California Bankruptcy Law » Bankruptcy

Do I have to tell them everything?

Malcolm Ruthven — Wed, 09 Jun 2010 15:21:36 +0000

Do I have to tell them everything? It's very important to understand that bankruptcy includes, as does much of life, a basic bargain. This bargain is that in exchange for getting a discharge of your debts (or a payment plan) in bankruptcy, you must operate with full disclosure regarding your financial life in all your dealings with the court or trustee, throughout the entire process from your filing papers to your discharge. This definitely includes listing all assets (things you own) and debts (amounts you owe). That type of disclosure and openness may seem difficult for some people depending on their cultural background, but anything less than full disclosure throughout your case may result in not only being denied a discharge of debts, but also possible prosecution for perjury or federal bankruptcy crimes.

The U.S. Supreme Court used the phrase "honest but unfortunate debtor" in commenting on bankruptcy, and the above paragraph merely expands on that.

A simple summary of all this is that bankruptcy is for honest people, and any deviation from that course can get you in big trouble.

Foreclosed? You may still owe your second mortgage.

Malcolm Ruthven — Mon, 19 Apr 2010 14:12:20 +0000

If you lost your home to foreclosure in California, you may still owe your second (and other) mortgages.

California is a "non-recourse" state, meaning that mortgages taken for the purpose of buying a home do not remain personal debts of the borrower after a foreclosure that doesn't fully pay those mortgages. But other loans that placed mortgages on that property, obtained for reasons other than the original purchase, do remain the personal debt of the borrower. The lender(s) may sue to collect the amounts remaining on those additional home loans, including money taken from home equity lines of credit (HELOC). This can be a very unpleasant surprise to people who have just lost their homes to foreclosure.

The good news, if any of this can be considered "good", is that personal debt remaining on home loans after a foreclosure may be discharged (eliminated) in bankruptcy just like other unsecured debt.

A San Francisco Chronicle article titled Homes lost, but some 2nd-mortgage debts remain, quotes Margot Saunders, attorney with the National Consumer Law Center:

"People with a second mortgage who are facing foreclosure should go to bankruptcy to get rid of the unsecured second-mortgage note," she said. "They should do it as soon as they're foreclosed upon, because that's when they're at rock-bottom, not when they've started to rebuild (their finances)."

Click here for that San Francisco Chronicle article.

The Bankruptcy Means Test and Benefits Income – A Short Course

Malcolm Ruthven — Sat, 03 Apr 2010 15:33:39 +0000

Is income from "benefits" included in the Means Test?

The Means Test became a part of bankruptcy law in 2005. The purpose of it is to prevent people with primarily consumer debts from discharging their debts in Chapter 7 bankruptcy if they are deemed to have enough income to use some of it to pay creditors. If debtors fail the Means Test, they must use another chapter of the bankruptcy code (probably Chapter 13) if they are to do bankruptcy at all.

Income for purposes of the Means Test is gross income during the six months prior to the month in which the bankruptcy petition is filed. Income from all sources is included unless excluded by the bankruptcy code. Sometimes the issue of what types of income are included or excluded determines whether a debtor may use Chapter 7 in bankruptcy.

That brings us to the question of whether "benefits income" is to be included as income for the Means Test. Benefits income is income from sources such as Social Security payments, unemployment compensation payments, and disability payments.

The general rule is that all income is to be included unless it derives from the federal Social Security Act. So let's see how that plays out for a few different types of benefits income.

- Social Security payments – These are definitely not included as income on the Means Test.

- Disability income – The prevailing opinion is that both state disability income and private-plan disability income are included as income on the Means Test.

- Unemployment compensation payments – There is a split from jurisdiction to jurisdiction on this one. I can only recommend that you consult with your bankruptcy attorney about the best course for you to take on this if it matters in your case. My current opinion is, unless you're in a federal court district where there is a decided case saying that unemployment compensation payments may be excluded from income on the Means Test, that you should include it. That is, unless you are willing to risk having your Chapter 7 case not allowed or you and your attorney are willing to assume the possibility of a lengthy and expensive appeal process with an uncertain outcome.

Does anyone still think people who file bankruptcy are bad people?

Malcolm Ruthven — Thu, 11 Mar 2010 21:50:51 +0000

If anyone out there still thinks that people who file bankruptcy are bad people or anything similar, I invite them to read the following portion of the first communication I received from a prospective client. I encounter similar stories all the time; that's a part of this work. But this introductory email was so moving that I thought I should share it with others. So I asked for permission which was granted. Here it is.

"I did tech support for a software product for 10 years, then quality assurance. I like helping people and am user friendly. Then one day my job went to India. In fact at the end of my illustrious career, I was laid off 4 times and lost all my savings and 401k just trying to survive. Since then I have been un-employed or under-employed. It looks like I will have to go down with my boots on. In 2003, finally homeless, I moved to [deleted] where my mother took me in. I switched hats and took up bookkeeping, which is needed here, or was, until the recession. I am now on Social Security, semi-retired, and having a hard time. I started a small business as a freelance bookkeeper when I turned 65, thinking I would finally be lay-off proof. What I didn't see coming was the recession. Now my business is failing. I can't pay my credit cards. I need to do a bankruptcy. I feel so ashamed. I was raised to pay my debts and to be honest."

Thinking of filing bankruptcy? It's time to get things together.

Malcolm Ruthven — Fri, 08 Jan 2010 12:55:51 +0000

Are you thinking of filing bankruptcy? If so, it's time to gather information and documents that will save you time later and will speed the process of your possible bankruptcy.

I send new clients a checklist of items they need to help them complete the bankruptcy questionnaire and also to bring to our in-person meeting. But bankruptcy attorney Jennifer Weil recently posted an online list that's a great one to use even before you contact a bankruptcy attorney. You'll save yourself time and prevent delays in your case if you follow her advice. Click here to read her article.

Can I "not file" on a credit card in my bankruptcy?

Malcolm Ruthven — Thu, 10 Dec 2009 03:54:26 +0000

I'm sometimes asked by a bankruptcy client if they can "not file" on or "not include" a particular credit card or other specific debts in their bankruptcy. Here's the deal…

1. You have to include all your debts in the bankruptcy petition and schedules. To fail to do so could result in not getting a bankruptcy discharge on any of your debts.

2. If the amount owed for a debt is less than $600, you are allowed to pay it off prior to the filing of the petition and therefore not list it because there would be no debt. If it's a credit card, the credit card company would probably cancel the account anyway after your bankruptcy. These days, credit card companies are taking a harder line than they used to. Therefore it doesn't make a lot of sense to use your scarce money to pay off that card.

3. After your bankruptcy discharge, you will probably get offers of new (low limit) credit cards. This is a good thing. Get one of those cards and use it to help rebuild your credit. Click here for an article about rebuilding your credit after bankruptcy.

Legal Aid of Marin Bankruptcy Presentation – September 30, 2009

Malcolm Ruthven — Thu, 01 Oct 2009 03:15:05 +0000

Malcolm Ruthven gave a bankruptcy presentation at Legal Aid of Marin on September 30, 2009. There were additional points to be covered at the end of the event and these items will be added here as comments.

Are you expecting a tax refund?

Malcolm Ruthven — Sat, 29 Aug 2009 04:01:05 +0000

Are you expecting a tax refund? As in life, timing is everything. If you're considering filing for bankruptcy in Chapter 7 to eliminate debts and you're expecting an income tax refund, you have some thinking to do.

If you file Chapter 7 before you receive the tax refund, that right to future income is an asset that becomes part of the bankruptcy estate under control of the bankruptcy trustee. In general, unless it qualifies as exempt under a "wildcard" type of exemption, the trustee can use it to pay off your creditors. That's probably not what you would want. So, it's often better to delay filing Chapter 7 until you receive your tax refund. That way you retain control over the refund and have an opportunity to use it in a way that benefits you. A few of those ways might be to spend it on normal living expenses and/or catch up on mortgage payments (of course before filing Chapter 7), or put it into an "exempt" place, like an ERISA-qualified plan within IRS limits. Note also that applying a refund amount to your future taxes still leaves that amount available as an asset to the bankruptcy trustee.

When do you acquire that right to the tax refund, the right that the bankruptcy trustee wants for the benefit of creditors? The general rule is that the right to receive a tax refund accrues every day taxes are withheld from your paycheck. That right doesn't wait to exist, for example, until you file a tax return. How might that play out in specific situations? Let's assume that you will get a refund for 2009 income taxes after the taxes are filed in 2010, and you want to file a Chapter 7 bankruptcy to discharge debts.

- If the bankruptcy is filed in 2009, the portion of the tax refund that becomes part of the bankruptcy estate is pro rated based upon the amount of income earned before bankruptcy filing compared to the total year's income. Of course, if you're still working, you might be able to reduce your withholding for the remainder of 2009 so there would either be no refund for the bankruptcy estate to get or a refund so small it wouldn't be worth the trustee's time to go after it.

- If the bankruptcy is filed in 2010 but before the tax refund is received, the entire amount of the refund would become part of the bankruptcy estate.

- If the bankruptcy is filed in 2010 but after the tax refund is received, the refund received becomes just another asset and may be used for normal living expenses or as described above prior to filing bankruptcy. Of course, if you will get a refund for 2010 taxes then the trustee can get the pro rated part of that, but there should be only very few months in 2010 before you file bankruptcy so that part of the refund should be small.

Delaying your bankruptcy filing may have other consequences, possibly worse than losing a part or all of a tax refund, especially if the refund is small. Because of these and other issues beyond this discussion, you should really consult a qualified bankruptcy attorney to discuss these issues as a part of your bankruptcy process.

Legal Aid of Marin Bankruptcy Presentation – August 17, 2009

Malcolm Ruthven — Tue, 18 Aug 2009 03:18:42 +0000

Malcolm Ruthven gave a bankruptcy presentation at Legal Aid of Marin on Monday, August 17, 2009. There were additional points to be covered at the end of the event and these items will be added here as comments.

Don't wait too long!

Malcolm Ruthven — Tue, 26 May 2009 01:07:46 +0000

Most bankruptcy attorneys will tell you that the most frequent mistake clients make is to wait too long to file bankruptcy. There's a natural reluctance to consider and file bankruptcy, and in that "delay" period people in serious financial trouble often do some of the following things.

- Get loans based on home equity. This is very dangerous. If your financial situation is not remedied, you will be less able to make the payments on the now-increased debt secured by your home. That makes losing your home more likely.

- Withdraw funds from IRAs or other qualified retirement plans. Funds in these plans are in general protected from creditors in a bankruptcy proceeding, so withdrawing the funds removes money you could have kept safe for your retirement or other uses following bankruptcy.

- Continue to make payments on debts for which there is no reasonable possibility of paying off. Do you really want to spend your last dollars in a hopeless effort to pay off your debts, leaving nothing left for you to keep for your Fresh Start if you do decide to file bankruptcy?

For the above reasons and more, you really should explore what options would be best for you by consulting a bankruptcy attorney when you feel that you're in serious financial trouble.

The Case for Bankruptcy (Newsweek)

Malcolm Ruthven — Mon, 18 May 2009 23:11:13 +0000

Newsweek magazine, in their January 12, 2009, issue, published an article explaining the case for bankruptcy and the circumstances favoring that action.

In that article, the author Jane Bryant Quinn says "Most families, honorable to the end, struggle longer than they should, says Katie Porter, a law professor at the University of Iowa. By the time they give in, they've lost assets they could have used to start over again. That defeats the point of bankruptcy—to stop the self-blame and hopelessness that goes with bad luck and bad bills, and give yourself a second chance."

It's a good, short, read and makes very good points. Here it is for you on the web: click here

Important addition: There's a comment on that Newsweek article by Pennsylvania bankruptcy attorney Charles Bierbach. He is also a bankruptcy trustee so he's "seen it all". He said:

My constant advice to my clients and to debtors who appear in front of me at Meetings of Creditors, is "think with your wallet"… Borrowing from exempt assets, like retirement accounts and exemptable equity in your home, is a step backward. Get good legal advice about bankruptcy before you cash in everything you own, or before you throw good money after bad.