Northern California Bankruptcy Lawyer

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3 Things That Prevent You From Getting Out Of Debt

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It’s not a bad economy, poor budgeting skills, or credit card interest that keep you from getting out of debt.

It’s emotions, not reasons, keep people from filing bankruptcy and starting fresh.

Even if Reason says that you’ll never pay your debts off in the usual way.

Reason also says that paying old debt steals from essential current and future needs.

But emotions stand between you and a rational decision that repayment isn’t possible and that bankruptcy is the solution.

It’s not as sexy as the seven deadly sins, but the Emotions Trio keep my clients mired in debt long after logic says “start over”.

Meet Fear, Stubbornness, and Pride.   They stand between you and freedom from old debt.

Fear

Fear of the unknown probably kept our primitive ancestors alive.  If you didn’t understand it, it made sense to fear it.

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 how they got in this mess.

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

Good bankruptcy information found at Bankruptcy in Brief.

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

Stubbornness

It’s hard to knock stubbornness.   After all, stubbornness, the drive to finish what you started, is often a virtue.

But stubbornness regardless of the facts is not admirable.

I’m talking about the attitude that says “these are my debts, and by d***n, I’ll get them paid”.

Honorable, but not rational.

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

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

Staying in debt means living with stress, or dying of stress.

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.

Pride won’t put food on the table in your old age.  It won’t pay for your prescriptions or your kids’ college.

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 our  more famous bankruptcy debtors, is an American hero.

Perhaps the saddest things I see as a bankruptcy lawyer are people who struggled far too long with intractable debt, making more bad choices before getting out from under.

It doesn’t have to be so.

More

Debt makes you stupid

Interviewing a bankruptcy lawyer

Is it better to just make minimum payments

Sign Your Corporation’s Name So You Aren’t On The Hook

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John Hancock knew how to sign his name- so large that King George could read it without his glasses.

But most small business folks who do business as a corporation are clueless when it comes to signing contracts on behalf of their corporation.

When they sign their name, without more, on the line that says “Owner”, they may have made themselves personally liable for the obligations in the contract.

Signing just your name likely defeats the very reason that you incorporated your business.  You’ve just put yourself personally on the hook.Fish-hook-green background-wikimedia-cropped

Why your business is a corporation

In the law, a corporation is a legal person, separate from the individuals or other entities who own its stock.  Despite how invested, financially and emotionally,  you are in your business, you and the business are really two separate entities.

The invention of the corporation made it possible for business people to limit their risk in an incorporated business to the amount they paid for their stock.  The creditors of the corporation couldn’t collect their claims from the stock holder.

That ability to limit your risk, to keep your business creditors away from your personal assets, probably figured large in your decision to incorporate.

How a corporation gets things done

Because a corporation is a “person” without any fleshy substance, it needs people to act for it.

Those people are its employees, managers, or its officers.  They can wield a pen and sign for the corporation.

A signature on a contract serves as proof that the signatories take on the benefits and burdens described in the written documents.  Physically, a real, live person has to sign.

But how do you sign for the corporation?

Acting for the corporation

Let’s assume that the document in question is an order for the design of a new website for your business and a year’s worth of maintenance.

You are the stockholder, president, and the manager of  My Business, Inc.  (For most of us small business folks, we are also the secretary, janitor, bookkeeper for the business as well.)

If this deal goes south, you don’t want the service provider suing you, liening your house, and garnishing your wages.  This is a corporate deal.

So, here’s how you sign the contract on behalf of your corporation:

MY BUSINESS, INC.

___________________

By  Your Name, President

You sign your name as you always do, but in your capacity as an agent of the corporation.  

Contracts don’t have to be signed by the president.  They can be signed by any party the corporation has authorized to act for it.  You could be, just as legally, the vice president, the CFO, or the general manager.

By adding your role in the corporation, you have signaled that the party to the agreement is the corporation, not you personally.  The entity making the promise to pay is the corporation, My Business, Inc.

Your signature as a representative of the corporation doesn’t put you personally on the hook for payment.

Good work, Mr. President!

More

Write a contract without a lawyer

Essential habits for entrepreneurs

Myth of the corporate credit card

 

Fish hook image:  © johnsroad7

Silicon Valley Horror Story: The Business Credit Card That Bit

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I’ve long said that there is no credit card for which a real, live human being isn’t liable.

(That may be an exaggeration, but not by much.)

And I’ve long worried about the prospects for success of business startups financed on credit cards.

But I’ve never seen a departing employee of a start up stuck with the bill for charges made by management after he left, until now.

He thought the card (and the balance owed) belonged to the business and he left it behind when he took a new job.

Eighty thousand dollars in charges later, he found he was on the hook as far as the card issuer was concerned.

It was a Silicon Valley horror story.

So, let’s review how this happened and what to learn from it.  Because this won’t be the last time that departing employees have gone out on a financial limb for a new venture that fails.

Who’s liable for the business card

While the card issuer may be willing to emboss the business name on the card along with yours, dollars to doughnuts, YOU are the only one legally liable to pay the bill.

Unless the card application calls for the signature of an officer of the business entity, the bank is extending credit to an individual who signs the application.

How a corporation signs its name

The business name on the plastic may make you look more “professional” or make it easier to sort business from personal expenses, but the legal liability lies with the named individual.

How management got free money

In a world of on line purchasing, possession of the card was probably sufficient to let the remaining employee charge more stuff.  When was the last time a signature was required for online use?

Maybe, the remaining employee genuinely thought the card was business property.

Or maybe not, given the nature of the purchases.

But my client left the card behind, without thought, until the collectors came calling.

Your exit strategy

Cutting ties to an employer should henceforth include cutting up the credit card.  Or more specifically, calling (and writing) the card issuer, closing the account.

Close the account, too, if the rupture is marital; don’t let more debt accrue

Closing the account doesn’t eliminate your liability for any outstanding balance, but it does prevent further use of the card.

And if the shoe is on the other foot, and you are the remaining employee and your company is actually liable on the account, close it when the named employee leaves.

 

 

 

 

5 Small Business Mistakes That Thwart Success

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small business

In recognition of National Small Business Week, we look at what a bankruptcy lawyer knows about business.

Everyone tells you what to do to succeed in business;  you also need to know what not to do if you don’t want to fail.

Running your own business is the classic American dream.  It’s romantic and heroic.

The romance of self determination, market recognition, and profit obscures the fact that the overwhelming percentage of small businesses fail within 5 years.

I love entrepreneurs.  They are creative, determined, skillful, and incredibly  hard working.  And still they fail.

Those failures represent not only dashed dreams, but financial pain.  That financial pain is personal pain as well.

No isolating business debt from personal assets

In thirty nine years as a bankruptcy lawyer, I’ve found themes in why they failed.  Here is my list of five behaviors tied to business failures.

They plan only for success

The business plan assumes steady straightline movement toward growth and profit.  A typical plan may start small and project growth.  But it doesn’t plan for setbacks.

  • What if it takes twice as long to get a toehold in your market?
  • What if capital costs more than you think?
  • What if your pricing model  craters?

Before you take the self employment plunge, you need to assess your ability to survive if your rosy plan for success is off by 25%.

The entrepreneur loves the craft, but not the business

If you’re a great carpenter, a great cook, or a great lawyer as an employee, it’s tempting to set out to ply those skills for your own benefit.  Run your own business, the way you think it should be run, and make more money doing what you do well.

When you go into business, you wear two hats:  the skilled professional AND the business manager.

Many business failures are grounded in the entrepreneur spending all his time on the craft, and less than the bare minimum on management.

Employment laws are ignored, bank accounts aren’t balanced, taxes are postponed.

To be a success in business, you need to attend to business, or to partner with someone who loves the business side of things.

They pay too much for existing business

Buying an existing business seems like the answer to all the start up difficulties.  It’s a turn key operation, often coming with some transitional help from the seller.

And, all too often, too good to be true.

The first question to ask is why the business is for sale.

Frequently, it’s because it isn’t really making it.  It may be paying the expenses of operation, but it isn’t actually supporting the owner who works there.  The hours are too long, the challenges larger than the rewards, and the owner wants out.

Ask yourself, why you want in under those circumstances?

Ask, too: are the books up to date?  Reliable?

Another motivation for sale is that the sellers want to retire and they see the business as their retirement plan.  To substitute for retirement savings, the selling price needs to be generous.

Is the business priced at what the sellers need, or what the business as constituted is worth?

No profit if financed on credit cards

Credit cards are associated with consumers and household budgets.  But all too often, new businesses are started on the owner’s credit cards.

The myth of the business credit card

Plastic is pitched to small business owners as either a convenience, a status item, or the bedrock of business operations.

It’s really hard to make a profit if your seed capital requires interest payments at 22%.

Also, far from simplifying business bookkeeping, credit cards obscure the fact that the debt service you pay on the credit card this month is really paying for a fraction of last month’s costs of operation.

Credit card payments become their own line item in the budget rather than simply a means of paying for inventory or services required last month.

They gamble their retirement on business success

When your retirement account  is the only hoard of money you’ve set aside and you want to go into business, the temptation to draw on your retirement to make it happen is almost irresistible.

You tell yourself you are making an investment in your future.

When you do that, you break one of the basic rules of investing:  diversification.  You have put all of your retirement “eggs” in the business basket.

If the business fails, you have neither a livelihood nor a nest egg for old age.

The phenomenon is not confined to those just starting in business.  Too many folks in my bankruptcy office to deal with a dying business tell me that the business was their retirement plan.

Instead of setting aside earnings for retirement, they plowed their money back into the business.

They expected to sell it to retire.

And now there’s nothing to sell.

Make a better business plan

Give some thought to the  business side of your craft.  Make a plan and go for it.  You can be great.

More

How to sign the corporation’s name to business deals

Your business needs a prenup

Essential  habits for successful entrepreneurship

Image: Pixabay

How Guarantors Can Escape Tax On Soured Debt

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Tax lawyer Bill Purdy and I shared a client with a small interest in a failed corporation with a huge SBA loan.  Could our client escape the tax consequences should we be able to settle his  liability on a million dollars in unpaid loan.  Was the client looking at a million dollars of cancellation of debt income? Here’s the marvelous result that Bill’s caper through the IRS regs returned.  Cathy

Ever guarantee the debt of another? Ever meet anyone who has?

Chances are if you’re in business and the business is a C-corporation, an S-corporation, an LLC , or a partnership, when that business borrows money, the lender will require one or more persons who own/control the entity to personally guarantee the business debt.

It seems harmless at the time. But signing a personal guarantee is as serious as a hard attack.

It can feel just like one if the lender tags you to actually pay the debt. Institutional lenders including but certainly not limited to, the SBA, don’t hesitate to demand payment from guarantors when the actual debtor fails to pay.

When regulations are your friend

Against this backdrop Treasury Regulation §1.6050P-1(d)(7) might take your breath away:

Guarantors and sureties. Solely for purposes of the reporting requirements of this section, a guarantor is not a debtor. Thus, in the case of guaranteed indebtedness, reporting under this section is not required with respect to a guarantor, whether or not there has been a default and demand for payment made upon the guarantor.

Did I read that right?

The regulation just cited is the official US Treasury guide for issuing (or NOT issuing) Form 1099-C when a debt is settled for less than the amount owed.  And that’s critically important since the usual consequence of a 1099-C is the inclusion of that amount in taxable income.

The regulation’s language is careful to limit its reach solely to the issue of whether or not a Form 1099-C should be issued.

But unlike so many other regulations and provisions of the Internal Revenue Code, it is NOT followed by endless provisos, exceptions and intricacies.

A lender who settles a debt for less than face is not supposed to issue a Form 1099-C to a guarantor because none is required. It doesn’t matter if the debt was settled with the actual debtor or if the lender demanded payment from the guarantor upon default by the debtor.

Given that reporting financial institutions are

  • responsible for issuing Form 1099-C in a timely and accurate fashion,
  • often fail to do so correctly and
  • face no consequences if they don’t,

this is potentially a very important rule to know.

What is much more important is to know why.

Love letter from the IRS

The “why” is found in Internal Revenue Service INFO 2002-0024 (released 3/29/2002).

In it, the IRS flatly states that a guarantor is not debtor who recognizes Form 1099-C debt relief, whether or not the creditor formally looks to guarantor for payment or settles with the actual debtor.

Once again the Service’s conclusion is sweeping and admitting of very little wiggle room ( which is hardly characteristic of that organization).

Unlike many attorneys and some court cases, the IRS DOES NOT ground its statement in the warm and fuzzy idea that the taxpayer received nothing of value in the way of loan proceeds or other benefits at the inception of the loan.

Instead, the Service bases its position on the idea that what the guarantor potentially gives (pays) is the basis for exclusion from debt relief.

This conclusion rests squarely on statutory law. IRC 108(e)(2).

Where payment by the guarantor would have given rise to either a business bad debt deduction or a capital loss deduction, the Service blesses the guarantor with an exemption from taxable debt relief.

Full stop. End of story.

Escape hatch for homeowners, too

homeowner taxOrdinary homeowners who receive Form 1099-C(s) are supposed to get the benefit of Section 108(e) (2) as well.

Any interest forgiven by lenders which would otherwise be deductible if paid by the homeowner are supposed to be removed from the calculation of taxable debt relief on the Form 1099-C.

Indeed the interest amount is supposed to be separately stated on that form in Box 3.

Given the massive number of defaulted loans with accrued interest, and negatively amortized loans that were “modified” with the accrued unpaid interest added to principal to make a “new modified principal balance” your guess is as good as mine as to whether lenders handily disguised hundreds of billions in interest income by transmuting it to “principal” on which they NEVER paid taxes.

There is little doubt this accrued interest was not correctly removed from modified debts when Form 1099-C(s) were issued on foreclosure or short sale.

Down the rabbit hole

And then, there’s Bullock.

A tax court, no less, held held that the taxpayer who actually signed a direct promise to pay as debtor did not incur a bona fide debt and was actually a guarantor. Bullock TC Memo, 2017-219.

One would assume the IRS was less than amused by the result in this case.

The judge actually references the idea that there was no net accretion of wealth to the taxpayer and then likens her situation to that of a homeowner where a tornado misses the home and thus she has no real net economic benefit.

Eh? Gadzooks!

Please don’t rely on Bullock as authority for the idea that a guarantor is not a debtor and thus no form 1099-C should be issued. Here the Tax Court emptied the baby’s bathwater out on the courtroom floor and started over.

Then much hemming and hawing ensued with citations to Dixie Dairies Corp. v. Commissioner, 74 T.C. at 494 and the existence of no bona fide debtor creditor relationship. (Sharp intake of breath…) Bullock manufactures a de-facto guarantor out of what was clearly direct debtor paperwork signed by the taxpayer, a high risk legal result at best.

Walk the Walk

The Bullock court may have felt great deciding as it did, but don’t count on any court to decide no real debt existed where your client signs on as a named debtor.

Especially here in California with some of the most obsequious and deferential judges alive when it comes to supporting lenders and the financial industry.

To get the one of the very few benefits of being a guarantor for tax purposes, be a guarantor in writing and in fact.

More Bill

When the 1099 is wrong

Danger in the long silent second mortgage

6 rotten reasons not to file bankruptcy

 

Guest author Bill Purdy is a tax and real estate lawyer with Simmons and Purdy in Soquel, California. I’m always tickled to share Bill’s pointed perspective on places our practices overlap.

          Bill and his partner Pam Simmons are my go-to resource for all matters of tax and mortgage law.  Bill assists clients with outstanding federal and state income tax liabilities, Form 1099-A and 1099-C related issues, collection resolution, failure to file returns and employment tax related liabilities. 

Is Home Equity A Substitute For Retirement Savings

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My house is my retirement plan.

If I had a dollar for every time a client said that, I could retire today.

But that approach to funding your old age only works if….

Sell your house to retire

The value in your house makes your balance sheet strong, but doesn’t put food on the table or gas in the car.

That home equity is illiquid.  You can’t write a check against it for the other necessities of life.

To get at that equity, you need to sell the house, or  borrow against it.

A traditional loan requires that you have cash to cover the monthly loan payments.  But hey, you’re not working.  Where does that money come from?

Reverse mortgage

The reverse mortgage was invented to allow seniors who can’t make monthly payments on a conventional loan to access the equity in their home.

But the fact that a reverse mortgage has no monthly payments does not mean that it’s cost free.

No, the interest on the money borrowed accumulates over the life of the borrower.  And the unpaid interest itself earns interest.  The cost is steep.

Dangers in reverse mortgages

Reverse mortgages top list of older consumer complaints

And a condition of a reverse mortgage is that you keep up insurance and property taxes.

Real property has carrying costs

Whether encumbered or owned free and clear, real property has its own set of expenses.

  • Hazard insurance,
  • property taxes,
  • repair and upkeep.

Gotta have cash for those things.  The average Social Security check is about $1300.

Where do you live if you sell

If you’ve benefited from rising home values over your lifetime as a homeowner, the cost to replace the house you’re selling has risen as well.

And buying less house in your community still has the carrying costs we talked about above.

Or you rent.  So housing still has a cost.

Or you move out of the community you live in to somewhere where your sale proceeds go further.

You move away from friends and support systems.  Or maybe you move back to somewhere where you have a support system.  It can work both ways.

Taxes shrink your equity

Capital gain taxes are triggered if you sell your home.  Current tax law excludes from taxable income $250,000 in gain for a single person and $500,000 for a married couple. (Watch for changes, here).

So taxation will deplete your sales proceeds only if you have experienced a lot of appreciation over your lifetime.

But if you’re sitting on lots and lots of equity, count on it shrinking if you sell.

Don’t hide behind your house

There are no easy or universal answers here.  Our lives are longer and our preparation for old age is woefully incomplete.

For too many people I meet, the “home is my retirement account” is an excuse for overpaying for housing at the expense of retirement savings.  It provides cover for failure to set aside any money now.

Diversification of your retirement assets is clearly best.  Have cash and home equity as you age.

But however you are situated, give some clear thought as to how you fund those decades of life when you aren’t working.

More

Do California seniors need bankruptcy

What it costs to retire here

California homestead and senior debt

Image © Fotolia

Financial Literacy Building Block: Compound Interest

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financial literacy building blocksAlbert Einstein said compound interest is the 8th wonder of the world.

Those who understand it, earn it.  He who doesn’t, pays it.

In other word, it’s a double edged sword.

Terrific if you’re earning it.  Debilitating if you’re paying it.

And compound interest is a fundamental building block of personal financial literacy.

Why compound interest matters

Understand compound interest, and you’re motivated to contribute to your IRA faithfully.  The interest your account earns this year itself earns interest next year.  And next year, and the next,

Borrow money at compound interest and the interest bearing balance can grow to be larger than the original loan.

Compound interest is at the heart of many of the student loan horror stories.  Student borrows $10,000, uses some deferments,  and, after paying for years, owes $18,000.

How does that work?

Deferred student loan payments compound

The interest portion of a deferred payment is added to the loan balance, and that unpaid interest accrues more interest.

Student loan servicer Navient explains it this way.

Unpaid accrued interest is added to the principal amount of your loan after you leave school and finish any applicable grace period. Simply put, there will be interest to be paid on both the principal of the loan and on the interest that has already accumulated.

Sallie Mae uses slightly different language.  They talk about “capitalization”.  Different words, same idea.

“Capitalized” means added to the Current Principal of the loan.  Your billing statement might show a Current Principal that’s more than the original amount that you borrowed. That’s because the interest has been accruing since the loan was originally disbursed. The more frequently interest is added to the Current Principal, the more interest you will pay. Capitalization may occur when the separation or grace period ends, or at the end of a period of forbearance or deferment.

So, that comforting deferment of your payment obligation has you suffering the downside of compound interest.

Reverse mortgage sucks equity

At the other end of the age spectrum, homeowners taking out a reverse mortgage suffer compound interest on their loan.

The money you draw out incurs interest, which you don’t pay under the terms of the mortgage.  However, that unpaid interest is added to the loan balance of the reverse mortgage.

Next accounting period, you’re incurring interest on the interest you didn’t pay before.

Equity shrinks fast at that rate.

Einstein got it:  Fail to pay according to terms and the debt grows even faster than at simple interest.

Compound interest fuels savings

If you are the saver, rather than the borrower, compound interest works great.

The interest your savings earn this year earns more interest next year.

Suppose you save $100 a month and it earns 3% interest.  At the end of 10 years, you have $15,782.

That’s $3782 in interest, even at today’s paltry interest rates.

Same rate of savings over 30 years gets you $25,716 in interest, swelling your nest egg.

Personally, I’d rather be earning compound interest than paying it.  You?

 

The Most Powerful Debt Management Tool

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black box croppedThe most powerful debt management tool isn’t a software program.

It isn’t a website, nor a consulting firm.

It isn’t even a calculator.

The most powerful debt management tool is a letter opener.

  • letteropener_tobyotter_FlickrIf you don’t open the mail, you don’t really know where you stand with your creditors.
  • If you don’t open the mail, you don’t know that your lender has instituted foreclosure proceedings.
  • If you don’t open the mail, you don’t know that you’re overdrawn at the bank or over limit on your credit card.

Or, less threateningly, the lender has transferred the servicing of your loan.

You don’t know anything about your situation except that you are in trouble, if you don’t open the mail.

Now, there is another step:  you need to read what’s in the envelope.

The envelope, please

I know confronting what you owe and your sense that there’s little you can do about it increases your stress.

But, the dunning letter or the lawsuit isn’t itself dangerous.

Creditors don’t lace their missives with ricin or anthrax.  They need you alive to pay them!  They hope, anyway.

What you’re trying to avoid by not opening the mail, or worse, tossing it out, is confronting your situation.

What you don’t know can hurt

Ignoring what’s in the mail can make the situation worse.

The only situation in which we throw people in jail for not paying their ordinary bills is when they’ve gotten a court order requiring their appearance and they ignore it.

My friend Jay Fleischman tells a marvelous story of a doctor and the doctor’s lawyers who didn’t open the mail nor read what was inside.  Instead of collecting money from Jay’s client, they ended up paying Jay’s client $20,000 for ignoring the court-ordered bankruptcy stay.

Fight or flee

Whether the solution to your debt problems is a payment plan or a bankruptcy filing, you need to know who you owe money to and where they get their mail.

All that’s contained in your mail.

So, open the mail, know whether there’s a situation that requires your attention.  Then if you want to put the opened mail in a shopping bag to bring to your bankruptcy attorney, that works.

Just don’t show up in my office, deep in debt, and not be able to tell me who to notify about your bankruptcy case.

More

How to weigh whether to file bankruptcy

How to interview a bankruptcy lawyer

The life-threatening cost of stress

Image of black box courtesy of Thierry Ehrmann and Flickr.

Image of letter opener courtesy of tobyotter and Flickr.

Smoke, Mirrors, And Budgets: Are You Missing Where Your Money Goes

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smoke and mirrors theilr cc

 

In honor of Financial Literacy month, we’re pulling out some vintage posts on financial basics.

I can’t save anything because it takes every dollar I make just to get by.

Sound like a description of your budget?

For some folks, that is absolutely true.

But for another slice of working folks, there’s some black magic budgeting going on that hides what’s really afoot.

These voodoo budgets look rational, but only on the surface.  If there were two budget line items:  1) food, and 2) groceries,  you’d see the duplication.

But what often happens is more subtle.  Meet the twins of budget self deceptions.

Budget Blunder #1:  Electronic entertainment

Got cable?  More than basic cable?  Do you also budget for entertainment, eating out, vacations?

Whoa!

What is premium cable if not entertainment?  You can probably say the same thing about data on smart phones.

These services make our days brighter.  But the cost has to be counted against the same budget category as other non essential pleasures.

Somehow, smart phones and HBO have become, in our minds, utilities or basics, rather than embellishments.  Once you count them as a given expense, then it’s easy to say, I have nothing left to save for the unexpected emergency or the absolutely expected old age.

Put digital diversion in the entertainment category when you lay out your budget.  Putting like with like, you can assess whether the allocation of income makes sense.

Then you can ask whether you can get what you’d like for less, or,  whether you’re paying for more than you use.

Budget Blunder #2:  Credit card payments

Credit card debt service is the second twin in the world of smoke-and-mirrors budgeting.

Monthly payments on credit cards now rate their own line in most budgets.  If you’re carrying a balance, some part of this month’s income is going to pay for last month’s spending.

But what did you buy with your credit card?  It’s not as though those purchases are distinguishable from the rest of the categories in your budget.

You probably bought gas, clothes, movie tickets, meals out.

By creating a separate cubby in your mental budget for payments on your credit card, you’ve hidden some part of  what you spend on transportation, clothes, and entertainment.

Cut through the smoke and mirrors

So, banish voodoo budgeting from your life.

Pull out your cable and wireless bills.  Read through where you used your credit cards last month.  Push those purchases into the right categories.

See if your spending is skewed in a way you didn’t see before.

Image courtesy of Theilr

Who Gets Grannie’s Cash – Grannie Or The Bankruptcy Trustee?

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joint accounts bankruptcy

Good intentions can go wrong in a hurry when there’s a joint bank account and a bankruptcy.

The bankruptcy trustee sees a pile of money in the bank to which the debtor has access, even though the account also bears the name of someone not in bankruptcy.

If the debtor can get the money, the trustee contends, so can a bankruptcy trustee for the benefit of creditors.

Well and good, if the money belongs to the debtor. But what if it’s really someone else’s money?

Do it yourself elder care

Who doesn’t have a joint bank account with someone they care about?

Most often, it’s the adult child’s name on an elder’s bank account.  It’s simple, convenient, and reassuring that if the elder loses capacity, a trusted party has access to pay the elder’s bills.

But if the trusted party loses a lawsuit, or files bankruptcy, all bets are off.  The elder’s money in a joint account  looks like money that belongs to the child.

And the elder’s funds are at risk of being seized to pay someone else’s debts.

Who gets the cash?

The answer lies in state law, since state law determines what the debtor owns, while bankruptcy law determines what happens to that property.

In California, the answer lies in Probate Code 5100 and the statutes following.

“[a]n account belongs, during the lifetime of all parties, to the parties in proportion to the net
contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.” (Cal Probate Code, § 5301, subd. (a))1
“In the absence of proof otherwise” the net contribution of each of the parties is deemed to be an equal
amount. § 5134, subd. (b)(2).
That’s a vast improvement over the prior law that presumed that the people named on the account owned the money equally.
California’s statute is based on the Uniform Probate Code, which drafts laws for adoption by the states to make law more uniform.
So, the result of the “joint account in bankruptcy” issue may be different in other states.

Avoid a fight with the trustee

More important than who wins a legal battle is the chance to skip the fight altogether.

Debtors need to disclose joint accounts to their attorneys.  Don’t fall into the “it’s not my money” trap and keep quiet about it.  As I said, that’s a trap.

Attorneys need to quiz their clients about such arrangements and get all the bank account statements.  See what the situation will look like to the trustee.

Know what state law says on the subject.

Consider, if the money in fact is traceable to someone other than the debtor, having that person withdraw it from the joint account before filing.

Make it your goal not to have someone else’s money in an bank account to which the bankruptcy debtor has access.

All involved might consider use of a revocable trust as a vehicle for the elder to empower another to manage their money in the face of incapacity.

This post draws on the always-comprehensive observations of Oakland bankruptcy attorney Larry Szabo.  Thanks, Larry, for your boundless willingness to share.

Image courtesy of Flickr & Duncan Hull

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

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