Northern California Bankruptcy Lawyer

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How One Family Settled Huge Debt For Pennies

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debt settlement
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.

Chapter 13 in the real world

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’.

Plan payment driven by asset value

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.

More

Life after bankruptcy

How Chapter 13 plan payments are calculated

Little known alternative to bankruptcy

 

The Flat Wrong 1099

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credit-squeeze-transparentWhen her soon-to-be-ex filed bankruptcy, my client got a 1099-C for the joint credit card.

The form claimed that the debt was cancelled.

Therefore, she had additional income equal to the card balance.

Only, none of the statements on the 1099 were true.

The debt wasn’t discharged as to the non filing spouse.  One spouse’s discharge does not discharge the personal liability of anyone else.

Further, the liability of the soon-to-be-ex wasn’t even discharged yet since it was the beginning of a 3 year Chapter 13.

The discharge doesn’t come until all the plan payments are made.

What to do?

Cancelled debt and taxes

Tax law requires the holder of a debt that is forgiven to report the forgiveness to the IRS.

The forgiveness can be voluntary, as in, we compromised the debt and now you owe less.

Or, it can be by operation of law:  you filed bankruptcy and discharged the debt.

Either way, the tax man sees the amount of money that you no longer owe as if it were cash income.

And, if it’s income, then you owe tax on the income.

No tax in bankruptcy

If my client was the spouse who had filed bankruptcy, she would properly have gotten a 1099-C, at the end of the case.  When the debt was truly gone.

But she wouldn’t have owed tax on the discharged debt, because bankruptcy is an exception to the rule.

Debt forgiven in any chapter of bankruptcy does not trigger cancellation of debt income.  Therefore, no tax.

Tax treatment of cancelled debt is one of the sterling features of bankruptcy that make it superior to debt settlement.

Attacking the erroneous 1099

Strike first, is my thought, when the 1099 is wrong.

The credit card company issued the defective 1099. Write the issuer and request an amended 1099.

The deadline for sending out 1099’s is about six weeks earlier than the deadline for submitting the 1099’s to the IRS.

Jump on the problem right away and attempt to correct the situation before it gets to the IRS.

When the IRS gets bad information

If you couldn’t head off a submission to the IRS that was wrong, tackle the problem in your tax return.

You can’t just file the return as if the IRS didn’t think you had this  extra “income”.  You have to address the error and overcome it.

The IRS has a form for claiming an exception to the cancellation of debt income rule:  Form 982.

Attach your explanation of why the 1099 is wrong to the 982.  There isn’t a box, or an “other” category on the form where you can provide further information, so you’ll have to attach your explanation to the form.

If not resolved at the issuer level, my client will have to point out that she hasn’t been relieved of the debt, since she hasn’t filed the bankruptcy AND that her spouse hasn’t yet been relieved of the debt yet either, as there is no discharge.

Wash, rinse and repeat

I’ve spoken as though the IRS was the sole taxing authority involved.

If you live in a state with an income tax, you must repeat the drill described for the IRS with your state tax agency.

Personal liability required

Probably the most common error in issuing 1099’s is the matter of personal liability.  If the debt cancelled was non-recourse, the borrower had no personal liability in the first place.

Cancellation of a non recourse debt doesn’t alter the borrower’s balance sheet.  The borrower wasn’t personally liable before cancellation, so there’s no cancellation of debt income to address.  More on the fictional 1099.

As I said, see above and wash, rinse and repeat.

More on tax

Discharging taxes in bankruptcy

Tax liens after bankruptcy

When tax debt is a life sentence

 

The One Person You Must Tell About Your Bankruptcy

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Spill the beans concept.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…]

Two Strikes & You’re Out (Of Your Home)

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bankruptcy stay

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.

Bankruptcy reform is cruel

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.

What you don’t know

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.

Do it yourself is dangerous

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.

More

How much should bankruptcy cost?

Timeline for foreclosure in California

How to interview a bankruptcy lawyer

When Can I File Bankruptcy Again

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calendarYou 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.

The no discharge Chapter 7

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…]

Who Owns Your Business When You File Bankruptcy?

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business bankruptcy

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.

Who owns the corporate business

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.

Why it matters

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 takeaway

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.

More

Rules for testifying at a bankruptcy hearing

How corporate officers can avoid personal liability

When a business needs to wind down

The Truth About Tax Liens After Bankruptcy

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liens after bankruptcyWe 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.

Liens attach to assets

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.

Liens don’t snag post bankruptcy assets

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:

  • Liens that attach to an asset owned on the day you file bankruptcy survive the discharge
  • If the debt supported by the lien is not discharged, the lien attaches to property acquired after bankruptcy
  • If the debt is discharged, there’s no lien on newly acquired stuff.

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.

Preventing post bankruptcy surprises

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.

When a judgment lien pops up after bankruptcy

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, died of old age 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.

More

Dealing with tax liens in bankruptcy

When creditors ignore your discharge

The IRS after your bankruptcy case

 

 

Divorce And The Ticking Debt Bomb

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dynamite-1293082_1280_opt

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.

Joint account remained open after divorce

It’s playing out in a bankruptcy case I have now:

  • divorce final for decades.
  • no balance on joint line of credit when the spouses divorced
  • no one closed the account

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.

What is discharged on joint debt

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

Unpaid support in bankruptcy

I see a couple of possible outcomes in my case:

  • The indemnification clause in the divorce agreement will require my client to make the ex whole.
  • The other spouse’s reported efforts to close the account will serve to insulate him from the debt.
  • In the face of the bankruptcy, the lender will not pursue the uninvolved ex.

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.

$7000 Off The Price Of The Car In Chapter 13

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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.

Sleuthing in bankruptcy

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.

Car loans in bankruptcy

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.

More

Car loans in Chapter 7

Expert tips on buying a car

Speak fluent bankruptcy

 

Choosing Between Bankruptcy Chapters

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choose bankruptcy chapter

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.

Chapter 7 over Chapter 13

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.

Chapter 13 after confirmation

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.

Chapter 7 looks at today

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.

More

How to make your divorce bankruptcy-proof

When your ex files bankruptcy

Dividing debts in divorce

 

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

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