Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

California Community Property Creates A Marital Threesome

By

 

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 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.

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.

[ I speak here of the traditional composition of a marital couple, but remember that both same sex couples and registered domestic partners fall under the California community property system. ]

The central concept is that only the person who contracts for a debt is personally liable.

Personal liability will outlast the marriage.  It’s yours, married or not.

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.  All the community property is liable for the debts incurred during marriage, regardless of which spouse incurred them.

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, personally, don’t become 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!

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

 

 

Does Bankruptcy Discharge A Judgment In California?

By

591px-Geologic_map_California_opt

Nothing gets a person into a bankruptcy lawyer’s office quicker than being served with a lawsuit.

The prospect of losing a lawsuit and having a judgment entered against them terrifies.

Callers are frantic to see if they can file bankruptcy before judgment is entered.

They worry that once a judgment is entered, their options in bankruptcy vanish.

Not so.

The debt underlying a California judgment remains just as dischargeable as it was before the case was filed.

And,  a judgment in California does not automatically become a lien on the defendant’s property.

It takes another step in California for a money judgment to become a lien.  And as long as there is no lien, the debt is unsecured and  potentially dischargeable in bankruptcy.

Discharge turns on kind of debt

Contrary to what some dishonest debt collectors will tell you, judgments are just as dischargeable in bankruptcy as the underlying debt is.

Whether an unsecured debt can be discharged in bankruptcy looks at  the nature of the debt, not whether a court has ruled on the merits of the claim.

So,

  • Child support is non dischargeable, whether or not there is a judgment.
  • Debts incurred by fraud are non dischargeable in bankruptcy, if the creditor can prove fraud to bankruptcy standards.
  • Credit card debts honestly incurred are dischargeable, judgment or no.

Liens change everything

What does change the dynamic is an abstract of judgment or a notice of judgment lien.

These documents do create a lien on the judgment debtor’s assets.

Recording an abstract of judgment creates a lien on real property in the county in which it is filed.  A notice of judgment filed with the California Secretary of State creates a judgment lien on personal property located in the state.

If the lien cannot be avoided in bankruptcy, the judgment creditor has obtained an advantage.

What my friend Jay Fleischman’s post about civil judgments in New York and their bankruptcy implications points out is the way state law impacts the operation of federal bankruptcy law.

The rights that each party in a bankruptcy case brings to the bankruptcy case originate in state law.

It also demonstrates why lawyers are licensed in each state and why my California law license does not entitle me to practice bankruptcy law in New York.

And why bankruptcy is not a do-it-yourself project.

More

When you’re served with a lawsuit

Three debts bankruptcy doesn’t discharge

Everything you need to know about judgments

Wage garnishment survival guide

Who are the really scary creditors

Image in the public domain, courtesy of Wikimedia.

Debt Collectors Distort Community Property Law

By

distorted lawCalifornia community property law is complicated.

I get it.

It shouldn’t surprise me that debt collectors don’t understand community property.

Or maybe, they find it inconvenient to understand.  Or deliberately distort the law.

Collector expands spousal liability

A client reported that her ex husband had been told by a debt collector that the former marriage made him personally liable for his exwife’s debts.

There must be an emphatic, yet polite, word for b***s****.

Wish I knew the word… “Balderdash” seems so weak.

In my most generous view, this could be debt collectors from outside of California who are clueless about community property law. Or, more realistically, they’ll say whatever they think will scare a payment out of someone.

What California spouses owe

For the record, living in a community property state such as California does not make each spouse personally liable for the contractual debts incurred by their spouse.

If your spouse in California takes out a credit card and runs up a balance, you are not liable to the card issuer for the debt. The community property is liable for the debt, but you are not liable.

Community property law in a nutshell

During the marriage, property that a married couple acquires is presumed to be community property.  That community property includes your earnings as well as those of your spouse.

It may feel like community property law makes you personally liable, but the liability doesn’t follow you out of the marriage.

Death, divorce or a post post nuptial agreement with your spouse not to have community property ends whatever exposure you, personally, have for your spouse’s debts.

If there is no community property, then only the person who contracted the debt is liable for it.

Don’t take legal advice from debt collectors

My client’s encounter with the all-knowing debt collector is all too typical of collectors.

This is but one of the “whoppers” told by debt collectors.

Engage skepticism when dealing with this breed.

Or take notes, and check out the requirement that collectors tell the truth found in the Fair Debt Collection Practices Act and California’s Rosenthal Act.

More

Make debt collectors pay you

How debt collector nearly cost elders their home

When filing bankruptcy is the right move

 

What Are Your Rights In A California Foreclosure

By

Foreclosure AuctionThe old saw about Oakland, California is that there is no “there” there.

I suggest it’s the same about being “in foreclosure”:  foreclosure is not a place, it’s a path.

Nothing legally meaningful changes until you get to a foreclosure sale.  Everything before that is prelude.

Yet several  Bay Area clients have asked whether they can remove personal property from their home while it’s “in foreclosure”.

Another client wanted to know what the rights of the foreclosing creditor were to come into her home before any sale was held.

Another thought he needed to vacate the house before the sale.

Your rights to the property remain the same,  unchanged by any default on the mortgage payment.

Rules of California foreclosure

Be clear:  it’s your property until there is a foreclosure sale.

Likewise, the lender is still an outsider unless and until it obtains title to the property by being the highest bidder at the foreclosure sale.

So, certainly you can remove personal property from your home, and, no, neither the lender nor anyone else can come on your property without your permission.

Debt changes your thought process

I’m fascinated by the concept of being “in foreclosure”.  It seems to be akin to being  “in collections”.

Neither are real places, or even changes in your legal rights.

Nicholas_Owen_in_the_manaclesYet laymen seem to think of them as situations in which the rules change and consequences follow. [ I have a mental image of them being dank dungeons with manacles on the wall, and cobwebs hanging from the beams.]

True, each represents a process that may lead to a change in legal rights, or a loss of property, but they are roadways, not fixed “places.”

The foreclosure process, which by California law, takes a minimum of  four months from formal notice of default to foreclosure sale, is being drawn out these days,  by the action or inaction of the foreclosing creditor.

The Homeowner’s Bill of Rights makes dual tracking illegal;  modification processes abound.

Don’t leave before it’s final

Which brings me to my current favorite sermon:  even if it’s inevitable that you lose the house to foreclosure, stay in the property and live payment-free until there is actually a sale.

You may be astounded at how long that interval is, how very much longer than the four month legal process.  Build up some savings to make your move.

How long does California foreclosure really take?

The foreclosure that was longer than War and Peace

More on walking away from a house you can’t save

HBOR

First image courtesy Colleen Lane;  woodcut of torture of Nicholas Owen courtesy of Wikimedia.

Do California Seniors Need to File Bankruptcy?

By

Rocking chair on the deck - Antigua, Mar 2010California, it turns out, is a great place to retire.

Not because of the cost of living, certainly.  In spite of the cost of living.

Because California exemptions are very generous to those of retirement age.

Those exemptions effectively make many indebted seniors collection-proof.

How exemptions protect seniors

Exemption laws come from the idea that, even if you owe money to creditors, a certain level of income and assets are protected from collection.

  • If you earn a wage, California law caps the amount of your wages that can be garnished at 25% of your after tax paycheck.
  • Pension income cannot be levied, before or after it’s paid to a retiree.
  • IRA’s are exempt to the extent necessary for support
  • The California homestead is $175,000 for individuals over 65
  • Social Security is exempt everywhere

It’s not hard to see that a California senior with home and retirement income might have nothing that a creditor with a judgment could reach.

That doesn’t mean that creditors will stop trying to collect.  They can bug a retiree, using shame, fear, and annoyance to get them to voluntarily pay a debt they owe.

But there may be no way for the creditor to compel payment of its claim at the present.

Is bankruptcy necessary

So, one of my tests for do you need to file bankruptcy  looks at whether bankruptcy would allow you to keep something that you might otherwise lose to a creditor who gets a judgment against you.

If the answer is yes, bankruptcy may be appropriate.

If the answer is no, it may be different.  If that creditor-with-a-judgment can’t tap your bank account or intercept your pension check, functionally, bankruptcy doesn’t make your situation any better.

You’re safe from your creditors.

Is bankruptcy helpful

But life isn’t all about money.  Peace of mind has a value not measured in dollars and cents.

For some seniors, the fact that they owe money they can’t pay is a source of stress.  Even when they know that the pushy, threatening collector can’t take anything from them, they lose sleep and emotional security.

Bankruptcy might have a benefit to those stressed out seniors, not because it’s necessary to preserve their assets, but because it’s necessary to for their peace of mind.

Bankruptcy and the next generation

Lots of elders are intent on leaving something financial to their heirs.

I hear it repeatedly from those getting along in age:  they want to leave their home to their kids.  They want to keep paying on a life insurance policy, even though no one is dependent on them for their care.  They are stretching themselves financially to give some value to their heirs.

Here’s where bankruptcy makes it possible to leave an inheritance to the next generation.

The exemptions that are available in bankruptcy are not available to a probate estate.  Probate will protect the homestead if there is a surviving spouse.  No surviving spouse who  needs the home to live in, and the home may be sold to pay the elder’s debts before anything goes to the offspring.

Most revocable trusts direct the successor trustee to pay the debts of the person who has passed away before distributing the trust estate to the beneficiaries.

Neither probate nor revocable trusts make it possible to avoid judgment liens that attach to homes.  Bankruptcy does.

So, by eliminating debts and perhaps liens as well, a senior intent on leaving a financial legacy to their survivors maximizes their gift by wiping out their debts during their life time.

Not a bad thing, perhaps.

More

Passing a home to kids without probate or risk

Image courtesy of Ed Yourdon and Flickr.

Marital Separation Doesn’t Require Two Homes

By

8071542885_3e3e19e278_h_opt

Split the sheets in California, and your wages are no longer community property.

That’s because property acquired during marriage but after a marital separation isn’t community property.

That’s been California law for a long while.

The sticky wicket has been drawing the line when the marriage has broken down and the couple has separated.

“When” they separated determines whether the estranged spouses have to split their earnings with each other.  It determines whether the creditors of one spouse can reach the wages of the other to pay the other’s debts.

Can estranged spouses live under the same roof and be living “separate and apart”?

Supreme Court makes separation expensive

In 2015, the California Supreme Court ruled that a couple isn’t “separated” when they live in the same house.  Even when they  shared little else besides the address.

In the Bay Area,  land of ruinous housing prices, I’ve seen many estranged couples continuing to share a house for a long while because neither can afford to move out.

Yet, according to the Davis decision, a couple is not separated and they continue to acquire community property until they no longer live in the same dwelling.

New law looks beyond common address

The justices kinda invited the legislature to change the law if they didn’t like the Davis result.  And they did.

New California law provides that spouses can live “separate and apart” under the same roof for purposes of California community property law.

Seven things you probably didn’t know about community property

The new law makes determining the date of separation messier, but more in conformity with economic realities.

A court trying to determine whether assets are community property has to look beyond the residence address.  Other indicators, not just where the spouses live, can show that there is no intention to resume the marriage.

Why this matters

Assets acquired during marriage and before separation are community property.  Simplest example is wages.

But suppose one spouse starts a business or writes a best seller when the marriage is rocky.  If there has been no separation, the business or the book royalties must be divided equally.

If STBX files bankruptcy

If the spouses have separated, different result.  The new asset is the sole property of the spouse who created it.

Or, more prosaically, suppose one spouse buys an expensive new car.  If they’ve separated, the debt is exclusively the responsibility that of the borrower.  If they aren’t living “separate and apart”, the debt is payable from the community.

Dividing debts in divorce

The new look at what it means to live “separate and apart” will inject more reality in the the “when” question, at the expense of making the determination more complex.

Image courtesy of  John Getchel  under a Creative Commons license.

Wage Garnishment Survival Guide

By

Gavel and money in wallet isolated on white“Your wages have been garnished, ” reads the letter from your employer.

Do nothing and twenty-five percent of your after-tax earnings will be sent to your judgment creditor.

So, do something:  keep reading this action guide for Californians subject to a wage garnishment.

This guide has three parts:

  • the short run guide for minimizing the hit to your income,
  • the medium range attack on the judgment, and
  • the long run look at the bigger picture of your personal finances.

Wage garnishment explained

A wage garnishment is a legal order that a creditor with a judgment against you can obtain from the court to collect on its judgment.

10 things you need to know about judgments

The existence of a judgment means that a court has already issued its order finding that your creditor is entitled to a sum of money from you to satisfy a debt.

If the system has worked as it’s supposed to, you should have been served with a copy of the complaint when it was filed.

Due process requires that before a judgment is entered, you get notice of the lawsuit and a chance to defend against it. Increasingly, these days, that doesn’t happen as it is supposed to.  More about that in our discussion of medium range survival tactics.

California is among the majority of states that allow a judgment creditor to intercept your wages at the source, your employer, to collect on its judgment.  Both federal law and state law impose a cap on how much of each paycheck the creditor gets.  State law can protect more than the federal law does;  it can’t protect less.

Here, we are looking at the garden-variety judgment for credit card debt or medical bills.  There are different rules governing collection of taxes and support that we won’t deal with today.

1.  Protect Your Paycheck From Garnishment

The wage garnishment entitles the judgment creditor to 25% of your paycheck, after mandatory deductions are subtracted.  But that’s the maximum the creditor gets.

You get a chance to show that you need more than 75% of your earnings to support yourself and your dependents. Cal. C. of Civil Procedure 706.051.

But to exercise that chance, you’ve got to fill out a form.  Are you game for that?

Claim exempt funds for support

With the notice of garnishment, you should have been served with a form to claim the exemption for money necessary for support.  To claim the exemption in wages, you need to also complete the form financial statement.

Note that the financial statement asks for your monthly income.  That’s easy if you are paid once a month, or twice a month. Watch out, though, if you are paid weekly or every two weeks.  There are 4.3 weeks in a month.  Figure your weekly income, then multiply by 4.3.

The claim of exemption and the financial statement get sent to the levying officer, not the court, and not your employer.  That information is shown on the notice of levy.    The back of the notice form has instructions for the judgment debtor; read them carefully.

Creditor can agree to allow exemption

The levying officer delivers your claim of exemption to the judgment creditor, who can accept your claim of exemption, or can request a hearing before a judge.

If a hearing is required, you will get a completed copy of the notice with the time and place of the hearing.  It will look like this.

If there will be a hearing, you need to appear, with evidence in hand about other sources of income, if any; proof of your expenses; and any other documents that support your need for all or nearly all of your wages.

You can also negotiate directly with your creditor for some alternative way to pay the judgment.

2.  Attack The Judgment

Wage garnishment is available only if a court has properly determined that you owe the money in question.

If you participated in the lawsuit, lost, and didn’t appeal, the matter is closed.  It’s a done deal.

But if the judgment supporting the wage garnishment was news to you, if it was entered because you didn’t appear in the suit, you may have a chance to fight back.

California law allows you to move to set aside a judgment that was improperly entered.  “Proper” here refers to the procedures involved, not the merits of the claim.

Grounds to set aside a default judgment include excusable neglect, lack of actual notice, or lack of subject matter jurisdiction.

Setting aside a judgment requires an understanding of the issue, attention to detail, and prompt action.  Sit on your hands and you may be barred from available relief because you waited too long.

The Sacramento County Public Law Library has a great guide to setting aside judgments.  If doing it yourself looks too difficult, a lawyer can help you.

Setting aside the judgment is probably only worth the effort if you have a defense to the substance of the lawsuit.  It’s a lot of work if at the end of the day, you are still liable for the debt.

3.  Assess Your Finances As A Whole

Your time and energy are precious commodities and come in limited supply.  Before spending a passel of time and energy defending yourself from this judgment creditor, take a look at all your financial obligations.

Ask yourself: Will managing this debt leave me able to pay everyone else I owe money to?

If not, get some help looking at the big picture.  Reputable credit counselors can help you with alternative payment plans.

I don’t recommend debt settlement schemes, however.  The concept is appealing, but in practice, it seldom works to solve the entire problem.

Bankruptcy lawyers are experienced in looking at debts and assessing whether you can dig yourself out of a financial hole without the help of available bankruptcy laws.  A bankruptcy filing stops a wage garnishment and usually eliminates your liability for the debt for all time.

Read more about bankruptcy and the alternatives.

 

Image:  © Africa Studio – Fotolia.com

Title Isn’t Everything: Watch Out For The Assets In Your Spouse’s Name

By

community property surprise

But it belongs to my spouse, sputtered the hapless debtor at the bankruptcy hearing.

Not so, says the bankruptcy trustee.  It was purchased during marriage, wasn’t it?

And so, the trouble begins for those who don’t understand community property.

Turns out the debtor left out of his schedules the bank account in his wife’s name.  Ooops!

Which motivates a trustee to keep digging for what else was left out of the bankruptcy papers.  Not where you want to be.

Property character, community or separate, makes a difference because it determines what assets creditors of the spouses can reach.  And, it determines what property falls under the control of a bankruptcy trustee.

All of the community property of a marriage becomes property of the estate when one spouse files bankruptcy.

So the community or separate distinction matters not just in divorce, but it matters to those Californians who owe debts they can’t pay.

Property title doesn’t control

In a nutshell, if you are a married Californian, it doesn’t matter whose name is on the title.

  • Buy a car.
  • Buy a house.
  • Take out an insurance policy

No matter whose name is on the paper work, chances are it’s still community property of you and your spouse.

Because “stuff” acquired during marriage is presumed to be community property under California law.

A presumption in law means  legal inference that must be made in light of certain facts.  Most presumptions are rebuttable, meaning that they are rejected if proven to be false or at least thrown into sufficient doubt by the evidence.  

The legal inference that acquisitions during marriage are community can be rebutted with sufficient and convincing evidence.  But absent such evidence, the presumption of community stands.

So, the house bought during marriage whose title reads Jane Spouse is community property, not Jane’s separate property.  That means that Jim Spouse’s creditors can reach it to pay Jim’s debts.

Magic words make a difference

The words in the title documents can themselves be evidence of an asset’s character.

If you want an asset acquired during marriage to be the separate property of one spouse, the first step in overcoming the presumption of community is to take title like this:

Jane Spouse, a married woman as her sole and separate property

But courts have made it more difficult, because what if Jane buys something using community property and takes title as her separate property.  Maybe she’s trying to cheat her spouse out of his share of the community that was used to buy the asset.  If she bought it, how does a creditor or a bankruptcy trustee know that Jim Spouse agrees that it’s hers alone?

Changing the character of an asset is called transmutation.  California law requires transmutation to be accomplished in a writing, signed by both spouses.  Then others know that the deviation from the usual is OK with Jim.

Prenuptial agreement can kill community property

An agreement between the spouses made before marriage (a “prenuptial” agreement) defeats the presumption.

A prenuptial agreement often says “we won’t have community property”.  The agreement lays out who is the owner of each kind of asset.  It may reject the legal cases that give the community an interest in property that either spouse brings to the marriage.

Because a properly drafted prenuptial agreement is in writing and signed by the spouses, it passes muster to rebut the presumption of community property.

Then, title plus the prenuptial beats the community property presumption.

Image courtesy of Flickr  & Nathan Pilkington 

 

Dates, Mates, and Debts In A Community Property State

By

couple_sitting_side by sideScoping out dates and mates by their credit scores at first seems far fetched and overblown.

Not to mention it pretty much kills romance.

CNN reported on credit scores and dating.  My colleague Frank Pipitone took off on the idea.

But there is a kernel of wisdom there that couples in California need to heed.

A couple’s community property is liable not only for the debts that either spouse incurs during the marriage, it is liable for the debts that either spouse incurred before the marriage.

Zap!

Your accumulations during marriage could be levied by a creditor with a judgment to satisfy your spouse’s debts that arose before the two of you even met.

California does have an exception to that rule that protects the wages of one spouse earned during marriage from the other spouse’s premarital debts.  It requires that the non liable spouse put those wages into a bank account to which the indebted spouse has no access.

Returning to credit scores as a dating criteria, maybe it isn’t so outlandish.  That is, assuming you think the credit score is meaningful.

Many of my bankruptcy clients, who are drowning in debt they can never pay off, tell me that they have a 800+ credit score.  The credit score cannot be a reliable measure of much of anything, if that’s so.

Remember that credit scores are based on credit reports, which are uniformly significantly inaccurate.  Here in Silicon Valley, we love to chant, garbage in, garbage out.

Community property is the default

So if the love of your life brings a bunch of debt to the relationship, all is not lost.

Bankruptcy will, of course, discharge most debt.

But if that’s not feasible or timely, remember that you don’t have to hold your marital assets as community property.

Community property is the default.  What you earn and acquire together doesn’t have to be community property.

Spouses can agree that they won’t have community property.  The agreement can craft any kind of characterization of assets that the parties desire.

There are rules about pre nuptial agreements, to guard against overreaching by either spouse.  If you are relying on an agreement to protect you from a significant debt of your spouse,  it’s worth it to get legal help.  From a lawyer, not a website, or a paralegal or a form book.

If your financial stability in the future depends on your marital property arrangement, do it right.

More

Principles of California community property

Why credit scores are meaningless in the real world

 

Image courtesy of Flickr and Zoetnet.

 

Means Test Means Little In Bay Area With New Census Numbers

By

The latest numbers used in means test for the San Francisco Bay Area after April 1, 2018 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 $ 91,349.

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 $92.000 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 $4000 a month to house a family of four in San Mateo County.

That’s more than half of the gross monthly income of a $92,000/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

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

Categories