Northern California Bankruptcy Lawyer
On The Bankruptcy Soapbox
Most people who file bankruptcy don’t want anyone else to know.
Some of my clients try to hide their break for financial freedom from friends and neighbors.
Others are worried about their boss finding out.
Occasionally, someone will try to keep it from their mate.
But trying to hide his bankruptcy nearly cost one client $103,000!
Because he hid his bankruptcy filing from his accountant. [Read more…]
Three strikes and you’re out. Anyone familiar with baseball knows that one.
The rules are different in bankruptcy.
Two strikes and you’re out.
And for one couple, they’re not only out of bankruptcy, they’re out of their house.
Foreclosed the day after they filed bankruptcy number three.
Because, what they didn’t know is that there is no automatic stay of foreclosure in a third bankruptcy filing.
Without a lawyer, they gambled and lost.
When Congress “reformed” bankruptcy law a decade ago, it limited the availability of the automatic stay in cases where the filer had had prior cases dismissed during the year.
Under the new law, the stay is automatic in a first case; lasts for 30 days in a second case; and doesn’t exist at all in a third case. See 11 U.S.C. 362(c)(3).
The rule looks at cases pending during the year and dismissed in the twelve months before the case at hand.
The change was intended to stop abuse of bankruptcy law by folks who filed bankruptcy only to get the stay of collection, folks who didn’t intend to follow through with a complete filing in accordance with the rules.
And certainly, there are a few examples of deliberate abuse of the law.
The elderly couple in this story wanted to put off the foreclosure long enough to sell their home. For reasons I haven’t figured out, with their house on the line, they opted to file a Chapter 13 without the help of a lawyer.
In each case, they filed a “skeleton” case, the bare bones necessary to initiate a bankruptcy case.
And in each case, they failed to file the balance of the schedules within the two week extension provided by the rules.
Under the “reformed” statute, the filing of their third case within the last 12 months didn’t trigger a stay against foreclosure.
So, when the lender foreclosed the day after they filed the third case, the lender was good under the law.
And the house was gone.
Usually, we admire the independent, the tenacious, the resourceful. We applaud the d0-it-yourself ethic.
But law is not like carpentry or car maintenance.
Like it or not, law is complicated, rule-driven, and often inflexible.
Hiring a lawyer seems particularly painful when the problem you need to solve is not enough money.
But the pain of paying for help is minor next to losing your house, unnecessarily.
Bankruptcy lawyers are used to clients with few funds. Chapter 13 provides a way to legally pay your lawyer after you file your case. We can often find a way to make it work.
In many ways, bankruptcy is a team sport: you and your lawyer. Victory is unlikely when you take the field short-handed.
How much should bankruptcy cost?
You can file bankruptcy tomorrow, so long as you don’t currently have a bankruptcy case pending.
When you can get a discharge in that case is a different story.
The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case.
My friend Gene Melchionne wrote a marvelous piece about the timing of the bankruptcy discharge that conjures up the old high school cheer: 2, 4, 6, 8, who do we appreciate.
The waiting period between cases, if you want a discharge, can be 2 years, 4 years, 6 years or 8 years, depending on what kind of case you filed before and what kind of case you want to file now.
You count those years from the filing of the first case to the filing of the second case.
But, contrary to the usual thinking, the discharge isn’t everything.
Sounds like heresy from a bankruptcy lawyer, doesn’t it, but let me tell you a couple of stories.
My client had a house with equity, a recent bankruptcy discharge, and a criminal conviction that had him heading to prison, soon.
He faced a future with no income and no way to pay the mortgage. And at the point he didn’t live in the property, his right to claim a California homestead in the property was in doubt. [Read more…]
The bankruptcy trustee’s question was straightforward (if inartful) yet the business owner nearly blew the answer.
The trustee asked: are you the sole owner of your business?
When my client hesitated, she followed up: are you a sole proprietor?
Focusing on the fact that he was the only person with an interest in the business, he said yes.
Wait a minute, was my response. That’s not so.
It took several minutes of sworn testimony at the first meeting of creditors to sort the matter out.
We were once again experiencing the phenomenon of the shape-shifting business owner. The businessman had, in his mind, morphed into a sole proprietor rather than a stockholder.
The debtor was the sole owner of the corporation that owned and operated the failed business.
He was correct that no one else had an interest. He skipped over the part that it was another legal entity, his corporation, that actually owned the assets and owed the debts of the business.
He owned the corporation that owned the business.
A sole proprietor owns a business as a personal asset. In law, he owns the assets of the business and is liable for its debts.
A sole proprietorship has no legal existence separate from the owner. The proprietorship may adopt a fictitious business name, but behind that dba is the individual who owns and operates the business.
So, if my client were a sole proprietor, the inventory of the business would have been an asset of the bankruptcy estate created when he filed bankruptcy. The business bank accounts would fall to the control of the trustee.
When a corporation is created, it becomes a legal entity distinct from the individuals who own the shares in the corporation. The corporation can have its own debts and its own funds that don’t belong directly to the shareholders.
That’s why business people incorporate: to create a legal “person” that can take risks without exposing the shareholder’s other assets to that risk.
When my client filed his Chapter 7 case, his stock in the corporation was an asset of the bankruptcy estate, but not the business itself. The business was owned and operated by the corporation.
Since the corporation had tons of debts, the stock that the bankruptcy trustee could administer had no net value. That’s because, equity holders get money when a corporation liquidates only after creditors of the corporation have been paid off.
The first meeting of creditors in a bankruptcy case is the trustee’s opportunity to gather more information about what the debtor owns and owes.
Once you focus on what the trustee needs to get from the meeting, it’s easier to answer correctly and avoid the confusion that happened in my case.
When confusion ensues, it’s important to sort it out on the spot.
And that’s how I earned my keep in this case.
Rules for testifying at a bankruptcy hearing
We have a lien on your name. Not your property, your name.
That’s what the county tax collector told my client, years after he got his bankruptcy discharge.
And that multi-thousand dollar lien claim threatened to sink the refinance of his house.
Eventually, we got the county straightened out without going back to bankruptcy court, and the lien claim withdrawn, but only after educating the county on liens and bankruptcy.
Here’s what was wrong with the county’s claim they had a lien on my client’s name.
The initial nonsensical claim is that a lien attaches to someone’s name.
A name isn’t property. You can’t enforce a lien against a person’s name by seizing the name and selling it. That’s what a creditor would do with a valid lien that attaches to an asset.
Yet the tax collector claimed the lien was against the name of my client. Not a lien against his home, but a lien that entitled them to payment from a real estate refinance. (Not logical, but this was a tax collector.)
Perhaps the tax collector was trying to say that the lien wasn’t one for real property taxes on that particular house. Or she was saying that it wasn’t a consensual lien where the homeowner pledged his house as collateral for a loan.
But she definitely contended that the lien on my client’s name survived his bankruptcy.
The second bit of nonsense was the claim that the county had a lien in the house my client acquired after he filed bankruptcy.
The law on liens and a bankruptcy discharge is straightforward:
It’s the last proposition that saved the day for this client. The county’s tax claim was discharged in the bankruptcy. My client didn’t own a house when he filed. Therefore, the county got no lien on after-acquired property on account of a debt that was discharged.
It’s not uncommon for creditors to pop up after bankruptcy with a claim inconsistent with the bankruptcy discharge. It happens because of ignorance, incompetence, and, occasionally, sheer greed.
Bankruptcy courts stand ready to enforce the rights that debtors get from bankruptcy. But that takes time.
The trouble comes when the creditor stands to upset a real estate transaction that has a deadline, and possible costs associated with missing that deadline. Like my client trying to refinance his house. Interest rates are going up. Miss the deadline and pay a higher rate for the life of the loan.If real estate is involved, start immediately to see what liens show in the public record. In California, where I practice, that means get a preliminary title report at the first opportunity.
Identify any liens that are unenforceable by reason of the bankruptcy discharge, or by reason of having been paid, or avoided in bankruptcy.
My attack on the county tax collector started with providing the creditor mailing list from the case, showing that the county had notice of the bankruptcy. I sent them a copy of the discharge order and the schedule that showed that my client didn’t own the house when he filed years ago.
Having given the county good notice of the bankruptcy, way back when, my client avoided more than $10,000 in tax claims.
And his name was his own.
Dealing with tax liens in bankruptcy
When creditors ignore your discharge
The IRS after your bankruptcy case
Debts of the marriage often outlive the marriage itself.
Left-over debts are nothing but trouble.
But too often, divorcing couples don’t mop up the joint debts they held during the marriage, and the situation blows up years later when one ex-spouse hits financial trouble.
It’s playing out in a bankruptcy case I have now:
When one spouse hit a rough patch, she accessed the left-over line of credit, big time. But it wasn’t enough to avoid the need for bankruptcy.
My client’s financial mess threatens to slop over to the former spouse who remained listed on a dormant line of credit.
Even though the current debt is long after the divorce, the ex spouse remains liable to the lender because his name is on the account.
During the marriage, the community would have gotten the benefit of the community property discharge. Not so after divorce, when there is no community.
My client can discharge the debt to the lender, but not the debt to the long-since ex spouse. That’s because obligations between spouses, such as the division of debt, can’t be discharged in Chapter 7
I see a couple of possible outcomes in my case:
It’s early days on this particular episode. But the broader lesson is clear: clean up all joint financial matters during the divorce.
Every joint obligation left for untangling later is a ticking time bomb. Leaving a refinance, a property transfer, or a joint account for “later” exposes one ex spouse to the debts and financial travails of the other.
Former spouses got a big bump in their protections from consequences of bankruptcy filings by their ex’s in the bankruptcy “reform” act of 2005. Now, no debt created by a divorce is dischargeable in a Chapter 7.
So the obligations created by an agreement to indemnify or hold harmless the other spouse from debts will survive Chapter 7.
But the value of that indemnification right may be questionable if the person required to protect the other former spouse has just gone through bankruptcy. If the protected spouse has to pay the lender, the only remedy is to sue the ex, who just went through bankruptcy.
So, clean up the debt situation in the divorce, just as thoroughly as you divide the assets.
Image courtesy of Fort Meade.
When the client finally got me a copy of the car finance contract, it saved them $7000 on the price of the car.
They’d tried just giving me the monthly statement.
But that statement on the car loan didn’t show the bombshell that I found when I finally examined the contract:
Included in the loan for the new car was the unpaid balance on their old trade in!
In bankruptcy-speak, that’s negative equity, and negative equity isn’t entitled to payment in full in Chapter 13.
So we can reduce what they pay for the car by the $7000 of the loan that paid off the trade-in. It really was worth the effort to find the contract.
I know, the amount of paper a diligent bankruptcy lawyer wants from you is daunting.
There’s loan documents, deeds, IRA statements, bank balances, insurance policies, pay stubs, and tax returns.
It can seem overwhelming and sometimes pointless. I get it.
Some of what we’re gathering is defensive: to show that the information in your bankruptcy schedules is correct. After all, disclosure is the price of getting a bankruptcy discharge.
But some of the paper we need supports our offense: having found the portion of the car loan that related to the trade in rather than the new car, we can slice $7000 off of the debt.
Same thing about getting payroll tax returns. Not everything a small-business employer owes the IRS is a must-pay. But we’ve got to get the right paper to figure that out.
Just believe that we are asking for documents for a real reason. Like reducing the loan by $7000.
The auto side of this story is worth the telling, too. The ability to manipulate car loans is one of the appealing features of Chapter 13.
Only purchase-money: After the 2005 bankruptcy amendments, car lenders got a windfall on cars purchased in the three years, more or less, before the bankruptcy. “Reform” entitled car lenders to more than their collateral was worth. (The lenders had a bigger lobbying budget than consumers when the law was passed).
But the 9th Circuit judges have held that the negative-equity part of a car finance transaction isn’t part of the purchase money loan. Thus we can strip out the payoff of the trade-in from the loan balance that must be paid.
Likewise, a debtor can reject gap insurance, maintenance contracts and other add-ons that aren’t part of the value of the car itself.
Interest rate changes: Regardless of when a car loan was made, Chapter 13 can alter the interest rate that the lender gets on the loan through Chapter 13. So the 10-15% car loan may pay something closer to 4-5% under the Chapter 13 plan.
Term extended: A Chapter 13 plan can extend the remaining term of a car loan to match the length of the bankruptcy case. Spread over more months, the monthly bite of a car loan in your budget can be reduced.
And that’s just a part of the reason that I love Chapter 13.
Seven or Thirteen?
13 or 7?
When you have a choice, how do you decide which chapter of bankruptcy works best?
Usually, the choice is driven by the scope of the discharge and the kind of debts you have.
More kinds of debts are dischargeable in Chapter 13 and the automatic stay protects you for the 60 month duration of the case.
So why did the client this week choose to walk out of Chapter 7 with fewer debts discharged than if he’d chosen 13?
It’s all about his future. And who will get to share in his growing earning capacity.
On the surface, this client seemed a great candidate for Chapter 13, which is my favorite bankruptcy chapter.
Some of his debts were only dischargeable in Chapter 13; in Chapter 7, he’d emerge still owing some debts from a divorce.
So why choose the smaller discharge?
Because his earnings were likely to double or triple over the life of a Chapter 13 case.
If that happened, we anticipated that a Chapter 13 trustee would move to modify his payment plan to pay more to general unsecured creditors.
Credit card debt, which would get nothing in a Chapter 7, might well get a substantial repayment from his increased earnings.
He’d pay fewer dollars paying the non dischargeable debt that survives a Chapter 7 directly than he would paying in a larger slice of his paycheck to all of his creditors in a Chapter 13 plan.
Judges approve Chapter 13 plans based on the situation when the bankruptcy case is filed. The means test looks at recent income. The liquidation test looks at non exempt assets at filing.
For this client, each of those numbers was modest and a repayment plan would be relatively cheap.
But Chapter 13 involves committing your future income to the supervision of the Chapter 13 trustee.
Now, that supervision is pretty minimal: it usually means the trustee monitors your tax returns to see in your income has increased.
If there’s a significant increase, the trustee can file a motion with the court proposing increased monthly payments going forward.
The debtor gets to respond with updated expense schedules, and if the parties can’t reach a deal, a judge decides whether payments change.
In the Bay Area, this happens very infrequently. I’ve seen it less than a half dozen times in 20+ years of doing lots of 13’s.
But it can happen, and for this client, it seemed quite likely that a new job in his usual profession would dramatically increase his income.
If Chapter 13 is a years long process, Chapter 7 is a single event.
The rights of the debtor and the creditors are determined by the situation on the day the case is filed.
If the means test says that Chapter 7 is an option, then the creditors get only what the debtor owns at the filing of the case.
And what the creditors share in is only what’s left after the debtor chooses his exempt property. Most Chapter 7 cases make no distribution to creditors.
Future income belongs to the debtor. The Chapter 7 trustee can’t come back a year later and ask for a slice of a larger paycheck.
So, much to my surprise, when we looked at this client’s current situation and his prospects, the more limited discharge was a better deal than Chapter 13.
He’ll get to enjoy a larger share of his future earnings and a fresh start.
How to make your divorce bankruptcy-proof
When he started the Chapter 13 trek, he owed $370,000 in personal loans and credit cards.
As he completes his plan, he will have settled that debt for three cents on the dollar.
No tax is due on the forgiven debt and no listed creditor can legally come back to try to collect the difference.
And that’s why I love Chapter 13 bankruptcy.
I’ve talked here lots about how Chapter 13 is structured, how plan payments are calculated, and all the nifty things Chapter 13 can do for those with bills they can’t pay. It’s sometimes dry and dense, but you see how it works.
But here’s how it worked for one real family now completing their plan.
They confirmed a Chapter 13 that resolved their debt for 3% of what they owed when they filed.
They got five years to pay that 3%, interest free.
The payments through their plan cured any pre bankruptcy arrears on their house, in full and without interest or penalty.
They were protected from the taxing authorities while they cured delinquent property taxes.
And in our insane real estate market in the Bay Area, their home appreciated about 50%. Appreciation that is theirs, rather than their creditors’.
Not all unsecured creditors are as lucky as the creditors in this case, who got something on their claims, even if it was only three cents.
Because the couple had some stock and other assets that weren’t exempt, their plan had to guarantee unsecured creditors a share of the $11,500 value of those non exempt assets.
Based on their income and the infamous means test, general unsecured creditors wouldn’t have gotten anything.
So, the take-away is that just what you have to pay in Chapter 13 is decided by the interaction of the kind of debts you have; the income that the law says is available to pay those debts; and the value of your non exempt assets.
But seen from the top of this mountain, Chapter 13 is powerful. And the view of life after bankruptcy is stunning.
How Chapter 13 plan payments are calculated
Little known alternative to bankruptcy
“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.
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. *
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.
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.
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.
Everything you need to know about the California homestead exemption
Who gets paid first in bankruptcy
