Consumer Rights Archives - Northern California Bankruptcy Lawyer

We’re Now In Redwood City

Moran Law Group has packed up and moved to Redwood City!

Effective October 1, 2018, Cathy and Renee are holding forth at 643 Bair Island Road, Suite 403, Redwood City. Our phone number and email addresses are the same.

We’re sharing our office with two good friends and marvelous bankruptcy lawyers, Jeff Curl and Wayne Silver. Rubbing shoulders with these guys sharpens our legal thinking and just generally enlivens our days.

We will continue to counsel consumers and small businesses about their financial challenges and provide candid advice on whether bankruptcy is appropriate.

We are focused on insisting that creditors honor the fresh start that a bankruptcy discharge should bring with it. That means we are ready to go to court if necessary to make creditors obey the law and make you whole for the cost of the exercise. We can help you enforce your rights even if we didn’t represent you in your bankruptcy case.

We also tackle mortgage servicing issues that arise after a Chapter 13. All too often, it seems that lenders can’t keep track of the money they’ve collected, nor can they follow the law on being transparent about what they do.

Choosing Between Bankruptcy Chapters

By Cathy Moran

Seven or Thirteen?

13 or 7?

When you have a choice, how do you decide which chapter of bankruptcy works best?

Usually, the choice is driven by the scope of the discharge and the kind of debts you have.

More kinds of debts are dischargeable in Chapter 13 and the automatic stay protects you for the 60 month duration of the case.

So why did the client this week choose to walk out of Chapter 7 with fewer debts discharged than if he’d chosen 13?

It’s all about his future. And who will get to share in his growing earning capacity.

Chapter 7 over Chapter 13

On the surface, this client seemed a great candidate for Chapter 13, which is my favorite bankruptcy chapter.

Some of his debts were only dischargeable in Chapter 13; in Chapter 7, he’d emerge still owing some debts from a divorce.

So why choose the smaller discharge?

Because his earnings were likely to double or triple over the life of a Chapter 13 case.

If that happened, we anticipated that a Chapter 13 trustee would move to modify his payment plan to pay more to general unsecured creditors.

Credit card debt, which would get nothing in a Chapter 7, might well get a substantial repayment from his increased earnings.

He’d pay fewer dollars paying the non dischargeable debt that survives a Chapter 7 directly than he would paying in a larger slice of his paycheck to all of his creditors in a Chapter 13 plan.

Chapter 13 after confirmation

Judges approve Chapter 13 plans based on the situation when the bankruptcy case is filed. The means test looks at recent income. The liquidation test looks at non exempt assets at filing.

For this client, each of those numbers was modest and a repayment plan would be relatively cheap.

But Chapter 13 involves committing your future income to the supervision of the Chapter 13 trustee.

Now, that supervision is pretty minimal: it usually means the trustee monitors your tax returns to see in your income has increased.

If there’s a significant increase, the trustee can file a motion with the court proposing increased monthly payments going forward.

The debtor gets to respond with updated expense schedules, and if the parties can’t reach a deal, a judge decides whether payments change.

In the Bay Area, this happens very infrequently. I’ve seen it less than a half dozen times in 20+ years of doing lots of 13’s.

But it can happen, and for this client, it seemed quite likely that a new job in his usual profession would dramatically increase his income.

Chapter 7 looks at today

If Chapter 13 is a years long process, Chapter 7 is a single event.

The rights of the debtor and the creditors are determined by the situation on the day the case is filed.

If the means test says that Chapter 7 is an option, then the creditors get only what the debtor owns at the filing of the case.

And what the creditors share in is only what’s left after the debtor chooses his exempt property. Most Chapter 7 cases make no distribution to creditors.

Future income belongs to the debtor. The Chapter 7 trustee can’t come back a year later and ask for a slice of a larger paycheck.

So, much to my surprise, when we looked at this client’s current situation and his prospects, the more limited discharge was a better deal than Chapter 13.

He’ll get to enjoy a larger share of his future earnings and a fresh start.

How to make your divorce bankruptcy-proof

When your ex files bankruptcy

Dividing debts in divorce

3 Real Reasons Chapter 13 Plans Fail

By Cathy Moran

Two out of three confirmed Chapter 13 cases fail. Those are cases that met all the tests and got the judge’s OK.

And still they crater.

That’s a heap of people, deeply in debt, who don’t make it out of debt by using Chapter 13.

Arizona bankruptcy lawyer John Skiba has a theory about those failures:

Life
Lack of a lawyer
Luck of the trustee draw

I wouldn’t argue against any of John’s culprits: none of the things he lists help a Chapter 13 debtor.

But I have an alternate set of reasons that those trying to reorganize their debt through Chapter 13 don’t make it to the end. [Read more…]

Your Business And You In Bankruptcy

By Cathy Moran

Facets on a gem bend light and change how we see things.

The same thing happens when bankruptcy law encounters a small business owner and the business itself.

Seen from one angle of the law, the business is a valuable asset.

Seen from another, it is nothing more than a job for the owner, having no real value without the owner.

It depends on where you stand and where the light hits.

Is incorporating dangerous?

The question comes up when individuals have a small business that provides a living, but the owners have accumulated crushing debt.

I wrote earlier about how incorporation could create a separate legal entity that could continue to operate during the bankruptcy of its shareholders.

My good friend Doug Jacobs pointed out that under some circumstances, incorporation could be seen as a fraudulent transfer. And that’s not good.

A fraudulent transfer is one where the entity conveying property either intends to put it beyond the reach of his creditors, or, receives less than the asset was worth in exchange, leaving the transferor less able to pay his debts.

The bankruptcy code allows the bankruptcy trustee to recapture assets transferred in fraud of creditors.

My counter argument to Doug’s point is that incorporation hardly conveys away the value of the business, as the debtor simply exchanges his outright ownership of the business for outright ownership of the stock in the corporation that owns the business.

If there is real value there, a bankruptcy trustee can reach it by dissolving the corporation.

My second argument is that before incorporation, the business was indistinguishable from the individual. The idea of “transferring” debts to the newly created corporation is facially pleasing, but cannot relieve the individual of any liability he had before incorporation.

It is an axiom of law that no agreement between two entities can bind a third: that is, the individual and his corporation cannot by agreement cut off the right of the individual’s creditor to look to the individual for repayment, even though the new corporation and the individual might agree that the corporation will be henceforth liable.

This analysis is probably more theoretical than real.

The small businesses my clients usually operate are little more than personal services businesses. Incorporation simply provides cover for the trustee who, because of incorporation, doesn’t have to shut the business down as part of his duties to preserve the assets of the estate.

Law colored by local culture

But whether you see incorporation representing a meaningful transfer or not, the issue highlights the fact that the legal culture does vary from place to place.

I practice in Silicon Valley; Doug practices in the Central Valley. Like it or not, even though the law is the same in both places, judges often bring a slightly different perspective to the bench, depending on where they practice.

For that reason, when you select a bankruptcy lawyer, you want one who knows the judges before whom your case will be heard and understands the legal culture in that community.

Image: Nemo & Pixabay

Life After Bankruptcy: What’s It Really Like?

By Cathy Moran

What’s life really like after bankruptcy?

Everyone suffering through financial difficulties wants to know whether filing bankruptcy just trades one form of pain for another.

Will you be shut out of the American dream forever?

Here’s a collection of our best stories and advice on the world of your fresh start.

Your credit heals

Damaged credit improves over time, just like wounds heal. A credit report is not like a wine glass that once it’s broken, it’s gone forever.

8 Tasks after bankruptcy

You’ve still got work to do after your bankruptcy to enjoy your fresh start. Figure out where you are, money wise, and apply the lessons of the debtor education class you took to get the discharge.

Renter to homeowner
Even with generous California exemptions, this aging client had nothing coming out of bankruptcy because she had nothing going in. Three years later, she’s a homeowner.

Dealing with debts that survive bankruptcy

A few unsecured debts can’t be discharged in bankruptcy; it’s a short list. Some liens are your assets remain a charge on the collateral for that lien, but not on your new acquisitions.

Getting new wheels
How do you hold on to your ride, or replace your aging car after bankruptcy? Understand the impact of a shedding debts through bankruptcy.

Defending your discharge

The bankruptcy discharge is a federal court order; it has teeth. If creditors ignore your right to be free of collection efforts, you may have to bite back.

Bankruptcy can be a life-changing event, for the positive

Life after bankruptcy can be what you make it. You get a chance to make some new choices and to strip some sources of stress from your life. How will you color it in?

Is it better to just keep making minimum payments?

Secret alternative to bankruptcy

How debt makes you dumb

Stop Making Quarterly Tax Payments

By Cathy Moran

Uncle Sam expects a quarterly tax payment from the self employed since you don’t issue yourself a paycheck with regular tax withholding.

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.

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

Image courtesy of Wikimedia.

Which Debt Collector Threats Should You Be Afraid Of?

By Cathy Moran

Threats are the tools of the trade of debt collectors.

Why not? Fear is effective to get people to do stupid things.

That’s why debt collectors use it.

Pay up or…

we’ll send you to collection
we’ll sue you
we’ll ruin your credit
we’ll have you arrested
we’ll have you deported
we’ll take your house
we’ll tell your neighbors

Terror shuts down rational thinking and upends priorities.

No passion so effectually robs the mind of all its powers of acting and reasoning as fear.

Edmund Burke

As a bankruptcy attorney, I meet lots of people because they’ve panicked. A debt collector has threatened them financially, and they are sure their world is coming to an end.

So let’s talk about debt collectors and the threats they use. Just which threats are bluster and which are blockbusters. [Read more…]

Protecting Your Co signor When You Can’t Pay

By Cathy Moran

Cosigning a loan links you and your cosignor together for the life of the debt.

If you get in financial trouble, your troubles are your co signor’s troubles too.

If you can’t pay your debts, the standard bankruptcy discharge will get rid of your debt, but it doesn’t help your co signor.

Even while you are protected in bankruptcy by the automatic stay, keeping collectors at bay, and by the discharge at the end of the case, anyone who cosigned for you is exposed.

But Chapter 13 isn’t the “standard” bankruptcy. It has a special protection for people whose debts are co signed.

Automatic stay covers co signors

Unique to Chapter 13, Section 1301 of the Bankruptcy Code extends the protection of the automatic stay to those who are jointly liable with the debtor on consumer debts.

To qualify, the debt must be for a personal or household purpose.

So a cosigned car loan is covered;

A cosigned business lease is not.

The benefits of the loan must have flowed to the person who filed bankruptcy. If you co signed a loan made to a friend, your friend isn’t protected by your Chapter 13 stay.

Finally, to keep the stay in place, the Chapter 13 plan must provide for payment in full of the debt.

Co signed debts get preference

Chapter 13 plans are normally required to treat all unsecured, non priority debts the same. Each of the general unsecured claims gets the same percentage payment through the plan.

But cosigned debts are excepted.

The debtor can treat the cosigned debt differently and better than other debts.

It’s OK to separately classify a co signed debt and pay it in full, while other debts get little or nothing in Chapter 13.

So your plan can say: pay 100% of the allowed claim on the joint credit card claim of BIG BANK, and far less to everyone else.

After the plan is over

The only sticky point for the co signor, who is protected from collection on the co signed debt during the plan, is that interest that may accrue on the debt over the life of the plan.

At the end of the plan, the principal on the debt and any interest owed when the case was filed, will have been paid. But the bankruptcy case doesn’t stop the accrual of interest at the contract rate during the plan.

The cosignor will remain liable for that interest despite the bankruptcy.

Power of Chapter 13

The co debtor stay and the ability to separately classify co signed debts is just another reason why, as a bankruptcy attorney, I love Chapter 13.

Consider

The secrets of successful Chapter 13 plans

Interviewing a bankruptcy lawyer

Wipe out tax penalties in Chapter 13

The Real Threat To Your Retirement Savings Isn’t Bankruptcy

By Cathy Moran

Your retirement accounts are safe from your creditors.

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

But retirement savings are at risk.

Look in the mirror.

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

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

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

It is almost always a wretched idea.

M.O. of a debt collector

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

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

How judgments work

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

Toward that end, the debt collector will try

annoyance,
shame, or
fear

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

Are retirement savings ever the right answer

My instinctual answer is “no”.

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

But only a bit.

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

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

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

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

You can probably find a better solution.

Image courtesy of Steve Calcott.

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

Fear keeps folks from bankruptcy relief

By Cathy Moran

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.

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 serveral of the families around my petrified client have filed bankruptcy, unknownst 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 s not the fare of papers where I practice and 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.

Debt is unhealthy

Debt makes you stupid

What’s life really like after bankruptcy

Chapter 7 over Chapter 13

Chapter 13 after confirmation

Chapter 7 looks at today

More

Is incorporating dangerous?

Law colored by local culture

More

Pay this year’s taxes monthly

More on taxes

Automatic stay covers co signors

Co signed debts get preference

After the plan is over

Power of Chapter 13

Consider

M.O. of a debt collector

Are retirement savings ever the right answer

More

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