Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Try The Community Property Two Step

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Life  and debt often presents us with conflicting imperatives.

Bankruptcy is required, but when to file?

One pressure says:  File now!

Another issue says: Wait!

I saw this vividly this week when the couple walked in with a foreclosure sale in two weeks and $40,000 in taxes that won’t be dischargeable for 18 months.

There’s no money to pay the non dischargeable taxes if we file now, and there’s no place for three generations to live if we let the foreclosure sale go forward.

It looked hard, until I noted that there were two people sitting across the table: two people, each of whom was entitled to their own bankruptcy discharge.

And better yet, because we’re in California, we can file their individual cases 18 months apart and still be protected against tax collection while we wait out the aging of the taxes.

Let’s talk about the community property discharge.

Community property and bankruptcy

Section 541 of the bankruptcy code brings all of the community property of a married couple into the bankruptcy estate, even if only one of the spouses files bankruptcy.

Seems kinda harsh, that the non filer’s undivided one half interest gets dragged into the case of their spouse, with or without their consent.

But there’s a sweetener:  section 524 provides that all of the couple’s community property going forward is protected by the discharge injunction from the creditors who existed as of the commencement of the bankruptcy case.

That protection extends both to the exempt property that survives the bankruptcy and to all the community property they acquire in the future, for so long as they are married and acquiring community property.

Straight-arm the taxing authorities

For my couple, it works this way.  We file one spouse now to  stop the foreclosure.  We give notice to all holders of community claims as defined in §101(10).

The community property will be exonerated from liability for all of the dischargeable debt .  The taxes will survive since they aren’t dischargeable right now.

When the taxes are old enough to discharge, the other spouse files.  Her discharge in the later case eliminates her personal liability for the tax and protects the community property going forward from collection actions, even tho her spouse remains legally liable for the tax.

 Image courtesy of caffeina.

 

No More Repossession Threat If Exemption Bill Passes

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tow-truck-309953_640_optWhat Congress took away ten years ago, the California legislature may give back if SB 308 becomes law.

When the Bankruptcy Code was amended in 2005, Congress gifted the car finance industry with a plum:  those who filed bankruptcy could no longer make their car payments  after bankruptcy and count on keeping their cars.

Instead debtors were faced with giving up their bankruptcy discharge as to the car loan or giving up their car to the lender.

Without a reaffirmation agreement, bankruptcy filers had to worry that they’d come out some morning and find their car repoed, even when the payments were current.

Hardly seems fair, but, hey, this was the auto lobby and Congress.

Keep and pay may return

The California Assembly takes up a bill this month that would prohibit car lenders from declaring a car loan in default just because the borrower filed bankruptcy.

The borrower has to keep paying for the car if she wants to keep it, but she doesn’t have to give up the bankruptcy discharge of the car loan to do so.

The return of ride-through is just one of the long needed provisions of Senator Bob Wieckowski’s bill to improve California exemptions.

Other standout changes proposed by the bill include:

  • A $5000 exemption for the inventory, cash, or receivables of a sole proprietor
  • Elimination of reinvestment provision that makes the homestead vanish if you don’t buy a new house
  • Protection for alimony or family support to the extent necessary for support
  • Wiping out the need for one spouse to get the other’s permission to use California bankruptcy exemptions
  • Increasing the exempt value of a car to $6000

Potholes ahead

Of course, monied interests and those who make their money selling the assets of debtors oppose these improvements in California exemptions.

The first test of SB 308 in the Assembly is expected June 30th in the Judiciary Committee.  The bill has already passed the California Senate.

The members of the Judiciary Committee are:

  • Mark Stone
  • Donald Wagner
  • Luis Alejo
  • Ed Chau
  • David Chiu
  • James Gallagher
  • Cristina Garcia
  • Chris Holden
  • Brian Maienschein
  • Patrick O’Donnell

You can find your assembly representative here.  Voter input on S.B. 308 has to be in by June 25th.

Got an opinion?  Get in contact.

No Recourse for Junior Lien in Short Sale

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Junior lenders who consent to a short sale of underwater homes are barred from seeking to collect anything further from sellers under a newly enacted California statute.

The law, signed on July 15, 2011, becomes effective immediately. It applies to properties, held by individuals, comprising 1-4 residential units.  Senate Bill 458 accords the same restrictions on seeking a deficiency judgment as SB 931 mandated for the senior lender.

Before these two bills were enacted, a secured lender who agreed to a short sale might reserve the right to collect the shortfall from the seller. Too often, the selling homeowner was not aware until very late in the transaction whether he would emerge free of the debt or still owing the lender.

Now, for transactions covered by this legislation, consent to the short sale is a waiver of future action against the borrower.

Hurray!

California addresses foreclosure crisis

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California’s legislature passed changes to state foreclosure law that attempts to require dialog between an unpaid mortgage lender and a homeowner facing loss of his home.

SB1137 adds a requirement that the parties meet and discuss options to foreclosure before a notice of default can be recorded. Lenders must advise the debtor of the availability of HUD certified housing counseling.

What are the constraints on the advice HUD counselors can give? Can they suggest the borrower look for violations of applicable law in their loan transactions? Will they suggest Chapter 13 as an alternative to foreclosure? Do they have contact information for the loan modification staff at the lenders?

I applaud the California politicians who took some action on the problem. (Congress, Mr. Bush, are you listening?). My concerns go to whether any form of “counseling” will make a difference.

The typical problem is that the terms of the existing loan are simply beyond the capacity of the borrowers. The only solution is a modification that includes a fixed interest rate and often a forgiveness of interest or even principal. Otherwise, at the end of a longer foreclosure process, the bank is going to own another home.

Bay Area credit card debt

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The changes to credit card billing practices proposed by the FRB are welcome, but just scratch the surface of the crushing quality of credit card debt. My sense, talking to financially stressed people day after day, is that credit cards have merely postponed for many Bay Area residents the recognition that they cannot live a middle class life in this high cost region.

The cost of living in the Bay Area is some 150% of the national average; our salaries are higher, but not 150% higher. The vital, start up, high tech, high risk economic climate makes huge winners of some, and economic losers of others. The availability of credit cards and the energy with which those cards are marketed have made it easier to mask the fact that a middle class life is more expensive than some can afford.

The other issue that makes credit card debt so poisonous is that it bears interest that a generation ago would have been criminal. California concepts of usury generally prohibit individuals from charging more than 10% on loans, yet banks can regularly charge twice that to borrowers in good standing and twice that again to borrowers in default. The FRB proposed rules don’t deal with that issue.

At base, the problem with an indebted middle class is more profound than accounting rules on how payments are to be applied will solve.

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

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