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

Let’s talk about Mr. Money today. This weekend, I decided to take in the movie, Maxed Out. What an awakening to see that over the years, we have been sold a load of crap about the economy. We are continually told to go out and spend. Again, in this recession, the people are being told to go out and spend money to stimulate the economy. Small business is being told to spend their capital as a means to stimulate the economy. Our government is spending the People's money because we can't and won't. The federal government is living in Fantasyland and the last time I checked, Fantasyland was a place I’d seen only at Disneyland.
 

An alarming statistic presented from this movie was the most popular customers of credit card companies are people who have been through bankruptcy. The reason cited was that the credit card companies know two things about people who have a prior bankruptcy;

1. First, they can’t file for bankruptcy again (or at least for 8 years), and
2. Second, they have a taste for credit. They’re willing to make minimum monthly payments forever. That’s where the banks make their money.
    

Professor Elizabeth Warren, Harvard Law School, spoke to executives at Citigroup and was told by one participant, that if you cut out the most marginal borrowers to reduce the risk of bankruptcy, you cut out the largest percentage of the bank’s income. Mr. Money was a character from a movie about money in the 1950's and excerpts from this classic film were strewn throughout. Mr. Money said that we have to ‘earn’ credit. However, many banks have found that ‘giving’ credit to college students is the same as recruiting young smokers; they’re loyal to their first credit card issuer.

I’m completely unnerved by the data collection companies such as ChoicePoint that collect data on each of us and then sell that data to the federal government. Just a reminder; you're right to privacy as provided in the Constitution, is only a right to privacy from the federal government and not private businesses.  Corporate America has been collecting information about YOU and is using it to take your money! 
 

Between 1994 and 2004 over ten million Americans filed for bankruptcy. Then, there was another rush to file bankruptcy, with more than one million bankruptcy filings just before the Bankruptcy Abuse Prevention and Consumer Protection Act, known as BAPCPA passed in 2005. This bill was promoted by the credit card issuers. The bill was written by MBNA, the primary contributor to George W. Bush’s presidential campaign. With the collapse of the economy in 2008, we are once again experiencing a historical number of bankruptcy filings in American history. A total of 781,150 consumer bankruptcy petitions were filed during the first six months of 2010. As I have been saying, we need to clear our debts and declare, “Never Again!.” Pass the bankruptcy petitions now please.
 

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I believe that filing bankruptcy is a compassionate act.  I alleviate the suffering of my clients by assisting them to obtain relief from their debts through bankruptcy.  My clients are good people with severe financial hardship, who seek to transform their financial distress into financial freedom.

In case you haven't heard, bankruptcy has a history as old as religion itself.  The Bible itself even allows for forgiveness of debts, as Matthew B. Tozer and Ben E. Lofstedt wrote so eloquently.  Jill Lepore wrote, Annals of Finance, “I.O.U.,” in The New Yorker, which chronicles how we used to treat debtors in America.  My favorite sentence in that article reads, " . . .most people who fall into debt are victims of the business cycle, and not of fate or divine retribution."  Keep that in mind as you consider that it's okay for the likes of Chrysler, GM, and celebrities to file for bankruptcy, but not you.

I have the hardest time, standing by, watching the incredible suffering of humanity over debt.  Remember when the airline attendant says that in case of emergency you put the oxygen mask on yourself first?  The same applies to your finances.  Loving one's self starts with you.    When you put yourself and your family first, you can transcend the suffering and make your own choices in life, moment to moment. 

Law Professor Brent T. White recently wrote a paper entitled, "Underwater and Not Walking Away:  Shame, Fear and the Social Management of the Housing Crisis."  The media plays a huge role in supporting the "moral responsibility' to pay one's mortgage.  Read his paper and decide for yourself. What will you do in 2010 to put your self and your family first?

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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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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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The mortgage meltdown and ensuing global financial crisis, in the fall of 2008, still reverberates today.  The New York Times reported on the essentials of the credit crisis and pointed out the breadth and depth origins of this crisis and likened these times to the Great Depression. 

I have previously reported on the financial crisis in The Economy of Bankruptcy ; while The National Association of Consumer Bankruptcy Attorneys [NACBA] has been following SB61 since its inception.  SB61 essentially will allow bankruptcy judges to modify the terms of a mortgage.  Recently, NACBA Director, John Rao testified on the matter in October, before the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts.

As posted in the New York Times, House Passes Far Reaching Bill Tightening Financial Rules.  Unfortunately, the banking industry struck a win when the House voted to reject the proposed amendment, known as "mortgage cramdown," which is the measure that would allow bankruptcy judges to change the terms of mortgages for distressed homeowners.  This vote reversed the House's passage in March of a cramdown measure that subsequently died in the Senate.

American homeowners need a real solution and based on what I read over at The National Bankruptcy forum, our Bankruptcy Courts may not be equipped to handle the tsunami of bankruptcy cases that would result in the passage of such legislation.  To date, few mortgages are being permanently modified, as reported by the LA Times.  

My solution is for every American to obtain independent financial freedom by paying off their debts outside of bankruptcy, if possible. For those Americans struggling to pay their bills, consider either a chapter 7 or 13 bankruptcy and never look back.  The rules of bankruptcy do not require that you spend down all of your savings and lose your assets in order to file for bankruptcy protection.  The goal here is financial freedom and independence from the banking industry FOREVER.  The new paradigm as Dave Ramsey so eloquently puts it, DEBT IS DUMB AND CASH IS KING!

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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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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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In the Central District of California, year-to-date bankruptcy filings are up 70% over last year.  Chapter 7 filings make up 77% of the total filings year to date. Why? Because California’s unemployment rate is at an all time high and holding at 12.1% according to the Bureau of Labor Statistics.   EDD says we’re at 11.9%

Let’s just pour salt upon the open wound and admit that California was also the sub-prime loan mecca all the way into the crash in 2008. These option arm loans were sold here in California well into late 2007 and the "teaser" or introductory rates on these loans sold were 5, 7, and 10 year terms. This means that we have yet to see the end of the foreclosure crisis here in California because these loans have not yet adjusted upward.

With a surplus of uninhabited homes on their hands, banks are left holding the bag in the foreclosure game. Unfortunately, many homeowners could have saved their homes, had they contacted an attorney, who would have determined any legal claims to stop the foreclosure, like Truth in Lending Act (TILA), predatory lending (Fraud), or Real Estate Settlement Procedures Act (RESPA) violations.  However, this is not as easy as it sounds and requires litigation.  A  chapter 13 bankruptcy has been the forum of choice to stop foreclosures and save homes.  Unfortunately, SB 61, has not passed, but is still being discussed.  SB 61 would allow bankruptcy courts to modify mortgages and reduce principal loan balances in bankrutpcy.

We are all in this together and this market affects us all.  At no other time has it become more apparent that we join together for the solution.

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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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