2019 Archives - Northern California Bankruptcy Lawyer

DIK Remedies For Foreclosure Breed Bankruptcy Tragedies

Warning: virulent outbreak of do-it-yourself bankruptcies all around.

Symptoms: panic over prospect of foreclosure

Supposed remedy: file your own skeleton Chapter 13 bankruptcy

Prognosis: enjoy the stay for about 2 weeks, followed by foreclosure relapse

Homeowners facing foreclosure

Three different would-be clients called in a 10 day period this month, facing foreclosure. And all three had the same tragic, but avoidable story.

I was on the trail of an epidemic.

Each had filed an emergency bankruptcy petition to address a looming foreclosure. They then did nothing to file the balance of the schedules necessary in their cases.

How dismissal differs from discharge

Without schedules, the case was dismissed, automatically. No court hearing, just tossed out for failure to follow the order that says “you’ve got two weeks to file the rest of the papers”.

And they did the same thing all over again a little bit later, again filing only the bare minimum of paperwork, before the second case is dismissed.

With two cases dismissed in the past 12 months, there will be no automatic stay in a third case. The bankruptcy won’t prevent the lender from foreclosing.

As a bankruptcy attorney, my bag of remedies was essentially empty.

Why homeowners sucked in

I understand the appeal of the automatic stay: it’s a lynch-pin of bankruptcy relief.

The automatic stay is powerful: it applies to all creditors, it makes actions in violation of the stay void, and it becomes effective instantly upon filing bankruptcy.

The necessary paperwork to initiate a case is minimal, and the filing fee is just over $300.

Pretty seductive if you are panicked about losing your home.

Multiple filings labeled abuse

The pattern of debtors filing, getting dismissed, and filing again irked lawmakers back when the last round of bankruptcy amendments passed Congress in 2005.

After “reform”, every debtor gets a stay in their case.

File a second case within 12 months after the first was dismissed, and the stay lasts only 30 days. The court will consider extending the stay if the debtor applies and gets an order within that 30 days.

File a third case, after two dismissals within 12 months, and there simply is no stay.

Chapter 13 can save your home

The tragedy in all of this is that Chapter 13 works, if you want more than just a two week stay. Few problems that threaten foreclosure can be solved in two weeks.

How 13 can save your home

Understand that letting your case be dismissed cripples your ability to use bankruptcy in another case.

What should bankruptcy cost

How to interview a bankruptcy lawyer

Don’t wait til the day before foreclosure

Image courtesy of torange.biz.

California Homestead Works In Other States, Too

By Cathy Moran

California homestead law drives bankruptcy exemptions even for those who no longer live in California.

Strange, when the homestead statute was state law originally written for Californians.

Two things have expanded its reach: bankruptcy “reform” and the concept of extraterritoriality.

The third driver, of course, is mobility: we seem much more likely these days to have moved between states.

I was reminded of the long reach of the homestead last week by a call from a couple in Colorado.

They used to live here, were filing bankruptcy in Colorado, and wondered if they could use the California homestead to protect their Colorado home.

The answer, on their facts, is YES.

So here’s how that works.

California exemptions for former residents

The 2005 amendments to bankruptcy law tried to limit debtors from moving to a state with more generous exemptions before filing bankruptcy.

Several states, most notably Texas and Florida, have an unlimited exemption for the value of your home. Shack or Taj Mahal, if you live there, it’s protected from creditors.

So the Congressional “fix” was to say that if you hadn’t lived for two years in the state where you filed bankruptcy, you must use the exemptions from the state in which you lived two years ago. (It has a few more wrinkles, but broadly, that’s the new law.)

The folks on the phone were California residents two years ago. They “must” use California exemptions to protect their home in Colorado, where they will file.

Instead of the $75,000 homestead in Colorado, they can claim the $100,000 exemption provided in California law at the time.

Neat.

Homestead beyond California

Extraterritorial is a long word for the idea that the state law in question applies to property outside the territory of the state.

The concept gained importance with the 2005 changes to bankruptcy law. What if the state you lived in two years ago doesn’t allow extraterritoriality?

Some states hold their exemptions have extraterritorial effect; other deny extraterritoriality.

North Carolina, for example, limits use of its state exemptions to residents of North Carolina. See the lawyerly piece by my friend Billy Brewer.

By contrast, California’s exemption laws are available for property outside the state. The 9th Circuit case of Arrol, decided long before bankruptcy “reform”, allowed the debtor who had just moved back to Minnesota to claim a homestead the Michigan house in which he lived in a bankruptcy filed in California.

More on where you file and what you claim exempt

Bankruptcy law required that he file in California, having just moved back to Michigan less than six months ago. The appeals court said that California law, where his case was filed, applied to the home he was living in when he filed, even if it was outside the state of California.

California allowed extraterritorial application of its exemptions.

If Arrol had moved from North Carolina to California, he couldn’t use North Carolina exemptions because they don’t apply to non residents. The laws of North Carolina aren’t extraterritorial.

In that case, the debtor can use the federal bankruptcy exemptions if the exemptions of the required state aren’t available.

Home truths

The moral of this piece is bankruptcy can be complicated for the well-traveled debtor.

Choose an experienced bankruptcy lawyer; share the tale of your travels; and explore your exemption options.

California homestead is a superpower

A homestead isn’t what you think

Secret bankruptcy exemptions

Find The Right Cure for Your Debt Problems

By Cathy Moran

Get-out-of- debt advice and sales pitches abound.

Like this one.

But too few get-out-of-debt gurus tell you that you need a diagnosis of your financial ills before prescribing the cure.

Is the stomach ache indigestion or appendicitis?

Is it temporary upset or a life threatening money pit?

The answer makes a big difference in how you treat it.

No single prescription for debt

A doctor treating your illness wants to know your age, your medical history, other medical conditions along with your symptoms.

Same sort of questions arise if debt is what ails you.

Age
Dependents
Current income
Assets
Debt total

All of those factors interact to shape a treatment plan to get out of debt.

If you are on the cusp of retirement, you don’t have time to tackle big debt by cutting out frills in the budget.

If you are young, single, suitably employed, the prescription may be different.

So don’t take to heart every buckle-down-and-pay scheme you find on the internet.

Too little, too late

Most get-out-of-debt advice is better suited for living economically after you’ve solved the debt problem.

Fewer lattes, more eating at home, less entertainment spending.

Compare bankruptcy with payment plans

That may work to get out of debt if you have time, discipline, and modest debt to start with.

But the starting point is comparing your income to your debt, in light of your fixed expenses.

How big is the problem? To bring it down, do you require a pellet gun or a bazooka?

How precarious are things

The final question is how risky is the treatment?

Think of the endless lists of common side effects and serious complications listed with every medicine you take.

When the ailment is debt, the risk is living with no reserves. A recent study found 40% of Americans couldn’t pay for a $400 emergency without borrowing.

Four hundred dollars isn’t much in this economy. Yet a $400 expense would imperil a huge swath of our citizens.

It’s easy to fool yourself into thinking that you aren’t likely to face an emergency. Yet, look at this list of pretty mundane things that require a $500 fix.

None of those are so far fetched that they couldn’t happen to any of us.

So living without a financial safety net in order to pay of big debt is big-time risky.

Here’s a further discussion of my diagnostic of your debt alternatives: when to hold and when to fold.

Bankruptcy Discharge Slays IRS Form 1099

By Cathy Moran

In a duel between a tax Form 1099 and a bankruptcy discharge, bankruptcy wins every time.

The prize? no tax on debt discharged in bankruptcy.

So, if you’ve already gotten your discharge, the creditor’s 1099, with your social security number on it, is no threat.

But you do need to file another form to secure the prize.

Bankruptcy is exception to tax

Normally, when an obligation is forgiven, the tax code treats the amount of forgiveness as if it were income. And income is exposed to tax.

Insolvency is another exception to tax on forgiven debt

But forgiveness in bankruptcy in the first exception to the rule.

Debt forgiven in bankruptcy is not treated as income.

Creditor is clueless

So, if bankruptcy is outside the IRS rule, why are you getting a form 1099?

Because there’s another rule, requiring creditors to report to the IRS, just the way your employer is required to send the IRS your W-2.

And seemingly, the creditor can’t figure out that the reason its claim is worthless is because of the bankruptcy discharge. So it’s easier for the creditor to just send out Form 1099, and make it your problem.

Fixing the 1099 problem

The solution is simple: file IRS form 982.

Title 11 is the part of the United States Code on bankruptcy. Cases are filed under different chapters of that title

Form 982 is your rebuttal to the report that you have taxable income because your debt was forgiven. Check the very first box on the form claiming the bankruptcy exception.

This debt is excluded from income because of Discharge of indebtedness in a title 11 case

The IRS provides a set of instructions for filing your “get out of tax” form. Form 982 Instructions.

Other tax consequences of discharge

If you have real property, you may have to reduce your basis in assets by the amount of debt discharged in your bankruptcy.

But thankfully, there is an exception to this rule too: no reduction in basis is required with respect to your principal residence claimed exempt in your bankruptcy case. IRC 1017(c).

Tax action plan

So there you have the skinny on form 1099 and your bankruptcy discharge.

Bankruptcy has other tax implications:

Taxes dischargeable in bankruptcy

Unfiled tax years are never dischargeable

Chapter 13 gets an interest-free tax repayment plan

Your accountant needs to know about your bankruptcy

What to do with a flat-wrong 1099

What’s Wrong With Most Get-Out-Of-Debt Advice

By Cathy Moran

Get-out-of-debt gurus too often miss the essential truth known to every carpenter.

Measure twice, cut once

Too many trite lists of tips to help you get out of debt miss the vital first step.

Before you choose a get-out-of-debt path, assess your situation.

When you put bankruptcy at the bottom of the list, to be chosen only after everything else has failed, you may spend a lot of time hopelessly floundering. A lot of stress. A lot of cash spent without achieving your goal.

Instead

Measure the size of your problem.

Inventory the tools you have available.

Know how long you have to get the job done.

There’s little point in attacking substantial tax debt by cutting out Starbucks. Nor is bankruptcy the right tool for a couple thousand dollars in credit card debt.

There’s no one-size-fits-all when it comes to debt. Whip out your financial tape measure, and check the factors that make a difference here.

Bankruptcy Drives Credit Score Surprise

By Cathy Moran

Bankruptcy improved my client’s credit score, almost on the spot.

Before bankruptcy, a miserable credit score was no surprise. My client reported a 498 credit score before he filed.

What was surprising is that, three month after he filed bankruptcy, his score was 614!

That’s a 116 point increase in his score in three months.

That’s while his bankruptcy case is still active, and long before he gets a Chapter 13 discharge.

So let’s hear no more about bankruptcy always trashing your credit score.

More importantly, let’s stop focusing on credit scores as a measure of financial well being. After all, a credit score only claims to measure the liklihood of your paying back more debt.

Instead, focus on the health of your balance sheet. And enjoy the peace that comes with reduced debts.

What credit scores measure

Credit reports and credit scores explained

Credit scores are supposed to measure the likelihood that a borrower will repay future credit. Makes sense that lenders would want to measure that.

But credit scores are based on information found in credit reports. And credit reports are notoriously inaccurate. Twenty five percent of credit reports contain material errors, according to government studies.

Isn’t it ironic that the oh-so-precise number in your credit score is based on bad information? As we say in number-obsessed Silicon Valley: garbage in, garbage out.

Misuse of credit scores

As if inaccuracy isn’t bad enough, credit scores are increasingly used for issues far removed from the extension of credit. Auto insurance rates, utility service, employers and even immigration decisions are influenced by credit scores.

So questionable information from credit reports invades your life far beyond issues of consumer credit.

And, even worse, in my view, is the commercial exploitation for profit of consumer’s focus on credit scoring.

Credit anxiety is profitable

The widening use of credit scores outside of finance created a entire industry of supplying credit scores, weekly or monthly, to consumers.

Originally credit scores were used by lenders, internally. But these days, credit card companies, personal finance sites, and even my credit union, try to sell you access to your credit score.

And by the time they’ve convinced the public that their credit score is as vital a measure as blood pressure or body-mass index, lenders and debt collectors can use that belief to demonize bankruptcy.

But, as my client’s experience shows, it just isn’t so. (And a national study says credit scores trend immediately upward after bankruptcy.)

Credit reports heal

The most compelling reason to file bankruptcy

Life after bankruptcy

New California Bankruptcy Exemptions

By Cathy Moran

Californians filing bankruptcy got an increase in the exemptions that protect their assets on April 1, 2019.

New: exemptions for money in the bank added in 20202

Every three years, the dollar amounts are adjusted for changes in the cost of living.

Californians don’t get to protect possessions under the Bankruptcy Code’s exemptions. Instead, a California resident who files bankruptcy must use California exemption law. That’s the case even though bankruptcy is governed by federal law.

Don’t shed a tear for the bankruptcy exemptions: the state exemptions are arguably better.

You have a choice of two exemption systems. One choice is the standard California state law exemptions found in Code of Civil Procedure 704. These are the exemptions applicable in state law collections as well as bankruptcy.

The second choice, appealing to those without significant equity in their home, is the California bankruptcy exemptions found at CCP 703.140(b).

What do debtors get to keep

Here’s the new list of increasedCalifornia bankruptcy exemptions:

Principal residence	$29,275
Vehicles	$5,860
Household goods per item	$725
Jewelry	$1,750
Grubstake	$1,550
Business assets	$8,725
Loan value of life insurance	$15,650
Personal injury claims	$29,275
Other misc. exemptions	703.140

Californians, because they are required to choose one state exemption system or the other rather than the federal bankruptcy exemptions, can also use the federal list of non bankruptcy exemptions.

Bankruptcy wild card exemption

The trickiest part of the California bankruptcy exemptions is what’s called the “wild card”. (It’s also called the “grubstake”.) When 703.140(b)(1) and (b)(5) are added together, the debtor can protect $30,825 of equity in any asset or combination of assets. That’s the wild card.

The wild card amount can be parceled out to protect some cash in a bank account; some equity in a vehicle that exceeds the car exemption; stock; a business or whatever else you have.

The point is that the exemption isn’t restricted to a certain kind of property. It can be used to protect anything.

How exemptions work

Exemptions protect the specified amount of equity in an asset.

If it’s a house, the exemption protects a certain amount of value in the property that exceeds the liens on the property. It doesn’t matter if the value of the house is $200,000 or $1,200,000. The exemption protects the specified amount of equity in the house.

Homestead amount slated for large increase in fall of 2020.

If there is equity in a house over and above the total of liens and the homestead, a Chapter 7 trustee can sell the house and give the debtor the homestead exemption in cash.

That doesn’t happen very often. Because, there has to be enough equity to pay the exemption, the costs of sale, any capital gains taxes and the trustee’s commission before the sale benefits creditors.

More about secret exemptions

If neither California exemption system adequately protects your assets, consider Chapter 13.

Exemptions in Chapter 13

Debts of spouses

k2d2vaca.

How Chapter 13 Saves You Money

By Cathy Moran

Why should I file Chapter 13 if I have to pay all my creditors in full?

Because, I said, even a 100% repayment plan under Chapter 13 saves you money.

This client had a fistful of equity in a home; that equity made a Chapter 13 the required choice of chapter for the man.

But he struggled with finding the benefit of using Chapter 13 to manage his debt.

I never would have filed bankruptcy if I realized I had to pay everyone 100%.

So I fired up Excel and crunched numbers to quantify the answer to “why file“. In this client’s case, the answer was $20,000.

When asset value drives Chapter 13 payment

Chapter 13 saved $20,000 over 5 years when compared to paying all the creditors what they were owed outside of bankruptcy.

It’s all about the interest rate

At base, the $20,000 bankruptcy savings for this client flowed from the difference between the interest rate in bankruptcy compared to the interest rates on taxes and credit cards in the non-bankruptcy world.

When creditors are entitled to get interest on their claims in bankruptcy, the interest rate that applies is the federal judgment rate. When I did this exercise, the federal interest rate was 2.35%. Find today’s judgment rate.

By contrast, I assumed credit card interest rate of 23% and the IRS interest rate to be 6%.

13 crushes credit card debt

Paying the approximately $39,000 in credit cards in 5 years (the same duration as the Chapter 13 plan) according to contract terms cost $27,000 in interest! The total cost to pay off those cards was roughly $69,000.

The cost to pay off the same $39,000 in cards in Chapter 13 was $2250 in interest and $4121 in Chapter 13 trustee commission (assuming the maximum allowed rate of 10% of dollars the trustee receives.)

So, which would you rather pay to keep your house and get rid of your credit cards: $27,000 or $6365?

Point: Chapter 13

Taxes score a draw

The savings on paying off taxes through Chapter 13 was less dramatic.

We were looking at $46,000 in taxes, some priority, some older than that. To pay them off outside of bankruptcy would run up about $7300 in interest.

Paying those same taxes in Chapter 13 incurred $2550 in interest. But when you added the trustee’s commission to the bankruptcy interest, the transaction costs essentially equaled the cost of paying the taxes outside of bankruptcy.

Point: neither side

Snoozing creditors lose

The unpredictable further savings may lie in creditor ineptitude. That’s because only creditors who file a timely proof of claim in a bankruptcy case share in the payments.

In my experience, it’s the rare case when every creditor follows through and files a claim.

So my client will get a discharge of all his liability to creditors who don’t file claims, without paying them a cent.

Point: too soon to tell

Non economic benefits

Here, we looked only at the dollars and cents differences between paying everyone in bankruptcy or outside of bankruptcy.

Not visible in a spreadsheet is the reduced stress that Chapter 13 brings, by corralling all creditors in a single proceeding and having the law to back you up on the schedule on which they are paid.

Stress kills

Chapter 13 keeps you in control of your assets, protected by law, while you pay off what you owe.

How Chapter 13 can save your house

Credit Scores Trend Upward After Bankruptcy

By Cathy Moran

After bankruptcy, credit scores go steadily up, says a 17 year study released by the Consumer Financial Protection Bureau.

Got that? Go UP. Every year.

Importantly, credit scores start improving the same year that the bankruptcy is filed.

Think on that for a moment.

How collectors stoke fears about bankruptcy

Creditors and their shills shout that bankruptcy trashes your credit score; the data show just the opposite. There’s no dip post filing, but instead an immediate uptick.

This is how the CFPB puts it:

Median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition.

Median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers possibly due to the much quicker and more likely discharge of Chapter 7 filings. http://bit.ly/33kgOaf

Bankruptcy improves your balance sheet

Let’s be clear about what is important in your financial health. Your credit score is far less important in the big picture than your balance sheet.

Credit scores are a side show

A balance sheet looks at what you own and what you owe. That’s the information that appears on a loan application.

Ditch the debt in bankruptcy and there’s less debt to weigh down your net worth.

Goose your credit score

You can take actions that may increase the rate of improvement.

Remember that credit scores are based on credit reports. And credit reports are notoriously inaccurate.

A government study in 2012 found that between 20 and 25% of credit reports had material errors.

Rest assured that the rate of errors on your credit report does not go down when you file bankruptcy. That’s why you should pull your credit report a few months after you get your discharge, and look for errors.

Attorney Mike Cardoza lays out how to do that in How To Spot Credit Report Errors After Your Bankruptcy & Fix Them.

Is bankruptcy the right choice

Just because bankruptcy may improve your credit score is not a reason to file bankruptcy. It’s just an issue to take off list of reasons not to file.

Lots of different facts influence whether bankruptcy is right, and whether the time is now.

I look at those factors in What Kenny Rogers Teaches Us About Getting Out Of Debt.

Homeowners facing foreclosure

Why homeowners sucked in

Multiple filings labeled abuse

Chapter 13 can save your home

More

Social Security numbers don’t get suspended

IRS lists latest identity scams

More

California exemptions for former residents

Homestead beyond California

Home truths

More

No single prescription for debt

Too little, too late

How precarious are things

Bankruptcy is exception to tax

Creditor is clueless

Fixing the 1099 problem

Other tax consequences of discharge

Tax action plan

What credit scores measure

Misuse of credit scores

Credit anxiety is profitable

More

What do debtors get to keep

Bankruptcy wild card exemption

How exemptions work

More

It’s all about the interest rate

13 crushes credit card debt

Taxes score a draw

Snoozing creditors lose

Non economic benefits

More

Bankruptcy improves your balance sheet

Goose your credit score

Is bankruptcy the right choice

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