Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

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.

UPDATE: California homestead increased

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

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.

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

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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

How One Family Settled Huge Debt For Pennies

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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

 

$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 in our Chapter 13 plan, 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

 

Silicon Valley Horror Story: The Business Credit Card That Bit

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I’ve long said that there is no credit card for which a real, live human being isn’t liable.

(That may be an exaggeration, but not by much.)

And I’ve long worried about the prospects for success of business startups financed on credit cards.

But I’ve never seen a departing employee of a start up stuck with the bill for charges made by management after he left, until now.

He thought the card (and the balance owed) belonged to the business and he left it behind when he took a new job.

Eighty thousand dollars in charges later, he found he was on the hook as far as the card issuer was concerned.

It was a Silicon Valley horror story.

So, let’s review how this happened and what to learn from it.  Because this won’t be the last time that departing employees have gone out on a financial limb for a new venture that fails.

Who’s liable for the business card

While the card issuer may be willing to emboss the business name on the card along with yours, dollars to doughnuts, YOU are the only one legally liable to pay the bill.

Unless the card application calls for the signature of an officer of the business entity, the bank is extending credit to an individual who signs the application.

How a corporation signs its name

The business name on the plastic may make you look more “professional” or make it easier to sort business from personal expenses, but the legal liability lies with the named individual.

How management got free money

In a world of on line purchasing, possession of the card was probably sufficient to let the remaining employee charge more stuff.  When was the last time a signature was required for online use?

Maybe, the remaining employee genuinely thought the card was business property.

Or maybe not, given the nature of the purchases.

But my client left the card behind, without thought, until the collectors came calling.

Your exit strategy

Cutting ties to an employer should henceforth include cutting up the credit card.  Or more specifically, calling (and writing) the card issuer, closing the account.

Close the account, too, if the rupture is marital; don’t let more debt accrue

Closing the account doesn’t eliminate your liability for any outstanding balance, but it does prevent further use of the card.

And if the shoe is on the other foot, and you are the remaining employee and your company is actually liable on the account, close it when the named employee leaves.

 

 

 

 

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.

It’s all about the tax

When my client got his bankruptcy discharge, stripping off the junior lien on his house, the mortgage lender dutifully sent him a form 1099.

The tax form correctly reported that $288,000 of debt had been forgiven in the last tax year.

And my client delivered the 1099 to his tax preparer, who in turn said,

That will be an extra $103,000 in tax, due and payable on April 15th.

Only, once the tax preparer got the news about the bankruptcy filing, it wasn’t so.

Debt forgiven in bankruptcy isn’t taxable

A discharge in bankruptcy is the first exception to the standard tax rule that debt that is forgiven is treated as if it were cash income.

When the discharge occurs by reason of a  bankruptcy case, the discharged debt is not taxable income.

Responsibility for connecting the dots on discharged debt falls to the debtor/taxpayer.  The creditor whose debt has become worthless is obligated only to report to the IRS that the debt has been forgiven, as a matter of law.

The 5 most common errors banks make on 1099’s

The creditor generates a 1099 form, without comment on the circumstances.

The taxpayer is charged with filing the form that says, in IRS speak, “yes, but….”

Yes, the debt was discharged;  but, no, the discharge didn’t increase my taxable income.

The “because” is the discharge in bankruptcy.

Accountant needs to know about discharge

Had my client told his tax preparer upfront about the bankruptcy, he could have avoided several hours of intense stress.

Retired and living with family, he probably doesn’t have $103,000 in net worth, much less that kind of money sitting around for Uncle Sam.

I’m an advocate for openness about bankruptcy.  It’s not shameful nor the mark of failure.

If everyone who had filed bankruptcy admitted it, those who are now struggling with the decision to file wouldn’t feel like they are the only ones  who ever chose bankruptcy rather than perpetual debt.

But regardless of whether you’re willing to share with others the fact you’ve filed bankruptcy and gotten a fresh start or not, share the facts with your CPA.

It will save you money.

More

Who profits when bankruptcy is source of shame

Tax deductions hidden in Chapter 13

Easy steps to maximize your bankruptcy discharge

Image © Fotolia 

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

 

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

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