How bankruptcy works Archives - Page 3 of 11 - Northern California Bankruptcy Lawyer

What Bankruptcy’s Automatic Stay Doesn’t Stop

The automatic stay is the signature feature of American bankruptcy.

Just by filing a bankruptcy case, your creditors are instantly prohibited, by a federal court injunction, from actions to collect a debt from you or your assets.

But, there’s a whole list of actions that aren’t included in the stay; we forget that some kinds of lawsuits with a financial aspect get excluded from the stay.

How the stay works

The automatic stay applies in all bankruptcy cases (unless you’ve filed more than two bankruptcy cases in the last year).

Outside of bankruptcy, you have to prove that you are entitled to an injunction that stops some otherwise lawful action. In bankruptcy the injunction is granted automatically, just because you filed.

The burden is then on creditors to take action to extract themselves from the stay.

The stay has its limits

The list of exceptions is long and many of the excluded actions are very specific and technical. See 11 U.S.C. 362(b).

But there are some biggies there too among the exceptions.

Here are the ones of most interest to the typical bankruptcy filer.

Family law issues

Actions to establish or modify support are not stayed. Neither are proceedings involving custody, marital status or paternity.

Support can be collected from property that isn’t “property of the estate” without violating bankruptcy law. And state issued licenses can be suspended for failure to pay support. That’s subsection (b)(2).

Law enforcement

The stay doesn’t stop criminal prosecutions. Nor does it stop the enforcement of actions grounded in the public health and safety; that’s called the government regulatory exemption. More about that below.

Tax administration

Your state tax folks and the feds can legally demand the filing of a tax return; audit returns you’ve filed; and assess taxes they claim you owe.

Government can’t, however, record liens or levy assets to collect a tax you owed when you filed bankruptcy.

Private rights

A landlord under a lease that expired according to its terms before the bankruptcy case was filed can proceed to get possession of non residential property.

Civil contempt sanctions

Collection of court-ordered sanctions for misconduct in litigation is not prohibited by the stay.

The 9th Circuit Court of Appeals recently decided that the public’s interest in making parties to a lawsuit play by the rules outweighed the sanctioned party’s interest in getting complete protection from collection action. The fact that the sanctions might be payable to the other party to the litigation didn’t change the state’s interest in enforcing its sanction for bad behavior in court. The case is Dingley.

Automatic stay in lawsuits

What litigators must know about bankruptcy

When your ex files bankruptcy

Out of Luck If You Skip A Creditor?

By Cathy Moran

So, you slipped up and left a creditor out of your bankruptcy schedules. Can you add an omitted creditor after the fact?

In the fateful words of a careful lawyer, it depends.

Depends on when the amendment is made and what chapter you’ve filed. And the effect of adding a creditor varies.

Let’s walk through the legal thicket.

Amendment while case is open

At the most basic level, anytime the case is open in the bankruptcy court’s clerks office, you can file an amendment to your schedules.

Adding a name to the schedules gets the new name added to the master address list which parties use to give interested parties notice about the case.

Just because the filing is accepted doesn’t decide anything about the effect of the filing. But it’s universally true that the sooner an omitted creditor is added, the better for the debtor.

There’s a fee for amending the lists of creditors, currently $30.

Does addition give timely notice?

Getting a creditor on the mailing list doesn’t necessary get them actual and timely notice of the case.

The clerk’s office sends out the notice of the bankruptcy filing at the beginning of the case. The notice of the case sets out the deadlines for creditor action in the case:

date of the first meeting of creditors
last day to object to discharge or dischargeability
bar date for filing proofs of claim

Unless the added creditor gets actual notice, just getting them in the bankruptcy papers may not be enough to bind that creditor to the deadlines in the case.

In my office, then, we amend the schedules, mail a copy of the notice of commencement of the case to the added creditor, and file a certificate of service showing that we gave the new creditor actual notice.

That way, there is no doubt that the creditor got notice.

When important deadlines have already passed

This is when the effect of adding a creditor gets dicey.

If the added creditor misses the first meeting of creditors, there are generally no adverse consequences.

Different story if the added creditor doesn’t get notice in time to challenge the discharge of that creditor’s debt. As we discussed in our post on Missing Creditors, if there will be a distribution to creditors in the case, a debt not listed survives the discharge.

Further if the added creditor has a claim that may be non dischargeable, the window for bringing an adversary to contest discharge remains open.

If the missed deadline is the deadline to file a proof of claim, often a late filed claim will be allowed on the grounds that the creditor didn’t get notice.

Chapter 13 is unforgiving

While the law makes varying accommodations for an omitted creditor in Chapter 7, the approach to the omitted creditor in Chapter 13 is more rigid.

Almost all courts hold that a creditor who doesn’t get notice of the filing of a Chapter 13 case in time to object to confirmation is not bound by the discharge. So, skipping a creditor in Chapter 13 stands to hurt the debtor’s fresh start by allowing the claim to survive

Takeaway

It’s worth a lot to get everyone affected by your bankruptcy case actual and timely notice of the case for the broadest possible discharge.

Why are bankruptcy papers so much work?

How to review your bankruptcy before you file

Cut Tax Penalties In Bankruptcy

By Cathy Moran

Get in tax trouble and the penalties often grow huge.

What starts as a manageable problem can soon tower over you.

Breathe deep; there is a solution.

Chapter 13 bankruptcy can cut tax penalties down to size.

All tax penalties discharged in 13

Old or new, large or small, Chapter 13 discharges all unsecured tax penalties.

In contrast, Chapter 7 discharges some tax penalties.

Discharged are penalties for taxes that are themselves dischargeable.

Also dischargeable in Chapter 7 are penalties where the transaction or event that triggered the tax occurred more than three years before filing, whether or not the tax itself is dischargeable. 523(a)(7)(B).

That’s good, but if you are eligible, Chapter 13 is better. All penalties are discharged.

Who can file Chapter 13

Chapter 13 is available to individuals (no corporations or LLC’s), with regular income, whose debts total less than the caps for secured and unsecured claims.

You know if you are a real person and whether you have regular income, so the thing that needs analysis is the allocation of your debts between those that are unsecured (the creditor has no lien on your assets) versus the debts for which there is a lien.

To be a secured claim in bankruptcy, that lien has to attach to an asset that has market value greater than any liens senior to it.

Tax liens don’t go to the head of the line just because they are debts owed to the government. They fall in line behind any other lien holder who perfected their lien before.

Recent taxes must be paid

Chapter 13 plans are written by the person who has filed the bankruptcy case. The Bankruptcy Code requires, however, that recent income taxes be paid in full through the plan.

Note that it is the TAX and the INTEREST on that tax that have to be paid during the life of the Chapter 13.

Penalties get treated just like personal loans, medical bills, and credit card debt: what that class of creditors gets in the Chapter 13 is driven by the means test and the best interests of creditors test. In most Chapter 13 plans, that’s little, or nothing.

Chapter 13 cuts those penalties down to size.

Tax liens whittled down

The discussion above deals with unsecured taxes and tax penalties. The rules change when a tax lien is filed.

At its simplest, a Chapter 7 discharge eliminates the IRS’s ability to levy your bank account or garnish your wages for taxes that have been discharged.

However, the Chapter 7 discharge doesn’t alter any tax lien recorded before the bankruptcy, even if the taxes themselves are discharged.

If the tax liability is discharged, any lien in place will not attach to assets you acquire after your bankruptcy is filed.

More about tax liens after bankruptcy

Chapter 13 does alter tax liens. (See why I’m a fan of 13?)

Chapter 13 treats as a secured claim only that part of a lien that attaches to real value in the taxpayer’s assets.

Put bluntly, if you don’t have any assets, then the lien is worthless and will be voided at the conclusion of your Chapter 13 plan.

Oh, technically, the tax lien may attach to your household goods, all right. But those things have very little market value.

Pay the resale value of your pots and pans through the Chapter 13 plan, and the lien is deemed satisfied.

If you can’t cut a deal with the IRS that eliminates the tax penalties as part of an offer in compromise or payment plan, you have bankruptcy options for tax penalties.

More about Chapter 13

Get rid of credit card balances without paying interest

Why Chapter 13 Plans Fail

How Chapter 13 Works

Images courtesy of Pixabay.

Can I Sell Stuff Before I File Bankruptcy

By Cathy Moran

Thinking about filing bankruptcy?

Folk wisdom supplies many “rules” about the time leading up to actually filing bankruptcy:

Don’t sell anything
Don’t pay anyone
Don’t make any money

This kind of thinking will have you frozen in time and space like this insect in amber.

Only, this folk “wisdom” is all wrong.

Here are the real concerns about your pre bankruptcy actions.

Sell stuff for what it’s worth

Bankruptcy law objects if you dispose of assets for less than they are worth. It’s not the sale that might be objectionable, it’s the price.

When you transfer an asset for less than its real value, there is less for your creditors. And Anglo Saxon law since the Statute of Elizabeth in 1571 has prohibited gifts, bargain sales, or sham transfers that have the effect of reducing your assets.

Transfers where you dispose of an asset for less than its fair market value are called fraudulent transfers.

The transfer can be actually fraudulent, where you intended to hide an asset from creditors. Or, constructively fraudulent. Those transfers can be innocent or even benevolent, as when you make a donation to charity.

But, if you got less in return than you gave up, it may be a fraud on creditors.

Fraudulent transfers in bankruptcy

Bankruptcy law frowns on fraudulent transfers.

The bankruptcy trustee is empowered to recover the assets or money transferred within 2 years of the filing from the recipient if the transfer was fraudulent.

That strips the benefit of the transfer from the transferee.

In many cases, even when a transfer is fraudulent, it isn’t worth the expense to the bankruptcy trustee to recover it. The benefit to creditors as a group is just too small or too tenuous to make it worthwhile.

But for the debtor in bankruptcy, significant transfers of assets with intent to hinder, delay or defraud creditors constitute a ground to deny an individual a discharge in bankruptcy. 11 USC 7272(2).

Sales for today’s value

You are absolutely free to dispose of assets before your bankruptcy is filed if you get “reasonably equivalent value” in return. That’s legalese for getting what it’s worth.

Remember, it’s only worth what a buyer will give you for this particular asset, on this day, in this market.

The stuff may be worth far less now than it was when you bought it. It may be that the market is glutted or the thing is obsolete, worn, or out of fashion.

If you get about what the market says it’s worth, you’re OK.

If you are selling on the eve of bankruptcy, just make sure that you expose the asset to the market. That may be Craig’s List; e Bay; Auto Trader or like marketplaces. Even a garage sale will do.

Keep a record of the steps you took in your sales campaign.

Disclose the transfer in the bankruptcy schedules and the Statement of Financial Affairs.

And if it genuinely doesn’t have any market value, you’re free to donate it or junk it.

What not to do before bankruptcy

Image licensed by Anders L. Damgaard under Creative Commons license 3.0.

Bankruptcy Alphabet: R is for Retirement

By Cathy Moran

In my bankruptcy alphabet, R stands for Retirement.

Retirement plans and IRA’s are safe in whatever chapter of bankruptcy you file.

Your rights in an employer’s pension plan or a union pension plan are not even part of the property of your bankruptcy estate. The Supreme Court held almost 20 years ago that ERISA qualified retirement plans are beyond the reach of bankruptcy trustees and of your creditors.

Perhaps the only good thing to come out of bankruptcy “reform” in 2005 was a provision that created an exemption available to everyone who files bankruptcy for up to a million dollars in an IRA. That’s found in 11 USC 522(n).

Note that whether retirement savings are excluded from the estate or included in the estate but exempt, the law protects savings that are formally dedicated to retirement.

But, you cannot simply earmark some asset or investment as your “retirement” savings and have it sail through bankruptcy. To be protected, the account needs to be part of a legally recognized, tax-deferred retirement vehicle.

Bankruptcy enables retirement savings

One of the most distressing fact patterns for me is the person who insists on paying minimum payments on credit card debt and has nothing left to save for retirement.

If you are both young and not too deep in debt, it may be doable to postpone retirement savings until the debt is gone.

But the older you are or the larger your debt, the more likely that you are creating a problem for yourself at retirement by lining the pocket of the banks today.

I may be like a broken record on this issue, but it is a theme that I pound on: personal responsibility involves not just paying your debts but also making provision for your old age so you are not dependent on family, friends or Uncle Sam.

A bankruptcy discharge can free up cash flow to make regular contributions to retirement savings. Think about it if you plan to live long enough to retire.

Which comes first: paying debts or starting to save?

Do seniors need to file bankruptcy?

How does bankruptcy work?

Image courtesy of Leo Reynolds.

My friend Jay Fleischman insists R is for Redemption.

Ryan Caldwell chose reaffirmation along with Bill Balena.

Bob Doig votes for repossession. as did Stuart Ing.

What Debts Were Discharged In My Bankruptcy?

By Cathy Moran

One of the hardest questions after your bankruptcy is answering just which debts were discharged.

Eliminating debts was the whole point of filing bankruptcy. You’ve got a court order, but no list.

You and your creditors understandably expect to find a single document telling them what debts are no longer enforceable and which survive the bankruptcy.

No such luck.

Bankruptcy discharge order

The official form used by most bankruptcy courts merely states that the debtor is granted a discharge. The general information on the second page of the form suggests that you might need an attorney to understand the application of the discharge in a particular case.

That’s because, while the bankruptcy schedules require you to list all of your debts, not all of your debts are dischargeable.

Some debts automatically survive the bankruptcy filing. Survivors include family support, recent taxes, and criminal restitution.

Debts a creditor can challenge

Other debts may be non dischargeable if the creditor challenges the dischargeability of its debt and wins at trial.

Student loans may be discharged only if the person filing bankruptcy brings an adversary proceeding to establish that repayment creates an undue hardship.

And then, liens generally survive as a charge on the debtor’s property but not a personal liability.

So, it’s complicated.

And the court doesn’t work out all the intricacies before issuing the discharge order.

Who was included in bankruptcy

The basic rule about discharging debts provides that debts are discharged unless there is a statutory exception to discharge listed in the Bankruptcy Code.

The concept of due process (and a provision of the Bankruptcy Code) says creditors get their debt discharged only if they get notice of the bankruptcy.

That’s why saving your bankruptcy papers is so on point. The schedules and the mailing matrix in your case (and any amendments to them) show who was listed in your case.

Listed creditors are most likely discharged.

Californians get broader discharge

In California, where 9th Circuit decisions are controlling, the Beezley opinion (994 F.2d 1433 1993) tells us that even a creditor who wasn’t listed is discharged in a no asset bankruptcy.

The caveat is that if the creditor has a claim to non dischargeability because of the debtor’s bad acts, the claim survives until the creditor has a chance to challenge the discharge of his debt.

Beezley stands for the proposition that even creditors not listed are discharged in a no asset case. If everything you owned when you filed bankruptcy was exempt or not worth the trustee’s time to administer, you don’t need to amend your bankruptcy schedules to add creditors that you forgot when you filed.

Other circuits have similar case law, too.

When creditors call after bankruptcy

In this era of debt buyers and zombie debt, most debtors can expect to get a collection letter on a debt that was discharged in their bankruptcy.

Usually what it takes to make a zombie debt collector go away is a copy of the discharge order and a copy of the schedules showing that the original creditor was listed in the bankruptcy.

A creditor who sold off bad debt can’t give the buyer anything more than the seller had; in this case, the creditor had an unenforceable debt.

So, save your bankruptcy documents. If giving the collector a copy of the schedules doesn’t make the creditor go away, contact a bankruptcy lawyer.

The bankruptcy court stands ready to sanction creditors who blow off the discharge order.

Enforcing the discharge

Can discharged debt come back

Maximize your bankruptcy discharge

Chapter 13: Know Who Gets Paid First When You Make Your Plan

By Cathy Moran

Sometimes I think my client’s only touch with reality is in the form of television shows.

And when reality hits them, it’s a trainwreck.

Think Chapter 13 cases where my client wants to keep all of his assets with secured debts AND pay off back support or, more often, non dishchargeable taxes.

The Problem

Secured debts are things like car loans, home mortgages , and property taxes.

If you don’t pay a secured debt, the creditor has the right to take the asset that is the collateral.

Over optimism

So here’s the dilemma. It’s hard to decide to give up houses and cars. You’ve usually got some part of yourself invested in the choice.

Even if the car is a gas guzzler or the house burdened with a bad loan or too little value, it’s tempting to assume you can gut it out. Make up the back payments over five years and have something at the end.

When the collateral is a toy, a boat or bike, or a rental home, you spin yourself messages of entitlement or future appreciation.

You commit in your plan to pay both the secured claims and the priority claims within the five year limit of a chapter 13 plan.

You look at your budget and it works, barely. You can project enough money to do it all within five years.

Hit a bump

But then, mid plan, life intervenes. Your work hours are reduced. The car breaks down. A family member gets sick.

And all of a sudden, there isn’t enough money to make the plan payments that get you everything.

Worse, what you’ve paid into the plan has gone for things you didn’t have to pay for: the Harley, the underwater rental, the house that’s too expensive. The trustee’s order of distribution puts the debts that won’t go away behind the options you chose.

Depending on how significant the loss of income or increased expenses, you may be able to recover.

But maybe not.

Plan for the unexpected

When making choices at the beginning of a Chapter 13, don’t assume that everything in your financial life going forward will be uniformly stable or improving.

Where you will be if there is a major negative event in your life? Have you taken care of the most important debts first?

Or does the overly optimistic plan you propose have you continuing to live on the financial edge?

Image courtesy of Flickr and bwats2.

Going To Court In Your Bankruptcy Case

By Cathy Moran

Every bankruptcy debtor must attend the first meeting of creditors in their case.

It’s usually the first and only time that your personal appearance is required.

The meeting is nicknamed the “341 meeting” from the section of the Bankruptcy Code that requires it.

What’s the point of going to court

The first meeting of creditors has two basic purposes: to have the debtor validate the information in the bankruptcy papers under oath, and to provide the trustee any information needed to determine exemptions or administer any non exempt assets.

More about the role of a Chapter 7 trustee

It’s also an opportunity for creditors, who are likely to take a financial hit in your bankruptcy case, to ask questions of the debtor. Those questions must be limited to inquiries about assets and about debts.

How does the first meeting of creditors work

The trustee, not a judge, conducts the meeting and leads the questioning. Creditors are invited but seldom attend.

The meeting is not a test or an inquisition. Its focus is on validating and perhaps expanding on the information in the bankruptcy papers.

If you genuinely don’t know the answer or don’t understand the question, it’s OK. Just say so. The trustee will adapt by rephrasing the question or asking that you supply supporting information.

Usually, each debtor’s testimony is concluded in a few minutes.

Rules for testifying

Here are my rules for how to behave:

Tell the truth
Listen to the question……. all the way to the end.
Answer in as few words as possible
Don’t explain, expand, justify, or speculate unless asked
If your attorney starts talking, you stop talking

While I have seldom had clients blow a case at the 341 meeting, they can certainly either prolong the meeting or confuse the trustee or the issues by babbling.

So, start by listening, carefully, to the question.

Bring your identification; be familiar with the information in the schedules; and answer questions in short sentences and all will be well at your first (and probably last) meeting of creditors.

About the 341 meeting.

How to review your bankruptcy schedules before they’re filed

Tips for worry free bankruptcy

When to file bankruptcy

By Cathy Moran

Should I wait until all of my savings are gone to file bankruptcy?, the caller asked.

And he didn’t mean, until my net worth is greatly reduced; he meant, until my bank balance is zero.

One has to admire the resolve of those who propose to pay on debts that they can never repay up to the point where they literally have nothing.

My advice, of course, is “no”.

There is no point in making further payments when you can see you’re heading for bankruptcy.

Bankruptcy exemptions allow you to keep a collection of assets necessary for a fresh start. In California, we have exemptions that will even shelter meaningful cash in the bank.

In Chapter 13, you can keep everything you own.

There is not even a requirement that you be destitute or even insolvent to file bankruptcy. You simply need to be willing to play by the rules of the bankruptcy chapter you choose.

Those rules are centered on making full financial disclosure.

When to consider bankruptcy

The short answer is probably now. If you are reading this, you probably wonder if bankruptcy could help you out of a hole. Instead of wondering, see a bankruptcy lawyer. (I’ll tell you a secret: bankruptcy lawyers don’t bite.)

So often I wish clients had come to me earlier: before they borrowed against their retirement to pay credit cards; before they took bad home loans that imperil their home; before they borrowed from one credit card to pay on another.

Don’t take big financial steps til you see a lawyer

The right time to consider bankruptcy is when you suspect that you can’t really repay your debts in full in 3-5 years, on your own.

Or, when the stress of being in debt interferes with your health or your relationships. Or, when you have no reserves should things get worse.

Stress kills

Seeing a bankruptcy lawyer doesn’t commit you to filing. It just arms you with information about what your options are.

Most people who see a good bankruptcy lawyer are surprised that bankruptcy relief is relatively simply and very effective for almost everyone.

Information is power….become more powerful.

Read on

Picking a bankruptcy lawyer

Alternatives to bankruptcy

What you keep through bankruptcy

Where Do I File My Bankruptcy Case?

By Cathy Moran

Remember the kid’s geography game, Where in the World is Carmen Sandiego?

Clues took players all around the world to stop a gang of thieves.

When it’s debt you want to stop, if you’ve moved around in the past two or three years, the rules of the game are not child’s play.

Two issues are in play. One concerns which courthouse your bankruptcy case is filed in. The second is what state’s exemptions can you use.

Where you file bankruptcy

The basic rule is that you file your case in the federal district where you have lived for the past 180 days or where you have assets. The legal term for the correct court is “venue”.

If you’ve lived in several federal districts in that period, you file where you have lived for the greater part of the last 180 days.

So, if you’ve recently moved, you can file in the district where your new home is located after you’ve been there 91 days. Before that point, you can file in the district you moved from.

What you keep through bankruptcy

State law where your case is filed usually defines the extent of your property interests.

State law tells the bankruptcy court what you own, and federal bankruptcy law determines what happens to that property.

Even though bankruptcy is federal law, state law controls exemptions, the law that determines what you keep when you file bankruptcy.

Because state exemption laws range from scrooge-like to Daddy-Warbucks generous, debtors in the past sometime moved to a state with generous exemption laws before filing.

The bankruptcy amendments of 2005 tried to stop people from moving to get better exemptions. The “reform” law made a state’s exemption laws available only to people who had lived in that state for at least two years before filing.

If you haven’t lived in the state for two years, you get the exemptions of the state where you lived for the six months beyond the 24 month requirement.

And, it gets worse: you can only use those exemptions if the law of the state allows the use of state exemptions to non residents. [Thanks, Congress].

If state law doesn’t authorize use by non residents, you get to use the federal bankruptcy exemptions.

Morale of this story: if you’ve lived a mobile life in the years before filing bankruptcy, make sure your attorney knows your residential history before you file the case.

More from the Soapbox on bankruptcy procedure

File bankruptcy without your spouse

Bankruptcy as a moment in your financial timeline

Does what you own drive what kind of bankruptcy you file?

Image courtesy of Cara Brugman.

How the stay works

The stay has its limits

Family law issues

Law enforcement

Tax administration

Private rights

Civil contempt sanctions

More

Amendment while case is open

Does addition give timely notice?

When important deadlines have already passed

Chapter 13 is unforgiving

Takeaway

More

All tax penalties discharged in 13

Who can file Chapter 13

Recent taxes must be paid

Tax liens whittled down

More about Chapter 13

Sell stuff for what it’s worth

Fraudulent transfers in bankruptcy

Sales for today’s value

More

Bankruptcy enables retirement savings

More

Bankruptcy discharge order

Who was included in bankruptcy

Californians get broader discharge

When creditors call after bankruptcy

The Problem

Over optimism

Hit a bump

Plan for the unexpected

What’s the point of going to court

How does the first meeting of creditors work

Rules for testifying

More

When to consider bankruptcy

Read on

Where you file bankruptcy

What you keep through bankruptcy

More from the Soapbox on bankruptcy procedure

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