It’s easy to assume that debts owed to the federal government can’t be discharged in bankruptcy.

Easy, but wrong.

Just because the creditor is Uncle Sam doesn’t mean the debt can’t be wiped out in bankruptcy.

In fact, debts to the government range from freely dischargeable to not-in-this-lifetime nondischargeable.

Honesty required for discharge

All of the discussion that follows assumes that your debt to the government is honestly incurred, and is unsecured.

Secured debts, those for which there is a lien, generally survive a bankruptcy discharge.  So tax liens and SBA liens live beyond a Chapter 7 discharge.  More on limits on tax liens after bankruptcy.

Debts dischargeable in bankruptcy

[Read more…]

Preparation for filing bankruptcy should include getting your money out of Wells Fargo Bank.

Unless, of course, you’re willing to have Wells freeze your money for days or weeks, on its own initiative.

Wells says they are “helping” the bankruptcy trustee by denying you access to your money.  Only the bankruptcy trustee didn’t ask for help.

The bank is, in that delicious phrase, an officious intermeddler.

Move it anywhere else, preferably to a bank where you have no recent history.  But whip up your horses, and get it out of Wells Fargo.

Here’s the issue.

Exemptions protect assets in bankruptcy

While a Chapter 7 bankruptcy filing is a moment in time, capturing the assets of the filer and the existing claims of her creditors on the day a bankruptcy is filed, life is more like a flowing stream.

Life doesn’t pause when you file bankruptcy:  you still have to eat, pay utilities, put gas in your car the day after your bankruptcy case, just as you did the day before you filed.

Exemptions allow you to keep some cash and other assets necessary for daily living as you enjoy your fresh start.  If you’ve got significant money in the bank, you’ve undoubtedly claimed it exempt.  Once allowed, exempt property becomes yours.

Wells, though,  doesn’t inquire about your claims of exemption, or care an iota about the impact on your day to day living.  It feels compelled to freeze bank accounts of debtors to preserve them for the bankruptcy trustee.

The freeze keeps you from ATM access;  your checks bounce; and automatic bill-pay is frustrated.

Experience says the funds will be released, once the debtor discovers the problem, informs the trustee, and gets a letter from the trustee requesting the release of the funds.

Legal challenge to account freeze rejected

Erik Mwangi filed an adversary proceeding against Wells Fargo for violation of the automatic stay when Wells froze his bank accounts after his bankruptcy case was filed.

His suit claimed that the bank improperly took possession or control of his account, without having obtained the permission of the bankruptcy judge.

The case wove its way through the courts til the 9th Circuit decided that the debtors had no interest in the funds until the exemptions became final, and thus they had no cause to complain.

So, Wells gets a pass to freeze your money.

Vote with your feet

This bank behavior seems, at the moment to be confined to Wells Fargo and to Chapter 7 bankruptcy cases.

You can avoid this further complication to your life by removing your funds from Wells Fargo before you file bankruptcy.  (I wouldn’t complain if everyone took their money out of Wells, but that’s a different campaign!)

Open an account with another bank, or better yet, a credit union.

Credit unions are owned by their members and generally understand customer service.

Wells Fargo could take a lesson from credit unions.

 

Image:  © Photobank

 

 

Ready for life after bankruptcy?

Even before your case is filed, you can start preparing for your life after bankruptcy.

These four steps will probably  make the bankruptcy case be smoother, too.

Change banks

Your money on deposit in “your” bank may not be solely yours.

If you have a loan or other debt to your bank, the bank can help itself to funds in your deposit account to apply to what you owe it.

That’s called set off:  the amount the bank owes you is set off against what you owe it.  Trust me, you’ll lose if that happens.

Since you usually stop making payments on dischargeable debts once you’ve made the decision to file bankruptcy, don’t leave your cash sitting in the bank, waiting to to be snatched by the bank who didn’t get paid this month. [Read more…]

One of the first questions a bankruptcy trustee will ask you at the hearing in your bankruptcy case is:  did you read the schedules before you signed them?

The obvious, and expected, answer is YES.

And if your answer is “yes”, then the trustee can conclude that you stand behind the information that the schedules contain.

You signed them under penalty of perjury, after all.

But did you really read them?

Let’s talk about it.

Get your schedules right

Schedules is bankruptcy lingo for the lists of assets, creditors, budgets and financial history that make up the initial bankruptcy papers.

Your right to a discharge of dischargeable debts is based on making full disclosure about your financial situation in those schedules. [Read more…]

Exemptions in bankruptcy are all about what you keep.

Exemptions define the collection of assets and rights that are safe from the reach of a bankruptcy trustee or your creditors.

But planning exemptions in a bankruptcy case is more than just the looking down the list of things you keep through bankruptcy and the dollar amount that is protected.

Jay Fleichman suggested that if the value of your assets exceeded the exemptions available, Chapter 13 needed to be your chapter of choice.

Actually, your exemptions in bankrupty swell beyond the stated amount for reasons not printed in the law books.

Add transaction costs to asset value

The unwritten enhancement to exemptions are the transaction costs, those expenses incurred to turn an asset into cash.

A Chapter 7 trustee can sell assets that are not exempt or that have an exemption that covers only some part of its value only if the sale produces money he can distribute to creditors.

To turn some assets into cash, he has to sell them.

There may be an auctioneer or realtor’s commission involved. The sale may trigger taxes.

And the trustee gets paid for his work from a fraction of the money he distributes to creditors.  Gotta subtract his commission before paying creditors.

So, add to the exemption value the estimated costs of the trustee’s sale and his commission.  Trustees are only supposed to take the debtor’s things for sale if the sale produces a meaningful distributions to creditors. [Read more…]

Your family may be bitten when you file bankruptcy if you aren’t careful.

Even if not fatal, the bite can  leave scars.

I sat waiting for my turn at a bankruptcy hearing last week and watched a series of other cases that left blood in the water.

The trustee’s feeding frenzy in at least three cases centered on payments or transfers the debtor  made to family before they filed their bankruptcy case.

In some cases, the debtor was repaying money lent by family.  In others, it appeared the debtor had simply made a gift to family.

In the worst case, it looked like the debtor had transferred a car to keep it out of the bankruptcy.

All of those transfers spelled trouble. [Read more…]