Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Free Bankruptcy Advice: Consider The Source

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Who gets their legal advice from their adversary?

My client did.

Get your legal advice from your adversary, your brother in law, or the internet and be prepared to get a surprise.  Often, not a pleasant surprise.

My client insisted that his tenant’s debt to him survived the tenant’s bankruptcy “because it was listed on Schedule G“.

The tenant had “explained” to my client that Schedule G was the list of debts the debtor didn’t seek to discharge.  So, my client continued, he was legally free to collect the back rent from the debtor after bankruptcy.

I had to explain it wasn’t so.

Schedule G is not a list of debts the debtor wants to continue paying on; it’s a list of executory contracts and unexpired leases.  The debtor’s obligation for each of those debts is discharged just as the debts listed on Schedule F.

How reaffirmation works

Reaffirmation is the only way that a dischargeable debt survives the discharge.  Reaffirmation requires a timely written agreement made after the bankruptcy is filed and approved by the bankruptcy judge.

None of that had happened in this case.

Law in the information age

The fund of information in our world is immense, and more accessible with the advent of the internet.

Not all of that information , however, is equally reliable.

The law is often complicated and dependent on the facts.  Information gets stale.  Not all bloggers know what they’re talking about.

I cringe when a client tells me that he’s “researched bankruptcy on the internet“.  Too often, the client’s full of misinformation complicated by erroneous assumptions.

I applaud the proactive consumer. Just take what you read on the internet with a grain of salt.  There’s a reason that lawyers go to school for three years before they can even take the bar exam.

If anything important to you rides on the information you seek, seek out a lawyer for some input.

Free legal advice can be really costly, and the cost of a lawyer to fix the situation is usually far greater than the cost of getting it right the first time.

More

Do it yourself bankruptcy

How to interview a lawyer

What should you pay a lawyer

Are you stuck with your current lawyer

Image:  ©VERSUS studio

Old Tax Liability Discharged In Bankruptcy, If….

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metal-keyDischarging tax debt in bankruptcy gets lots of families out of a horrible hole.

The tax debt is large, swelled by interest and penalties.  Collection often compromised their ability to stay current on more recent years.

Bankruptcy can save their bacon because taxes found on returns due three years ago or more are generally dischargeable in bankruptcy.

But there is a key that opens the door to discharging taxes in bankruptcy.

When old taxes live on

The man in my office expected to wipe out his liability for  several years of taxes that were now four and five years old in a  Chapter 13 case.  Chapter 13 would allow him five years to pay the more recent, non dischargeable taxes through his reorganization plan.

Only the rule for discharging taxes in bankruptcy has three prongs:

  • the three year rule,
  • the two year rule, and
  • the 240 day rule.

Turns out that the returns for those four and five year old taxes were never filed.  He prepared the returns, but didn’t file them because he couldn’t pay the tax due.

So those old taxes failed the two year rule:  

 Exclamation-icons-2taxes for years where the return wasn’t filed on time are only dischargeable when the return has been on file for two years.

The story gets worse:  because the taxes are not priority claims under the bankruptcy code, they don’t get the same special treatment that the more recent tax debts get as priority claims.

The non dischargeable but non priority taxes will get the same fractional payment in Chapter 13 that the medical bills will get, but the tax will survive the bankruptcy and be collectible later because these taxes are non dischargeable.

So, even if you can’t pay the tax now, not filing the return is not a meaningful long term strategy.

File the return and get the two year clock ticking for bankruptcy relief.

Four reasons to file even if you can’t pay

Outside of bankruptcy, the 10 year statute of limitations on collection of federal taxes doesn’t start running until the taxes are assessed by filing a return.

Filing returns without any records

Got no records for the unfiled tax year?  That’s often why a tax return goes unfiled.  Without records, it’s hard to calculate what you owe, or what’s owed to you.

The IRS can help.

You can request a Wage & Income transcript from the IRS for free.  It will tell you what items of income have been reported to the IRS from your employer, bank, or mortgage lender.

Under certain circumstances, that may be as good as you can do.  If you get better information after you’ve filed the return, you can amend the return for three years from filing.

The key is to get a return on file and get those assorted time periods running.

Image: Erulisseuiin

Personal Assets Can Be At Risk For Your Business Debts

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Business debt can bleed over into an entrepreneur’s personal assets.  My client was dumbfounded.

He was aghast that the generous equity in the home he and his wife owned was at risk when his corporate business folded.

That was not because the shareholder is liable for the corporation’s debts.  A properly operated corporation confines the business debts to the corporate entity.

How to properly sign for your corporation

No,  it’s because he signed the business lease in his individual name.  And because he was a corporate officer who didn’t pay all the payroll taxes for the corporation’s employees.

As a person liable for a debt, his assets (and the whole of the community property in California) are exposed to creditors.

While exemptions protect some assets, up to a specified dollar value,  the non exempt equity in the family home is at risk when debts incurred for business go unpaid.

Understand the California homestead

When business vs. personal distinction matters

The only time that it matters whether a debt is personal rather than business is when figuring the infamous means test.  The means test applies only to those whose debts are “primarily consumer”.

So, debts incurred in business, taxes and debts imposed by law are not “consumer” debts.

If those kinds of debts exceed the total of consumer debts, the means test doesn’t apply.  There is no need to “qualify” for bankruptcy relief by reason of income.

Sole proprietors are fully at risk

As a matter of debtor-creditor law, if your business is a proprietorship, there is no legal distinction between you and your business.  The debts you incur to run the business have the same legal rights to payment from your assets, personal and business,  as the debts incurred for personal living.

When the business is one with the business owner, failure to pay any debt imperils both business and business owner.

Isolating business debt

Corporations and LLC’s are legal “persons” invented to create a distinction between the business and the business owner.  The corporation can incur debt in its name alone, and only it is liable.

The practical catch is that vendors and landlords may not want to extend credit where the only “person” liable is a thinly capitalized corporation. They may insist on a guarantor.  Execute that guarantee of the corporation’s debt, and the individual has staked his personal assets to pay the debt.

The other way owners of corporate businesses become liable for the business debts is inattention.  They never change the vendor accounts to the corporate name when they incorporate.

They are sloppy about how they sign business agreements.

The myth of the corporate credit card

They take a business credit card and don’t realize that they are personally liable.

Who needs bankruptcy

In the case of the entrepreneur I met with, it turns out that the corporation is liable for very little and it can survive as an entity if there is a business future.

The shareholder, however, is a likely candidate for a Chapter 13, to keep the house and pay the debts over time.

More

Is it safe to file a corporate bankruptcy?

Asset protection for everyday folks

How exemptions work

Is There Life After Bankruptcy?

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Is bankruptcy worth it?

If you see filing bankruptcy to get a fresh start as painful or less than honorable, you might wonder what life is like, on the other side of bankruptcy.

What’s the return on taking the big step?

I got a report from the other side this week from a Chapter 7 client from 3 years ago.  It knocked me off my chair.

When she filed bankruptcy

Single, well past middle age, a renter, and dead broke when she’d filed, she’d retired, moved, and bought a house!

Her email was entitled:  “A Happy Ending”.

I had been confident that bankruptcy was right for her, but she had found the decision fraught and painful. So it was nice to hear it from the woman who was living the life that it worked out.

I just didn’t image how well it had worked out.

Home ownership?  that soon, on her own, starting with nothing?

I didn’t see that coming.

Bankruptcy makes it possible

The downside of bankruptcy always seems to be at the forefront of the thinking of those struggling with the decision.

Debtors are bombarded with fear inducing visions of life after bankruptcy: no assets, no credit, no self respect.

Debtors image that lenders may ask about bankruptcy filings;  others might find out.  What if something catastrophic happens?

It’s easy to overlook the upside:

  • no holdovers from your current financial life;
  • no stress about promises to pay that you can’t keep;
  • no financial barriers to life improving.

Our laws make a fresh start possible.  Our economy wants us back as consumers.

The barriers to a fresh start are internal.

Usually, all we have to fear are the voices in our head.

This week’s voice from the past said there is a happy ending.

More about deciding to file bankruptcy

What the Motley Fool got wrong about filing bankruptcy

   Filing bankruptcy is all about a better future

   Tax trap in out of court debt settlement

   It’s not about the credit score

Image courtesy of Grisel D’An and Flickr.

California Homestead Exemption: The Truth Isn’t What You Think

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“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 California 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 piece together 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. 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

 

 

Which Bankruptcy Chapter Is Right For Me?

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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

Cheat sheet for passing the means test

Figuring what you pay in Chapter 13

How to make your divorce bankruptcy-proof

When your ex files bankruptcy

Dividing debts in divorce

 

The Foreclosure That Was Longer Than War & Peace

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Foreclosure is coming.  Whether by choice or circumstances, you know the bank will take the house.

Should you start packing immediately?

The way banks are currently operating, the answer is:  not yet, not soon, not for a long time.

For one of my clients, the answer to how long was well more than 735 days.  And they did nothing to delay the inevitable.

Here’s the foreclosure timeline for this California couple.

A year of missed payments

When they filed bankruptcy in June, 2013, they were 13 months behind on their mortgage.  That’s 390 days without paying.

The house was waaaaay underwater and they decided upfront to let it go.  And said so in the Chapter 13 plan.

From bankruptcy filing to relief from stay

It took 477 days from the commencement of the bankruptcy case for the lender to request and get an order from the bankruptcy court permitting them to foreclose.

Court order til foreclosure

It took another 180 days to actually conduct a  sale.  At that point, the lender owned the house, but the couple was still living there.

Sale to eviction

Then, remarkably, another 271 days went by before the bank took steps to evict the former owners from the house that it had owned for more than 8 months.  And the bank paid the former owners some cash to move out voluntarily.

Your mileage may vary

The experience of this couple doesn’t assure you of a mortgage servicer with a similarly lackadaisical approach.  But it is consistent with the data on California foreclosure.

The takeaway is:  don’t move out until you absolutely have to.

Living rent free til the foreclosure allows you to build up a kitty to finance the move.  Or feed your retirement fund.  Or start saving for a new house.

More:

Get paid to surrender possession

Your rights while you’re in foreclosure

Buying a house after foreclosure

Basics of California foreclosure

Pay Off Credit Cards Without Interest And Be Debt Free

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The  sixtyish client sitting in my office had assets worth 10 times his credit card debt.

What could bankruptcy possibly do for someone who was solvent?

His problem was liquidity and an income that was certain to decline in the next few years.

His generous disability income would end at 65, leaving him with only Social Security and the income from the illiquid annuities to live on.

Minimum payments on $50,000 of credit card debt took 40% of his current income.  It would take 42 years to pay it off at contract terms.

Like so many clients, he wanted desperately to pay off the debt, yet the credit card interest rates made it impossible without selling off the assets on which he relied for a stable future.

Care to guess what saved the day?  The Federal Reserve!

The interest rate on federal funds was at .18%.  Less than one percent.

It’s the federal funds rate that defines the interest rate on federal judgments, and therefore the interest a solvent debtor must pay creditors in Chapter 13.

In a Chapter 13 plan, he could keep his house, preserve the annuities he’d need for his support at 65, and  pay the face amount of the debt plus minuscule interest.

All that Chapter 13 requires is that creditors do at least as well under the Chapter 13 plan as they would in a Chapter 7 where the trustee would sell the assets of the trustee’s choice to pay creditors.

So, by reducing the interest rate from credit card rates to the federal judgment rate,  my client’s $50,000 in credit card debt could be paid off in a 100% Chapter 13 plan, with less than $300 of interest paid on the debt over the entire 60 months of the plan.

Payments to the plan will be less than the current debt service and in five years, he’ll be debt free.

When we talk about saving, we talk about the power of compound interest.  Savor the reverse, the power of a minuscule interest rate on debts paid through Chapter 13.

More

Bankruptcy terms, simplified

How Chapter 13 works

 Image courtesy of Leo Reynolds.

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

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

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

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