Northern California Bankruptcy Lawyer
On The Bankruptcy Soapbox
Is bankruptcy worth it?
Those who see the decision to file bankruptcy to get a fresh start as painful or less than honorable wonder what life is like, on the other side of bankruptcy.
I got a report from the other side this week from a Chapter 7 client from 3 years ago.
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”. [Read more…]
Silicon Valley is booming; our highways are so full of people getting to work that we can’t get to work.
Employment is approaching the level of the dot.com bubble. Property values soar.
So who needs bankruptcy in this pocket of prosperity?
All kinds of people, it turns out.
Let’s look at the people who sought me out last month to explore what bankruptcy could do about their crisis.
I’ve smudged the stories just enough to preserve privacy but still tell their stories. See if any story resonates with you.
The mortgage mess lingers on around the Bay Area: this single elder had been advised to miss mortgage payments in order to qualify for a loan modification.
Then, you guessed it, he didn’t get the loan modification and was stuck with a defaulted mortgage.
Chapter 13 will allow another attempt at modification, out from under the foreclosure threat, and a payment plan to get current if no modification is forthcoming.
A lawsuit by a customer threatened to ruin the business this corporation owned. Even if the legal defense was successful, the legal fees and the time away from work would sink the business.
While usually a bankruptcy doesn’t do much for a corporation, in this case a Chapter 7 stopped the litigation and freed up the owner of the business to start a new operation in the same field.
Chapter 13 saves businessman from crippling lawsuit
There are contractor licensing issues and cash flow challenges when the existing receivables belong to the entity and the individual needs to start over, but, with planning, it can be done.
Several clients brought tax troubles. For one couple, it was taxes that one spouse brought to the marriage from a previous life. The age of the taxes will permit an immediate discharge of the tax in Chapter 7 and only one spouse needs to file.
Another couple came with hundreds of thousands in taxes, some dischargeable and some that will survive Chapter 7. Wiping out the old taxes makes sure that their payments going forward get applied to the most recent taxes that won’t go away in bankruptcy.
A third couple will be paying the non dischargeable taxes through a Chapter 13, paying off the tax liens that actually attach to value, and eliminating the older taxes at the end of the payment plan.
More on how bankruptcy can deal with taxes
Failed self employment efforts and continuing underemployment lead to credit card debt that my last client couldn’t manage.
She hopes for a fresh start next year, free from the collectors that are now hounding her.
Silicon Valley is world renowned for start ups and technical innovation. The successes are widely heralded.
But for every success, there are far more ideas and efforts that didn’t make it big or failed spectacularly. The ability to try, fail and start over is one of the strengths of our approach to financial distress.
For individuals, illness, divorce and job loss magnify the economic challenges of living in the Bay Area.
The chance to put the debts of the past behind us fuels creativity, productivity and a good home life.
Bankruptcy can set the stage for good things.
Discharging 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.
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:
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:
taxes 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.
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.
We got a call about three o’clock the other afternoon from someone who wanted to come in that afternoon and file bankruptcy that day.
When my partner hesitated, the caller responded, “Well , you are open now aren’t you?”
I had a mental image of one of those parking lot, drive up coffee vendors, selling “bankruptcy” instead of java. Would that the information gathering for bankruptcy was that easy.
When Congress “reformed” bankruptcy, they added pointless additional hoops to jump through. They hoped that it would seem too daunting for people to use bankruptcy.
All Congress succeeded in doing was making attention to detail and a good bankruptcy lawyer more important. It didn’t extinguish the need for bankruptcy.
Nor did “reform” make bankruptcy any less effective.
The general “bankruptcy bargain” is that the debtor provides full financial disclosure and the system provides a discharge of debts. (It’s somewhat more complicated than that, but that describes the overview).
The bankruptcy papers include
None of this is particularly difficult. It’s just required. And paper-heavy. More about your bankruptcy papers.
We’ve experienced a spate of clients who think that because they’ve signed a representation agreement and provided us with some information, their work is done.
Wrong.
Usually the information is incomplete, ’cause they either don’t read, don’t think about the “bankruptcy bargain”, or can’t believe that we really need all that information.
Believe me, we wouldn’t ask for it if it wasn’t necessary.
Staggering in our door and paying us money just gets you out of the starting blocks in the Bankruptcy Relay.
The finish line is getting the discharge, and there are miles to run between those two points.
I’ll pour a cup of coffee and get down to work.
Mistakes to avoid before you see a lawyer
Interviewing a bankruptcy lawyer
List it or lose it: intangibles in bankruptcy
Image courtesy of AdamL212
Two clients, each with $200,000 in tax debt, came to my office this week.
One can escape it all now; the other is facing several years before bankruptcy will do anything for him.
What’s the difference?
The first man had filed his tax returns, even though he hadn’t paid the taxes called for.
The second man had not filed returns for the last 10 years.
In each situation, the IRS computed their tax debt to be the same.
One I can help today, the other has to fend of the feds for at least two years before bankruptcy can help.
Why? because you cannot discharge liability for tax year for which you have not filed a return.
You CAN discharge most taxes. [Read more…]
I’m seeing a real change in the people seeing me about filing bankruptcy.
Used to be, the problem was credit card debt, unemployment, or divorce.
A surprising trend over the past six months is developing.
I acknowledge the sample size is small. Statistically, you can challenge the significance, but here are the trends.
My office is crowded with single women scammed on dating sites; on line borrowers from virtual lenders; and small retailers.
Different, huh?
The women are single, moderately prosperous, and looking for a romantic connection. The men are elsewhere, seemingly interested, and broke.
My clients each maxed out their credit, took out loans and even took lines of credit secured by their homes to help their “boyfriend”.
And when the credit was tapped out, the “boyfriend” was gone.
The debt hung around, and the women next met a bankruptcy lawyer.
On line lending is the new source of money for the financially challenged. Fire up the computer and order up some cash. Give the lender access to your bank account.
Never mind that the rates are awful, and the ease of borrowing is deceptive.
I’ve seen several instances where the loan amount ranged from $50,000 to $90,000.
It’s my guess that the borrowers are even less likely than normal to read the terms, understand the transaction.
The deal doesn’t even require an ink signature.
I’ll need an ink signature, however, on the bankruptcy petition.
You’d think that any retailer that survived the Great Recession was solid and good for the long haul.
Not so, apparently.
I’ve seen two in the last two months who can see they won’t make it.
Traditionally, small business folk come to see me when times are tough and they want the magic wand to fend off creditors.
Not so for this duo. Each arrived in my office ready to throw in the towel.
If there is a lesson here, it is that money troubles touch lots of people, in different realms and under different circumstances.
The stereotype of the reckless and self centered spender is just that: a stereotype.
And mercifully, you don’t have to explain how you got into financial trouble to use bankruptcy to get out of trouble.
You can get a pass on the means test without claiming your dog ate your homework.
If your debt is not “primarily consumer debt”, you don’t have to pass the means test to file bankruptcy.
So, you need to total up the consumer debt you have and compare it to the rest of your debts.
Don’t miss the fact that tort claims aren’t “consumer debts” under the means test.
So if tort judgments or even unliquidated tort claims total more than your consumer debt, you don’t have to take the means test.
Check the box, and come on in and file the bankruptcy chapter of your choice.
Let’s start by defining a “tort”. A tort is a civil wrong, other than a breach of contract, that causes injury or damage to another without excuse.
Automobile accidents make up the largest group of torts. The law requires everyone to conduct themselves so that others are not hurt. One who negligently fails to use appropriate care such that someone else is hurt has committed a tort.
Whereas people choose to enter into contracts, and the contract can specify the remedy if one breaches the contract, tort liability is imposed by law.
It is that imposition of liability that courts have looked to in finding that tort damages are not consumer debts for the purposes of bankruptcy law.
Virtually everyone who comes into my office has heard about, and obsesses over, the means test.
Often they assume that merely making more than the median income disqualifies them from bankruptcy relief.
I remind even bankruptcy lawyers that debt incurred for business or investment purposes and tax debt is not “consumer debt”. If non-consumer debt predominates, the means test does not apply.
Now, the logic of giving a pass in bankruptcy to those who don’t pay their taxes eludes me, but that’s Congress for you.
But there is a little discussed additional category of debt that is not debt “incurred for personal, family or household” purposes (§ 101(8)) : tort claims. The reported cases hold that these sorts of debts aren’t incurred in the manner of contract debts like credit cards and medical bills.
The client in my office had no contractual debt, other than a tiny student loan. But the pending lawsuit accused him of harboring a dangerous dog.
Now mind you, the dog didn’t weigh 5 pounds and the wound it inflicted was objectively insignificant. The suit, nonetheless, was expensive to defend, stressful, and could blight an otherwise sound financial life.
The bankruptcy case became just that much simpler when I recognized that we could bypass the means test.
Tort claims aren’t consumer debts; since the dog bite claim dominated the client’s list of debts, it became irrelevant how much money the client made.
The best way to ace the means test is to avoid it altogether.
Even High Income Families Pass The Means Test
The Problem Even A Good Bankruptcy Lawyer Can’t Fix
Discharging Taxes In Bankruptcy
Image courtesy of Wikimedia Commons.
True story from the mortgage meltdown 10 years ago.
Usually, I try to be the voice of common sense, conservation of energy, and moving on after a debacle.
The client I saw the other day had the warrior side of me overwhelming the lawyer’s logic.
The facts: the client, an immigrant carpenter with limited English literacy, “invested” in a rental house with partners who bailed on him. The loan was the typical sub prime, adjustable rate loan where the rents on the house could never have covered the debt service.
Then the “friendly” real estate professional helped him borrow some money on the rental to pay the closing costs on a no-money-down purchase of a home for himself. Realtor gets a real estate commission on the purchase and a fat commission on the two loans to buy the house.
Again there were supposed to be partners who would contribute to the debt service and own some interest in the property. None of it was in writing, others bail, and again my client is left holding the mortgage “bag”.
Meanwhile, the home’s value goes down and the mortgage payments go up. While the client is willing to walk away from the rental, some self interested “expert” tells him that if he defaults on the rental mortgages, he will lose his home, on which he is current, even though the property is upside down.
He works huge amounts of overtime, loses sleep, figures he will lose everything. He’s near tears when he sees me.
The good news in this scenario is, such as it is, that all the client has invested in these deals is about $15,000, and a year and a half of inflated mortgage payments on “investments” that are worthless now, and probably when purchased.
When I analyzed the first loan on the home, I calculated what the mortgage payment would be if, instead of an exploding ARM, it were a conventional, 30 year fixed rate note at 6.5%. The answer was that the monthly mortgage payment on a loan of that size, if it could be restructured, equaled his gross monthly income!
What lender makes such a loan?
The rational part of me wants to tell the client, take your lumps, be glad you didn’t lose any more than you did following the American dream.
The warrior side of me says, who were this guy’s friends who engineered these “deals”, with commissions to themselves? Who gets away with misrepresenting the consequences of a foreclosure on the rental? Who were the lenders who participated in exploiting a simple man who couldn’t read the relevant documents?
Again, my advice will probably be to live in the property payment free til the lender forecloses . But my personal inclination is to sue the assorted bastards involved in this mess.
Just being a consumer is enough to put you on Congress’s bad side when it comes to bankruptcy.
How do I know?
I read the “reformed” bankruptcy code.
Only those individuals whose debts are primarily consumer debts have to prove that they aren’t abusing the bankruptcy laws.
The Bankruptcy Code attempts to exclude from its shelter those who “abuse” the system. Abuse is equated with having “enough” money to pay your debts.
That’s “enough” money under the formula Congress wrote.
Only a debtor whose debts are “primarily consumer” debts is subject to this scrutiny. Others get a pass.
Those whose debts result from business failure or failure to pay their taxes are not subject to review for “abuse”, regardless of their ability to pay.
Those debts aren’t “consumer” debts for this purpose.
One’s ability to pay back some or all of business debts or, for Pete’s sake, pay your taxes, isn’t a gating factor for getting into bankruptcy. [Read more…]
Once again, Chapter 13 rescued a client.
He’ll get out of debt and pay (effectively) no interest going forward on his credit cards.
He owned a home, had a job, and was solvent on paper, but he couldn’t sleep for worry about his debts.
Despite having lots of equity in a house, there wasn’t not enough income to retire the debt when the mortgage resets in the spring.
Chapter 7 would get rid of the debt, but cost him his house.
Thank goodness for Chapter 13, where you
Chapter 13 gets my client out from under credit cards with ruinous interest rates, reduces the interest rate on his high interest car loan, and lets him sleep at night knowing he won’t lose his house to unsecured creditors.
A pretty good deal for a $310 filing fee.
The good news is that the equity in his house requires that his Chapter 13 plan pay his debts in full. But, “in full” does not mean “with the usual credit card interest”.
Pay off the cards in full in Chapter 13 and you pay only the federal judgment rate. Currently , that’s little more than one half of one percent, instead of 18-34% due under the credit card agreements.
To pay off the cards according to their terms outside of bankruptcy, most of each payment for a long while goes to interest. That’s why credit card issuers are content to have you carry a balance.
For this client, we figure that a 100% repayment plan for the cards and the tax debt will require a payment about 1/3 of what he currently pays each month on the cards.
This client looks good on paper. He’s solvent due to lots of equity in his house. He’s current on his bills.
He just sees the freight train coming down the tracks when he reaches the end of the interest-only feature on his home equity loan.
You don’t have to be upside down, financially, to file bankruptcy. You only need to be willing to play by the rules of the Bankruptcy Code for dealing with your creditors.
The applicable rule for this client says: if you keep your house with that much equity, you must pay the creditors in full.
Bankruptcy won’t change the terms of his home loan, it will just spread out and pay off the other debts that have a claim on his monthly income.
And, he can stop underwithholding on his taxes. He had increased his exemptions to get more cash monthly, leaving him owing taxes at the end of the year.
Part of our plan is making the withholding match the taxes owed, so we don’t have a recurring tax problem.
13 was my client’s lucky number.
