Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Tax Tips & Tidbits

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Tax filing deadline approaches, so I thought we’d gather up tax tips and little known tax strategies, especially useful if you’ve filed bankruptcy.

The Tax Deduction No One Tells You Aboutfan of bills

If you are paying mortgage interest, state taxes, back support, or business debt through a Chapter 13 plan, those payments made by the trustee may be deductible to you.  Just because the trustee cuts the check, doesn’t mean you aren’t the payor.

insolvent for tax purposesEscape Tax On Settled Debt

Proving to the IRS that you are insolvent is one way out of paying taxes on the canceled debt.  But watch out, the IRS’s definition of insolvent is different from most.

5930176734_380196d14c_zTax Software Makes A Lousy Purchase, When It Can Be Free

The IRS provides free, commercial tax prep software for those with an income of $62,000 or less.  And they partner with volunteers to provide free help with returns through VITA.

credit-squeeze-transparentHow To Escape The Flat Wrong 1099

You’ve got challenges when the creditor sends you a dead wrong 1099.  The IRS got the same, erroneous info.  What to do to avoid the tax consequence of someone’s mistake.

Tax Myth Saddles You WIth Tax ForeverShould You File The Return If You Can’t Pay The Tax

It’s a myth that filing a timely return without a check to pay the tax you owe makes you instantly exposed to collection.  Instead, here are four reasons to file the return whether or not you can pay right now.

?????Don’t Let The Tax Scammers Catch You

Stolen identities and stolen tax refunds are just two of the consequences of falling for the fake call from the “IRS”.  Here’s what to watch for to stay safe during tax season.

Spill the beans concept.The One Person You Must Tell That You Filed Bankruptcy

Hiding your bankruptcy discharge from your tax preparer can be an expensive mistake.  The bankruptcy discharge trumps (if we can still use the word) the tax on canceled debt.

chained businessman on white backgroundDitch The Tax Debt In Bankruptcy

You can get rid of tax debt in bankruptcy.  Walk through the rules that control when a tax is dischargeable without payment.  Also, help filing a return when you have no records.

More tax tips on Income Taxes in Bankruptcy on our sister site.

Laboring Over Bankruptcy Papers

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Why is filing bankruptcy so much work?

Paper.  Statements. Tax returns.  Car contracts.  Pay stubs.  Appraisals.  Title reports. Credit counseling.

It gets tedious fast.

So, why is bankruptcy so complicated?

Do you want the polite, professional answer, or the pointed, political answer?

Bankruptcy bargain

Polite answer first:  the bankruptcy bargain, your deal with the legal system & your creditors, is disclosure in exchange for the discharge.

Make full disclosure of what you have, who you owe, and what you’ve done with your money recently and you get a discharge.

You need to cooperate with the trustee and live with the legal consequences of the mix of assets, exemptions, and avoidance powers.

But tell the whole story honestly and you shed the dischargeable debts in your life.

Political answer

The more opinionated answer is that filing bankruptcy is lots of work because Congress and the businesses who funded Congressmen a decade ago wanted to discourage bankruptcy.

After all, creditors don’t get everything they bargained for when a consumer discharges their debt.  So big-money types didn’t want to let consumer off the hook through bankruptcy.

Some lawmakers believed that not paying your debts, regardless of the reason, was a moral failing.  Don’t want to make it easy to be immoral.

Senator Grassley just plain hates lawyers, so if he could make it difficult for bankruptcy lawyers and keep good lawyers out of the field, bankruptcy “reform” was a great deal.

BAPCPA, the bankruptcy law passed in 2005, added lots of additional things to file, exercises to complete, reasons to get kicked out of bankruptcy to discourage people from filing.

There’s even a theory out there that a creditor goal in the new law was to extend the time necessary to prepare a bankruptcy case for a couple of months more. while folks kept making minimum payments.  Minimum payments mean maximizing profits.

So bankruptcy is hard work because Congress wants it to be hard, so maybe you won’t file.

Client lament

One of my clients just complained that to prepare his bankruptcy papers,  my paralegal asked him for the same information I had asked him when we first met.

It may seem like duplication to the client, but not to the attorney.

As an attorney, I want to see the big picture for the client, the relationship between income, assets, and debts.  I want to know what the client expects in his financial future.

And what it is that brings them to my office TODAY rather than last month or next year.  What’s happening that you made an appointment to talk with a bankruptcy lawyer?

Having decided to file, the bankruptcy forms that my paralegal is drafting require the story in fine detail, not broad strokes.

How many payments left on your car loan?  Is your retirement account ERISA qualified?  Who else lives under your roof and do they pay for the privilege?

And on, and on.  Because Congress wants to make this hard.

Bankruptcy not hard

But at the end of the day, and after BAPCPA, bankruptcy relief is still broadly available.  It just takes a slog to get it done.

But on Labor Day, or any day,  we honor hard work.

And in my office, we help with the work required to wipe out debts.

More

How to interview a bankruptcy lawyer

What should bankruptcy cost?

What’s life like after bankruptcy?

The Zero Interest Get-Out-Of-Debt Tool: Bankruptcy For The Solvent

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chapter 13 rescue

Once again, Chapter 13 rescued a client.

He’ll get out of debt and pay off credit cards with no interest going forward.

So many people tell me they could pay off the credit card balance if it wasn’t for the high interest.

This client 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

  • keep your assets,
  • propose a plan, and
  • get a discharge.

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.

Interest free debt repayment

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.

No need to be broke to file bankruptcy

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.

More

Why I love Chapter 13

Update on California homestead

California Bankruptcy Law Is All Our Own

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california bankruptcy law

California Bankruptcy law is a lot like a unicorn….appealing but imaginary.

Instead, we have bankruptcy in California, where the landscape is shaped by community property;  state exemptions, large mortgages, and the 9th circuit court of appeals.

Like the Merced River cutting through the granite of Yosemite, those factors alter the bankruptcy landscape here.

Community property

California community property law defines what assets of a married couple come within the control of the bankruptcy court. While there are other community property states, it is the law of each state that defines how community property is created.  State law also defines the rights of creditors in that community property.

Whether one spouses files, or both join in a bankruptcy case, all of the community is available to the creditors of the marriage.

In return, after the bankruptcy all community property is forever protected by the discharge.   Post bankruptcy wages and purchases are beyond the reach of creditors.

Even when only one spouse files, all the community gets protection from creditors who had claims when the case was filed.

Much different from the treatment of marital property other places.

Two California exemption laws

While bankruptcy is federal law, California state law defines  exemptions.  Exemptions specify assets a debtor can protect from creditors in bankruptcy.

Exemptions are the only place in bankruptcy that the law is explicitly different from state to state.

Congress, in a legislative compromise in 1978 on the adoption of the Bankruptcy Code (back when Congress knew how to compromise), states were given the option to opt out of the federal bankruptcy exemptions in favor of the state’s exemptions.

In response, California’s legislature gave debtors a choice:  the existing state law exemptions found in Code of Civil Procedure 704, or a special set of California bankruptcy exemptions starting at CCP 703.140.

California homestead increased to better match home values

Mortgage debt dominates

California boasts (or suffers) home loan balances that make eyes bug in other states.  The cost of housing here skews family budgets, leaving less for other living expenses.

Why the means test is toothless in the Bay Area

For many years, credit cards were used to fill the gap between the available income and the expectations of comfortable living.

For homeowners, the deduction for mortgage payments on the means test assures most homeowners that they pass the means test.

The increasing cost of renting has sharpened the drive to save a house from foreclosure, at whatever cost.

Bankruptcy can often make that possible in Chapter 13.

9th Circuit shapes us

California bankruptcy judges are bound by the decisions of the 9th Circuit Court of Appeals.  The circuit courts can only be overruled by the Supreme Court.

So, the decisions made by the 9th Circuit on bankruptcy issues drive outcomes that may be different from outcomes in other circuits.

Recently the 9th Circuit made some very satisfying decisions for bankruptcy debtors, including allowing lien stripping in Chapter 20;  granting attorneys fees to debtors who win bankruptcy disputes with their creditors; and slapping down bankruptcy trustees who sought to disqualify Chapter 13 debtors who had secured debts for non essentials.

And, the 9th Circuit rejected its earlier, horrible decision about making debtors whole when creditors violate the automatic stay.

Bankruptcy the product of our environment

So, sorry to disappoint, there is no “California bankruptcy law.”

There’s just the granite of the Bankruptcy Code, fractured, shaped, and worn by the economic and legal realities of California.

And the resulting landscape is generally awesome.

More on California

The California fair debt collection law

California limits on debt collection

If you’re sued in California courts

Marital Separation Doesn’t Require Two Homes

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Split the sheets in California, and your wages are no longer community property.

That’s because property acquired during marriage but after a marital separation isn’t community property.

That’s been California law for a long while.

The sticky wicket has been drawing the line when the marriage has broken down and the couple has separated.

“When” they separated determines whether the estranged spouses have to split their earnings with each other.  It determines whether the creditors of one spouse can reach the wages of the other to pay the other’s debts.

Can estranged spouses live under the same roof and be living “separate and apart”?

Supreme Court makes separation expensive

In 2015, the California Supreme Court ruled that a couple isn’t “separated” when they live in the same house.  Even when they  shared little else besides the address.

In the Bay Area,  land of ruinous housing prices, I’ve seen many estranged couples continuing to share a house for a long while because neither can afford to move out.

Yet, according to the Davis decision, a couple is not separated and they continue to acquire community property until they no longer live in the same dwelling.

New law looks beyond common address

The justices kinda invited the legislature to change the law if they didn’t like the Davis result.  And they did.

New California law provides that spouses can live “separate and apart” under the same roof for purposes of California community property law.

Seven things you probably didn’t know about community property

The new law makes determining the date of separation messier, but more in conformity with economic realities.

A court trying to determine whether assets are community property has to look beyond the residence address.  Other indicators, not just where the spouses live, can show that there is no intention to resume the marriage.

Why this matters

Assets acquired during marriage and before separation are community property.  Simplest example is wages.

But suppose one spouse starts a business or writes a best seller when the marriage is rocky.  If there has been no separation, the business or the book royalties must be divided equally.

If STBX files bankruptcy

If the spouses have separated, different result.  The new asset is the sole property of the spouse who created it.

Or, more prosaically, suppose one spouse buys an expensive new car.  If they’ve separated, the debt is exclusively the responsibility that of the borrower.  If they aren’t living “separate and apart”, the debt is payable from the community.

Dividing debts in divorce

The new look at what it means to live “separate and apart” will inject more reality in the the “when” question, at the expense of making the determination more complex.

More

When your STBX files bankruptcy

Image courtesy of  John Getchel  under a Creative Commons license.

Chapter 13 Keeps You In Control

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steering your financial course

You can’t decide between bankruptcy chapters until you really understand how Chapter 13 works to keep you in control.  

Control of your assets, control of your payment plan, control of who gets paid.

You want to be at the helm of your case.  Chapter 13 can do that.

Chapter 13 works to protect more than assets

Chapter 13 bankruptcy is about protecting assets, I read somewhere on the internet.

That sells Chapter 13 short by half in my view.

It’s not just about assets.

Many of my Chapter 13 clients have no meaningful assets to protect.  Assets to protect isn’t what made 13 right for them.

It’s that Chapter 13 kept them in control.

  • Control of creditor interaction.
  • Control of income.
  • Control of whether to stay in bankruptcy

In the face of a creditor who is entitled to levy, garnish, and harass, Chapter 13 lets the debtor-client stay at the helm of their financial life.

You call the shots

The basic difference between Chapter 7 and Chapter 13 is the role of the bankruptcy trustee.  In 7, the trustee may take possession of your non-exempt assets to sell for benefit of creditors.

A Chapter 7 trustee is entitled to sue people you’ve paid off just before bankruptcy and to assert his own view of the value of your assets.  Chapter 7 can be uncomfortable and risky.

In 13, you commit to a payment plan that gives creditors at least what they would have gotten if a Chapter 7 trustee scooped up your stuff, sued your family members, and otherwise wreaked havoc in your life.

How a Chapter 13 plan is calculated

You stay in possession of your assets and in control of your income.

You write the plan that says how much you pay into your plan a month, within the requirements of the law.  The Chapter 13 trustee just cashes your check, and pays creditors as the plan directs.

The automatic stay prevents the continuation of litigation or collection action outside the court.

You’ve rounded up all the folks to whom you owe money and corralled them in the bankruptcy court, where the bankruptcy rules apply.

You’re on your way to getting control of the situation.

Even judgment creditors bound

The appeal of Chapter 13 for several of my recent clients involves the way Chapter 13 limits how much of their income going forward is exposed to judgment creditors.

Outside of bankruptcy, a creditor with a California judgment can reach 25% of a person’s after-tax paycheck.  I don’t know many individuals who can meet their other financial obligations with only 75% of their paycheck.

Sure, you can argue that you can’t live on 75%, but you have to work through the state courts to reduce the amount a judgment creditor can get.

In Chapter 13, the means test, which I usually detest, saves the day.  It has a formula for calculating what is genuinely available to pay run-of-the-mill creditors.

That’s creditors as a whole.

Lumped together, creditors share their slice of the available pie.

General unsecured creditors in Chapter 13, under the means test, get what’s left after:

  • Rent or mortgage payments
  • Car payments
  • Health care
  • Child care
  • Delinquent taxes
  • Support of dependent elders

I don’t think I’ve ever seen a Chapter 13 payment to general unsecured creditors that equaled 25% of my client’s after tax income.

So in addition to simplifying the process of how much a legitimate creditor gets, almost invariably, Chapter 13 reduces the absolute amount that the creditors get.

And the Chapter 13 debtor is assured of having control of his paycheck so his current living expenses are met.

Note that this analysis applies even to debts like student loans:  while the student loan may survive the Chapter 13 discharge, the amount paid out on the loan is limited by the means test and the claims of other creditors.

Time is on your side

Chapter 13 has a maximum length of 5 years.  The life of a judgment is generally far longer.  A California judgment is good for 10 years, and can be renewed for another 10.

So a Chapter 13 plan can halve the length of time your earnings are exposed to your creditor.

It may not be pleasant to be in bankruptcy for 5 years, but it shortens duration of the pain considerably.

Another time-related benefit of 13 is the durability of the Chapter 13 plan.   Plan terms are worked out and approved by the court at the beginning of the case.  Absent a marked improvement in your ability to pay creditors, the plan controls.

Chapter 13 has none of the periodic  judgment-debtor examinations that are features of state law.  Your time commitment to managing old debts is limited.

Chapter 13 keeps you in control

So, Chapter 13 isn’t just about protecting assets.  If you have a paycheck, or a small business, and have creditors you can’t pay, Chapter 13 works to let you to chart a course out of debt, on your terms.

Image courtesy of Terence Faircloth under a Creative Commons license.

4 Compelling Reasons To File The Tax Return Even If You Can’t Pay

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Should you file the tax return if you can’t pay the tax?

You got to the bottom of your tax return and the amount you owe is bigger than your checkbook balance.

  • Scared of filing the return for fear of immediate collection action?
  • Scared of even calculating how much you owe?  think an extension of time to file looks good?
  • Fearful that you’ll be hanging a sign around your neck:  squeeze this guy?

Nope.  It doesn’t work that way.

The IRS does not start harassing nonpayers for money on April 16th.  Or even September 16th.  They haven’t even posted the returns that have been filed by then.

Relax, breathe deeply, and file the return.

There are far more advantages to getting the return on file than risks in admitting you owe money you can’t pay.

Easy tax payment plans available

If you can’t pay the full amount of the tax owed, send a partial payment with your return.  Reduce  your debt to the tax folks as much as you can.

Nothing requires that you enter into an installment agreement for payment.  Simply send money regularly toward retiring the tax.

Put your name, social security number and the tax year you want the money credited to on the check.

If you feel the need for a formal payment agreement with the feds, you can set up a payment plan, online, if you owe less than $50,000.

Separate penalties for failure to file

If you fail to file a tax return and don’t get an extension, you expose yourself to a separate penalty for failure to file the return.

That’s on top of the penalty for failure to pay as required.

So, it’s expensive to try to drop out of sight.

Filing returns start clock ticking on escape options

Taxes don’t live forever.

There’s a collection statute of limitations that makes taxes uncollectable.  Bankruptcy laws permit the discharge of taxes of a certain age long before they expire of old age.

But both escape routes for delinquent taxes start counting from the filing of your tax return.  (More precisely, the statute of limitations starts from assessment, but filing the return is a self assessment).

Last year’s figures drive this year’s withholding

The most important reason to prepare last year’s tax return now is to get your withholding right for the current year.

Extensions to file are seductive, but dangerous.  It delays adjusting your withholding long into the current tax year to match your actual tax liability.  You don’t want to be in the hole again, do you?,

If you put off calculating just how much you owe for last year til October, you have only a few months before next April to get this year’s taxes paid in.

Closing your eyes to an underwithholding problem won’t make it go away.

Calculate what you owe, make a plan to pay it if possible, and fix your withholding or quarterly payments so you’re OK next year.

More

Tax on cancelled debt

Tackling tax liens in Chapter 13

Stop making quarterly tax payments

When You Can’t Make Your Chapter 13 Payments

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going nowhere

When your wallet’s as flat as this tire and you can’t make your Chapter 13 plan payments, what do  you do?

Chapter 13 promised a chance to reorganize, keep what’s important, and get out of a financial hole.

But it just isn’t working.

What now?

In good lawyer style, I’ve got to tell you:  it depends.

It depends on why you’re in Chapter 13;  what’s happened that you can’t make the Chapter 13 plan payment; and what your goals are/were for your bankruptcy case.

Is the money problem going to last?

First question:  is the problem with your cash flow temporary or longer term?  When the problem is an unexpected expense or a short interruption in income, your case may be easily salvageable.

Some trustees allow an informal suspension of payments, or a plan to catch up on the court approved payment plan.

Others may require a formal plan modification, that confirms a payment schedule different than the one originally proposed.

Asset or income driven?

The degree of flexibility you have to adjust your plan payments depends in part on how the amount you’re paying to unsecured creditors was calculated.

To be confirmed, a plan has to provide unsecured creditors the larger of

  • what they would get if you had filed Chapter 7 instead of 13,

OR

  • your monthly disposable income calculated under the means test

If your plan is income driven, and your income goes down, it’s relatively easy to modify your plan.

On the other hand, if your plan is driven by the value of your non exempt assets, to get a Chapter 13 discharge, creditors need to get the total distribution originally calculated.  So, modification can restructure the payments, but the sum of those payments remains unchanged.

Goals of your Chapter 13

Over-optimism causes lots of plan breakdowns.

Often, those in bankruptcy start out determined to save the house from foreclosure, or to keep the timeshare, or the pricey car.  Reality, or later changes, may say that it simply isn’t possible.

Your goals may have to change if the income available simply doesn’t stretch that far.

Chapter 13 plan fixes

You’ve got four basic alternatives if you can’t catch up quickly and informally.

Modify your plan – figure out which goals are feasible and how much income is available.  Propose a plan that’s consistent.

Convert to Chapter 7 – consider whether under the present facts, you’d be better off in Chapter 7.

Dismiss your case – dismissal is always available in Chapter 13.  That’s why I like 13 so much.  Dismissal could be a chance to start a new case, with new timelines and new values.

Hardship discharge –  under certain circumstances, you can get the benefits of the Chapter 13 discharge without completing the payment plan.

So, the good news is that there are choices.  Get help from your bankruptcy lawyer evaluating which works best for you.

More

Changing lawyers mid case

Image courtesy of Michael Sclaldone under a Creative Commons license.

How To Pick A Bankruptcy Lawyer

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interview a bankruptcy lawyer

How do you pick a bankruptcy lawyer when you’ve never hired any lawyer and never before considered filing bankruptcy?

What do you ask a bankruptcy lawyer to determine if the lawyer is the right one for you? After all, the conversation has to move beyond “what does bankruptcy cost?”

Financial troubles are tough and bankruptcy can seem scary.

So, you want to find a lawyer who can make it easier. You need to know if bankruptcy is really the right thing for you.

But what do you ask a prospective lawyer to make your decision?

Interviewing a bankruptcy lawyer

Actually, it probably doesn’t matter what you ask.

It matters how the lawyer answers.

Here’s a starter set of questions to get the conversation going

1.  Do I have a meaningful alternative to bankruptcy?

Asking about alternatives to bankruptcy allows the lawyer to talk about the scope of your financial difficulties.  

It allows you to gauge whether the lawyer can only see you as a buyer for what he sells. Or, has the lawyer considered both issues and timing to see if you need bankruptcy.

In fact, most people who sit down with a bankruptcy lawyer really need bankruptcy.  They have ignored the signs that the situation is beyond repair for a long time.

So, the answer that bankruptcy is appropriate isn’t a black mark on the lawyer.  Inability to explain why the alternatives don’t work well is a negative.

2.  What’s the most serious complication for me?

Few cases are problem-free.  Whether it’s protecting assets, passing the means test, or finding the money to fund a Chapter 13,  almost every set of facts has bankruptcy challenges.

You want to know if the lawyer is forthcoming about the expected rough spots.  Can he talk candidly about what might be challenging in your case?

3.   How many cases like mine have you handled?

While the answer may be short, you do want to talk about the lawyer’s bankruptcy experience.  Generally, the larger portion of a lawyer’s work load that is bankruptcy, the better.

Bankruptcy is a recognized legal specialty and if your case has a complexity, experience is an asset on your bankruptcy team.

4.  Who will work on my case?

A bankruptcy legal team usually includes both a lawyer and staff.  Much of the work in preparing the all important schedules is routine.

What you want to avoid, however, is a business model where all the work and the analysis is done by those without a law degree.  Bankruptcy is not just “filling out forms”.   Each answer in the form has a legal consequence that’s important to your case.

Ask, too, how you and the lawyer will communicate when you have questions during the process.

5.  What is not included in your fee?

Those drowning in bills often think price is important in picking a lawyer.

From experience, about the only time I think it’s important is when the price is unreasonably low.  Either you aren’t getting much service at that price, or the lawyer can’t compete on quality and therefore cuts the fee.

Ask if lien avoidance or reaffirmation issues are extra.  Ask if there are costs beyond the court’s filing fee that you must pay.  Ask about representation should there be a trustee audit, a 2004 examination, or an adversary proceeding.

It’s attitude that matters

As I said at the top, these questions are as much about the lawyer’s approach to you and your case as they are about the answers.

  • Is the lawyer comfortable with you driving the agenda?
  • Can he/she explain admittedly complicated matters clearly in a way you understand?
  • Are your questions welcomed?

If communication between you and your lawyer  isn’t open and valued, there’s trouble ahead.  You need to be comfortable enough with the relationship to disclose the troubling or the embarrassing.  Otherwise, you and your lawyer are playing without a full deck.

It needs to be OK to say “I don’t understand” or “I’m worried”.  Otherwise, you may be setting off into the bankruptcy jungle without a current map or an adequate guide.

Don’t be afraid to leave an initial meeting with a lawyer without making a commitment.  If you are uncertain about the fit, think it over.

Or interview another lawyer.  Several data points will make things clearer.

Chapter 13 To The Rescue In Ruinous Business Lawsuit

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rescued

Twice in the last six months, Chapter 13 bankruptcy has saved clients facing catastrophic lawsuits arising out of business.

And because the targets of these lawsuits filed bankruptcy before they’d spent a fortune on lawyers and before the court had a chance to award huge damages, they fit beneath the Chapter 13 debt limits.

We think of Chapter 13 as a consumer tool.  It’s designed for those with a regular income.  It’s sometimes called a wage earner plan.  The amount of debt involved has to be below certain limits.

So, Chapter 13’s application to business lawsuits isn’t obvious.

But it works like a charm.

Here’s how Chapter 13 rescued one client sued about a business dispute.

Chapter 13 filed before judgment

Chapter 13 is not available to everyone.  Only individuals can file.  Their debts must fall below certain amounts.

But, critically, the debt limits in Chapter 13 apply to debts that are liquidated.  That means that the amount of money owing is fixed.

Liquidate:  to determine the amount of indebtedness or damages.

The lawsuit my client faced asked for “damages according to proof”.  The former business associate claimed many measures of harm, all of which was disputed.  The claim was unliquidated; you couldn’t see or calculate the claim from the face of the complaint.

The suit could not be ignored.  And given the attitude of the plaintiff, the seriousness of the allegations, and the complexity of the case, it was going to be expensive to try.  And ruinous if the plaintiff won.

By filing Chapter 13 before trial, the claim was UNliquidated when the bankruptcy was filed.

No matter how much the plaintiff claimed was owed, because no amount of damages had been determined before the bankruptcy was filed, the unliquidated debt didn’t count against the Chapter 13 debt caps. [For context, when the plaintiff later filed a claim, he sought $15,000,000!]

Why Chapter 13 rocks

Chapter 13 offers eyepopping advantages over other forms of bankruptcy that my client could have chosen.  The first advantage is that a debtor in Chapter 13 stays in possession and control of his assets during the case.

By contrast, in Chapter 7, a court appointed trustee takes legal control of the debtor’s assets.  The trustee is tasked with turning non exempt assets into cash for the benefit of creditors.

My client could have seen his home sold in a Chapter 7, long before it was determined if he really owed the former business associate anything.

In a Chapter 11, which has no debt caps, he could have stayed in possession of his assets.  But to confirm a Chapter 11 plan, he would have to get the votes of his creditors in favor of a plan.  An angry creditor with a large claim is unlikely to vote for a plan the debtor sees as desireable.

In Chapter 13, the role of creditors in approving a plan is much smaller.  A creditor can object only on certain grounds found in the bankruptcy code.  Being unhappy with the amount being paid to creditors is not one of the permissible objections.

Confirmation tests for Chapter 13

Not to mention that the legal fees in Chapter 11 are invariably much larger than in Chapter 13.

Plan confirmation limits the damage

When the Chapter 13 plan proposed by my client was confirmed, that plan effectively limited for all time the amount he’d have to pay to put all of his debts behind him.

Where a creditor with a California judgment can collect that judgment for 10 years, and renew it for another 10 years, confirmation of a Chapter 13 plan limits what creditors get.  The pot of money the debtor will create through the plan equals the amount that would have been paid to creditors if the bankruptcy case had been Chapter 7 instead of Chapter 13.

Importantly, the amount a Chapter 7 trustee would distribute is what’s left when the trustee’s expenses have been paid, any capital gains taxes have been paid, and any claims with priority over unsecured creditors have been paid.

Instead of his wages and his acquisitions for the next 10 or 20 years being exposed to levy to pay a judgment, now the client has a 5 year payment plan based on the value of his assets on the day he filed bankruptcy.

Appreciation in value and improvement in financial circumstances all remain with the debtor.

What plaintiff gets if he wins

Confirmation of a Chapter 13 plan which fixes the total amount that unsecured creditors get on their claims limits the up-side to the vicious plaintiff.

The dispute about whether my client owes this guy anything is ongoing;  since we objected to the $15 M claim, the dispute has to be decided somewhere.

If the debtor wins, his other creditors don’t have to share the pot of money created by the plan with plaintiff.

If plaintiff wins and fixes the amount that the debtor owes him, he gets only a larger slice of the same “pie”.  Whether he is owed fifteen dollars or $15, 000,000, plaintiff’s recovery is limited to a share of the money going through the Chapter 13.

At the end of the Chapter 13, any part of the judgment that hasn’t been paid is discharged.

Some pain remains

It’s not going to be a free ride.  My client has been forced to file bankruptcy and still has to pay for representation in the bankruptcy case and for his trial lawyers.

The litigation over plaintiff’s claim won’t be pleasant.

He faces five years of plan payments to fund the Chapter 13 plan.

But even an adverse result at trial will not blot his life for the foreseeable future.

That’s why our legal system favors a fresh start through bankruptcy.  And why I’m a huge fan of Chapter 13.

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

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