Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

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Eventually, we got the county straightened out without going back to bankruptcy court, and the lien claim withdrawn, but only after educating the county on liens and bankruptcy.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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dynamite-1293082_1280_opt

Debts of the marriage often outlive the marriage itself.

And, those left-over debts are nothing but trouble.

But too often, divorcing couples don’t mop up the joint debts they held during the marriage, only to have the situation blows up years later when one ex-spouse hits financial trouble.

Here’s a true story that illustrates the danger.

Joint account remained open after divorce

When the client arrived in my office

  • divorce has been final for decades.
  • no balance on joint line of credit when the spouses divorced
  • no one closed the account

When my client 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.

As a result, my client’s financial mess threatens to slop over to the former spouse who remained liable on the dormant line of credit, because no one paid attention to the debts at the time of the divorce.

Even though the new balance on the line of credit arose long after the divorce, the ex spouse remains liable to the lender because his name is on the account.

Chapter 7 doesn’t discharge debts to spouses

My client can discharge the debt to the lender in her bankruptcy, 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.

Deal with debts of marriage up front

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.

More on bankruptcy and divorce

When your STBX files bankruptcy

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…]

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.

 

Who Files Bankruptcy In The Face Of Booming Bay Area Economy?

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who files bankruptcy

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.

Foreclosure threatens elder

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.

Lawsuit cripples contractor

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.

Old taxes cloud retirement

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

Underemployment and credit cards

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.

Not all are equally lucky

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.

More

What causes bankruptcy

Myths about bankruptcy

Alternatives to bankruptcy

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

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