Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

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.

But the recent bankruptcy case meant he couldn’t get a discharge in a new Chapter 7 case; and prison wages were not going to support a Chapter 13.

But what we wanted was the automatic stay, the sale of the house, and the homestead paid to the client.

The balance of the equity was beyond saving, on these facts.  We were content to have the balance go to pay toward the restitution judgment.

So, we filed a Chapter 7.  The fact that my client wasn’t eligible for a discharge wasn’t important .  What we needed was a sale managed by the trustee while my client was behind bars and the homestead carved out and paid to the debtor.

No discharge Chapter 13

Much more common than prison-bound debtors are no-discharge Chapter 13 cases.  When they follow hard on a Chapter 7, we sometimes call them Chapter 20 cases:  7 + 13=20.

After BAPCPA’s changes to the bankruptcy code in 2005, the four year rule applies to getting a Chapter 13 discharge after a Chapter 7.  There must be four years between the filing of the 7 and the filing of the 13 in order to get a discharge of your debts in the Chapter 13.

But the discharge isn’t everything.

Pay debts that survived

Often what you need in a Chapter 20 is the automatic stay and time to pay debts that didn’t get discharged in the Chapter 7.  Those debts might be priority taxes, back family support, or even student loans.

It is the payment plan and the predictability that you need, not necessarily the discharge.

Catch up mortgage

Chapter 13 works to give you time and protection to bring a mortgage current.  Because the mortgage is a lien and wasn’t wiped out in the Chapter 7,  failure to get right with the lender will lead to foreclosure.

Liens that survive the discharge

File a Chapter 13, and you’ve got time to get current.

Strip off the worthless lien

While you can’t strip off liens in Chapter 7 unless they impair an exemption, in Chapter 13 you can void an utterly underwater mortgage AND  strip or bifurcate a tax lien.

Two recent 9th Circuit decisions make it clear that it is completion of the Chapter 13 plan, not the discharge, that entitles you to strip a lien, and that the balance on a lien that survived the Chapter 7 doesn’t count for the Chapter 13 debt limits.

When can you file

So, like lots of legal questions, it depends.  It depends on whether you can achieve your goal without getting a discharge.

Image courtesy of Flickr and Hichako.

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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

 

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.

How to sign for your corporation

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

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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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.

Why Your Mortgage Lender Won’t Send Statements After Bankruptcy

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Don't gag mortgage servicersLists of stupid laws are lots of fun, when they don’t really touch your life.

But the law that gags mortgage lenders after bankruptcy isn’t funny.

Preventing lenders from sending mortgage statements to homeowners after bankruptcy just sets families up for foreclosure and rewards servicers with the fees that follow default.

It’s just a stupid result that no one has fixed.

Bankruptcy laws collide

Two clients this week weren’t laughing when two different bankruptcy laws collided:

One law says that the lender’s lien on your home remains enforceable after bankruptcy.

The second law prohibits efforts to collect a debt after bankruptcy.

The survival of the lien after bankruptcy protects the secured lender;  the injunction against post bankruptcy collection protects the debtor.

But what if the debtor wants, and needs, to continuing paying?  The intersection of these two provisions thwarts both. [Read more…]

What Everyone Knows About Bankruptcy: Not

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torture deviceOther professionals should know better than to advise people about the workings of bankruptcy.

And if they don’t know better, they should be made to pay, in some exquisitely painful way, for the harm they inflict.

The rack seems good to me.

The terrified client in my office was told by her accountant that if she filed Chapter 13 to save her home, the court would not allow her to buy prescription dog food for an ailing 16 year old pet!

Further, the accountant went on to declare that in Chapter 13, the debtor could pay only for housing, food and gas: nothing more. No maintenance for the house, no insurance, no clothes, no medical care.

Of course, the accountant was dead wrong. Articulate but wrong.

Means test and budgets in Chapter 13

So I explained the operation of Chapter 13, how the means test works, and the balance between the debtor’s reasonable living expenses and the claims of creditors. And assured the client that she can provide for her treasured pet for the balance of its life.

Then I fumed.

I’m resigned in the age of the internet that new clients have encountered lots of bad information on the web. There is no competency examination before anyone with a browser and an internet connection can opine on any subject.

The most trusted advice on a criminal law site recently turned out to be from a 15 year old whose knowledge came from TV!

But the source of this utterly distorted information holds a professional license in another field; that license gave apparent authority to the tales of horror she told my client.

How was the client to know it was tripe, pure tripe?

It took me two hours to find and eradicate the externally caused fears in my client and the self-generated terrors she’d nurtured based on bad information.

Can I count on my readership to bail me out of jail if I find the accountant providing worthless and harmful bankruptcy advice?

Image courtesy of Sandeep Thukral

Hidden Dangers In Tapping The Reverse Mortgage Piggybank

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broken piggybank-images of moneyActor Fred Thompson used to appear on my Sunday morning news program every week touting the benefits of a “government insured”,  safe, reverse mortgage.

Get the money you deserve to live the good life, he urged.

I’m watching the aftermath of that sales pitch play out for one of my clients, and it’s not “the good life” I’m watching.

In fact, the foreclosure sale on the home is scheduled for next week.

Intentions thwarted

The borrower, a single woman of many decades,  took out the reverse mortgage and drew down on the loan.

She has passed away, leaving the house to my client.

The house may have as much as $300,000 in equity over and above the reverse mortgage.

But because the borrower has passed away, the lender won’t take payments from anyone else.  The loan is due and full, says the lien holder, and that’s that.

The climate for a refinance of the property in the hands of my client isn’t auspicious, so the house, and all that equity, may go, not to the relative of choice, but to the “friendly”, reverse mortgage lender.

Bankruptcy possible

A bankruptcy filing may solve this particular problem.  We’ll see.

Bankruptcy is an option only because the heir to the house is an individual.  Individuals can file bankruptcy.  Trusts and estates cannot.

If the elderly borrower had left the house to her estate, the automatic stay that comes with a bankruptcy filing, would not be available to the probate estate.  The probate estate isn’t eligible for bankruptcy relief.

House as piggybank

The risks of reverse mortgages are becoming more apparent, summarized in this Consumer Financial Protection Bureau report to Congress.

A surviving spouse who is not on the loan may have no right to stay in the home on the borrower’s death.   The loan is complex and may encourage premature tapping of home equity.

In the bigger picture, the pressure to tap home equity to support retirement is the predicable result of regarding your home as your piggybank or your retirement nest egg.

The only way to take advantage of that nest egg is to either sell the house or to borrow against it.  By retirement age, most homeowners aren’t great candidates for a conventional loan contemplating monthly payments.

And as we’ve seen in the Great Recession, you can’t count on a robust real estate market when you need that equity for retirement.

So, the gap in the retirement safety net is created, and in steps Fred Thompson and the company he shills for.

As the sergeant on Hill Street Blues said every shift:  Hey, let’s be careful out there.

 Image courtesy of Flickr and Images of Money

 

IRS Shakedown Happening In Bankruptcy Court

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The latest IRS scam is happening in bankruptcy, out in the open.

Now usually when I write about IRS scams, I’m talking about genuine bad guys either pretending to be the IRS to hijack your money or pretending to be you to the IRS, to hijack your money.

But nobody is pretending in the trick I first saw last week.  The IRS is simply trying to collect the Affordable Care Act penalty twice.

What the IRS did

My client filed Chapter 13, owing income taxes.  The most recent of those taxes must be paid in full to get a Chapter 13 discharge.  So, the amount that must be paid is critical to the success of the plan.

The IRS filed a proof of claim for the unpaid income taxes.

But then, weeks later, the IRS amended their claim to add an “excise tax”, for the penalty under the Affordable Care Act, for not having health insurance.

The IRS conveniently “overlooked” the fact that the filed tax return already included the penalty on line 61 of the 1040.

So, they wanted to get paid twice by putting a benign label, “excise tax”, on the form, and hoping that you didn’t dig deeper.

No right to double payment

The tax law for the years in question, 2015 and 2016, imposed a penalty for not having insurance, to be collected by the IRS.

The IRS form includes a line where you add the penalty to your taxes if you didn’t have appropriate insurance.  So when my client filed his return, he’d already added the penalty to what he owed.

And the IRS dutifully used his return to claim payment for the unpaid amount.

OK.

But it’s not OK to double dip and add a duplicate penalty with another name.

When I challenged the IRS agent who filed the claim, his response suggests that he’d not looked at the client’s tax return;  he’d just added the penalty to the claim by rote.

Conversations with fellow bankruptcy specialist William Brownstein suggests the IRS confusion runs more broadly on this issue.  He reports the IRS assessing non-bankrupt tax payers with penalties for not including form 1095-B with their returns, even though the form itself says “don’t file with your return”.

So, the first step is to eliminate the duplicate claim.

But there’s more.

Is the ACA penalty entitled to priority payment

Recent taxes are given a priority for payment under the Bankruptcy Code.  If the ACA penalty is a “tax” within the meaning of the Bankruptcy Code, it must be paid in full in Chapter 13.

But, is this exaction a tax?

A Louisiana bankruptcy court recently said no in a case called Chesteen.  It’s not a tax, it’s a penalty.  And as a penalty, it isn’t entitled to payment in full, and as a penalty, it is dischargeable at the completion of the plan.  Great work by NACBA member Rachel Thyre Anderson, who reports that the decision has been appealed.

Where do we stand on ACA penalty

While the issue of whether the penalty is a tax or not may not yet be settled by the Chesteen decision, it is clear that the IRS, at best, only gets to collect the penalty once.

If the penalty is properly included on the tax return as filed, then any additional “excise tax” that claims priority status should be challenged.

How Avoiding Probate Ended Up In Bankruptcy

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Do it Yourself law

Do it yourself seems so industrious and self reliant.

And we’ve been bombarded with books, speeches and courses on the evils of probate.

So, I guess it should be no surprise when people try DIY  schemes to both avoid probate and avoid lawyers who create probate-avoiding trusts.

Yet they forget an unavoidable truth:  the transfer of bank accounts or title to property intended to facilitate the care of the elderly or  enable the fee-free passage of property to the next generation can end up involving all parties in a bankruptcy lawsuit.

While the goals are admirable and understandable, the consequences can be horrific when a bankruptcy filing comes along.

Avoid probate and court disaster

Frank Pipitone tells a gut wrenching story of a DIY bankruptcy involving a DIY will substitute that will likely cost the elder her home.

An elderly woman adds her adult children to title of her paid-for home.  The children think that their interest in the home is a formality; it remains the mother’s home, they think. [Read more…]

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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