Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

The bankruptcy rule changes from Bankruptcy Abuse Prevention and Consumer Protection Act 0f 2005, or BAPCPA, created the Means Test formula for determining whether a consumer qualified to file bankruptcy under Chapter 7 of the Bankruptcy Code. Basically, the means testing requires that the debtor’s income must be below the median level for households, using Census Bureau and IRS standards. 

Based on your current income and expenses you have determined that you qualify to file bankruptcy under Chapter 7 and file your case in good faith. Now, enters the United States Trustee. The Trustee’s role in a Chapter 7 case, is to determine whether your estate has any assets that can be sold to pay your debts, or whether you have income to pay at least a portion of your debts, pursuant to 11 U.S.C. § 707(b)(3)(B). 

A June, 2010 decision by Bankruptcy Judge Randall L. Dunn, in In re Stubblefield (Bankr. D. Or. 2010) granted the U.S. Trustee’s motion to dismiss the debtor’s case pursuant to Section 707(b)(3) because the debtor’s ability to pay creditors through Chapter 13 is of primary importance when considering whether the Chapter 7 filing is an abuse. The Court determined that although the debtor’s income had declined, under the totality of the circumstances and using the six factors outlined in Price (In re Price, 353 F.3d 1135 (9^th Cir. 2004)), the debtor’s ability to pay a substantial portion of her unsecured debts was of primary importance. 

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Let's face it, we are in tough financial times throughout our country.  There are many options to dealing with money issues.  Along with tough financial times comes stress, even depression, anxiety and fear.  Our emotions are tied very closely to our relationship with money.  Here are a few tools that just might help you gain some perspective.

Take a look at this WebMD article, The Debt-Stress Connection and notice where you might be in terms of your stress level about your current financial situation.  Your life is much too precious to lose over your debts.  It's important to start right where you are and decide to take action; whatever action is necessary to change the outcome. What is the worst that could happen to you financially?  Most people don't answer the question with any health issues, but that's what you're facing if you remain paralyzed about the situation.

Take action and get help.  I'm a big fan of the Dave Ramsey program for those of you that have the ability to climb out of debt without bankruptcy.  Learn about financial planning and get yourself on a budget today.  Have a reality check with your doctor, your tax professional, financial planner and your bankruptcy lawyer.

Vision your life in five years.  What does your life in the future look like?  Where will you live?  How will you provide for your self?  Your family?  Imagine what that looks like and then decide the path that is right for you to get there.  For some, it's creating a budget and sticking to it.  For others, it means filing for bankruptcy. The sooner you commit to your future, the sooner you'll feel better.

Remember that financial responsibility requires that we make some tough choices in our lives.  Filing bankruptcy is not the end, but a process toward a new beginning.

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I know what you've been told because I have heard it all too.  The government wants you to do your very best to avoid bankruptcy at all cost.  Bankruptcy is bad; or at least, a harsh remedy to dealing with debt, and should be your last resort.  We have all bought into this 'agreement reality' and it couldn't be further from the truth.

I assert, bankruptcy is a powerful tool that should be considered in your overall financial plan that includes eliminating debts.  Adrian Lapas, over at Bankruptcy Law Network explained the pitfalls of debt settlement by warning of 1099 tax bills for canceled debts; and even creditor's unwillingness to negotiate a settlement at all.  Oh, and I'm really tired of discussing your credit  score because it's already been adversely affected by your not making your payments on time. In fact, filing bankruptcy might actually improve your credit score once all that bad debt is cleared from your credit report. 

I've had clients come to me after signing up with these debt settlement companies and spending nearly $10,000 on fees, only to find themselves in lawsuits with their creditors that these companies warned them about and would not help them with.  Remember that if you negotiate your settled debts, you're still paying money toward them and you'd better have some cash saved up to pay it in full if they accept your offer.  Also, you must be prepared for that 1099 tax bill at the end of the year because you'll wind up paying taxes on that can celled debt.

Bankruptcy not only eliminates the debt without any payments from you, it will eliminate your liability entirely and you won't owe taxes on the debts that were discharged in the bankruptcy.  That's where bankruptcy as a tool, is more efficient and not only a powerful tool, but a cost saving device for you as well.

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Many a Creditor has driven us bankruptcy lawyers and our clients nuts with their antics, but freezing a client's bank account after their case has been filed takes the cake.  The Ninth Circuit BAP just released In re Mwangi Case No. 09-1408 (9th Cir.B.A.P., June 30, 2010), which held that Wells Fargo's national policy of placing administrative holds on accounts of persons filing a bankruptcy petition violates the automatic stay by exercising control over property of the estate.  The issue in Mwangi was their national procedure of running a computerized comparison of all newly filed Chapter 7 bankruptcy cases against Wells Fargo's list of account holders.  If they found a match of one of their account holders who had also filed bankruptcy, then Wells Fargo would immediately 'freeze' that account, preventing the debtor from having access to their money. 

It's no secret that Wells Fargo has been notorious for freezing the accounts of debtors filing bankruptcy under Chatper 7.  We also have it on good word that Wells Fargo will continue to hold funds while they appeal the Mwangi case. 

Keep in mind that your bank account is property of the estate upon filing your bankruptcy case that presumably includes the cash in your bank accounts.  So, don't go on a spending spree just yet.  Any Exempt funds are not exempt until 60 days after the conclusion of your meeting of creditors.  Technically, all of your assets, including cash on hand must be turned over the trustee to administer your estate, but that is just not practical.  This means that the law is not on your side here and while Wells Fargo can put a freeze on your accounts, they also must act prudently by asking for guidance and direction from the Trustee and/or Court as to what to do with your funds.

This reminds me of the term "vicious compliance."  This term seems to crop up in certain union worker circles when they don't like a particular ruling or law, they will strictly comply with it and demonstrate that it doesn't work and then use it against management by knowing it better.  So, if Wells Fargo wanted to 'viciously' comply with the law, they would stop freezing accounts and simply send all the money to the trustee.  No matter how you slice this ruling, Wells Fargo is still a big bully.

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Are you one of the many Americans caught up in the viscious grip of payday loans?  It seems, these days, that payday loan shops are replacing Starbucks on every corner.  It's the new business to be in with this depressed economy. Here's what happens when you obtain payday loans in your rup-up to filing for bankruptcy.

If you have presented a post-dated check as 'security' for the loan, when you file for bankruptcy, the payday lender will simply cash the check and hang on to the funds.  The lender can do this under 11 U.S.C. Sectioin 362(b)(11), which provides that the automatic stay does not apply to the presentment of a negotiable instrument and the giving of notice and protesting dishonor of such an instrument.

However, the overconfidence on the part of these payday lenders comes with a price.  One decision, In re Thomas, 311 B.R. 75 (W.D. Mo. 2004) provides that a post-petition transfer of funds out of the account by presentment of post-dated payday loan check could be avoided pursuant to 11 U.S.C. Section 549(a).  This means that you could bring an action to recover the funds as an unauthorized post-petition transfer.  Unfortunately, such actions are more costly than the amount transferred; which is why most debtors decline to bring an action under Section 549.

Ask your bankruptcy lawyer about their experience with repeat offenses by payday lenders because the creditor's willful violation of the automatic stay does give rise to actual damages, costs, and attorney fees; even punitive damages in some cases.  Don't think that these payday lenders have the upper hand just because they have your check in their hands.

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A bankruptcy will remain on your credit report for up to ten (10) years. However, the perceived hit to your credit is an illusion that your creditors don’t want you know about. You see, if you’re already experiencing wide spread defaults on your bills, or even your mortgage, then your credit score has already been adversely affected. 

In fact, not taking any action toward resolving your money problems will cause significant and long-term damage to your credit score. Late payments and defaults will stay on your credit report for up to seven (7) years and if those debts are not discharged or paid, they can haunt you for all eternity. The biggest hit to your credit score is unpaid debts; not a bankruptcy.

Filing bankruptcy will eliminate old debts and completely clear your credit report of all debts, period. This fresh start by filing bankruptcy, cleans the slate and can actually cause your credit score to go up. Yes, I said that your credit score will likely increase after bankruptcy. Your creditors don’t want you to know this and they will do everything they can to get you to pay them as much as possible.

The folks over at the National Bankruptcy Forum agree, according to their recent blog article entitled, “Has the Biggest Reason Not to File Bankruptcy Already Happened to You?” This article points to the fact that being late, or failing to pay your debts has more of a negative impact on your credit score than filing bankruptcy. Why continue to suffer and throw good money after bad? If you are considering bankruptcy, call your local bankruptcy lawyer today.

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Whether you're filing bankruptcy under Chapter 7 or 13 in California, you will get to keep most of your belongings and your home.  That is, if you have a home worth keeping.  Under the law, the keeping of assets is known as 'exemptions;' meaning the assets are exempt from being taken to pay your debts.  These exemptions can be found in the California Code of Civil Procedure Sections 703 and 704. 

On Schedule C of the bankruptcy forms, you will be required to state under which law you are applying your exemptions and you must use one or the other and cannot use both.  This is important to keep in mind because even though Bankruptcy Law is federal law, here in California, we have our own unique sets of exemptions that we can apply.

Don't lose your stuff in your attempt to eliminate your debts through bankruptcy by filing your own case.  Now, more than ever before, you need to consult with your local bankruptcy lawyer to protect your rights.

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I always tell my clients that your credit score only tells you one thing; how well you manage DEBT.  So, why would you want to go back into debt again after bankruptcy?  After all, don't you just want to enjoy the feeling of financial freedom from debt for as long as possible?  My first inclination would be  to strongly discourage you from ever getting into debt again, but I know you're an adult and you can do with your life and money as you please.  So, here are some suggestions I found from the folks over at the National Consumer Law Center on Using Credit Wisely After Bankruptcy. 

Lower interest rates. Just because you've filed bankruptcy; it doesn't mean that you will forever be stuck with high interest rate offers on credit.  In fact, I strongly encourage you to avoid those high cost, high interest rate predatory type lenders.  Run, don't walk away from anyone advertising, "Bad Credit?; No Credit? Bankruptcy? No Problem!"  You're guaranteed to get a loan from these lenders, but it will cost you more than it did to file bankruptcy in the first place.  Don't get pressured into signing any contract that you don't understand, or that cost too much just for the credit. 

Here's the deal.  You've worked hard to take responsibility for your financial well-being and now have your bankruptcy discharge.  You'll be able to get credit again and on good terms too, but don't you want better than that for yourself and your family?

Savings accounts.  Instead of debt and credit, consider setting money aside every month in a savings account to save for big ticket items.  Remember layaway?  Be your own lender and save money to buy what you want.  Chances are, if you have the cash in your account and actually have the money to buy that flat screen TV, it will be much harder to part with that cash than it would be to put it on a credit card and pay 29% interest.  There is a dysfunctional psychology to that.  So, if you can't afford it, save your money and pay cash instead.

Shop around.  Rich people do this all the time.  Shop around for services you need and use all the time, like groceries, phone service, insurance, etc. 

Ask for discounts.  I have found that negotiating and asking for discounts on things really makes a difference.  Here's a story:  I was at a do-it-yourself-store a few weeks back.  My boyfriend and I were shopping for area rugs for our living room.  We found one we could both agree on, but the only one left was the hanging sample.  It was in otherwise perfect condition hanging on the display clamps.  So, I told the representative that I would like for him to roll it up, give me a discount and send me on my way with the rug.  Now, mind you, they were already on sale and I was asking for an even greater marked down price.  He went to talk to his manager and brought back a hand written ticket and had taken another $50.00 off the price!  I am telling you that asking for a discount works. 

Read before you sign.  Don't be embarrassed because you don't understand a complex financial document.  You're not a lawyer.  Hey, I know some lawyers that don't understand complex financial products.  Remember that when you sign a legal document and enter into a contract, you're agreeing to what is in that document whether you read it, or understood it.  Be a well informed consumer.  If you don't understand the contract; don't sign it.  Just because something is being sold in the marketplace does not make it a good idea. 

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In this economy, all cross-sections of our community have been impacted.  Money matters to all of us.  Your local bankruptcy attorneys are working hard to dispel the lies and myths about filing bankruptcy.  It is imperative that the truth be told; bankruptcy is an important tool that will facilitate Economic Recovery for America.  That's why we're coming to the Long Beach Lesbian and Gay Pride Festival, May 15-16, 2010.

Attorney R. Grace Rodriguez is the sponsor of the Financial Wellness Clinic booth inside the festival.  Local Bankruptcy Attorneys will be on hand to answer your questions about debt relief options; fiancial wellness; tips to avoid bankruptcy; the bankruptcy process and life after bankruptcy.  A special note to homeowners:  Filing Bankruptcy Will Stop Foreclosure! 

The lesbian and Gay community has special legal needs when it comes to bankruptcy and financial wellness.  It is more important than ever to know your legal rights.  The attorneys will be dispensing valuable information and providing pricelss resources to the booth's viistors.  Be sure to look for the Financial Wellness Clinic Booth at this year's festival, held in Long Beach on May 15-16, 2010.  Be proud.  Be debt FREE.

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As a consumer debtor, you will usually have two options when deciding to file bankruptcy; Chapter 13 or 7 under the Bankruptcy Code.  The question is which is better?; and which one should you file?  The answers to these questions are as unique as your individual circumstances.

Under Chapter 7 of the Bankruptcy Code, you are declaring that you have no ability to pay your debts at all.  You are, in a sense, liquidating your estate.  From the moment you file your case under chapter 7, the trustee takes control and has the right to take any assets available to pay your debts.  However, you have certain rights to retain assets under California Code of Civil Procedure Sections 703 or 704.  This means, that you will be able to keep your home, cars, retirement accounts, personal belongings, up to the limits pursuant to the law. These cases usually conclude within about six (6) months.

Under Chapter 13, you are declaring that you have some disposable monthly income to apply toward your debts and you are asking the Court to allow you to restructure that debt over time and allow you to pay only what you can afford. 

Chapter 13 is, in my opinion, the best choice to save your home, dispute debts owed, and otherwise hold your creditors accountable for any mistakes in your debt obligations, accounting, collection activity, fraud or abuse.  These cases require a longer period of time, usually up to five (5) years, and there are additional reporting duties involved.  You are strongly discouraged from filing a chapter 13 bankruptcy without an attorney because of the additional local rules, accounting and reporting requirements. 

Most everyone has thought of filing bankruptcy as simply filling out a bunch of forms.  I would have said that before the BAPCPA in 2005.  Now, with the sub-prime mortgage meltdown and their complex financial contracts; scams, despair and desperation of the banking industry; and the complexities of the Bankruptcy Laws, you need to consult with your personal bankruptcy lawyer before your case is filed.  Your bankruptcy lawyer will save you time and money by reviewing your current financial situation and create strategic plan to eliminate your debt with the least amount of money out of your pocket.

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Let's talk about your retirement accounts as they relate to your decision to file for bankruptcy.  There are many varieties and vehicles for retirements savings that include pensions, 401k, 403b, IRA and Roth IRA accounts.  Perhaps there are others that I am not aware of.  As I have said before, DO NOT CASH OUT YOUR RETIREMENT TO PAY YOUR DEBTS.  Your retirement accounts are ONLY for retirement and should NEVER be accessed for any other reason. 

When you file bankruptcy, all of your assets become a part of your estate.  The trustee will have temporary control over that estate and can administer certain assets to pay debts.  However, some assets in your estate, including retirement accounts are exempt from being taken by the trustee. 

One great reason to hire an attorney to assist you in filing bankruptcy is pre-bankruptcy planning.  Your attorney will give you valuable advice before filing your bankruptcy case.  Converting non-exempt assets to exempt assets before filing a bankruptcy is not only non-fraudulent, your attorney has a duty to maximize this type of pre-bankruptcy planning.  Keep in mind the CA IRA has a "reasonably necessary" for retirement limit, in addition to limitations of contributions to only the tax deductible amount for each tax year.

The good news is yes, you can fund that IRA before filing bankruptcy.  Be sure to consult with your personal bankruptcy lawyer to ensure you're taking full advantage of your exemption rights.

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Let's face it; the economic recession is dragging on and there are no signs of improvement.  The government spending is the only spending that is propping up our economy.  So, when you hear in the news that spending is up, it's your federal government doing the spending with bailout money, and building projects for green technology; that's it.  We consumers are not so fortunate and I'm am proud to be counted with the majority who are paying down our debts, but why?  Why do we continue to be the slaves to our creditors who are increasing interest rates and charging extortion penalties when we're a day late?

Jay Jump, a Washington based consumer bankruptcy attorney addressed this very question in his recent blog post where he discusses, to a group of Realtors, that filing bankruptcy is personal financial responsibility.  His article is pretty lengthy and he admits that at the outset, but he's right on point.  We need to set our emotional high morality aside and look at our own households as small corporations and our families as our shareholders.  When you look at your financial affairs from the perspective of a business owner and who you owe a duty to; your family becomes the priority and your creditors take a back seat.  When you put your priorities in order, filing for bankruptcy makes sense in many cases.

Being financially responsible means cutting your losses before you lose everything.  It means leaving your retirement money where it belongs; for retirement.  When you are financially responsible and know that the numbers don't add up where you can feed your family and pay your debts, then the debts must be discharged in bankruptcy. 

You can transform your financial distress into financial freedom from the moment you sit down with your bankruptcy lawyer.  The stress is further reduced the moment the bankruptcy case is filed on your behalf.  Then, when your discharge notice arrives from the Court, you have done the very best you can and protected your small corporation, Your Family, from financial disaster and made a difference.  Read what Mr. Jump has to say and decide for yourself if filing for bankruptcy is responsible financial behavior because I'm in complete agreement with him.

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The only reason you should negotiate directly with your creditors, is to avoid bankruptcy.  Remember that working with debt settlement companies is both costly and detrimental to your finances and will likely land you in my office filing for bankruptcy.  If you want to avoid bankruptcy, work directly with your creditors for an agreement on what your debt is worth.  If they even think you're about to file for bankruptcy, they will most likely make some kind of offer.  However, settling debts to avoid bankruptcy comes with a price;  Income Taxes!

Beware that if you settle, or negotiate a debt to avoid bankruptcy, you could end up getting a tax bill.  while the IRS is forgiving settled debt where mortgages are concerned; the California Franchise Tax Board is not because their program has expired.  So, in California, you'll wind up owing state income taxes, if the debt you settled relates to a secured mortgage in a short sale.

But what about your credit cards?  Unsecured debt negotiations and settlements will be taxed by both the state and federal agencies.  So, unless you're prepared to pay taxes on the amount that will be written off by your creditor, then, like Cathy Moran said in her blog, Should I Settle Some Debts Before Bankruptcy, your money could be put to better use, like saving for retirement.

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In order for your bankruptcy case to run smoothly through the process, you need to avoid these seven mistakes people make before they file their bankruptcy case. 

1. Do Not Run Up Your Credit Cards:  Once you've decided to file for bankruptcy because any debt in excess of $500.00 incurred within 90 days of filing for bankruptcy are presumed to be non-dischargeable and you may end up holding the bag on this.  Also, cash advances of more that $750.00 made within 70 days of filing are presumed to be non-dishcargeable and may be found due and owing.
2. Don't Repay Any Family Members:  You cannot repay your family members any better than you would any other creditor.  In fact, the bankruptcy trustee can reclaim any amount you paid to a family member within one (1) year of filing bankruptcy.
3. Do Not, I Repeat, DO NOT Cash Out Your Retirement Accounts:  This is one of the biggest financial mistakes you can make EVER.  Retirement accounts are generally exempt from the trustee taking when you file for bankruptcy.  This means that you can usually eliminate your debts and keep whatever you have in an ERISA qualified account. 
4. Do Not Transfer Any Property Out of Your Name:  You have a duty to disclose all  of your assets to the trustee and your estate essentially belongs to the trustee once you file for bankruptcy.  The trustee can, and in most cases, will undo any such transfers made within two (2) years prior to filing for bankruptcy.
5. Do Not Try to Reduce Your Home's Equity:  Right now this should not be an issue here in California since most of us have no equity in our homes.  Just keep in mind that there is a homestead exemption and in most cases, you can keep your home and the equity, and still file for bankruptcy.
6. Do Not Fail to Appear At Court Proceedings:  Until your bankruptcy case is filed with the court, any civil proceedings, or collections case against you will continue and you MUST appear.  Also, you MUST appear at your 341(a) Meeting of Creditors in your bankruptcy case and all other appearances as instructed by your lawyer.
7. You Must Tell Your Lawyer The Truth:  Your lawyer can only provide advice based upon the information you provide.  If you fail to tell your lawyer about your assets you could lose them, your bankruptcy case could be dismissed, you could be fined, and you could end up in prison for bankruptcy fraud.

So, if you've decided to file for bankruptcy, follow these golden rules.  Don't risk your financial fresh start because you deserve a life free from debts that you cannot afford to pay. 

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Over on MSN Money, Liz Pulliam Weston wrote an article entitled, "Are You Foolish to Pay Your Mortgage?"  I get asked this question all the time, is it worth it to keep my home?  I'm passionate about this subject on behalf of my clients, whom I advise whether filing bankruptcy is in their best interests financially.  What really caught my eye about this article was Law Professor Brent White's paper, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."  I agree with Liz that this is a must read for the finer points and Liz certainly summarizes his points from her perspective that we all need to do our best to save our homes and we all must make the best of a bad situation and know when it's time to walk away from our mortgages.

The good news is that California is a 'non-recourse' state.  This means that lender cannot pursue defaulting homeowners for deficiency judgments where they owe more than what the house is worth or what the lender might receive in a short sale or foreclosure sale.  For Californian's this is good news too because their will be no income tax on the cancelled debt or capital gains taxes to be paid on the deficiency. 

Knowing that we won't get taxed or sued after we walk away from our mortgages here in California should bring a sigh of relief, but when is it a good financial decision to walk away?  Professor White says that when the net cost of homeownership becomes more expensive than the net cost of renting is when you should walk away.  His article provides in-depth details and citations and even a hypothetical example of a couple who bought their home in 2006, at the height of the real estate boom. To make it easy, I've found a housing cost calculator on the internet that might help, but I wouldn't base any decision solely on this information.

I think the biggest challenge is to walk the imaginary road into the future and ask yourself whether you'll be better off in the long run.  I suggest that if you can afford your mortgage payment now, even though you're home's value is less than what you owe, you may be better off in 20 years than if you had rented.  Why?  In 20 years you will likely have paid down your principal, or even paid off your mortgage and if you've been maintaining your home, you're maintenance costs will likely have dropped.  If you rented for 20 years, you're still a renter and we all know the cost to rent will invariably rise over that time too.

I agree with Liz when she says to "Get Help."  Talk to your HUD Counselor, your tax professional and your local bankruptcy lawyer.  The sooner, the better.  Don't spend down any savings trying to save a sinking ship because you may end up in a worse financial situation. 

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Nowadays it seems everyone from big business to celebrities is filing for bankruptcy.  While major corporations are getting government bailouts with our tax dollars, wouldn't it seem fair if we could get a bailout too? 

Sure, you can file for bankruptcy and have many of your debts cleared off your books through a bankruptcy discharge.  But, how do you know if you need to file for bankruptcy?  At what point do you throw up the white flag to your creditors and declare bankruptcy?  Here are 10 signs that are strong indicators that you may need to file for bankruptcy:

1.  You've depleted your savings and are considering cashing out your retirement savings to pay your bills;

2.  You're living on credit cards and your debt increases rather than decreases each month;

3.  Your family has given you loans or bought you food;

4.  You're behind on your rent or mortgage, or are in foreclosure;

5.  You're anxious when the phone rings because the only calls you get are from debt collectors;

6.  You can only afford to pay the minimum payments on your debts and have high interest rates;

7.  You're using the legal loan sharks at those payday advance shops to get cash;

8. You know you have a lot of debt, but don't exactly know how much and you're afraid to look;

9.  Your car is about to be repossessed;

10.  You're being sued and you know you cannot afford to pay for any judgment.

If you, or someone you know is experiencing extreme financial hardship during these challenging economic times, it's important to take action sooner rather than later.  The sooner you discuss your situation with a trusted authority, like your local bankruptcy lawyer, the more likely you will be able to have your debts discharged without having to go broke doing it.  This means that you can save your retirement for retirement and still get out of debt.

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Once you've decided that filing personal bankruptcy is the right path toward financial freedom from your debts, you need to know: what is the process? How long does the process last? Do filers have to go to court? Who needs to be informed of the bankruptcy filing?

The process of filing bankruptcy requires that you complete a bankruptcy petition and disclose all of your debts and assets to the bankruptcy court.  Before you file for bankruptcy with the court, you will be required to complete a pre-filing credit counseling course and your certificate of completion of that course must be filed with your bankruptcy petition. 

After you've filed your petition with the bankruptcy court, you must attend a meeting of the creditors as required by 11 U.S.C. 341(a); otherwise known as a 341(a) hearing.  This meeting takes place before your court appointed trustee.  The trustee's job is to verify your identity by viewing your government issued identification card [usually a driver's license] and social security card; and the trustee will ask you some basic questions about your petition.  You must also complete a financial management debtor education course in order to be considered for a discharge of your debts. 

For chapter 7 liquidation cases, the process usually lasts approximately six months with a mandatory meeting of the creditors before the trustees.  Chapter 7 debtors will not see the bankruptcy judge, unless they need a reaffirmation hearing.  Chapter 13 individual debt adjustment cases where a debtor repays a portion of their debts over time, requires considerably more time and expense.  The process for a chapter 13 case lasts between three and five years depending upon the household income and the debtor's ability to repay their debts.  

The fact that you've filed for bankruptcy will appear on your credit report for 10 years if you filed Chapter 7 or Chapter 11 and will appear on your credit report for 7 years if you filed Chapter 13.  Bankruptcy may also affect your ability to lease rental property and find employment; and filing bankruptcy will impact your ability to file again in the future.  

Experiencing extreme financial hardship has emotional costs as well.  That's why it's best to talk to a bankruptcy lawyer so that you can make a well informed decision and lead your family to financial freedom from your debts with a trusted advisor who will inform you of all of your legal rights and remedies available through the bankruptcy process.  

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When you file for bankruptcy, you will be listing all of your assets, including any vehicle you own.  If you still owe money on your car, you will need to tell the court whether you intend to keep the car and reaffim the debt or whether you will give up the car.  Most people here in Los Angeles, need a car to get back and forth to work and so would want to keep the car and reaffirm the debt.  But what is a reaffirmation agreement and what does it do?

A reaffirmation agreement is made between you and the lender of your vehicle.  Essentially, a reaffirmation agreement tells the lender that you promise to be liable for the debt outside of the bankruptcy.  Iif anything happens to you later; i.e., job loss, illness, etc., you will remain liable for that debt.  The agreement takes that debt out of the protection of the bankruptcy and keeps you on the hook after your bankruptcy is discharged, even if you can't afford that debt later.  The reaffirmation agreement gives the creditor the same legal right as if you did not file a bankruptcy on that debt.

It used to be that if you just kept making the payments and stayed current on the car loan, insurance and registration, you could simply keep it in the bankruptcy and keep the car.  Unfortunately, the Ninth Circuit recently eliminated what was known as the "Ride Thru," which eliminated one of the most fundamental benefits to bankruptcy debtors.

Here's the good news.  Even after you sign the reaffirmation agreement with the lender, the lender must file it with the bankruptcy court and a hearing will be set on the matter.  The reaffirmation agreement does not become legally binding against you until it is approved by the judge. 

If the judge approves the reaffirmation agreement and you miss a loan payment in the future, the lender can:

1. Repossess the car;
2. Sell the car at auction; and
3. Sue you for the money you still owe ("a deficiency balance")

At the hearing, the judge will use the "In the best interest of the debtor" test to determine if you can afford the debt.  Don't despair if the judge denies your reaffirmation agreement.  In fact, a denial may be beneficial to you because then the loan remains under the protection of your bankruptcy case and you'll likely get to keep the car.

If your case was filed in Los Angeles, the Public Counsel Law Center provides volunteer attorneys, like myself, who will answer any questions you may have before your hearing.  Public Counsel provides this service through their Debtor Assistance Project & Consumer Law Project.  If you have a reaffirmation hearing date, please read Public Counsel's information packet before your hearing.

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From The Hospital to Bankruptcy Court is the title of a recent article in the New York Times that gets to the heart of why we need healthcare reform.  You could have a job that provides health insurance, but that health insurance policy has a cap on how much they will pay over the life of the policy.  Add to that limit, your deductible and co-payment amount of say 20% and you have a recipe for financial disaster and a prime bankruptcy case.

If you're faced with medical debt, do not use your credit cards or home equity or any other financing to pay that debt.  You're only adding interest to that debt and avoiding the most likely inevitable bankruptcy.  What's worse is that if you use home equity, you could lose your home later if you fall behind on your mortgage.  Taking action sooner, on deciding your options, could help you avoid a financial collision with bankruptcy court.

First, be sure you understand the limits on your health insurance plan and if you anticipate any large medical expenses, check to see if your employer offers a benefit plan where cash is taken from your paycheck, in pre-tax dollars, in advance to cover anticipated medical expenses.  What this does is essentially save you from paying income taxes on that money in advance, as opposed to deducting it on your income tax return later. If you've already paid for medical bills with your after tax money, then be sure to deduct it on your tax return.

Second, if you have medical bills that have gone to collections, you can make an effort to negotiate that debt.  Unfortunately, if the bills are completely out of your ability to pay, you need to consult with a bankruptcy lawyer who can help you file the right bankruptcy chapter for you and get that debt discharged.  Remember, you don't have to go broke to file for bankruptcy and you should consult a bankruptcy lawyer before playing debt roulette and using credit cards or savings to pay for medical bills because medical debt can be discharged in bankruptcy.

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When closing a small business, there are advantages to using Bankruptcy as a means to winding up your small business.  If you're Going Out of Business and are looking for alternatives to Bankruptcy, or a more detailed discussion on bankruptcy advantages, then you must read Gordon Eng's recent article in the Los Angeles Lawyer magazine of the Los Angeles County Bar Association entitled, Going Out of Business. 

The advantages of using Bankruptcy as a means of closing your small business include having the Court judicially assist in winding up the financial affairs of the business by providing a single forum for contesting the validity of creditor's claims.  The Court also provides a valuable mechanism for the liquidation of the debtor's assets and determining the allocation among the creditors based upon their priority in a chapter 7 bankruptcy.  After the business has been liquidated and distributed among the creditors, any remaining debt is usually discharged.

Debts that cannot be discharged in a bankruptcy are

• Federal, state and local taxes
• Family support; i.e., spousal and/or child support
• Student Loans, absent undue hardship
• Secured debts
• Government imposed fines or penalties
• Fraud and punitive damage claims

A small business may file a chapter 7 bankruptcy as a corporation or LLC., otherwise the business owner must file a personal bankruptcy.  If the business is not incorporated and the owner files a personal bankruptcy, they are subject to the means test in determining whether they qualify for a chapter 7, or if they must file under chapter 13. 

Business owners who are shutting their doors would be wise to consult with an attorney who can help them work through the issues of closing a business in the most efficient manner that limits or eliminates their financial and legal exposure. 

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The November, 2009 issue of ABA Journal article entitled, The Bad-Debt Blues, explained the need to take federal taxes into consideration when restructuring debt as, "crucial."  The article provides an excellent overview of the federal tax rules that apply to debt workouts, and focuses on the impact to individual debtors.

The recent media blitz touting the end of the recession is an illusion caused only by government spending.  Bankruptcy filings are still up over last year and climbing to record numbers since the BAPCPA in 2005. Americans continue to struggle with what to do about their debt.

The so-called housing bubble we appear to be experiencing is caused by the fact that banks are holding foreclosed homes in their inventory rather than selling them because putting them on the market will only reduce already depressed housing values.  Similarly, the banks are also refraining from foreclosing on homes and moving toward more workout programs and modifications because they're starting to realize the error of their greedy ways. 

When faced with the tax consequences of the restructuring of individual consumer debt; either through foreclosure, repossession, or modification; filing bankruptcy provides a safe harbor and important IRS exclusions.  There is another exclusion under the Mortgage Forgiveness Debt Relief Act of 2007 that applies to Qualified Principal Residence Indebtedness on or after Jan. 1, 2006. 

It is important to remember that most financial transactions have tax consequences and we all know that ignoring the IRS with its hand out is never a good idea.  Consult with your lawyer to fully understand the tax consequences and restructure debt in the way that best minimizes tax liabilities for you. 

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I am excited to share with you, a new resource for information regarding student loans, as published by the National Consumer Law Center.  The Student Loan Borrower Assistance portal offers answers and and solutions to student loan borrowers, however, they do not provide legal advice. This issue has also attracted the attention of Congress, who recently held an oversight hearing on the matter.

Student Loans, in general, are not dischargeable in bankruptcy, absent undue hardship.  11 U.S.C. Section 523 (a)(8) provides that the debtor must show that the payment of the student loan debt will "impose an undue hardship on the debtor and the debtor's dependents."  Courts have interpreted this standard very restrictively, which makes it very difficult for even the most vulnerable to receive a discharge. A recent case, Booth v. U.S. Department of Education, et al., 10 CBN 1093 (Bankr. E.D. Wash. 2009) held that debtors can prove undue hardship even if their Income Contingent Repayment Loan Program (ICRP) payments are zero.  The Ninth Circuit Court asked, in Craig v. Educational Credit Management Corp., 19 CBN 1039 (9th Cir. 2009), how the bankruptcy court thought the debtor could pay their student loan. 

The Court will apply a three-part test, known as the Brunner test, to determine whether excepting all or part of a student loan debt from discharge will impose an "undue hardship" under § 523(a)(8); Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987). Under the Brunner test, a debtor must demonstrate:

(1) that she cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans;

(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

(3) that the debtor has made good faith efforts to repay the loans.

Further, the procedural difficulty level is a general deterrent for most attorneys since the debtor must affirmatively seek this determination in bankruptcy and prove her case.  For more information on this subject, check out Student Loans In Bankruptcy.  Bankruptcy practitioners can purchase Discharging Student Loans in Bankruptcy as a resource.

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In determining eligibility to file for a chapter 7 bankruptcy, the basic qualifying factor is income under the Means Test as set forth in 11 U.S.C. 707(b)(2).  The debtor's income must fall below the Census Bureau's Median Income by Family Size.   Thus, the Means Test is a two prong test:

• The first prong being the size of the household; and

• The second prong being that of the debtor's gross income for the six months preceding the bankruptcy filing. 

Debts generally not dis chargeable in Chapter 7 bankruptcy include:  taxes, child or family support payments, student loans [absent undue hardship], traffic tickets, government fines, alcohol related accident judgments, judgment for willful or malicious conduct resulting in serious physical injury or death.

Debtors are required to submit a copy of their recent tax transcripts to the Trustee prior to the meeting of creditors, 11. U.S.C. 341(a).  A copy of the tax transcripts can be obtained by the debtor by calling the IRS 1-800-829-1040 and the debtor can even authorize the transcripts be faxed directly to counsel.  The IRS attorney line for transcripts is 1-866-860-4259. 

In California, their are certain exemptions that can be taken under California Code of Civil Procedure Sections 703, 704.  Exemptions allow a person to keep certain assets after the bankruptcy.  You must select only one set of exemptions.  If spouses are filing jointly, they must select the same set of exemptions.

A qualified bankruptcy attorney will review your individual financial situation and determine whether you qualify for chapter 7 or need to file chapter 13 bankruptcy.   

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New median income figures take effect November 1, 2009.  The change in median income levels will have a direct impact on those seeking debt relief through chapter 7 bankruptcy because of the means test.  Individuals seeking to file chapter 7 bankruptcy must pass the means test   in order to qualify; otherwise they will be required to file under chapter 13 and make some payments toward their debt.  Not since the inception of Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") in 2005 have we seen the income figures drop.  What this means is that those seeking debt relief under Chapter 7 bankruptcy, may soon be disqualified and forced to file under Chapter 13 instead.

Here in California, our current unemployment rate is 12.2%, according to the Bureau of Labor Statistics.  Our real estate market still has not bottomed out as those in the industry project a Gloomy Outlook.  Lenders have been stalling out or flat out refusing to modify mortgages that would otherwise qualify under the Obama Plan and more foreclosures are coming soon.  Also, our state workers have taken approximately 3 furlough workdays without pay, which equals an approximate 14% pay cut.  No wonder the median income figures are dropping. 

It's time to review those borderline Chapter 7 cases pending and get them filed before the client potentially becomes disqualified under the new changes taking effect November 1st. I don't think it's Bankruptcy Means Test Irony as the folks over at Bankruptcy Law Network do; it's the factual truth.

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Would you advise your client to file a Strategic Bankruptcy?  I read Michael Doan's recent blog article about the subject and would like to add there are tax advantages to home ownership that were not considered in the equation.  A homeowner receives the tax advantage of writing off the mortgage interest paid on their loans and property tax payments, while renters receive no such tax advantage.  When a homeowner stops paying on their mortgage, they no longer receive these tax advantages. The tax advantage would serve to reduce the overall savings by the amount in reduction of income tax, even if nominal, it still must be a consideration.

Further, the insurance requirements of home ownership can be expensive, depending upon the home.  However, the usual homeowner policy also covers the owners personal property both on premises and off, and personal liability.  A renters policy serves a similar puprose and will cost sometimes less or about the same as a homeowners policy.  I would never suggest that an owner stop paying on the insurance policy while they are still legally on title and responsible for the property, especially in our fire ridden state of California.  If there is a loss on the property, while the owner is still on title, and no insurance in force, then the owner would be  personally liable. 

Here's an idea:  A Shortsale with a lease back option is something I've personally considered for my own home.  As an example, my home is currently upside down by approximately $209,000.  I could eliminate that debt by having a family member buy my home for fair market value in a short sale and then I could rent it from them.  That way, I eliminate the debt and later, I buy back the house from them without the additional burden.

In conclusion, make sure you get all the facts and numbers on the table.  Each situation is more unique and we cannot possibly say that anyone with negative equity should strategically foreclose or file bankruptcy.  An attorney will discuss all your options and then you decide your best course of action. 

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The Central District Consumer Bankruptcy Attorneys Association (CDCBAA) hosted, an MCLE program on September 12th called, “The Chapter 7 Trustees.” Southwestern Law School co-sponsored the event and provided the wonderful location. The panel trustees consisted of Jeffrey I. Golden, Amy L. Goldman, David Seror, Diana C. Weil, and Edward Wolkowitz.  The trustees set forth to air their “pet peeves” and reinforced their duties and obligations as set forth in the Handbook for Chapter 7 Trustees.
 

11 U.S.C. Section 341(a), known as the "meeting of creditors" is required and it is mandatory that the debtor appear in person before the trustee at this meeting. “Appearing in person” requires the debtor to bring their current valid driver’s license with any extensions and social security card. The trustee is looking for a substantial deviation from the name(s) reported on the petition and the identity of the person appearing before them. If there is a substantial deviation in the name, an amendment to the petition is a best practice.

In preparing the debtor for their 341(a) meeting, I will provide my clients with the 10 mandatory questions that the trustee must ask and make sure they bring their “current,” “valid” identification forms, a signed copy of their petition and I will bring a copy of their tax return.

As for priority at the section 341(a) meetings, we were advised the following: Even though small children are to be left at home, anyone with small children are likely to be handled expeditiously. One attorney commented that this is a little known priority and parents have been offered as much as five dollars for the use of their children for this priority. Otherwise, represented debtors are given priority at these meetings.

What is important to note is that the goal is to avoid a continuance. Disclosure and explanation is never a problem for the trustees and being helpful by noting any discrepancies is actually refreshing. We must continue to lead by example and assist the trustees in maintaining a respectful and dignified space in the hearing room for the benefit of all debtors.
 

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I have been reading everything bankruptcy related lately.  A few weeks ago, M. Jonathon Hayes sent us an email on our listserv for the Central District Consumber Bankrutpcy Attorneys Association, CDCBAA for short, that he had just published a new book entitled, A Summary of Bankruptcy Law.  I am one of those folks who likes summaries or digest versions of anything that cuts to the point and gives me just the meat, hold the potatoes and vegetables. 

The section on chapter 7 bankruptcies takes up a major portion of the summary material.  I would have liked more information regarding chapter 13 processes, but it is a summary, so I let that go.  The material is concise and to the point.  It's an easy read and looks similar to a top tier law student's outline of a subject.  Not that I was a top tier law student, but I've obtained outlines from a few.  Overall, the book holds up to its title as a summary and I would add, a thorough summary at that.

Like kicking the tires on a car you're thinking about buying, I took the book's website citations and case citations for a spin.  The book provides valuable tools, advice on practice materials and case citations that I am still looking up.  I reccommend this book to the new practioner and law student.  Since the book was written by a California attorney,  it is well suited for the California practitioner and more specifically, those of us practicing in the Central District.  I even printed a copy of Judge randall Newsome's Research Notebook and if I ever get a chance to meet the man, I promise to buy him a beer Jonathon.  Thank you for your good work. 

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Generally, taxes are treated the same as other debts in a chapter 7 bankruptcy case.  Taxes may be treated as secured, unsecured, or non-priority unsecured, or some combination.  IRS Code, found in 26 U.S.C. 6321, states that the government is secured if it has recorded a notice of lien.  Taxes that have been recorded as a  lien are a priority and must be paid in bankruptcy and cannot be discharged.  

A colleague of mine,  John Greifendorf, addressed the question, Can I discharge Federal Income Tax in Bankruptcy?  His article is concise and outlines five conditions for discharging what the debtor owes to the IRS and even sets forth and example to follow. 

The Five Conditions are:

1. The due date for filing the tax return was not less than three years ago
2. The tax return was filed at least two years ago
3. The tax assessment is at least 240 days old
4. The tax return was not fraudulent
5. The tax payor is not guilty of tax evasion

If the debtor meets the qualifications, then the tax liability is not a priority and is discharged in bankruptcy; 11 U.S.C. 523(a)(1).  Unsecured taxes that are deemed a priority, fall outside the scope of the conditions discussed by Mr. Greifendorf and cannot be discharged in bankruptcy.

Timing is a critical component in deciding to file for bankruptcy protection and the advice of a bankruptcy attorney will address this issue.  Best practices include filing all tax returns prior to filing a bankruptcy petition with the court.  Seek the advice of a CPA or tax attorney regarding IRS claims. 

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Somewhere in the American vocabulary, there has got to be a list of the top ten most dreaded words like death, divorce, bankruptcy, we’re moving, your fired, etc. These dreaded words all have one common theme, change. Any significant change can be a traumatic experience and filing for bankruptcy is no exception.

At the heart of deciding to file for bankruptcy, every debtor must face the spiritual, emotional decision, as well as the financial decision to file bankruptcy. Each aspect, spiritual, emotional, and financial, calls for a unique conversation we must have with ourselves.

Religion aside, bankruptcy is and can be a spiritual journey in letting go of the material world as you have come to know it. You are letting go and it feels like you have lost control and you are afraid. I hear this in my client’s voices, “I’m a good person and have always paid my debts . . .” We are all good people. Being able to pay your debts does not a good person make, and the freefall happens anyway.

I have seen it many times. Clients will exhaust all of their resources and drain their savings before filing for bankruptcy because they are paralyzed by the fear and stigma of bankruptcy. They may be following their religious dogma that tells them that somehow bankruptcy is “a sin” and therefore, not an option.

I have another paradigm for bankruptcy. In bankruptcy, you are given an opportunity for a fresh start on your finances to begin again. Like in video games, when you hit the restart button, you get to start over. If you have learned the spiritual lesson of letting go of the material realm, you will view this, not as dread, but rather as an opportunity to live much differently than before.

Start from the point of being legally forgiven for your debt; in bankruptcy terms, it’s the date of discharge. Learn to be a good steward of your money and guide it forward, toward a great retirement program for your self and your family. You have more than enough stuff and no longer have to keep up with the Jones’.

Some of my clients don’t need bankruptcy, but rather come to me because they have run out of options on their own. At this point, I would encourage them to follow some sound financial principles and, as a result, I often prescribe Dave Ramsey’s book, “Total Money Makeover.” His book has seven baby steps that really get to the heart of your emotional relationship with money.

These are breakdown or breakthrough times; it’s your choice. I challenge each of us to have a breakthrough in our relationship to the material world and money. This requires being responsible in handling our money and putting it toward good use. Thank you for allowing me to lead the way.
 

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