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Means Test Means Little In Bay Area With New Census Numbers

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The latest numbers used in means test for the San Francisco Bay Area after April 1, 2020 are out.  They reinforce my contention that the means test is meaningless for most in Northern California.

Bankruptcy’s means test was sold to Congress in 2005 as a way to make sure those filing bankruptcy really needed relief.

It added expense and complexity to bankruptcy, which was  what the drafters secretly wanted.  They’d heard this story of people casually filing bankruptcy to avoid the inconvenience of paying their bills.

Of course, that was a myth; but that’s another story.

The income dividing line increases

Those whose gross family income is below the median get a pass on the means test.  It simply doesn’t apply to below median income debtors.

Median: the middle number in a sequence of numbers 

The median income for a family of four this spring in California is $ 101,315.

Make less than that, exclusive of Social Security, and you are free to file bankruptcy without taking the test.

Housing costs drive the bus

If you make more than the median income, the means test applies.  That doesn’t mean you can’t file bankruptcy.

It just means you have another hoop to jump through.

The means test formula purports to calculate how much money you have available each month after paying essential expenses.

The ugly truth for this high-cost part of the world is that housing eats up far too much of our budgets.

Lets assume you are just over the median income line and gross $102,000 a year, a fine salary in many places, but not really enough here.

The folks at the Census Bureau, who supply the bankruptcy system the numbers that drive the means test, say it costs $4173 a month to house a family of four in San Mateo County.

That’s almost half of the gross monthly income of a $102,000/year household.  Not much is left to pay for food, clothes, medical care and transportation.

Good news, bad news, there’s nothing really available to pay creditors, inside or outside of bankruptcy.

So bankruptcy is available because you’ve passed the means test.

Mortgage payments deductible

The same calculus applies to homeowners:  over median families can deduct monthly mortgage payments, property taxes, HOA dues, and hazard insurance from their gross income in doing the means test.

Again, those expenses tend to swallow up a huge part of most incomes.

Leaving little or nothing for creditors.

And leaving you the choice of which chapter of bankruptcy furthers your goals.

More about the means test

Who gets excused from the means test

Cheat sheet for passing means test

See a bankruptcy lawyer before making any of these stupid moves

California Income Tax Deadlines Extended

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california income taxes

California’s Franchise Tax Board postponed until July 15, 2020, the filing and  tax payment deadlines for all individuals and business entities .

This special tax relief due to the COVID-19 pandemic for all California taxpayers was announced  on March 18, 2020 covering

  • 2019 tax returns
  • 2019 tax return payments
  • 2020 1st and 2nd quarter estimate payments
  • 2020 LLC taxes and fees
  • 2020 Non-wage withholding payments

To give taxpayers a deadline consistent with that of the IRS without the federal dollar limitations, the FTB is following the federal relief described in IRS Notice 2020-17.

Since California conforms to the underlying code sections that grant tax postponements for emergencies, the FTB is extending the relief to all California taxpayers.

What you need to do

Taxpayers do not need to claim any special treatment or call the FTB to qualify for this relief.

What you can do

While there’s no immediate deadline to file, now may be a good time to prepare your tax returns.

If you expect to get a refund, all the more reason to file now.

However, if you expect to owe taxes, the FTB offers the ability to make electronic payments online.

Pay online

The days of manually writing a check and mailing it to the taxing agency via certified mail make little sense, given that secure options exist for electronic payments.  Manual checks can be lost in the mail, stolen, or incorrectly posted to the wrong tax period.

The FTB has an electronic one-line payment program called Web Pay.  It can be used by both personal taxpayers as well as businesses (corporation, partnership, or LLC).

There’s more  information on the FTB’s website .

More on money & COVID-19

When you can’t pay your bills during the pandemic

Car payment and the pandemic

Protections for California home loans during the virus shutdown

 

Steven WalkerGuest contributor San Jose attorney Steven L. Walker advises clients on tax controversies and litigation with the IRS, the FTB, and state & local taxing agencies. His clients bring him civil and criminal tax matters, including tax audits and appeals, litigation in U.S. Tax Court and federal district court, tax fraud, offshore/foreign tax compliance, and tax collection. He also advises clients on business matters.  Steven is an adjunct professor at the University of San Francisco School of Law in the LLM (Taxation) program, where he teaches Civil and Criminal Tax Penalties, and Bankruptcy Taxation. He is also a Fellow of the American College of Tax Counsel and a former IRS attorney with additional experience at the FTB Legal Division.  www.walk-law.com.

California Statute of Limitations Gets Teeth

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law has teeth

California law on debt collection finally has teeth.

Recent changes to California law say that a debt collector must allege that the statute of limitations has not run when it files a lawsuit.

No more suing on long-dead debt and winning unless the consumer files an answer and pleads the statute of limitations.

No more collectors relying on consumers being broke, scared, or ignorant of the legal facts about the timeliness of a lawsuit.

The timeliness of the lawsuit has gone from being matter of defense to an element of the cause of action.

Score one for consumers.

California statute of limitations on debt

The law on when you can sue someone on a contract, like a credit card, a medical bill, or a personal loan, lives in the Code of Civil Procedure.

AB 1526 added to the statute of limitations in § 337 the following:

(d) When the period in which an action must be commenced under this section has run, a person shall not bring suit or initiate an arbitration or other legal proceeding to collect the debt. The period in which an action may be commenced under this section shall only be extended pursuant to Section 360.

Before the 2019 change

Used to be, a creditor was free to sue on a debt, even if the creditor knew that the four year California statute of limitations was long past.

The burden to assert the statute was on the defendant to raise the statute as an affirmative defense.

An affirmative defense operates to say, in the pleadings, that even if everything you claim is true, you don’t win because….

As a result, the issue of whether a debt was too old to be enforced through the courts was seldom considered by the judge because the consumer-defendant never filed an answer.

If no answer is filed, the judge effectively never considers the merits of the lawsuit.  The system assumes that if a lawsuit is defective, the defendant being sued will answer and point it out.

But that’s not how most collection actions go.  The overwhelming number of collection actions go to judgment by default, because the defendant never spoke up.

New law in action

As of now, Spring 2020, there don’t seem to be reported cases applying the new rule.

Over time, it will be worth looking at whether the number of collection actions goes down.  That may be hard to discern if we hit a period of further economic distress.

More

What to do when you are sued

All about California judgments

Will bankruptcy wipe out a judgment

 

 

 

The Secret Bankruptcy Discharge For Community Property

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When only one spouse files

 

Psst!

Let me tell you a secret about bankruptcy law.

You can get 3/4 of the benefits of a bankruptcy discharge without ever going near a bankruptcy court if you are a married person in California, or any other community property state.

If your spouse files bankruptcy and you don’t join in, you still reap much of the protection from your creditors that you would get if you had filed.

How can that be?

It’s the law,  a little known feature of the bankruptcy code that applies to a bankruptcy discharge in a community property state.  §523(a)(5)

Here’s how and why it works this way.

When only one spouse files

Spouses aren’t required to file bankruptcy together.  They can file together, but they don’t have to.

But even if only one spouse files, all of the community property of the marriage becomes property of the bankruptcy estate.

7 Essential things about community property

In return, the community property gets a bankruptcy discharge, just as though it was a separate person.  (Which is why I sometimes  say that, in a community property state, each marriage is a menage a trois.)

The discharge protects not only the property that the couple owned when one spouse filed bankruptcy, it protects community property that they acquire in the future.

The creditors who are affected are the creditors who had claims against the community property when the bankruptcy was filed.  Not just creditors of the debtor, the person who filed bankruptcy.   The creditor’s claim could be one against the non-filing spouse, and the discharge protects the non filer’s community property.

It doesn’t surprise us that the spouse who elects bankruptcy is protected.  What is mind blowing is that the creditors of the non filer are equally barred, after the discharge, from reaching the couple’s community property on account of the non filer’s debts.

Post bankruptcy wages are immune

It’s worth repeating this because 1) it’s so important, and 2) it is so hard for creditors to grasp:

the paycheck of the married person is protected from garnishment for that person’s own debts incurred before the bankruptcy,  for all time during the marriage, by reason of their spouse’s bankruptcy discharge.

For most couples, their paychecks are their most important asset outside their homes.  Paychecks are the most easily garnished by a creditor with a judgment.

And the community property discharge protects those wages for so long as there is a marital community.

What is left for creditors of non filer

A legitimate creditor of a non filing spouse, after a bankruptcy discharge, can effectively only enforce its debt against the separate property of the non filer.

Separate property in California includes

  • acquired before marriage
  • acquired by gift during marriage
  • inherited during marriage

The community ceases to exist at divorce or death.  Whatever a spouse is awarded in the division of property is that person’s separate property.

So, after divorce, the non filer’s separate property could be vulnerable to claims that were discharged against the community, assuming that the passage of time hasn’t invoked the statute of limitations on collection suits.

The community property discharge doesn’t prevent a creditor from suing the spouse who didn’t file bankruptcy.  It just limits the assets from which that debt can be collected.

So your creditors can only collect what you owe them from your separate property, if you have any.

Pretty neat, eh?

More

When the bankruptcy trustee asks about your missing spouse

Image courtesy of Openclipart.com

California Bankruptcy Law Is All Our Own

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california bankruptcy law

California Bankruptcy law is a lot like a unicorn….appealing but imaginary.

Instead, we have bankruptcy in California, where the landscape is shaped by community property;  state exemptions, large mortgages, and the 9th circuit court of appeals.

Like the Merced River cutting through the granite of Yosemite, those factors alter the bankruptcy landscape here.

Community property

California community property law defines what assets of a married couple come within the control of the bankruptcy court. While there are other community property states, it is the law of each state that defines how community property is created.  State law also defines the rights of creditors in that community property.

Whether one spouses files, or both join in a bankruptcy case, all of the community is available to the creditors of the marriage.

In return, after the bankruptcy all community property is forever protected by the discharge.   Post bankruptcy wages and purchases are beyond the reach of creditors.

Even when only one spouse files, all the community gets protection from creditors who had claims when the case was filed.

Much different from the treatment of marital property other places.

Two California exemption laws

While bankruptcy is federal law, California state law defines  exemptions.  Exemptions specify assets a debtor can protect from creditors in bankruptcy.

Exemptions are the only place in bankruptcy that the law is explicitly different from state to state.

Congress, in a legislative compromise in 1978 on the adoption of the Bankruptcy Code (back when Congress knew how to compromise), states were given the option to opt out of the federal bankruptcy exemptions in favor of the state’s exemptions.

In response, California’s legislature gave debtors a choice:  the existing state law exemptions found in Code of Civil Procedure 704, or a special set of California bankruptcy exemptions starting at CCP 703.140.

Mortgage debt dominates

California boasts (or suffers) home loan balances that make eyes bug in other states.  The cost of housing here skews family budgets, leaving less for other living expenses.

Why the means test is toothless in the Bay Area

For many years, credit cards were used to fill the gap between the available income and the expectations of comfortable living.

For homeowners, the deduction for mortgage payments on the means test assures most homeowners that they pass the means test.

The increasing cost of renting has sharpened the drive to save a house from foreclosure, at whatever cost.

Bankruptcy can often make that possible in Chapter 13.

9th Circuit shapes us

California bankruptcy judges are bound by the decisions of the 9th Circuit Court of Appeals.  The circuit courts can only be overruled by the Supreme Court.

So, the decisions made by the 9th Circuit on bankruptcy issues drive outcomes that may be different from outcomes in other circuits.

Recently the 9th Circuit made some very satisfying decisions for bankruptcy debtors, including allowing lien stripping in Chapter 20;  granting attorneys fees to debtors who win bankruptcy disputes with their creditors; and slapping down bankruptcy trustees who sought to disqualify Chapter 13 debtors who had secured debts for non essentials.

And, the 9th Circuit rejected its earlier, horrible decision about making debtors whole when creditors violate the automatic stay.

Bankruptcy the product of our environment

So, sorry to disappoint, there is no “California bankruptcy law.”

There’s just the granite of the Bankruptcy Code, fractured, shaped, and worn by the economic and legal realities of California.

And the resulting landscape is generally awesome.

Why Bankruptcy Means Test Is Paper Tiger In Bay Area

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Bankruptcy’s means test is a paper tiger in the San Francisco Bay Area.

Really!

You can see why few Bay Area residents are constrained by the means test when you compare the latest median income figures  used in the means test with the allowed cost of rental housing here.

To review:  Congress  in 2005 tried to write a universal formula to limit bankruptcy relief to those who “needed” it. Bankruptcy judges were to be stripped of discretion in favor of a formula that would be universal.

Those whose average income in the past six months exceeded the median for their state would have to show that they had little more than $200 a month left over after subtracting some standardized allowances for food, clothing and housing and their actual projected expenses for other allowed costs of living.

Never fear, the cost of housing in the Bay Area stands this formula on its head.  (While the exact numbers have changed since 2016, when this piece debuted, the principle remains the same.)

The means test numbers

The means test starts with the median income in the state for a family of each size.  Income numbers and the fixed deductions from income are updated twice a year.

The new numbers become effective for cases filed April 1, 2016 or after.  

Newer numbers don’t change the story

Our survey says, the median income in California for a single person household is $ 50, 579.  Make a dollar more than that and you have to pass the means test to file Chapter 7.

That median income translates to a monthly gross income of $4215 for one person.

How does that work in the Bay Area?

Bankruptcy in San Mateo County

Apply the new cost of housing numbers, and passing the means test is a piece of cake:

The allowed deduction for rent for a single person in San Mateo County is $2508.  Non rent costs of housing like utilities add $461 a month to the cost of putting a roof over your head.

Seventy percent of a median income single worker’s gross income goes to housing! Most financial advisors target 31-35% of gross income for the cost of housing.

A single person in San Mateo County would have to gross nearly $9000 a month before their housing expenses were only one third of their gross monthly income.

Since the numbers vary by the size of the family, let’s look at a hypothetical  family of four in San Mateo County.

Median income for a family of four in California is $81,837, or $6820 a month, before taxes and other deductions.

Rent in San Mateo County for those four people is $3462, with an additional $636 in additional housing expense.

Our median income family is paying 53% of their gross income for housing.  They’d have to gross $12,418  before the allowed cost of housing was only one third of their income.

With slight variations, the result is the same for all Bay Area counties.

What the numbers mean for Bay Area debtors

It’s no news that it costs a lot to live in the Bay Area.

After you’ve put a roof over your head, there isn’t a lot left for all the other things that you need, like food, transportation and health care.  All of those things are deductible on the means test as well.

Not to mention reserves for the unexpected, savings for college, and provision for retirement.

So, if you are servicing credit card debt, you are probably spending money on long ago purchases that is desperately needed  for current expenses.

Know that the means test is not likely to bar you from bankruptcy.

Only you know what is keeping you from a fresh start.

More about deciding about debt

Alternatives to bankruptcy

What holds you back

Bankruptcy makes the future better

Image:  licensed under Creative Commons license by Cucchiaio

Updated with April, 2016 numbers.

Little Time To Spare When You’re Served With A Lawsuit

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Lawsuit concept.Being served with papers in a collection suit doesn’t generally help your critical thinking process.

In fact, that surge of adrenaline seems to blur the eyes and fog the brain.

So when you scan the lawsuit papers and see a date, months down the road, you exhale and set the problem aside for another day.

Serious mistake.

The date you picked out is the date set for a case management conference in the California Superior Court.

That date is long after you need to act to protect yourself.

Answer or lose on the spot

Your answer to the complaint is due 30 days after you are served.

No date is typed out because the clerk issuing the California summons can’t know when you’ll be served with the complaint.

The summons form has a summary of what you have to do to defend yourself printed right on its face.

Here’s a blank California summons.

What your answer does

The case management conference is only meaningful if you’ve filed an answer and laid out what’s in dispute in the lawsuit.

  • Are you really the person who owes the money?
  • Have they calculated the debt correctly?
  • Has the statute of limitations passed?

If you file an answer to the complaint that sets out your side of the story, a judge will hold a trial if necessary to determine the truth of the matter.

Court date is only housekeeping

The case management conference, the date that appears in the papers, is the judge’s first look at the case.  It’s a time to assess what the issues for trial are, how soon the case will be ready, and what motions might be required.

It does no good to appear at the case management conference, expecting to argue the case if you haven’t filed an answer, in writing, and served it on the plaintiff who filed the case.

Been served?

Sit down and read the papers, line for line.

The California courts have an online help center for people without a lawyer.

If you can’t bring yourself to read it, see a lawyer who can assess the situation.  Here’s a list of bar association referral panels in California.

Maybe you want to answer;  maybe you concede the debt, and want to pay.  Maybe it’s time to consider bankruptcy.

But whatever your approach, don’t wait til the date on the papers to take action.  It may well be too late.

More

 What to do when you are sued.

Understanding judgments

Is it too late for bankruptcy?

Should you pay up or file bankruptcy

Image: © creative soul – Fotolia.com

When Your Bank Account Is Seized: California Action Plan

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bank levyTime is short when you get a notice that a creditor has levied your bank account.

California has protections that may allow you to recover money that’s been seized.

But success in getting your money back depends on prompt action and following the procedures.

Bank levy basics

A creditor with a judgment is entitled to levy your bank account to collect the money you owe.

All about judgments

You have an offsetting right to keep some money by claiming exemptions.

A levy only catches the money that is in your account when the levy is served.  It doesn’t affect money deposited to the account later.

Your bank has few choices when a levy is served.  By law, it must hold the money in the account on the day the levy is served for the creditor.

And it must deliver to you a notice of the levy and information about your rights to claim exemptions.

What you can keep

Let’s assume that the money in the levied bank account consists of your wages.

California exemption law protects a minimum of 75% of take home pay.  A non-support creditor simply can’t reach the 75% that is exempt. Cal. Code of Civil Procedure 704.070.

If your wages were already garnished before they were paid to you, what you take home is exempt from further levy.

And, you may be able to protect more than 75% of your wages if you show that you need more than 75% to provide for yourself and your family.

California law grants absolute protection to the assets of and distributions from private retirement plans and retirement-focused profit sharing plans.  CCP 704.115.

Public retirement benefits are also exempt.  CCP 704.110.

Federal law protects Social Security.

Claiming funds exempt

Here’s what you need to do to contest the levy.

When a bank account is levied,  CCP 700.010 requires the levying officer to serve on the judgment debtor these documents:

  • the writ of execution (issued by the court)
  • a notice of the levy
  • a list of exemptions prepared by the Judicial Council

The last item, the list of exemptions, is your key to regaining some part of the bank balance if they are traceable to wages.

The notice of levy contains the critical instructions and the time line:

To claim an exemption, you complete the Claim of Exemption form and give it to the levying officer, typically the sheriff.  If you contend that the levied money is necessary for your support and for the support of your dependents, you also complete the Financial Statement.

The judgment creditor then has a choice.  It can agree that the levied funds are exempt and they are returned to you.  Or, the judgment creditor can set a hearing before a judge to challenge your claim of exemption.

Serve papers on time

The burden is on you as the judgment debtor to complete your clams of exemption and get them back to the levying officer on time.

A successful claim of exemption protects your funds from this levy.  While it may give the creditor some visibility into your finance, it doesn’t solve the bigger problem created by the judgment.

Consider consulting with a credit counseling agency or a bankruptcy lawyer to assess the bigger picture of your finances.  Even if the creditor has a judgment, the debt may still be dischargeable in bankruptcy.

More

Collection lawsuits in California

Property safe from creditors under California law

Myths about bankruptcy

Image © vladimirfloyd

California Homestead Exemption: The Truth Isn’t What You Think

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patchwork

“They can’t take my house, whatever happens.  Right?”

The young man in my office “knew” that the substantial equity in his home was exempt as a California homestead, even if he filed bankruptcy.

He “knew” that credit card debt was dischargeable.

And that “knowledge” lead to his conviction that , in bankruptcy, he could keep the house and ditch the credit card debt without payment.

Wrong.

In his mind, bits of legal truth got stitched together into a bankruptcy myth.  Let’s piece together the truth.

California homestead

True:  every California homeowner can claim a homestead in their principal residence.  CCP 704.720

But:  the homestead is limited to a certain amount of value.  For the single guy sitting across my desk, that amount was $75,000.  Equity in his condo in excess of that isn’t protected by the homestead.

Worse, the homestead is only effective against certain kinds of creditors.  The tax liens that were of record for old tax years aren’t defeated by a state law homestead.   So the tax liens remain enforceable. *

Credit card debt is dischargeable

True:  unsecured credit card debt (not incurred by fraud) can be wiped out in bankruptcy.

But: the discharge speaks to whether the debt survives the bankruptcy and is enforceable afterwards.  Being dischargeable doesn’t mean that creditors don’t share in the bankruptcy distribution.

Asset value matters in bankruptcy

True:  every debtor can claim exemptions that protect the exempt amount from being paid out to creditors in the bankruptcy case.

But:  the asset value not protected by an exemption is available to pay the claims of creditors, as far as that value goes.  For most unsecured creditors, all they get from the debtor is their pro rata share of the non exempt property of the estate.   Any unpaid balance is discharged.

Bankruptcy truths

So when the bits of the law my client got right are expanded and seen as a whole,  any bankruptcy discharge was unlikely to result in paying less to his creditors. His house represented far more value than the debts, dischargeable and non dischargeable, that he owed.

Likely, in either Chapter 7 or Chapter 13, his creditors would get 100% of their claims.  In my view, any amount he might save in reducing the interest accruing on those claims to the bankruptcy interest rate would be eaten up by the legal fees to file the case, and the credit hit he would incur.

True story of huge savings on credit card debt

The one critical bankruptcy advantage might be the power of the automatic stay:  if the mortgage lender threatened a foreclosure before he could cure the secured arrears, bankruptcy could stop foreclosure long enough to either propose a Chapter 13 plan, or arrange family help to keep the house.

* In Chapter 13, the homeowner could strip a tax lien down to the value of the home after all senior liens were subtracted.  The stripped down lien would have to be paid in full through the plan.  The balance of the tax lien would be treated as an unsecured claim.

More

Bankruptcy myths abound

Everything you need to know about the California homestead exemption

Who gets paid first in bankruptcy

 

 

California Community Property Creates A Marital Threesome

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3 paper dolls_optSounds kinky, doesn’t it?

Three players in a marriage.

Sharing.

Everything.

Only this is something you can talk about openly, without blushing: community property.

Community property is the default property arrangement in California for a married couple.

Yet it is poorly understood by those affected by it and it isn’t inevitable.

How community property works

The community property system provides that everything acquired during marriage is equally owned by the spouses, regardless of which spouse acquired it.

Property owned before marriage or acquired by gift or inheritance is the separate property of the spouse who acquired it.  It retains that separate property character as long as it isn’t comingled with community property.

The most vivid way to imagine the community property system is to see marriage as comprised (for financial issues) of three players:

  • husband,
  • wife, and
  • the community property.

Each of the three may have different exposure to debts.

Both same sex couples and registered domestic partners fall under the California community property system

Only the person who contracts for a debt is personally liable.

That personal liability will outlast the marriage.  It’s your responsibility, whatever your marital status.

The community, however, is liable, regardless of who incurred the debt.

All of the community property is liable for the debts of either spouse.  There’s no halvsies here: no “my half of the community is liable for my debts”.

On money issues, the community is all in.

And that’s not all:  the community property is liable for the debts of either spouse incurred before marriage.

Liable for my spouse’s debts?

You don’t become personally liable for your spouse’s debts by reason of living in a community property state.

That means that the credit card company can’t sue you for a debt contracted by your spouse.  So, no judgment against you for his debts.

But a judgment against your spouse can be collected from the community property, including your wages! But it can’t be collected from your separate property.

Community property can be avoided

Spouses in California are free to agree that they won’t have community property.

That’s what a pre nuptial agreement is often about.  Spouses can agree that their accumulations during marriage will be the separate property of each spouse.

If you are already a married Californian, maybe the three of you want to talk about this.

More

New community property case shakes things up

Community property in bankruptcy

 

 

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