick the time that’s right.

Any attorney can fill out the forms for you. Skilled attorneys understand what the information in those forms means for the outcome of your case.

Just as importantly, skilled attorneys help you understand the pro’s and con’s of filing at any particular time.

More

What you have to do to file bankruptcy

How to interview a bankruptcy lawyer

Debt Settlement Is A Dud

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debt settlement

Debt settlement is often dangled in front of the financially challenged as an alternative to bankruptcy.

Sounds good:  making a deal with your creditors has enormous appeal when you can’t pay everything that you owe.

And debt settlement companies count on it.

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

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

Their pitch shouts that debt settlement is superior to bankruptcy.

It just ain’t so.

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

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

The appeal of debt settlement

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

I’d suggest:

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

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

Settlement company gets theirs first

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

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

Bankruptcy works

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

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

It is instantly effective to stop collections.

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

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

What a bankruptcy judge does

The cherry on the top is that bankruptcy doesn’t generate cancellation of debt income issues. like debt settlement does. By law, debt cancelled in bankruptcy isn’t taxable income.

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

Bankruptcy bashes debt, for certain and for all time.

More

Pay off credit cards with no interest

Make no changes til you see a bankruptcy lawyer

What to ask a bankruptcy lawyer before signing up

Image courtesy of derekbruff.

Stop Making Quarterly Tax Payments

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quarterly tax paymentUncle Sam expects a quarterly tax payment from the self employed.  Since you don’t get a paycheck with regular tax withholding, the burden’s on you.

Lighten the burden. Make this the last quarterly tax payment you pay.

Seriously.  Don’t make any quarterly payments for this coming year.

Think I’m advocating tax resistance?  No way.

The tax collectors  have more weapons than you want to encounter.  It’s like the advice from the era of newspapers:  don’t pick a fight with someone who buys ink by the barrel;  

Don’t spit in the face of the tax man.

Give up making them quarterly, I say.

Pay taxes monthly, just like every other recurring bill in your life.

Why quarterly tax payments invite trouble

Folks who get a paycheck have their income tax liability, or at least some estimate of that liability, deducted from each paycheck.  No fuss, and, well,  only some bother.

Their take home pay has already paid the taxes.  The paycheck is what is available to pay the bills.

Not so the self employed.

We are expected to make quarterly estimated tax payments in January, April, July, and October.

I’m sure the quarterly arrangement was seen as a convenience when instituted.

But it’s not necessarily convenient.  You have to set aside money regularly so you have a fistful come quarter day.

If you free lance or run a small business, budgeting may be the hardest think you do.  Who knows, in this economy, how much you’ll make this quarter, or how you’re going to pay the bills?

Quarterly payments invite us to fudge.

Get caught not having prepaid enough and you get  hit with penalties.

Get really behind, and it’s tax liens and levies.

Pay this year’s taxes monthly

My charge?  Add Uncle Sam to your list of creditors that you pay monthly.

Most creditors expect monthly payment:  the rent, the car payment, the credit card.  Add your estimated taxes to that list.

Income taxes are a cost of doing business.  No reason not to pay them as you go, just like the folks on salary do.

  • You avoid the need to set up a separate savings account in which to accumulate the taxes to be paid quarterly.
  • You resist the temptation to use those savings for some intervening crisis.
  • You escape the urge to make no provision “just this month”.

Making regular and smaller payments makes it easier to get the total bill paid in a manner that avoids penalties for not paying regularly.

Send your monthly income tax prepayment to the same place the quarterlies were headed.  Write on your check your Social Security number and “estimated 2017  tax liability”.

Take care of taxes monthly and you don’t find yourself in a tax hole come next April.

Here’s the IRS  on making estimated tax payments.

More on taxes

Unfiled taxes live forever

Dig out of payroll tax trouble

  Getting rid of tax liens

Find the mortgage interest deduction in Chapter 13

Image courtesy of Wikimedia.

Myth Of The Corporate Credit Card

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business credit cardAs far as myths go, the myth of the business credit card ranks right up there with  unicorns, Big Foot, and leprechauns .

Every struggling small business owner who crosses the threshold of my office believes that his corporate credit card is not a personal debt.

Wrong.

In 39 years of bankruptcy practice, I have never seen a credit card for which a living, breathing human being was not liable.  Not one.

The card may have the corporate business name on it.  Mine says  Cathleen Moran, Moran Law Group.  

But in fact, my corporation is not even jointly liable with me on that card.  It’s just me on the hook.

Which is scary given that these “business” cards are marketed as another form of business financing.  Their debt limits are easily five figures and many businesses have a drawer full of them.

The 23% business loan

What is insidious about business credit cards is their impact on the likelihood of a small business using them becoming profitable.

Just like the consumer credit card, business folks are conditioned to think they’re doing OK in business if they make regular payments on the 23% loan they have from Big Bank on the card.

But it takes a hell of a business to pay 23% for seed capital and make a profit.

Yet few business plans look at the cost of funds when assessing how they’re doing.

Business cards when business craters

There’s a perverse “benefit” to the fact the business isn’t liable for the credit card if the corporate business gets in financial trouble.  The card isn’t a debt of the corporation.

More times than I can count, the corporate business can continue on, assuming that there is a path forward, and the shareholder can file bankruptcy and ditch the credit card balance.

The corporation is a separate legal person and the bankruptcy of its shareholder doesn’t directly impact the corporation.  And it’s far easier and cheaper to reorganize the financial affairs of the shareholder in Chapter 13 than it is to reorganize a corporation in Chapter 11, the only form of bankruptcy that gets a corporation a discharge.

Now, the business has to have a plan for funding operations without the shareholder’s credit cards.  But, if we face the fact that the business doesn’t have to service that debt either going forward, the numbers may look different.

Seems there are two sides to every coin, and every card.

More

“B” is for business in my Bankruptcy Alphabet

How to sign the corporation’s name

Your business needs a prenup

Draft an enforceable contract without a lawyer

Who To Pay When There’s Not Enough Money To Go Around

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collection calls

If you can’t pay your bills, the squeaky wheel should NOT get the oil...

At least, not until you’ve assessed all the other demands for oil.

That’s a quaint way of saying that your decisions about which of your creditors to pay when you can’t pay everyone should not be based on who is on the phone.

The creditors who call you are the ones with few other tools in their toolbox to collect the money you owe.

They hope to get you to write them a check for money they can’t easily get any other way.

Just because they squeak, doesn’t mean they should  get paid first.

Important creditors don’t need to call

The debt collector on the phone certainly feels like he has invaded your sanctuary.  Life is challenging enough without your money problems interrupting home life.

You are tempted to do anything to get them off the phone.  Or keep them off the phone to friends and family.

But the creditors that really matter don’t bother calling.

The taxing authorities just levy your accounts.

The mortgage creditor schedules a foreclosure.

The car lender repossesses the car.

The ex spouse gets you cited for contempt for not paying support.

These creditors have real weapons, and those weapons aren’t the telephone.

Get them to leave you alone

You have a federal right to have debt collectors stop calling you.

State law may give you other rights not to be contacted.

Write a do-not-contact letter, keep a copy, and send it return receipt requested.

The squeaking should stop.  Then start prioritizing.

Who to pay first

It’s your checkbook.  You take control.

Take care of current living expenses first.  Short the landlord and you’ll be homeless.  Miss the car payments and you can’t get to work.

bordeaux-869020_640_optI’ve seen too many people tinker with their tax withholding to create cash flow to pay credit card bills.  They have effectively made the toothless credit card creditor happy at the expense of taunting the big dog, the IRS.

Rest assured, the IRS has more collection rights than a credit card company.

Make a plan and stick to it.

Hands off the retirement money

It’s tempting, if you’ve been wise enough to set money aside for retirement, to dip into that fund to get out of today’s money jam.

Don’t do it.

Retirement funds are precious and almost everyone I talk to has saved far too little.  The older you are, the less time you have to restore what you’ve already saved, when you should be adding to that store.

Your creditors can’t take your retirement savings;  don’t you do it for them.

If the money doesn’t go around

Get help.  Get input from a credit counselor or a bankruptcy attorney.

Find out what your options are.  Get objective advice on a long range plan.

Don’t let the threats on the phone tell you how to manage your money.

More

Understand the weapons of a debt collector 

Assess the threats of collectors: most aren’t real

Images courtesy of   Erich Ferdinand , Flickr and Tindaisies. and Pixabay.

Should You Pay Your Creditors Rather Than File Bankruptcy?

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bankruptcy alternative

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 bankruptcy alternatives

So, you want to pay off your debt without help from the legal system.

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 your creditors comes unraveled.

Make good decisions about your future

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

Studies prove being in debt makes you stupid

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

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

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

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

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

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

More

Secret alternative to bankruptcy

How to evaluate your choices about debt

Leave a legacy not a pile of debt

What you keep despite bankruptcy

How To Pay For Bankruptcy When You’re Flat Broke

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paying for bankruptcy

One of the cosmic ironies of our legal system is that it costs money to file bankruptcy. Bankruptcy gets you out of debt only if you have the money to file.

The costs of bankruptcy include the filing fee collected by the court; the required credit counseling; and, if you’re smart, an experienced lawyer to make sure it’s done right.

I have not recommended people represent themselves in bankruptcy since Congress “reformed” bankruptcy 15 years ago. The express intent of that law was to discourage consumers from getting relief from their debts. With “reform”, bankruptcy law acquired pitfalls, traps, and requirements that invited mistake.

But a malicious Congress left untouched one of the shining features of bankruptcy, the ability to pay your bankruptcy attorney after you file Chapter 13.

Chapter 13 pays attorneys fees

Chapter 13 is a repayment plan for individuals. You make a monthly payment to a Chapter 13 trustee for the life of the plan. Those plan payments can pay the lawyer who helped you file the plan and get a bankruptcy discharge.

By contrast, to file Chapter 7, the most common alternative to Chapter 13, your attorneys fees usually need to be paid in full, before you file. Paying for Chapter 7 then becomes a challenge unto itself.

In Chapter 13, the debtor’s attorney has an administrative claim in the case for whatever part of the total fee wasn’t paid before the case was filed. Administrative claims have a priority for payment under bankruptcy law.

Choosing Chapter 13

The ability to effectively finance the attorneys fees to file bankruptcy can be a godsend when you face the need for an immediate bankruptcy filing. That need can be as concrete as the need to save your house or your paycheck. Or it can be as ephemeral as the need to stop the stress of being in debt.

Chapter 13 comes with some features that aren’t as appealing as Chapter 7. The biggest downside is that the discharge doesn’t come until you complete the plan payments, which can run from 36 months to 60 months.

The duration of the plan risks that intervening events, like job loss or health issues may compromise your ability to make the plan payment.

But usually, if your situation was so bleak that you couldn’t pay for a Chapter 7, the Chapter 13 plan payment may be as little as $50 to $100 a month.

And, if it develops that you can’t make the Chapter 13 payments, you have the absolute right to convert your case at any point to Chapter 7.

All in all, that’s why I love Chapter 13.

More

What should bankruptcy cost?

How to interview a bankruptcy lawyer

What you have to pay in Chapter 13

Personal Assets Can Be At Risk For Your Business Debts

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Business debt can bleed over into an entrepreneur’s personal assets.  My client was dumbfounded.

He was aghast that the generous equity in the home he and his wife owned was at risk when his corporate business folded.

That was not because the shareholder is liable for the corporation’s debts.  A properly operated corporation confines the business debts to the corporate entity.

How to properly sign for your corporation

No,  it’s because he signed the business lease in his individual name.  And because he was a corporate officer who didn’t pay all the payroll taxes for the corporation’s employees.

As a person liable for a debt, his assets (and the whole of the community property in California) are exposed to creditors.

While exemptions protect some assets, up to a specified dollar value,  the non exempt equity in the family home is at risk when debts incurred for business go unpaid.

Understand the California homestead

When business vs. personal distinction matters

The only time that it matters whether a debt is personal rather than business is when figuring the infamous means test.  The means test applies only to those whose debts are “primarily consumer”.

So, debts incurred in business, taxes and debts imposed by law are not “consumer” debts.

If those kinds of debts exceed the total of consumer debts, the means test doesn’t apply.  There is no need to “qualify” for bankruptcy relief by reason of income.

Sole proprietors are fully at risk

As a matter of debtor-creditor law, if your business is a proprietorship, there is no legal distinction between you and your business.  The debts you incur to run the business have the same legal rights to payment from your assets, personal and business,  as the debts incurred for personal living.

When the business is one with the business owner, failure to pay any debt imperils both business and business owner.

Isolating business debt

Corporations and LLC’s are legal “persons” invented to create a distinction between the business and the business owner.  The corporation can incur debt in its name alone, and only it is liable.

The practical catch is that vendors and landlords may not want to extend credit where the only “person” liable is a thinly capitalized corporation. They may insist on a guarantor.  Execute that guarantee of the corporation’s debt, and the individual has staked his personal assets to pay the debt.

The other way owners of corporate businesses become liable for the business debts is inattention.  They never change the vendor accounts to the corporate name when they incorporate.

They are sloppy about how they sign business agreements.

The myth of the corporate credit card

They take a business credit card and don’t realize that they are personally liable.

Who needs bankruptcy

In the case of the entrepreneur I met with, it turns out that the corporation is liable for very little and it can survive as an entity if there is a business future.

The shareholder, however, is a likely candidate for a Chapter 13, to keep the house and pay the debts over time.

More

Is it safe to file a corporate bankruptcy?

Asset protection for everyday folks

How exemptions work

Financial Fundamentals: Credit v. Debit

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financial literacy building blocks

Just because it’s plastic, doesn’t mean it’s a credit card.

Yet when I ask my clients about their credit card accounts, too many of them proffer their debit card.

And the confusion about plastic cards that aren’t credit cards isn’t confined to those in debt. My young adult son struggles with the distinction, too.

So, let’s trot out the vital distinctions.

 A credit card let’s you borrow money on the fly according to the terms of your agreement with the card issuer.

 A debit card let’s you access your money in your bank account by swiping the card.

Look-alike cards work differently

Same shape, same feel, same layout.  The confusion is understandable.

The CFPB explains prepaid cards v. credit cards

Label each with a credit card company’s name, and the masquerade is complete.

The basic distinction is that a credit card gets you a small loan on demand. You can borrow money to buy stuff, or get cash, up to your credit limit.

It’s generally a very expensive loan, and the repayment terms are so relaxed that you almost don’t notice that the minimum payments will be with you nearly forever.

The debit card simply allows you to spend your own money more quickly than writing a check.  It gives the merchant comfort that you really have the money to spend.  The credit card logo just means that you can spend your money via plastic where the merchant accepts that brand of credit card.

Opting to pay more for your card

Your use of a debit card to spend your own money is subject to an agreement with your bank or credit union where the money is on deposit.

One provision of that agreement covers what happens if you swipe the card for a purchase in excess of your bank balance.  Logically, if a debit card just gets you convenient access to your money, and you don’t have enough money, the transaction should be declined.

But you can agree (opt in) to having the bank cover the shortage, for a fee.  Yes, Virginia, there’s always a fee in these deals.

More about opt-in

Pre paid cards bypass the bank

Finally, the prepaid card is an electronic wallet.  The prepaid card carries around however much is loaded on to it.

Its appeal is that no banking relationship is required.

Its dark side is that each swipe of the card deducts not only the cost of your purchase, but also a fee for its use.

There are fees for activation, monthly maintenance, reloading, and ATM use.  ConsumerReports

So, there you have an introduction to plastic in the world of finance.

More

Fundamentals of Compound Interest

Take The Long View With Your Money

Taxes:  A Beginner’s Guide

 

No Rush To File Bankruptcy

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file bankruptcyWhen the virus steals your income, it’s easy to be overwhelmed with unpaid bills and terrifying economic uncertainty.

Immediate relief by filing bankruptcy may look appealing.

Make it all go away, you say. I’ll never pay this off.

But not so fast.

With few exceptions, this bankruptcy attorney thinks it’s too early in this pandemic to think about filing bankruptcy.

Here’s why.

Creditors have few remedies

In the short run, unpaid creditors can’t do much about non-payment.  Courts are essentially closed, lawyers are at home, and sheriffs have been ordered to stand down.

The normal legal remedies for non-payment simply aren’t available.

And few creditors think that hard ball tactics and lawsuits are actually going to make money magically appear.

We’re not at the bottom

One of  my indicators that it’s time to file bankruptcy is when you know you’ve hit the bottom.

When things are looking up and your future income is exposed to past debts, then it’s time.

Relief in bankruptcy is a rationed item:  you can only file Chapter 7 every eight years, and Chapter 13 slightly sooner, but not at will.

You don’t want to shoot your wad too soon.  Move too quickly and you may find that more debts accumulate but you’ve already played the bankruptcy card.

Today’s debts dischargeable tomorrow

You needn’t worry that you have to file bankruptcy before you are sued, or before a judgment is entered, or even before your bank account is levied.

At any point in the life of a debt, the debt can be discharged.  Assuming it’s a dischargeable debt, which most are, its age or procedural posture makes no difference.

Governmental action may change the picture

Given the massive nature of the COVID-19 recession, further action from the government to stabilize the economy and protect the millions of people affected is assured.

The shape of that assistance, the size of the help, and whether it actually keeps people from needing bankruptcy, it’s too soon to know.

But this bankruptcy veteran is counseling that we take it slow and understand the lay of the land before rushing to bankruptcy court.

More on Coronavirus economic survival

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Phone: (650) 694-4700

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