Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

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, to the apparent amazement of a recent client.

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.

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.

Exemptions protect some assets, up to a specificed dollar value, but the 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”.

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

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…]

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. [Read more…]

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

 

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. [Read more…]

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…]

Loan Modification: The $100,000 Mistake

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loan payoff

 

The job of a mortgage servicer is to collect loan payments and keep track of what’s owed on the mortgage.  That shouldn’t be too hard.

But the evidence is that they don’t do that basic job very well.

Throw a loan modification into the mix, and who knows what you’ll get.

Accounting for modification

I got a glimpse of what we face when my client requested a loan payoff in connection with a sale.

The loan had been modified some five years ago, with the result that a sizable hunk of the amount due when the loan was modified was due only upon sale.

Asked for a payoff, the servicer returned a payoff that failed to include some $127,000 of non interest bearing principal.

Granted, this particular mistake cut in favor of my client.  Who are we to complain?

But it is just as easy to image that the blunder works the other way:  the requested payoff doesn’t take into account the changes made to the debt when the loan was modified downward.  The payoff demand could just as easily have been calculated at the old, higher rates in effect before modification.

Multiply this instance by a fraction of the modified loans out there, and we need to tell Houston we have a problem.

Mortgage modifications to the rescue

Mortgage modifications were supposed to save both individual homeowners and the economy as a whole.

They promised to keep homeowners in their homes despite the housing crash of the Great Recession.

To some extent that has worked.

Or at least mortgage modifications spread the failures out over time so that the market wasn’t glutted with foreclosed properties.

But anyone who has attempted a mortgage modification knows first hand the frustration of submitting an application to the servicer.

Over and over, the servicer claims that you haven’t sent the documents, or the documents are stale or incomplete.

That inability to account for the modificiation application documents is, I’m afraid, just a sneak-peak at the next mortgage horror:

Servicers have no records about the loans they did modify.

Or, more precisely, the records they have are not to be trusted.

Rotten record keeping

The casualness with which servicers approached modifications has scared me for sometime.

  • modification agreements were poorly drafted
  • borrowers never got copies signed by the lender
  • changes in terms not part of public record

Mortgage accounting departmentThe quality of the customer interface at the servicer was laughable, if it wasn’t frightening.

The problems are compounded when the servicing on loans changes hands.

The new servicer starts with the ending balances from the prior servicer.  Few records other than an electronic data base change hands.  Any mistakes made by the prior servicer are now impenetrable.

The terms, or maybe even the enforceability of the modification itself, are lost in the mists of time.

Practice self defense

Who knew that homeownership was going to be a contact sport?

But you have to assume, if you got a loan modification, it will be up to you to defend the modification when the time comes to pay it off.

Here’s the homeowner’s two step:

  1. Keep good records– find and preserve the loan modification agreement.  Treat it as being just as important as the deed to your home.
  2. Request mortgage accounting each year –  make an annual request for the state of your loan, and preserve the response

Your goal is to have your own records supporting the terms of the loan modification and to catch any problems in accounting early.

May all the lender’s mistakes cut in your favor, and may the Force be with you.

You’ll need all the help you can get.

Nightmare image: 

Monkey at typewriter:  Oliver Hammond

How Their Telephone Can Ruin Elders

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red-telephone-mimooh-01_optThe elderly couple was suddenly in financial trouble.

The two mortgages on their home were a couple of months delinquent.

Their bank account had just been levied by the state taxing authority.

They hadn’t filed tax returns since 2009.

From the outside, it didn’t seem like anything had changed.  Yet their financial world was imploding.

What had happened?

Their phone is to blame

Turns out, they had entered into a debt repayment plan over the phone.

The caller got their attention while they were comfortable at home, over the phone.  They signed up, over the phone.

They couldn’t tell me even who the caller represented, But, the voice on the other end of the phone promised to keep creditors from calling them anymore.

With the clients’ permission, this creditor was automatically taking money out of their account monthly.

And when the tax levy hit, there wasn’t enough money to keep a roof over their heads.

These elders were victims of their telephone and their good intentions.

Only the powerless call

It’s a nearly universal truth that the only creditors who call you about your debts are the least important creditors among those you owe.

Credit card companies can’t force you to pay their debt without suing you, getting a judge to agree you owe the money and giving you a chance to defend.  It’s cheaper and more effective to frighten or shame you into paying.

And even better if they can get you to give them regular access to your bank account.  What could be better?

What seemed to have happened here was a debt collector called up and offered a solution, one that would stop harassing phone calls and pay the credit card debt automatically.

But, the “solution” would only pay the credit card debt.

That is, the only debt that would be paid is the debt that could be discharged in bankruptcy.  The mortgage debt that kept a roof over their head became second to the debt management program.  No attention was paid to the back income taxes.

Who to pay when money is tight

It was exactly the wrong order of payment.  The least had become the first among creditors.

Elders more vulnerable

The tactics of debt collectors aren’t confined to the elderly, but they sure work better if the person who owes the money is frail, alone, or unsophisticated.  That described the couple in my office.

The good news for my couple was that their children had somehow gotten wind of the trouble and came with their parents to see if bankruptcy could help.  And bankruptcy will help.

In the bigger picture,  adult children need to be sensitive to how well elderly parents are managing their money.

The telephone is the instrument by which legitimate but self interested creditors can get to the elderly and convince them to warp their financial priorities.

Whether the pitch uses annoyance, fear or shame, the result is the same:  the elder pays the wrong creditor.

If these could be your parents, screw up your courage and find out what is happening, on the phone and at the bank.

It can be a difficult conversation for elders clinging to independence.  But you have to  have that conversation if you’re to help them, before their roof falls in.

Image courtesy of notKlaatu and openclipart.

 

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

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