Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

New California Bankruptcy Exemptions

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california exemptions

Californians filing bankruptcy got an increase in the exemptions that protect their assets on April 1, 2019.

Every three years, the dollar amounts are adjusted for changes in the cost of living.

Californians don’t get to protect possessions under the Bankruptcy Code’s exemptions.  Instead, a California resident who files bankruptcy must use California exemption law. That’s the case even though bankruptcy is governed by federal law.

Don’t shed a tear for the bankruptcy exemptions:  the state exemptions are arguably better.

You have a choice of two exemption systems.  One choice is the standard California state law exemptions found in Code of Civil Procedure 704. These are the exemptions  applicable in state law collections as well as bankruptcy.

The second choice, appealing to those without significant equity in their home, is the California bankruptcy exemptions found at CCP 703.140(b).

What do debtors get to keep

Here’s the new  list of increasedCalifornia bankruptcy exemptions:

Principal residence$29,275
Vehicles$5,860
Household goods per item$725
Jewelry$1,750
Grubstake$1,550
Business assets$8,725
Loan value of life insurance$15,650
Personal injury claims$29,275
Other misc. exemptions703.140

Californians, because they are required to choose one state exemption system or the other rather than the federal bankruptcy exemptions, can also use the federal list of non bankruptcy exemptions.

Bankruptcy wild card exemption

The trickiest part of the California bankruptcy exemptions is what’s called the “wild card”. (It’s also called the “grubstake”.)    When 703.140(b)(1) and (b)(5) are added together, the debtor can protect $30,825 of equity in any asset or combination of assets.  That’s the wild card.wild card exemption

The wild card amount can be parceled out to protect some cash in a bank account;  some equity in a vehicle that exceeds the car exemption; stock; a  business or whatever else you have.

The point is that the exemption isn’t restricted to a certain kind of property. It can be used to protect anything.

How exemptions work

Exemptions protect the specified amount of equity in an asset.

If it’s a house, the exemption protects a certain amount of value in the property that exceeds the liens on the property.  It doesn’t matter if the value of the house is $200,000 or $1,200,000.  The exemption protects the specified amount of equity in the house.

If there is equity in a house over and above the total of liens and the homestead, a Chapter 7 trustee can sell the house and give the debtor the homestead exemption in cash.

That doesn’t happen very often.  Because, there has to be enough equity to pay the exemption, the costs of sale, any capital gains taxes and the trustee’s commission before the sale benefits creditors.

More about secret exemptions

If neither California exemption system adequately protects your  assets, consider Chapter 13.

More

Exemptions in Chapter 13

Debts of spouses

Wild card:

Image courtesy of Flickr and k2d2vaca.

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.

More on California

Means test is toothless in California

California statute of limitations gets teeth

When you’re sued

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

Do You Get The Bankruptcy Grubstake Exemption?

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How bankruptcy grubstake exemption works

The word grubstake never appears in the Bankruptcy Code or the California Code of Civil Procedure where the exemptions available in bankruptcy cases filed in California are found.

Yet every bankruptcy lawyer uses the phrase; and seemingly, every bankruptcy debtor struggles to understand it.

What’s a bankruptcy grubstake

Here’s the standard English definition of grubstake.

1.provisions, gear, etc., furnished to a prospector on condition of participating in the profits of any discoveries.
2.money or other assistance furnished at a time of need or of starting an enterprise.
The miner’s grubstake allowed him to buy food and feed his burro while prospecting.  The bankruptcy grubstake does the same:  it furnishes the wherewithal for a fresh start.

The grubstake exemption is sometimes called the wildcard exemption. The exemption is expressed as a dollar amount. 

In a California case, that amount is currently $27,425.  That’s the total of the amounts provided in sections  Code of Civil Procedure 703.140(b)(1) and (b)(5).  Here’s the Judicial Council list of exemption amounts.

While other exemptions in the California bankruptcy exemption statute are limited to particular kinds of property ($1425 for jewelry, $4800 for equity in a car, etc.) the grubstake can be applied to any kind of property.

More importantly, it can be divided among different kinds of assets.

A person filing Chapter 7 or Chapter 13  can use part of the grubstake to protect extra value in a car; part for the balance in a bank account, or stocks held for investment; or part for a timeshare or business interest.

Any kind of asset is fair game, so long as the total grubstake claims doesn’t exceed  $27,425.

Contrast with state exemptions

The exemptions found in CCP 703.140 are available only in a California bankruptcy.  They aren’t available to protect assets from collection of a money judgment outside of bankruptcy.

The standard California exemption system is found in CCP 704.  Those exemptions do apply in state law proceedings and are an alternative choice for a Californian filing bankruptcy.

The debtor in a case under Title 11  must choose either the 703 or the 704 system of exemptions as a whole.  You cannot combine the two systems or choose one exemption from this system and another exemption from the other system.

The California state exemptions include the generous homestead exemption that protects a specified amount of equity in property used as the debtor’s home.  The grubstake in the California bankruptcy exemptions is a much smaller sop to the family that doesn’t have equity in a home.

Making use of the grubstake

One of the most important services a bankruptcy attorney provides is choosing the exemption system and allocating  the grubstake among the client’s assets so as to protect as much property as possible.  It’s not usually possible to select exemptions until the client has provided a list of what they own and an estimate of the present sale value of the property.

More

Getting your bankruptcy papers right

Secret exemptions

Pay creditors or file bankruptcy

Image courtesy of scrambldmeggs

Updated October, 2016.

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 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

 

 

 

California Renter Protections From Eviction: How To Qualify

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california eviction protection California  bans evictions for non payment triggered by the COVID-19 shut-down under Gov. Newsom’s executive order of March 27,2020.

The protection comes with a big IF:  A tenant must act to trigger these protections, which run through May 31,2020.

Who is protected

The order covers tenants who have been

  • laid off
  • had hours cut
  • suffered other income reductions
  • missed work to care for a child whose school closed

The loss of income has to be traceable to the virus, the state of emergency, or related government response.

How to qualify

You need to do two things to invoke eviction protection.

One, you need to notify your landlord, in writing, that you need to delay, in whole or in part, payment of the rent due.

That notice needs to be given before the rent comes due or within 7 days of the due date.

Two, you need to keep paperwork that supports the claim that your income is reduced by COVID-19.

That documentation can be

  • pink slips;
  • payroll checks;
  • bank statements;
  • medical bills, or
  • signed statement from your employer that explains your changed financial circumstances.

What protection is provided

The order makes two changes to existing law.

First, tenants get an extension of time to answer an eviction complaint.

Normally, a tenant’s answer to an unlawful detainer action (legalese for “eviction complaint”) is due 5 days from service of the summons.

The executive order extends that period for the 60+ days this order is in effect.

Second, no writ of possession may be enforced against a tenant who qualifies under the order.  That means the sheriff can’t evict you if you have taken the steps above.

What’s unclear

This order doesn’t seem to address the situation where the tenant was behind before the order became effective.

That situation may be addressed in further orders.

In most California counties, the issue may be moot because, independently, county boards of supervisors have instructed sheriffs not to enforce pending evictions.

What’s to come

I fully expect that this order or one like it will be extended if the economic shutdown continues beyond May 31.  It’s hard to imagine that it won’t, as I write this.

In the meantime, stay home, stay healthy, and stay hopeful.

More on the virus money crunch

When you can’t pay your bills because of the virus

Car payments and the pandemic

California tax deadlines extended

Are You Liable For Your Spouse’s Debts In California?

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wedding-154985_1280“Everyone knows” that spouses are liable for each other’s debts in a community property state like California.

Only, “everyone” is wrong.

Or, more accurately, they’re only half right.

Community property is liable for everything

In California, the community property is liable for the debts of either spouse.

In fact, the community property is liable for the debts that either spouse brings to the marriage as well as the debts incurred during marriage.

But while the community property may be liable for your spouse’s debts, you personally aren’t liable if you didn’t incur the debt.

So, your spouse’s creditor can’t reach your separate property.  Nor can that creditor take property you acquire after the marriage ends.

But during marriage, that creditor can reach your community property wages.

Once the marriage ends,   your spouse’s debts don’t follow you after the marriage unless the judgment of dissolution awards a debt to you.

Creation of community property

So, where does community property come from?

Property acquired during marriage is presumed to be community property.

Presumed, but doesn’t have to be.

You aren’t bound to have community property.  Spouses can agree that they won’t have community property. Or they can agree that only certain property will be community and the balance will be the separate property of the spouses.

To be enforceable at law, the agreement needs to be in writing and both spouses should be separately represented by counsel.

Who is liable for marital debts

When you think about community property, consider that marriage really involves three entities.  Two of those are the spouses.  The third is the community property.

It’s  a menage a trois, sanctioned by the law<g>.3 paper dolls_opt

Each spouse is personally liable for the debts that spouse incurs.  That personal liability is independent of the marriage: it follows the person.

The community, as long as it has property, is liable for the debts of both spouses, incurred before and during marriage.

If/when the community is no more, each spouse is liable for their own debts, which may include debts assigned to them in a dissolution.  The community is divided and ceases to exist.

Researching law on the internet

This describes California community property law.  The law may not be exactly the same even in other community property states.

That’s why lawyers are licenced in each state.  The law differs, state to state.

So take care about  “researching” your legal questions on the internet.  Unless you know which state’s law is under discussion, and what the qualifications of the writer are,  your research may be not only useless, but dangerous.

More about community property basics

 

Image courtesy of Pixabay and OpenClips via Creative Commons license

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.

The Most Costly Community Property Blunder

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california map with roadsWhat do you do when creditors from your spouse’s past threaten?

Chances are your first reaction is to put the title to your biggest assets in just your name.

Whew! Safe.

Not.

Just because  the deed to the house now reads Jane Doe instead of John Doe and Jane Doe it’s easy to think the house is Jane’s separate property and  the operation of California community property law has been beaten back.

Wrong.

Character matters, even for property

Why does it matter whether the house or a business is community property?  Because the character of the property determines which creditors of the married couple can levy on the asset to pay a debt.

Community property is available to creditors of either spouse, for debts incurred during their marriage and before marriage.

Ouch!

Registered domestic partners are also presumed to have community property and are subject to the benefits and burdens of community property.

One couple I saw this week had started a business during the marriage and issued the stock in the corporation in the name of one spouse alone.  They thought that holding the stock in just one name made it the separate property of the named spouse, and insulated the business from the $ 1 million pre marriage tax debt of the other spouse.

Nope.

California law starts from the proposition that all property acquired by a married person during the marriage is community property. CA Family Code 760.   Which spouse’s name is on the property doesn’t alter the character of the property.  So when a married woman buys a house in her name alone, it is presumed to be community property.

By statute, the exceptions to the presumption of community property cover

  • property acquired by one spouse before marriage
  • property acquired during marriage by gift or inheritance
  • income generated by separate property

Defeating the community property presumption

If you want to beat the presumption, you have two alternatives.

The first is a prenuptial agreement that defines whether you will have community property in your marriage.  You are perfectly free to make such an agreement.  It needs to be in writing and is subject to rules about genuine understanding about the effect of the agreement.  Remember the Barry Bonds case?

The second is transmutation.  That’s a big word that means changing the legal character of property already owned by the couple.  Because transmutation has such a significant effect on the legal rights of the spouses and their creditors, California law sets out the requirements of a valid transmutation.  Family Code 852.

To be effective in law, a transmutation must be

  • in writing
  • expressly provide for a change of character of property
  • made by or consented to by the party adversely affect.

Creditors may upset transmutation

Remember that the claims of creditors on the community property was the usual reason spouses try to change the character of property, to build a wall around an asset that the creditors of one spouse might reach.

For that reason, transmutations are subject to that collection of laws that prohibit transfers that frustrate creditors’ rights.  Those laws, dating back to the 17th century, allow creditors to follow property transferred without consideration, i.e. an exchange of value, even though now titled to someone else.

California statutes on transmutation clearly warn that transfers among spouses are subject to the laws of fraudulent transfer.  Transfers of real property between spouses are only effective if the deed is recorded.

Community property take away

If you are content to have your accumulations during marriage classified as community property, it’s hard to muck that up on your own.

But if you, and your mate, genuinely want some or all of your assets to be the separate property of one spouse, to the exclusion of any interest in the other spouse, you need to do far more than just change the name on title.

More on community property basics.

*In the event of divorce, it determines whether the court can divide the property.

Image courtesy of Wikimedia.

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