Northern California Bankruptcy Lawyer

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Homestead Exemptions: 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 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 unravel 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, because 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 Courts Provide On Line Help

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legal helpIndividuals with matters before the state courts of California have an updated resource in the Self Help Center.

The information here can be either good background if you have a legal problem or a treasure-trove if you expect to represent yourself in court.

It even includes a section on bankruptcy, as part of the materials on Problems With Money.

Bankruptcies are actually filed in the federal bankruptcy courts, but the information offered is sound.

Image courtesy of Wikimedia

Your Home Loan May Be Excluded From Homeowner Bill of Rights

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Hazard_Warning-openclipartHomeowners whose loans were originally made by a federally chartered savings bank are excluded from protections of HBOR,  a federal judge has ruled.

Dual tracking is back on the rails

California Homeowners Bill of Rights, enacted January, 2013,  prohibited dual tracking of mortgages:  that is, the lender could not simultaneously consider a loan modification and prosecute a non judicial foreclosure.

That’s exactly what Sonoma County homeowner Keni Meyer alleged in her lawsuit that Wells Fargo did.  On April 3, they send her letters discussing the modification of her mortgage loan and on April 8, sent her a notice of foreclosure sale.

Under the provisions of HBOR, a completed loan modification application halts the foreclosure process.

Northern California federal district court ruled in December, 2013 that  HBOR  is preempted by Depression era law creating federal savings banks.  The preemption doctrine holds that federal law on a subject trumps state law on that subject.

Here’s Judge Alsup’s written decision

While the foreclosing bank was Wells Fargo, the loan had originated with World Savings and World Savings was a federal savings bank subject to the federal Home Owners Loan Act of 1933.

The judge held that federal law occupied the field as to servicing mortgages of federally chartered savings banks and the federal law followed the mortgage, even when now held by an institution that isn’t a federal savings bank.

Thus, Ms. Meyer’s claim that Wells Fargo engaged in dual tracking in violation of California law was denied and those claims grounded in HBOR were dismissed.

Mortgages now unprotected

Mortgage servicing in California sometimes feels like the old Laurel and Hardy routine, Who’s On First.  Loans change hands, banks fail, trusts are created, and entities merge.

Below is my preliminary list of entities which may have been federally charted savings banks.  I make no guarantees that I’ve got them all nor that this information is absolutely reliable.

  • World Savings
  • First Federal Bank of California
  • California Federal Bank
  • USAA Federal Savings Bank
  • Glendale Federal Bank

If, however, your loan was initially made by a federal savings bank, you cannot rely on the California Homeowners Bill of Rights to prevent a foreclosure while the servicer considers a loan modification.

I would welcome your comments to flesh out or correct my list of federal savings banks to whom HOLA preemption may apply.

Image courtesy of OpenClipArt.

Life And Death of Debt In California

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statute of limitations on debt

CPR has its place when human life is involved. Human life is precious.

But if what’s dying is the legal right to collect a debt?   Not so fast.

You don’t want to breathe new life into an old debt that is legally dead.

Yet you can do that, unintentionally reviving a debt that is legally dead or giving it new life when it’s approaching its life’s end.

California statute of limitations can be tricky.  I  intended to explain in this post the law and how to keep from unwittingly extending your legal exposure to a debt.

I’ve concluded that the law is simply too complicated and evolving to provide a nuanced, reliable guide to avoiding screw ups.

So, I’m adopting the Nancy Reagan approach to the statute of limitations.

Just Say No! 

NO, I don’t owe it.

NO, I won’t pay it.

While it may stretch the truth as to whether you owe it, it’s simple and safe.  It keeps you from adding to your exposure to old debts.

Admit nothing.

Avoid extending the statute of limitations

The statute of limitations allows enforcement of a legal right through the courts only if brought before the running of the statute.

Broad brush, you can extend your legal exposure to an old debt in two ways:

  • Make a payment on the debt
  • Admit that you owe the debt

Important to note that either of these ways of extending the life of a debt are acts that you, the person who owes the money, take.  The debt collector can’t extend the statute unilaterally.  Only by getting you to do something against your interests is the life of the debt prolonged.

Payment breathes new life

Making a payment on the debt is putting your money where your mouth is:  you wouldn’t pay anything if you thought you didn’t owe money.

So payment is seen as proof that you owe the money.

Payment starts the statute of limitations clock running again, from the beginning.

That’s where the debt collector’s request for a “good faith” payment on a debt you can’t pay off at this time is so insidious.  The debt collector cares far less about the amount of that “good faith” payment than he does about the fact that you’ve just extended your legal exposure to the debt for an entirely new period.  What that period is we’ll discuss below.

Admitting the debt is fatal

An admission that you owe the debt, even without payment, can reset the SOL clock.

California law provides that only an admission of the debt in writing can extend the statute:

No acknowledgment or promise is sufficient evidence of a new or continuing contract, by which to take the case out of the operation of this title, unless the same is contained in some writing, signed by the party to be charged thereby, provided that any payment on account of principal or interest due on a promissory note made by the party to be charged shall be deemed a sufficient acknowledgment or promise of a continuing contract to stop, from time to time as any such payment is made, the running of the time within which an action may be commenced upon the principal sum or upon any installment of principal or interest due on such note, and to start the running of a new period of time, but no such payment of itself shall revive a cause of action once barred.  Code of Civil Procedure 360.

Yet there are precious few cases on the subject.

And while traditionally, the statute of limitations that applies to any collection suit was the law of the state where the defendant lives, recent cases make that less certain.  Topping off the uncertainty, the 9th Circuit Court of Appeals recently ruled that in bankruptcy, the statute of limitations of the state whose law applied to the contract controlled, not the shorter statute where the debtor lived.  Sterba

All of which makes saying nothing, or saying no, the safest course of action if you have an old debt that you can’t pay.

Why have a statute of limitations

Pubic policy says we want legal disputes resolved sooner rather than later.  If a lawsuit is involved,  we want the evidence  available and memories fresh.

It’s the legal version of  SNOOZE, YOU LOSE.

A debt collector or a debt buyer has the same statute of limitation as the original creditor.

When does the limitations clock start running

The SOL clock starts running on the limitations period upon the last activity on the debt.  That activity could be a payment on a debt;  it could be a charge on an open account.

If there are neither charges nor payments on a contract debt after that, the period runs for four years in California. 

Once the limitations period has run, the person who owes the debt has a slam-bang winner of a defense if the creditor files a lawsuit to collect. 

Cheat sheet on statute of limitations from the California Courts

More from the FTC on time barred debts.

More here on debt collection lawsuits

What to do when you’ve been 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

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.

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, sometimes also called the wildcard 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  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 of it 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 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.

6 Things You Need To Know About The California Homestead

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super_hero_flyingCalifornia’s homestead exemption is the Super Hero of the exemption world.

While other exemptions protect things worth a thousand dollars here and a couple of thousand there, the homestead protects $75,000 for a single person and $100,000 for a couple.

For the elderly or disabled, the homestead balloons to $175,000.

The homestead may be powerful and famous but often not well understood.

Here are six things you probably didn’t know about the homestead.

Homestead superior to a judgment creditor

Homesteads protect homeowners from a particular kind of creditor- the judgment creditor.  A judgment results from a lawsuit and the determination that you owe the plaintiff who brought the action a certain amount of money.  All about California judgments.

The judgment entitles the judgment creditor to use certain legal powers of the state to collect that money.  That right to collect is limited by the judgment debtor’s homestead rights.

The homestead exemption was designed to assure judgment debtors of a place to live, even if they owed money to creditors.

Homestead protection not absolute

The California homestead does not guarantee you that a creditor can’t force a sale of your home to pay a debt.

Instead, it guarantees that you get the dollar value of your homestead from the forced sale of your home before the creditor forcing the sale gets any money.

More about the limitations on homestead protection

A creditor who seeks to levy on a homestead has to convince the sheriff or a judge that any sheriff’s sale will return enough money to pay the homeowner the homestead.

The cost of making sure that the homeowner gets their homestead first restrains judgment creditors from looking to home equity as a source of payment.  It’s just too expensive and uncertain in most cases.

Homestead no protection from foreclosure

California law allows you to pledge your homestead as collateral for a loan.

So, when you encumber your home as part of the purchase transaction, or tap the equity through a HELOC or refinance, you give the lender the right to foreclose on your home without regard to your homestead.

The law says a foreclosure that doesn’t pay you your homestead is OK, because the transaction that put your homestead at risk was voluntary.

Homesteads come in two styles

Own your home and you automatically have a homestead exemption.  You don’t have to do anything to get certain protection of your equity from judicial creditors.  CCP 704.710.

The automatic homestead has the same monetary measurements as its beefier, more powerful sibling, the declared homestead. The automatic homestead only protects the home against a forced sale that wouldn’t yield enough proceeds to pay the homestead before paying the creditor.

If you choose to sell your home and a creditor has recorded a judgment lien that attaches to your property, the judgment creditor gets paid from the sale before you get your homestead.

The declared homestead operates differently:  the homestead amounts are the same, but the declared homestead protects exempt equity if you voluntarily sell your home.  CCP 704.910.

The exempt proceeds remain protected for six months from the voluntary sale of the home.   That six month period is intended to provide a window in which you can reinvest the homestead in a replacement home.

Either spouse can claim the entire exemption

When a married couple is entitled to a homestead, but the debt is an obligation of only one spouse, the debtor spouse can assert the entire homestead available to a married couple.

One of my cases established this proposition in a bankruptcy case.  When only one spouse filed bankruptcy and only his half of a tenancy in common came into the bankruptcy estate, he could still claim the entire exemption available to a married man.  McFall.

California homestead powerless against the feds

Since the homestead is found in state law, it does not limit the collection powers of the IRS or other federal agencies.  The Supremacy Clause of the Constitution says federal law trumps state law.

The IRS has its own, much smaller set of exemptions for delinquent tax payers.  Those exemptions aren’t much force protecting a California home.

In the real world, however,  the IRS seldom tries to force the sale of homes.  Like most other creditors with a lien on real property, the IRS simply waits til the homeowner wants to sell or refinance.  Either sale or refinance generally require that tax liens be paid before the transaction closes.

Now, you know about California homestead exemptions

More important California law:

How long before foreclosing lender takes my house?

California protections after foreclosure

California bankruptcy law

Image courtesy of Laobc. 

 

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, or property you acquire after the marriage ends.  But that creditor can reach your community property wages. [Read more…]

Free Tax Preparation Offered In Bay Area

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Households with an annual income of $54,000 or less can have their tax returns prepared for free through the United Way’s Earn It, Keep It, Save It program.

Too many Californians – far too many here in the Bay Area – work hard yet find themselves unable to meet their most basic needs. Furthermore, tax season can be stressful time for many people, as they round up tax documents and receipts, and make sense of confusing tax forms. Those of us who can afford it may pay for tax software that walks us through the process, or we may pay a tax preparer to file on our behalf. But the cost for paid preparers can be costly, and tax software varies widely in price. For low-income families who may not be able to afford these services, tax time can be a significant source of stress, and securing a full refund is not assured. Additionally, many of these families face additional challenges in doing their own taxes –English may not be their primary language or they may have limited computer skills. This is why EKS is so important in our community.

Find a location near you.

Interactive map

Print list of locations

Earned Income Tax Credit

The Earn It, Keep It, Save It campaign is particularly focused on enabling qualifying individuals and families to access this tax credit that stands to put real money in the pockets of working families.

Too many families miss claiming the EITC.  Something like 20% of the families that are eligible fail to take advantage of this support for low and moderate income folks.

Even if you owe no taxes, you can claim the tax credit and receive a check.

Generally, the lower your income and the more children you have, the larger the payment you’re entitled to.

California puts money in pockets, too

California has a state version of the Earned Income Tax Credit.  The California rules are set out in this fact sheet from the Franchise Tax Board.

California’s Good Deed: Passing Real Property At Death

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property upon death

The horror stories about do-it-yourself estate planning are both plentiful and tragic.

Between the fear of probate and the fear of legal fees, inventive people invent inexpensive strategies for passing property to the next generation.

Adding someone to the deed is the most common one I see.

It works like this: in order to see that her house passes to her kids at her death, Mom puts the “kids” on the deed to her house today.

She thinks that will assure that, at her passing, real property law will automatically make the kids the owners.  No probate, no fuss, no delay.

What Mom doesn’t fully understand is that her deed to the kids gives them an interest in the house, TODAY.

So, if there is a economic melt-down the the kids’ financial lives, the kid’s creditors can lien and levy their interest in Mom’s house.

If one of the kids files bankruptcy, the kid’s share of the house passes to the bankruptcy trustee, TODAY.

Far from creating stability and simplicity, the add-them-to-the-deed trick can create chaos.  And land Mom in bankruptcy court, fighting a bankruptcy trustee.

California, bless its heart, has enacted a solution:  a deed effective only on death.

Transfer on Death Deed

Created by Probate Code 5642, a Transfer on Death deed gives the “kids”, in my example, an interest in the house effective only at Mom’s death.

The deed is revocable as long as Mom is competent.  It can be used only for a home or a multi-family unit of 4 units or less.

It doesn’t protect the kids’ interest in the house from Mom’s debts, but a recent amendment protects the transfer from Medi-Cal Recovery claims.

The deed must be recorded within 60 days of execution.  Unlike other deeds, it doesn’t need to be delivered to the beneficiaries to be effective.

Why Deed on Death works

What’s magic about the Deed On Death is that the next generation has no interest in the property until Mom’s death.

There is nothing for the kid’s creditors until Mom’s passing.

So, if the kids end up in bankruptcy, they don’t drag Mom along and find the trustee selling Mom’s share of the house.

Stay out of bankruptcy and we may never meet.

There’s a form for that

The statute provides a form which must be used and has a FAQ page.

You can get more information online from the Sacramento Public  Library (yeah, libraries!) or from CANHR.

Let’s keep DIY estate planning disasters out of California bankruptcy courts.

More

The huge cost of avoiding probate

Joint bank accounts in bankruptcy

The problem your bankruptcy lawyer can’t fix

 

 

 

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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