The 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.

Yet 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.

“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

Scoping 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.

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.

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. [Read more…]

The game isn’t very fair when the players are mismatched.

Though bankruptcy court is hardly a game, it’s been unfair when it comes to attorneys fees for the winning party.

California law provides that when a contract allows one party their fees if they prevail, the other party got their fees if they won.  So, even if the contract only provided that you pay my fees if I have to sue you to collect,  the statute made the right to fees reciprocal.

Only, bankruptcy courts have for decades held that the California statute didn’t control if the issue involved bankruptcy.

And then came Penrod in the 9th Circuit.

The firm of bankruptcy icon Ken Klee argued for the consumer that the fight between the car lender and the debtor in the bankruptcy court was “on the contract” and covered by the agreement.  And the 9th Circuit agreed.

A bankruptcy fight over $7000 in negative equity in a Ford ended up with an attorneys fees award for the car buyer of $245,000.

Going forward, when debtors win in fights with creditors in bankruptcy court, they, too, will get the benefit of the contract they made with the creditor.

Chapter 13 Confirmation Fight Covered

The case that lead to a ruling about attorneys fees started out as an objection to confirmation of the Chapter 13 plan.

Prior to filing bankruptcy in 2007,  Marlene Penrod had traded in a car that was worth less than she owed on it for a new Ford Taurus.  The new loan included not only the purchase price of the new wheels but the unpaid balance of her trade in.

When she filed Chapter 13, she proposed to pay in full that part of the new car loan that reflected the purchase price of the new car, but not the part of the loan that payed off her trade in.

That difference, in bankruptcy lingo, was the “negative equity” in the trade in.

The car lender objected to confirmation of the plan, contending that the entire loan taken when the debtor bought the new car was a “purchase money” loan.  Therefore, said the lender, it was protected from cramdown by the”hanging paragraph” added to 1325 by BAPCPA, the mislabeled bankruptcy reform act of 2005.

Several rounds of appeals later, the 9th Circuit held that the “negative equity” portion of the loan was not “purchase money” and therefore, the debtor could confirm a Chapter 13 plan that paid that part of the loan pennies on the dollar.

Who Pays For Debtor’s Win

Winning wasn’t cheap for Marlene.  By the time she got a ruling in her favor from the 9th Circuit in 2011, and beat back the lender’s petition to the Supreme Court, her attorneys fees were $245,000.

Her loan agreement with Americredit said:

“You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts.”

And California’s Civil Code 1717 says:

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

But, said each court considering her request for an award of her fees, the confirmation fight over treatment in bankruptcy of the loan wasn’t an action “to enforce that contract.”  You won, Marlene, but you pay for the victory out of your pocket.

Not so, held the 9th Circuit.  The Supreme Court’s decision in Traveler’s held that nothing in the Bankruptcy Code expressly disallows claims for attorney’s fees simply because the fees are incurred litigating questions of federal bankruptcy law.

Under the language of the attorneys fees provision in the contract, Americredit would have been entitled to its fees had it won on the issue of plan confirmation.  Accordingly, when the bankrupt borrower prevails, that borrower gets an award of attorneys fees.

Attorneys Fees For Winner, Period

The implications of this second Penrod decision are substantial.  It becomes possible for the debtor to challenge creditor actions in the bankruptcy forum and recover the cost of the challenge, if they prevail.

I see it most important in bankruptcy litigation about the amount of mortgage arrearage claims and in relief from stay actions.

Any number of times, I’ve defeated motions for relief from stay, where the lender’s declaration about my client’s alleged defaults were simply untrue.  But because we were in bankruptcy court, fighting over bankruptcy’s automatic stay, my client had to pay the cost of the fight.

To benefit from the newest Penrod holding, debtor’s counsel may need to get a determination from the court that the debtor is the prevailing party.  But the possibility of such may make it possible to negotiate payment of the debtor’s fees without the necessity of trial.

The fruits of victory are now available to both players.