Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Know who you are when the business files bankruptcy

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While knowing who you are may be central to philosophy and mental health, you wouldn’t think it poses a difficult question in a business bankruptcy.

You wouldn’t think the word “you” would be so challenging.

Yet, small business owners find it hard to separate themselves from the business, even when that business is incorporated.

After all, the owner’s financial livelihood rises and falls with the success of the corporation’s business.

You and your corporate business

Twice in the past two days, I had occasion to point out to clients who own small corporations that when the bankruptcy trustee says “you”, the trustee is talking about you, the individual, not the business that you have been immersed in.

How to sign for your corporation and not be personally on the hook

But the distinction is important.

In the law, the corporation that owns the business is a separate legal “person” from the flesh and blood human being who owns the stock in the corporation and serves as its officer and director.

The debts of the corporation are not necessarily the debts of the shareholder. The corporation can file bankruptcy without the shareholder, and conversely, the shareholder can file bankruptcy without impacting the day to day operations of the corporation.

In analyzing a bankruptcy filing or answering questions from a bankruptcy lawyer or bankruptcy trustee, make sure you know who you are.

More about struggling businesses

Individual bankruptcy and business debts

Is it safe to file corporate bankruptcy

The unexpected benefits of incorporating

When your business needs to wind down

 

More on business bankruptcy on Bankruptcy in Brief.

Bankruptcy Discharge Slays IRS Form 1099

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In a duel between a Form 1099 and a bankruptcy discharge, bankruptcy wins every time.

The prize?  no tax on debt discharged in bankruptcy.

So, if you’ve already gotten your discharge, the creditor’s 1099, with your social security number on it, is no threat.

But you do need to file another form to secure the prize.

Bankruptcy is exception to tax

Normally, when an obligation is forgiven, the tax code treats the amount of forgiveness as if it were income.  And income is exposed to tax.

Insolvency is another exception to tax on forgiven debt

But forgiveness in bankruptcy in the first exception to the rule.

Debt forgiven in bankruptcy is not treated as income.

Creditor is clueless

So, if bankruptcy is outside the IRS rule, why are you getting a form 1099?

Because there’s another rule, requiring creditors to report to the IRS, just the way your employer is required to send the IRS your W-2.

And seemingly, the creditor can’t figure out that the reason its claim is worthless is because of the bankruptcy discharge.  So it’s easier for the creditor to just send out Form 1099, and make it your problem.

Fixing the 1099 problem

The solution is simple:  file IRS form 982.

Title 11 is the part of the United States Code on bankruptcy.  Cases are filed under different chapters of that title

Form 982 is your rebuttal to the report that you have taxable income because your debt was forgiven.  Check the very first box on the form claiming the bankruptcy exception.

This debt is excluded from income because of  Discharge of indebtedness in a title 11 case 

The IRS provides a set of instructions for filing  your “get out of tax” form.  Form  982 Instructions.

Other tax consequences of discharge

If you have real property, you may have to reduce your basis in assets by the amount of debt discharged in your bankruptcy.

But thankfully, there is an exception to this rule too:  no reduction in basis is required with respect to your principal residence claimed exempt in your bankruptcy case.  IRC 1017(c).

Tax action plan

So there you have the skinny on form 1099 and your bankruptcy discharge.

Bankruptcy has other tax implications:

Taxes dischargeable in bankruptcy

Unfiled tax years are never dischargeable

Chapter 13 gets an interest-free tax repayment plan

Your accountant needs to know about your bankruptcy

What to do with a flat-wrong 1099

 

How Does Your Household Budget Measure Up?

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stretching money

The expenses your paycheck has to cover go on and on.

Each dollar is stretched;  each expense clamors for attention.

Too often, the expenses go on long after the available money is gone.

What seem like immediate needs squeeze out those necessities that only come round occasionally but in big numbers:  car repair, medical incidents, college.

And when the “occasionals”  do come round, you’re caught short.

I generally see families to talk about bankruptcy when things have gotten so out of balance that better budgeting won’t fix the problem.

So, let’s take a tour of the cost of living so you can stay in balance, and we’ll never meet face to face in my law office.

What daily living costs

Consumer Credit Counselors  proposes a model allocation of your income among all of those categories on your household expense list.

The headings in blue are the big wedges of the pie;  below are all of the expenses to be paid from that percentage of your income.

 

MONTHLY EXPENSES

MONTHLY AMOUNT

HOUSING

 35%
Rent
First Mortgage
Second Mortgage
Association Dues
Property Taxes
Renters/Homeowners
Lot Rent
Home Maintenance
Electric/Gas/Oil/Propane
Water/Sewer/Garbage

TRANSPORTATION

 15%
Gasoline
Auto insurance
Maintenance – Oil/Lube/Tires
Auto Tags/Inspection
Bus Fares/Ride Shares/Parking

INSTALLMENT DEBT

 15%
Car Payment #1
Car Payment #2
 Student Loans
Tax installments

EVERYTHING ELSE

 25%

FOOD
Groceries
Meals Out
School Lunches
Food/Snacks at Work
Telephone/Cell Phone/Beeper
Cable TV/Internet

CLOTHING

INSURANCE
Medical
Life

HEALTHCARE
Drugs/Medication
Office Visits/Deductible
Dental
Optical

CHILDCARE
Daycare/Babysitter
Allowances/Kid’s Stuff
Diapers/Formula/Baby Supplies
Child Support
School – Tuition/Supplies
Church/Charities
Lawn/Pool Maintenance/Home Security
Personal Care – Shampoo/Toothpaste/Haircuts
Bank Service Charges/Postage
Work Tools/Clothes/Occupational Dues
Dry Cleaning/Laundry
Home Cleaning Supplies
Cigarettes/Tobacco
Hobbies/Clubs
Lottery/Casinos/Bingo
Gifts/Parties/Holidays/Cards
Vacations/Travel
Alcohol
Books/Newspapers/Magazines
Lawn/Pool Maintenance/Home Security
Movies/Sporting Events/Entertainment
Pet Care/Vet/Food/Medications

Savings/Reserve

 10%
Emergency reserves
Retirement
College

TOTAL

 

So, how do your monthly expenditures line up against this model allocation?

I was struck by how many of my standard expenditures are slated to come out of just 25% of my income.  That’s a long list.

Reshuffle the cards

Another way to look at your allocation of money comes from now-senator Elizabeth Warren’s book, All Your Worth:

  • 20% to savings;
  • 50% to must-haves; and
  • 30% allocated among your “wants”.

How does it work in your household?

 

 

The Flat Wrong 1099

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credit-squeeze-transparentWhen her soon-to-be-ex filed bankruptcy, my client got a 1099-C for the joint credit card.

The form claimed that the debt was cancelled.

Therefore, she had additional income equal to the card balance.

Only, none of the statements on the 1099 were true.

The debt wasn’t discharged as to the non filing spouse.  One spouse’s discharge does not discharge the personal liability of anyone else.

Further, the liability of the soon-to-be-ex wasn’t even discharged yet since it was the beginning of a 3 year Chapter 13.

The discharge doesn’t come until all the plan payments are made.

What to do?

Cancelled debt and taxes

Tax law requires the holder of a debt that is forgiven to report the forgiveness to the IRS.

The forgiveness can be voluntary, as in, we compromised the debt and now you owe less.

Or, it can be by operation of law:  you filed bankruptcy and discharged the debt.

Either way, the tax man sees the amount of money that you no longer owe as if it were cash income.

And, if it’s income, then you owe tax on the income.

No tax in bankruptcy

If my client was the spouse who had filed bankruptcy, she would properly have gotten a 1099-C, at the end of the case.  When the debt was truly gone.

But she wouldn’t have owed tax on the discharged debt, because bankruptcy is an exception to the rule.

Debt forgiven in any chapter of bankruptcy does not trigger cancellation of debt income.  Therefore, no tax.

Tax treatment of cancelled debt is one of the sterling features of bankruptcy that make it superior to debt settlement.

Attacking the erroneous 1099

Strike first, is my thought, when the 1099 is wrong.

The credit card company issued the defective 1099. Write the issuer and request an amended 1099.

The deadline for sending out 1099’s is about six weeks earlier than the deadline for submitting the 1099’s to the IRS.

Jump on the problem right away and attempt to correct the situation before it gets to the IRS.

When the IRS gets bad information

If you couldn’t head off a submission to the IRS that was wrong, tackle the problem in your tax return.

You can’t just file the return as if the IRS didn’t think you had this  extra “income”.  You have to address the error and overcome it.

The IRS has a form for claiming an exception to the cancellation of debt income rule:  Form 982.

Attach your explanation of why the 1099 is wrong to the 982.  There isn’t a box, or an “other” category on the form where you can provide further information, so you’ll have to attach your explanation to the form.

If not resolved at the issuer level, my client will have to point out that she hasn’t been relieved of the debt, since she hasn’t filed the bankruptcy AND that her spouse hasn’t yet been relieved of the debt yet either, as there is no discharge.

Wash, rinse and repeat

I’ve spoken as though the IRS was the sole taxing authority involved.

If you live in a state with an income tax, you must repeat the drill described for the IRS with your state tax agency.

Personal liability required

Probably the most common error in issuing 1099’s is the matter of personal liability.  If the debt cancelled was non-recourse, the borrower had no personal liability in the first place.

Cancellation of a non recourse debt doesn’t alter the borrower’s balance sheet.  The borrower wasn’t personally liable before cancellation, so there’s no cancellation of debt income to address.  More on the fictional 1099.

As I said, see above and wash, rinse and repeat.

More on tax

Discharging taxes in bankruptcy

Tax liens after bankruptcy

When tax debt is a life sentence

 

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.

Bouncing Back From Bankruptcy: The To-Do List

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You’ve hurdled the debt chasm and finished your bankruptcy case.

There’s a fresh  start ahead.

But where do you start on that fresh start?

Consider this to-do list for bouncing back from bankruptcy.

Keep on keeping on

Whether your bankruptcy case was a Chapter 7, over and done in months, or a Chapter 13 reorganization lasting years, you’ve probably been funneling money at old debt problems for a long while.

Use that discipline you honed through tough times to set aside a like amount for yourself now that you’re out of debt.

You’ve shown that you can do it.  Keep doing it, but for yourself and your family.

  • Create an emergency fund, so you don’t have to resort to credit cards or payday loans when there’s an unexpected or infrequent expense.
  • Up your retirement game.  We live longer and that’s no fun if you’re barely getting by.

Know what debts survived your bankruptcy

Not all debts get wiped out in bankruptcy.  Figure out what remains to be paid, if anything, in your case.

Debts that survive a bankruptcy discharge

A creditor with a debt that survives the bankruptcy retains legal rights to enforce that debt.

So make a list of the surviving debts and make a plan for payment.  If you can’t retire the debt as fast as the creditor insists, consider filing Chapter 13 to impose a 3-5 year repayment plan on the troublesome creditor.

Figure out where your money goes now

Take a look at the fixed expenses in your life.  Usually that’s housing and transportation.

Can you afford the mortgage payment or the car payment that stretches out into your future?

Look at your monthly expenses that are more easily trimmed.

  • what are you spending on cable, internet, and cell phones?
  • are you overpaying for insurance on your car or your home?
  • do you rely on fast food or prepared meals that you could fix at home?
  • are you having more taxes withheld than required to pay what you’ll owe?

Clean up your credit report

I’d like to say that credit reports are only important if you want to get back into debt.

That’s what credit reports were created to do:  help lenders decide who gets credit and at what price.

But the unfortunate truth today is that credit reports impact rental housing; insurance rates; and even job prospects.

So, make sure the debt discharged in your bankruptcy shows as having a zero balance. Here’s how.

Avoiding another financial crisis

Most bankruptcies are triggered by things over which you have little control:

  • job loss;
  • ill health;
  • divorce.

You may not be able to insure that none of those things happen again.

But with forethought and savings, you can absorb many financial blows and survive.

More

What’s life really like after bankruptcy

Resetting how you think about money and life style

Your mortgage after bankruptcy

Your discharge comes with rights: enforce them

 

The Difference Between Good Bankruptcy Lawyer and Great Bankruptcy Lawyer

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question-markFinding the right bankruptcy lawyer may be the difference between a successful bankruptcy and a nightmare.

Choosing a lawyer you can talk to is critical.

You’ll be disclosing lots of information normally held confidential.

But there’s more.

It’s not just a lawyer you can tell your secrets to.

You need to find a lawyer willing to answer your questions, over and over, if necessary, until you understand the choices that you must make in filing bankruptcy.

Until you understand the issues and the consequences, you can’t play your position on the bankruptcy team.

Choices after deciding to file

Some things a client doesn’t have to truly understand to file bankruptcy: how the means test works, or doesn’t work, is one of them.

The debtor need only validate some of the information in the form.

But other bankruptcy issues require the client to make choices and perhaps confront risks.

Is the loan repayment to your parents a recoverable preference?

Does the recent use of your credit card make you susceptible to the charge of incurring debt by fraud?

Are you at risk of a UST challenge to your Chapter 7 case as an abuse?

Decisions surrounding these issues are, in the end, the client’s decision. The factors are complex, and in this day of “new” bankruptcy law, sometimes uncertain.

The client needs to feel absolutely comfortable asking their counsel to explain the issue, assess the risks, and explore alternatives with them.

The lawyer needs to be capable of explaining without jargon or presumption.

The bankruptcy problem your lawyer can’t handle

So I would add to the list of qualities in superior bankruptcy counsel: openness to the layman’s questions.

Great bankruptcy lawyers are willing to restate and reanalyze the options until the client understands.  You need to feel comfortable saying you don’t understand and asking that the lawyer try another way to say it.

A lawyer who is not capable of making you a partner in the conduct of the case may end up excluding you from considerations that rightfully belong to you, the client.

More

Questions to ask a prospective bankruptcy lawyer

What should bankruptcy cost

Can you afford the bankruptcy alternatives

The Kind of Person Who Files Bankruptcy

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who files bankruptcyThis is last place I ever expected to be, says the client sitting in my bankruptcy office.  I hear that probably twice a week.

Or, the client assures me:  I’m not the kind of person who doesn’t pay their debts.

My clients seem to think that only someone who is different or defective has trouble paying their bills.  Not so at all.

Who IS the kind of person who files bankruptcy?

It just happens that Leslie Linfield has assembled a composite picture of  the “kind of person” who filed bankruptcy last year.

Leslie should know:  she heads the Institute for Financial Literacy.

The typical bankruptcy filer

White, married couples in their mid to late 40″s, college educated and  both working are the “kind” of people who file bankruptcy.

Doesn’t sound very different or distinctive, does it?

Most of them find themselves in bankruptcy by reason of a loss of income.  Even if both are once again working, their income is now less and it’s not enough to pay the accumulated debts.

Trends

Over the past decade, the average age of  those filing bankruptcy has risen as more seniors file bankruptcy.  Many have carried consumer debt  and substantial mortgage payments into retirement  and find they can’t make it.

In my Bay Area  practice, over the past three years not only am I seeing more people who are 60 plus, I’m seeing more people whose last job paid $150,000 or more.

Now, they are either unemployed, or back to work after an episode of unemployment  at far lower pay.  Investments in real estate that were expected to provide supplemental income crashed.  Expenditures that were manageable and appropriate at higher incomes couldn’t be sustained with a drop in pay.

I am also seeing lots of small business owners, some with businesses that have survived for years, only to go down in the Great Recession.

The face of bankruptcy

In the past week, my new bankruptcy clients have included:

  • a 50’s entrepreneur with a well established business floundering  under credit card debt that financed operations
  • a young couple walking away from a house that is grossly under water
  • a retired couple whose start up didn’t
  • a 50 ish couple, housing their adult children and their kids, on half the prior income
  • two couples who invested in out of state rentals before the crash
What kind of people file bankruptcy?  All kinds, as you can see.
Or maybe it’s only those who are smart enough to see that bankruptcy offers a way out of an impossible situation and clears the decks for a better financial life.

More about the decision to file bankruptcy

What factors should you look at when considering bankruptcy?

You don’t need bankruptcy if….

Debt settlement as an alternative

Image courtey of giuliamara

 

 

Avoid Paying Taxes On That 1099 Form, Legally

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IRS form 1099tax magnifiedIt’s tax time and the mails are full of IRS form 1099.

If you managed a short sale of your property; suffered a foreclosure; filed bankruptcy; or settled your debt for less than you owed, you probably got a 1099.

But that’s not the end of the tax story.

Receipt of the form does not mean  that you must include the reported sum as income.

Please repeat:

mere receipt of the form does not mean you are necessarily paying taxes on that money.

Form 1099 is an informational form.  It is sent out routinely and without much thought on the creditor’s part.

When real property changes hands or when a debt is forgiven,  the creditor involved is required to report the transaction to the IRS.  You,  the potentially affected taxpayer, get a copy.

Here’s the action plan to avoid paying more tax.

Claim the exceptions to the rule

The Internal Revenue Code starts with the proposition that debts that are forgiven increase your net worth.  In IRS-think, there must be a tax due.

But there are exceptions.  The three most important exceptions for my clients:

  1. Bankruptcy
  2. Insolvency
  3. Qualified mortgage indebtedness

Fit in one of these exceptions and the cancelled debt does not get added to your taxable income.

To establish your right to exclude the money shown on the 1099, you have to file IRS form 982.

If you don’t file the form and claim the exception, the IRS has no way to know that, despite the debt forgiveness, there is no tax payable.

Form 982 tax-avoiding choices

Form 982 lays out the possible reasons forgiven debt might not be taxable.

Bankruptcy–  A discharge in bankruptcy forgives the debt without tax consequences.  It’s the first exception found on Form 982.  Bankruptcy law is found in Title 11 of the United States Code. The tax exception applies to the discharge of debt in any chapter of bankruptcy.

Insolvency–  Perhaps,when the debt in question was forgiven, you still owed more to other creditors than the value of your assets.  You don’t have to include the forgiven debt in your income.  You were insolvent.  Note, however, that the solvency calculation here includes the value of retirement assets that your creditors can’t reach.  Many people who have little net worth outside of retirement savings are actually solvent when you add in pensions, etc.

Qualified mortgage indebtedness-  With the Great Recession and a slew of foreclosures, Congress enacted a short term safe harbor for the debt forgiven on a principal residence.  The loan must have been was used to buy or improve the home.  The law was recently extended to include tax year 2016.

In case of mistake

Another situation where you might get a 1099 but not owe tax is where you had no personal liability for the debt;  that is, the debt forgiven was a non recourse debt.  The foreclosure agent probably has no way to know whether the lender had a right to sue you.

When your debt wasn’t really cancelled

If none of the other exceptions to inclusion in income apply, make sure you consider whether you had personal liability for the debt.  If not, seek to have the 1099 corrected, or attach an explanation to your tax return with the facts of your situation.

Remember, just because they sent you the form doesn’t mean you owe the tax.

More on tax return issues

Mortgage interest missing from Form 1098

Tax deductions hidden in Chapter 13

Tax question roundup

Are you insolvent for cancellation of debt purposes

Consequences of unfiled returns

Image courtesy of IRS EIN

 

What Causes Bankruptcy?

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Cure TargetI was playing in my head with a piece I was writing for consumers about the bankruptcy decision.

I caught myself thinking about “whether the bankruptcy was caused by mortgage debt or ….” .

And I hauled myself to a halt.

How did the words “bankruptcy” and “cause” get linked in my head?

In my head, for Pete’s sake?

Bankruptcy is not caused by insolvency, it’s a cure for insolvency.

Debt in excess of assets, particularly liquid assets, causes insolvency.

Where debts come from

The real question should be:  how did the debts arise?

The trite explanation for debt is irresponsible spending and lack of financial self control.

Not in my experiences of the past two decades.

Instead, financial distress most often comes from job loss; ill health; divorce; and multigenerational family issues.

Add to that, the ridiculous cost of housing where I practice in the Bay Area.  Too many folks subscribed to the idea that home ownership is an essential to be really middle class.

Bankruptcy is a cure

If inability to pay your debts is the disease, bankruptcy is the remedy.

The question for families is whether they avail themselves of a freely available, legal remedy for that situation.

Or, do they continuing treading water with respect to their debts until there is a further crisis.

So, for purposes of the blog I was constructing, the  correct construction juxtaposes whether the financial distress was caused by mortgage debt or some other cause.

My message is that bankruptcy is as much a beginning as an end.

It ends the distress of being financially incapable.

It is the beginning of an opportunity to realign spending, to move beyond the misfortunes of the past, and to address the challenges of the present and the future.

Families need cash reserves; they need retirement savings.  Families with children need to save for college if they are to escape a further round of incapacitating debt.

My mantra becomes:  clear thinking and emotional courage cause bankruptcy.  And the debtor is better for it.

More

Is bankruptcy right for you?

Life after bankruptcy

What should bankruptcy cost

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

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