Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

How To Pick A Bankruptcy Lawyer

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interview a bankruptcy lawyer

How do you pick a bankruptcy lawyer when you’ve never hired any lawyer and never before considered filing bankruptcy?

What do you ask a bankruptcy lawyer to determine if the lawyer is the right one for you? After all, the conversation has to move beyond “what does bankruptcy cost?”

Financial troubles are tough and bankruptcy can seem scary.

So, you want to find a lawyer who can make it easier. You need to know if bankruptcy is really the right thing for you.

But what do you ask a prospective lawyer to make your decision?

Interviewing a bankruptcy lawyer

Actually, it probably doesn’t matter what you ask.

It matters how the lawyer answers.

Here’s a starter set of questions to get the conversation going

1.  Do I have a meaningful alternative to bankruptcy?

Asking about alternatives to bankruptcy allows the lawyer to talk about the scope of your financial difficulties.  

It allows you to gauge whether the lawyer can only see you as a buyer for what he sells. Or, has the lawyer considered both issues and timing to see if you need bankruptcy.

In fact, most people who sit down with a bankruptcy lawyer really need bankruptcy.  They have ignored the signs that the situation is beyond repair for a long time.

So, the answer that bankruptcy is appropriate isn’t a black mark on the lawyer.  Inability to explain why the alternatives don’t work well is a negative.

2.  What’s the most serious complication for me?

Few cases are problem-free.  Whether it’s protecting assets, passing the means test, or finding the money to fund a Chapter 13,  almost every set of facts has bankruptcy challenges.

You want to know if the lawyer is forthcoming about the expected rough spots.  Can he talk candidly about what might be challenging in your case?

3.   How many cases like mine have you handled?

While the answer may be short, you do want to talk about the lawyer’s bankruptcy experience.  Generally, the larger portion of a lawyer’s work load that is bankruptcy, the better.

Bankruptcy is a recognized legal specialty and if your case has a complexity, experience is an asset on your bankruptcy team.

4.  Who will work on my case?

A bankruptcy legal team usually includes both a lawyer and staff.  Much of the work in preparing the all important schedules is routine.

What you want to avoid, however, is a business model where all the work and the analysis is done by those without a law degree.  Bankruptcy is not just “filling out forms”.   Each answer in the form has a legal consequence that’s important to your case.

Ask, too, how you and the lawyer will communicate when you have questions during the process.

5.  What is not included in your fee?

Those drowning in bills often think price is important in picking a lawyer.

From experience, about the only time I think it’s important is when the price is unreasonably low.  Either you aren’t getting much service at that price, or the lawyer can’t compete on quality and therefore cuts the fee.

Ask if lien avoidance or reaffirmation issues are extra.  Ask if there are costs beyond the court’s filing fee that you must pay.  Ask about representation should there be a trustee audit, a 2004 examination, or an adversary proceeding.

It’s attitude that matters

As I said at the top, these questions are as much about the lawyer’s approach to you and your case as they are about the answers.

  • Is the lawyer comfortable with you driving the agenda?
  • Can he/she explain admittedly complicated matters clearly in a way you understand?
  • Are your questions welcomed?

If communication between you and your lawyer  isn’t open and valued, there’s trouble ahead.  You need to be comfortable enough with the relationship to disclose the troubling or the embarrassing.  Otherwise, you and your lawyer are playing without a full deck.

It needs to be OK to say “I don’t understand” or “I’m worried”.  Otherwise, you may be setting off into the bankruptcy jungle without a current map or an adequate guide.

Don’t be afraid to leave an initial meeting with a lawyer without making a commitment.  If you are uncertain about the fit, think it over.

Or interview another lawyer.  Several data points will make things clearer.

Bankruptcy Drives Credit Score Surprise

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credit score increaseBefore bankruptcy, a miserable credit score was no surprise.  My client reported a 498 credit score before he filed.

What was surprising is that, three month after he filed bankruptcy, his score was 614!

That’s a 116 point increase in his score in three months. 

That’s while his bankruptcy case is still active, and long before he gets a Chapter 13 discharge.

So let’s hear no more about bankruptcy always trashing your credit score.

Setting worries about future credit issue aside allows you to  focus on the health of your balance sheet.  And enjoy the peace that comes with reduced debts.

What credit scores measure

Credit reports and credit scores explained

Credit scores are supposed to measure the likelihood that a borrower will repay future credit. Makes sense that lenders would want to measure that.

But credit scores are based on information found in credit reports.  And credit reports are notoriously inaccurate. Twenty five percent of credit reports contain material errors, according to government studies.

Isn’t it ironic that the oh-so-precise number in your credit score is based on bad information?  As we say in number-obsessed Silicon Valley:  garbage in, garbage out.

Misuse of credit scores

As if inaccuracy isn’t bad enough, credit scores are increasingly used for issues far removed from the extension of credit.  Auto insurance rates, utility service,  employers and even immigration decisions are influenced by credit scores.

So questionable information invades your life far beyond issues of consumer credit.

And, even worse, in my view, is the commercial exploitation for profit of consumer’s focus on credit scoring.

Credit anxiety is profitable

The widening use of credit scores outside of finance created a entire industry of supplying credit scores, weekly or monthly, to consumers.

Originally credit scores were used by lenders, internally.  But these days, credit card companies, personal finance sites, and even my credit union, try to sell you access to your credit score.

And by the time they’ve convinced the public that their credit score is as vital a measure as blood pressure or body-mass index, lenders and debt collectors can use that belief to demonize bankruptcy.

But, as my client’s experience shows, it just isn’t so.  (And a national study says credit scores trend immediately upward after bankruptcy.)

More

Credit reports heal

The most compelling reason to file bankruptcy

Life after bankruptcy

Does This Struggling Business Have A Future?

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virus damaged business

Long after the human patients recover from the coronavirus, small businesses will still be struggling.

And long nights will be spent deciding whether to try to stay in business.

Here are some things to weigh as you consider the future of a struggling small business.

The desire to continue

The most important part of most small businesses is the owner. The owner supplies the vision and the drive that makes the business run.

If you are drained of vision and drive, then allow yourself to exit. Soldiering on just so you don’t have to admit you’re done is unlikely to have a good result.

If you’re game to continue, there are more questions.

Is the business viable

When the lock-down is over, and we creep back to the new “normal”, the next gating question is whether there’s a post pandemic market for the business’s product .

And if there is continuing demand for the product, how long is the ramp up?  What financial resources does it take to survive the ramp up? And what’s the likely volume of business to be expected over the short run? The longer run?

Reorganize for survival

The pandemic has forced change and re evaluation on all of us.  When things are already disrupted, considering change seems less overwhelming. And more essential.

Could the business continue with

  • fewer owners
  • fewer employees
  • no brick and mortar premises
  • narrower market
  • broader market
  • partnered with others

Embrace the disruption and move the pieces around the board, at least in your mind.

New debt and lingering death

Business loans seem to be at the center of the government’s recovery strategy. Distressingly, the rules about when/if those loans need to be repaid are unclear, incomplete, and subject to change.

It’s worth some thought as to whether the business can handle more debt. What is the current debt structure, and were you paying that debt down before the pandemic?

Another way to think about more borrowing is that it may be essential as a short term strategy to keep food on the table until you have more options outside of the current business.

Wind down and move on

Writing the existing  business off as a lost cause isn’t necessarily an all or nothing choice.

Perhaps you fold the existing business but remain in the same industry, as a proprietor rather than an entity, or as an entity after a personal bankruptcy.

Dangers inherent in corporate Chapter 7

Maybe, this is the time to change industries, take a salaried job, return to school, or ????

Challenges for all

The issues are complex and intertwined. And with the virus still shadowing our lives, uncertainty abounds. Allow yourself some time to consider how you move forward.

More

Collected posts on coronavirus impact on personal finances

Separating yourself from your business

Does Bankruptcy Bar Retirement Savings?

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Ongoing retirement saving by Chapter 13 debtors has been a touchy subject since the means test became a part of the bankruptcy scene.

The means test was intended to squeeze every available dollar from consumer debtors. It works by limiting the expenses that can be deducted from income in figuring what a debtor can/must pay his existing creditors.

Retirement savings accounts have been broadly protected from the reach of Chapter 7 trustees and excluded or exempted in the asset analysis in Chapter 13.

But courts have been split over whether debtors are permitted deduct as a reasonably necessary expense their ongoing contributions to voluntary retirement schemes while in Chapter 13.

So, I’m cheering the 6th Circuit’s decision in Davis which held that monies withheld by a debtor’s employer to fund her 401(k) plan were an allowable deduction from income under the means test.

Ongoing 401(k) contributions allowed

The Davis decision effectively allows the debtor to reduce the amount the means test formula would require her to pay to her creditors by the amount of her 401(k) contributions.

The court described its ruling as narrow: it applied to contributions withheld by the debtor’s employer from her wages during the means test look-back period of six months.

Only by virtue of the provisions of Section 541(b)(7) that reference sums “withheld by an employer” were the contributions deductible in calculating “current monthly income”. The self employed or those whose contributions to retirement savings took another form are not protected like Ms. Davis.

In deciding that Ms. Davis could make ongoing 401(k) contributions, the appeals court had to wade through more sloppy drafting of the bankruptcy “reform” act of 2005. The drafters inserted this protection for ongoing contributions to retirement in a section that deals with property of the estate, rather than with the means test. The Davis decision decided that the judicial canon that says “every word matters” trumped the location of the text in the Bankruptcy Code.

Californians still barred from savings

Sad to report, but the retirement-friendly Davis decision comes from the 6th Circuit, not the 9th Circuit which includes California.

federal judicial circuits

The 9th Circuit BAP held in Parks, 475 B.R. 703 (B.A.P. 9th Cir. 2012) that a Chapter 13 debtor could not deduct any voluntary retirement contributions in calculating what debtors pay in Chapter 13.

While it’s unclear the extent to which BAP decisions bind bankrutpcy courts in its circuit, as a practical matter, it will take an appeal to the 9th Circuit or legislation to assure Californians filing bankruptcy that they can continue to make provisions for their old age.

Retirement savings are necessary

I’ve long advocated for treating retirement savings as a necessary expense for purposes of both the means test and the debtor’s projected budget.

It is ludicrous to contend that individuals don’t have to make regular and meaningful contributions to their retirement accounts to enjoy a stable retirement.

And by mandating that savings are not permitted in Chapter 13, we condition debtors to spending every penny they make either for current living expenses or plan payments to deal with past debts. We forfeit the opportunity to habituate debtors to looking at their needs beyond the upcoming month.

Planning to file bankruptcy

Too often, individuals find themselves filing bankruptcy with little or no forethought. But if you see a bankruptcy in your future, and have the opportunity to have 401(k) contributions deducted from your paycheck, do it.

10 Things Personal Finance Bloggers Need To Get Right About Bankruptcy

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bankruptcy facts

Too many personal finance bloggers need to sharpen their game when it comes to bankruptcy.

Personal finance bloggers do so much good promoting better financial habits and deeper understanding of money.

But too often they drop the ball when it comes to bankruptcy.

One, they get the basic facts about bankruptcy wrong; and

Two, they categorically make bankruptcy the last choice for relief, rather than an option to consider along side alternatives.

So, instead of blogs shedding light on bankruptcy as a personal finance tool, myths and misconceptions get recirculated.

So, here are 10 things a 40 year bankruptcy law veteran wishes personal finance writers would get right.

1. Debtors lose nothing in 97% of bankruptcy cases

While Chapter 7 is termed a liquidation proceeding, in fact very few individual debtors have any property liquidated. That’s because exemptions laws that protect certain assets from creditor’s claims. Note that exemptions vary from state to state. Further, most personal property has little sale value.

2. Debtors with assets can keep everything through Chapter 13

Debtors with assets at risk in Chapter 7 can choose a Chapter 13 bankruptcy where they propose a payment plan that must give creditors what those assets would yield in Chapter 7. Debtors keep their assets throughout, and emerge with a discharge of debts.

3. Means test affects only choice of chapter, not availability of relief

The means test does not bar anyone from bankruptcy. It is a flawed attempt to see that high income individuals justify their choice of Chapter 7, or elect a repayment plan through Chapter 13. That repayment plan may still only pay creditors a fraction of their claims.

4. Credit scores improve immediately after bankruptcy

Long term studies show that, far from trashing credit scores, bankruptcy fuels an increase in credit scores, pushing scores immediately and steadily upward. The fact of filing appears in credit reports for 7-10 years (depending on chapter) but becomes less and less significant over time.

5. Even those in bankruptcy can get loans

Filing bankruptcy affects the price of credit; it is not an absolute bar to getting a loan. In fact, debtors in Chapter 13 get car loans during their cases. The terms aren’t great, but bankruptcy filers are not locked out of the credit market.

6. Stress is deadly

The toll of money-driven stress on individuals and families is incalculable. Stress not only degrades health, but leads to fuzzy thinking about all kinds of subjects. While repayment schemes drag on, bankruptcy relief can immediately alleviate that pernicious stress.

7. No one rule fits all

The suitability of bankruptcy as a remedy for debt is highly individual. There’s no one formula or check list that applies to everyone with debts they can’t pay. Age, family size, retirement resources, income level and debt total are all factors that should influence the decision to file bankruptcy. Each factor cuts in a unique direction.

8. Bankruptcy enables payment of debts that aren’t discharged

A slice of debts can’t be discharged in bankruptcy. Too many writers lead with the list of debts that can’t be wiped out. They omit that by using bankruptcy to get rid of the dischargeable debts, an individual can free up funds to pay those important debts that survive a discharge.

9. Bankruptcy effects a debtor-creditor power shift

Bankruptcy provides a different playbook for the debtor/creditor relationship. No longer does the threat of legal action empower the aggressive creditor. The law provides for the order in which creditor claims are paid (if paid at all) and a federal judge enforces the automatic stay that halts collection action. All creditors are bound by bankruptcy law so hold out creditors can’t wreck a repayment plan.

10. Bankruptcy benefits the economy

Even when the Constitution was written, lawmakers recognized the benefits to all of us from freeing people from debts they couldn’t pay. The Founders provided that Congress would enact uniform bankruptcy laws. Allowing the discharge of old debts allows families to participate in the economic life of the country going forward. It makes it more likely families are economically resilient and positioned for old age. And it allows business people to take risks and try new things, knowing it won’t ruin the balance of their lives.

Bankruptcy is not the last resort

Bankruptcy offers a swift and certain remedy for overwhelming debt. The biggest tragedy I see in my law practice is people who struggle far too long with debt remedies that are doomed from the beginning.

Bankruptcy is an option to be considered alongside other debt options, from the beginning.

While bankruptcy is not to be used lightly, it is not a last resort.

How Chapter 13 Saves You Money

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chapter 13

Why should I file Chapter 13  if I have to pay all my creditors in full?

Because, I said, even a 100% repayment plan under Chapter 13 saves you money.

This client had a fistful of equity in a home;  that equity made a Chapter 13 the required choice of chapter for the man.

But he struggled with finding the benefit of using Chapter 13 to manage his debt.

I never would have filed bankruptcy if I realized I had to pay everyone 100%.

So I fired up Excel and crunched numbers to quantify the answer to “why file“.  In this client’s case, the answer was $20,000. 

When asset value drives Chapter 13 payment

Chapter 13 saved $20,000 over 5 years when compared to paying all the creditors what they were owed outside of bankruptcy.

It’s all about the interest rate

At base, the $20,000 bankruptcy savings for this client flowed from the difference between the interest rate in bankruptcy compared to the interest rates on taxes and credit cards in the non-bankruptcy world.

When creditors are entitled to get interest on their claims in bankruptcy, the interest rate that applies is the federal judgment rate.  When I did this exercise, the federal interest rate was 2.35%.  Find today’s judgment rate.

By contrast, I assumed credit card interest rate of 23% and the IRS interest rate to be 6%.

13 crushes credit card debt

Paying the approximately $39,000 in credit cards in 5 years (the same duration as the Chapter 13 plan)  according to contract terms  cost $27,000 in interest!  The total cost to pay off those cards was roughly $69,000.

The cost to pay off the same $39,000 in cards in Chapter 13 was $2250 in interest and $4121 in Chapter 13 trustee commission (assuming the maximum allowed rate of 10% of dollars the trustee receives.)

So, which would you rather pay to keep your house and get rid of your credit cards:  $27,000 or $6365?

Point: Chapter 13

Taxes score a draw

The savings on paying off taxes through Chapter 13 was less dramatic.

We were looking at $46,000 in taxes, some priority, some older than that.  To pay them off outside of bankruptcy would run up about $7300 in interest.

Paying those same taxes in Chapter 13 incurred $2550 in interest. But when you added the trustee’s commission to the bankruptcy interest, the transaction costs essentially equaled the cost of paying the taxes outside of bankruptcy.

Point: neither side

Snoozing creditors lose

The unpredictable further savings may lie in creditor ineptitude.  That’s because only creditors who file a timely proof of claim in a bankruptcy case share in the payments.

In my experience, it’s the rare case when every creditor follows through and files a claim.

So my client will get a discharge of all his liability to creditors who don’t file claims, without paying them a cent.

Point: too soon to tell

Non economic benefits

Here, we looked only at the dollars and cents differences between paying everyone in bankruptcy or outside of bankruptcy.

Not visible in a spreadsheet is the reduced stress that Chapter 13 brings, by corralling all creditors in a single proceeding and having the law to back you up on the schedule on which they are paid.

Stress kills

Chapter 13 keeps you in control of your assets, protected by law, while you pay off what you owe.

More

How Chapter 13 can save your house

Credit Scores Trend Upward After Bankruptcy

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After bankruptcy, credit scores go steadily up, says a 17 year study released by  the Consumer Financial Protection Bureau.

Got that?  Go UP.  Every year.

Importantly,  credit scores start improving the same year that the bankruptcy is filed.

Think on that for a moment.

How collectors stoke fears about bankruptcy

Creditors and their shills shout that bankruptcy trashes your credit score;  the data show just the opposite.  There’s no dip post filing, but instead an immediate uptick.

This is how the CFPB puts it:

Median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition.

Median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers possibly due to the much quicker and more likely discharge of Chapter 7 filings.  http://bit.ly/33kgOaf

Bankruptcy improves your balance sheet

Let’s be clear about what is important in your financial health. Your credit score is far less important in the big picture than your balance sheet.

Credit scores are a side show

A balance sheet looks at what you own and what you owe.  That’s the information that appears on a loan application.

Ditch the debt in bankruptcy and there’s less debt to weigh down your net worth.

Goose your credit score

You can take actions that may increase the rate of improvement.

Remember that credit scores are based on credit reports.  And credit reports are notoriously inaccurate.

A government study in 2012 found that between 20 and 25% of credit reports had material errors.

Rest assured that the rate of errors on your credit report does not go down when you file bankruptcy.  That’s why you should pull your credit report a few months after you get your discharge, and look for errors.

Attorney Mike Cardoza lays out how to do that in How To Spot Credit Report Errors After Your Bankruptcy & Fix Them.

Is bankruptcy the right choice

Just because bankruptcy may improve your credit score is not a reason to file bankruptcy.  It’s just an issue to take off list of reasons not to file.

Lots of different facts influence whether bankruptcy is right, and whether the time is now.

I look at those factors in What Kenny Rogers Teaches Us About Getting Out Of Debt.

 

 

What’s Wrong With Most Get-Out-Of-Debt Advice

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consider bankruptcy

Get-out-of-debt gurus too often miss the essential truth known to every carpenter.

Measure twice, cut once

Too many trite lists of tips to help you get out of debt miss the vital first step.

Before you choose a get-out-of-debt path, assess your situation.

When you put bankruptcy at the bottom of the list, to be chosen only after everything else has failed, you may spend a lot of time  hopelessly floundering. A lot of stress. A lot of cash spent without achieving your goal.

Instead

Measure the size of your problem.

Inventory the tools you have available.

Know how long you have to get the job done.

There’s little point in attacking substantial tax debt by cutting out Starbucks.  Nor is bankruptcy the right tool for a couple thousand dollars in credit card debt.

There’s no one-size-fits-all when it comes to debt.  Whip out your financial tape measure, and check the factors that make a difference here.

 

 

Three Barriers To Getting Out Of Debt

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get out of debt

Three emotions, not reasons, keep people from filing bankruptcy and getting out of debt.

While not as sexy as the seven deadly sins,  these emotions still keep my clients mired in debt long after logic says “quit”.

Fear

Stubbornness

Pride

These emotions keep people mired where they are. They block the road forward.

Fear

Fear of the unknown probably kept our primitive ancestors alive.  In the age of the internet when nothing remains unknown, it’s ironic that fear continues to keep people from filing bankruptcy.

People fear life in a consumer society without credit.  They fear being branded as a failure.  They fear the judgment of others about whether they are worthy of bankruptcy relief.

Some of this fear is rooted in bad information that circulates;  some of it is deliberately planted by those who profit as long as you avoid the bankruptcy remedy.

So, I’m with Franklin Roosevelt:  all we have to fear is fear itself.

Stubbornness

It’s hard to knock stubbornness, even when it keeps people doing foolish things.  After all, stubbornness, the drive to finish what you started, is often a virtue.

I’m talking about the attitude that says “these are my debts, and by d***n, I’ll get them paid”.  Honorable, but not always rational.

See how long it takes to pay off a modest credit card balance by paying the monthly minimum.

After all, life is about choices, and the choice to keep chipping away at a Mt.Rushmore of debt means usually that some other need, real and important, goes unmet.  The greatest of these neglected choices, in my world, is retirement savings.

Cultivate stubbornness as a virtue, and the negative events of the past poison your future as far as the eye can see.

Pride

 I’m not the kind of person that files bankruptcy, I often hear.

Well, what kind of person is it that files bankruptcy?

It’s people who’ve gotten sick, even with health insurance;  people who’ve divorced;  people who’ve lost jobs; and people who got suckered into believing that the marvels of a consumer society were available to everyone.

Bankruptcy is not a moral failing; it’s a legal solution to an economic problem.

Look around at the celebrities and the iconic corporations who have all filed for bankruptcy relief.  Do we think that they are lesser people for starting over?  Not usually.  Walt Disney, one of the more famous bankruptcy filers is an American hero.

For too many, it takes exhaustion to get over the emotional barriers:  when the wall of these corrosive emotions is worn down, rationality wins out.

Feds Offer Deferral Option For Home Mortgage Payments

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save house

Homeowners with federally backed mortgage loans just got a lifeline for payments skipped under COVID 19 forbearance agreements.

The feds have mandated that servicers offer deferral as one way to repay those payments that came due while the loan was in forbearance.

Deferral results in the missed payments being added to the back end of the loan. When homeowners resume making payments, their payments are the same as they were before the forbearance.

The deferred payments will be due when the home is sold or refinanced, or when the loan reaches the end of its term.

Without a deferral option

This action saves homeowners from facing a lump sum payment of the skipped payment the month after the forbearance ends.

The language in the offers of forbearance that I’ve seen all said that the missed payments were due in full at the end of the forbearance. Or the homeowner would have to negotiate a loan modification.

Pronouncements from governmental sources similarly suggested that each borrower with a forbearance agreement would have to negotiate with the servicer a modification of their loan terms.

Requiring loan modification threatened, in my view, a repeat of the disastrous round of mangled or illusory loan modifications we experienced in the Great Recession. The pandemic has put far more homeowners in jeopardy than we experienced a decade ago.

Guidance only for federally backed loans

While the federal government owns or backs some 2/3’s of home loans nationally, the remaining loans are not guaranteed the same mitigation options that FHFA directs.

You can find out if your loan is owned by Fannie Mae or Freddie Mac, the huge governmental financing agencies through these look up tools:

Fannie Mae

Freddie Mac

More on personal finances & coronavirus

Paying your bills

Tax deadlines moved

Chapter 13 cases imperiled by lock-down

Future of small business

Thinking about filing bankruptcy

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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