My clients had owned a small company for 40 years. They had amassed a half-dozen properties, owned a very valuable home, an expensive recreational vehicle, and of course, a big party boat. But when their company began to falter due to the economy, the owners guaranteed a half-million dollar loan to try to get the company through the hard times.

Now they have only a single house they live in, and social security to get them by. The boat and RV had is gone, along with a number of homes they owned.

After helping people file for bankruptcy for some time now, I’ve noticed that people who own struggling businesses often attempt to save their business by personally guaranteeing loans to provide needed cash. Sadly, when the business fails, the business owner needlessly loses assets accumulated over a lifetime that should have been protected by a business failure.

Of course, in the beginning stages of many companies, owners have to provide personal guarantees on loans, but once a company has been alive long enough to be able to borrow its own money, that sort of behavior should cease. One of the major reasons to incorporate a business is to ensure that the failure of a company does not reach down and impact its owners. The corporation acts to buffer bad events from its shareholders, such as a major law suit or simple financial failure. When a personal guarantee is used to obtain funds, that buffer is breached, and failure of a company can turn into a nightmare for its owners.

In that recent case, my clients should have come to me two years before they actually arrived. Sadly, the difference was that they could have closed up their shop and retired, rather than put themselves at risk, and had more than a million dollars of assets and property to enjoy.

Instead, they have their homestead, and no other property. They even had to ask one of their children to give a house back that they had given to the child a year earlier!

So remember why you incorporated your company – for most people, the driving reason to use a corporate entity was to separate themselves from business losses. Be very careful about risking decades of asset accumulation by putting your name on the line of your business debt. In particular, if you are at retirement age, you must ask how much longer you intend to work, and if it is merely a couple years more….consider retiring now, and keeping your properties and funds. Otherwise, there is a good chance you’ll be visiting my office or some other attorney to talk about a bankruptcy, rather than a travel agent about that vacation you always wanted to do.

Warren Norred is an Arlington, TX lawyer who practices in the fields of bankruptcy, intellectual property, and litigation.

So, when do you decide that your debt problems are so bad that you need to file for bankruptcy? Do you only have a few inches of debt in your financial basement, or are you drowning in debt? Do you need to declare a state of financial emergency?

Here are a few considerations.  You know it is time to call a bankruptcy lawyer when you experience the following:

1. Daily reliance on credit cards for living expenses. If you can’t buy groceries, put gas in your car, or pick up prescription medicine without relying on plastic, you need help now. There is a difference between using credit as a convenient form of payment and using credit because you have no money. The first month you are unable to pay your credit card off in full, you are entering very dangerous territory.

2. Reliance on overdraft. Many in financial crisis write checks they are unable to cover with their own resources. They might have $ 50 in their checking account, but they consistently write larger checks and rely on the bank to make up the difference. This is a very expensive and dangerous habit. Develop your own emergency fund. If you are single, or are the only income earner in your household, you should have a minimum of 6 months of cash to cover your fixed living expenses. Married individuals with dual incomes need at least 3 months.

3. Collection activity. It is not uncommon for those needing help to say they just don’t open the mail anymore. Maybe they are even throwing the bills in the trash. If you have reached this point, you need help now. When bills pile up, you need to take action immediately. This applies to those getting collection calls at home, or at work, and those who are being sued by creditors.

Don’t be tempted to use the wrong tools to handle your financial crisis. These include payday loans, cash advances, taking money from retirement accounts, and debt consolidation scams. A skilled specialist, like a bankruptcy lawyer, can explain all of your debt relief options available under the law.

Under the U.S. Bankruptcy Code, if a debt is discharged in a bankruptcy case, it does NOT count as taxable income.  Bankruptcy-discharged debt is, therefore, much more powerful than merely canceled debt.  While canceled debt may create an income tax liability, discharged debt does not. See What is a 1099c and what do I do about it?

CANCELED DEBT SOUNDS GOOD

We all know that wage income is taxable.  Take a look at your latest pay stub and remind yourself just how much the government actually takes.

But what are the tax ramifications of canceled debt?  Is canceled debt treated the same way as regular income?  Will you end up owing the IRS because of a debt settled or canceled by a creditor?

By “canceled debt” I mean that portion of a debt that a creditor is unable to collect from you and is later ”written off.”  Its that pile of bills you have no ability to repay and is basically not collectible.

First, lets consider some examples.  What if you borrow $ 100,000 from a bank and then default after only repaying $ 20,000?  How should the $ 80,000 unpaid portion be treated by the Internal Revenue Service? Here is another example. If you owe $ 8,000 on a Visa credit card and stop making payments, how should the creditor’s loss be treated on your tax return?

Generally, a creditor’s loss is your income gain.  When a creditor loses hope of collecting a debt, they may cancel the debt and report the amount canceled to the IRS using form 1099-C (Cancellation of Debt).  Then, when tax season arrives, you receive your 1099-C and report the canceled debt as additional income subject to the tax ax.

This is why many debt management, or debt consolidation programs are dangerous.  While they may be marginally successful in getting your phone to stop ringing from debt collectors, they cannot prevent the IRS from knocking on your door wanting to tax you on the canceled debt.

DISCHARGED DEBT IS BETTER

This is not to say that a creditor won’t still attempt to send a  debtor with a bankruptcy discharge a Form 1099-C.  The solution for one who has filed bankruptcy, however, is to file IRS Form 982.  This can exclude the amount of discharged indebtedness from your gross income.

In a future post, we will consider the Mortgage Forgiveness Debt Relief Act of 2007.  While the act will not prevent a mortgage company from suing you, it may remove the tax liability of canceled debt for a homeowner on his principal residence.

CHARGE OFFS

Don’t confuse “canceled” debt with “charged off” or “written off” debt.  A “charge off” means the creditor has removed the account from its active books and likely sent the account for collection or sold the account to a debt buyer.  You may see “charge off” on your credit report, but that does not mean you don’t owe the debt.  You still owe the money unless the debt was canceled with a 1099-C or the debt was discharged in bankruptcy.

We all handle medical problems differently.  Go to any Emergency Room and you may wonder why the guy experiencing chest pains for the past week didn’t come in earlier and why the kid with the splinter is there at all.

Financial problems are the same.  Some delay getting financial counsel, while others are pro-active and want to prevent a problem before it becomes uncontrollable.

I had two very interesting calls the other day.  One came from a single man in his twenties who was in obvious distress.  He had no children, no real estate and surprisingly no credit card debt.  He also had no medical bills, student loans, or back taxes.  He was in good health and had a steady job.  So, what was his problem?

After a few minutes, I discovered that he had no debt other than 13 payments remaining on a vehicle lease.  He was struggling every month to make the lease payment and was just tired of the struggle.  He was thinking of surrendering the car and dealing with the problem later  . . . . through a possible bankruptcy.

My advice for him was to NOT file bankruptcy.  He was young, had no particular time commitments (i.e. family), and should consider getting a second job to earn extra income.  He only needed $ 5,000 over 13 months to complete the lease.  I gave him a few other ideas and was happy to tell him that bankruptcy was not the solution to his financial splinter.

My second call came from someone who did NOT want to file bankruptcy, but was just calling for advice.  She was a single parent of two children, received no child support, and was struggling on a very modest income. 

She earned considerably less than the median income for a household of three.  She explained how she was current on all her credit accounts except for one and considered herself managing pretty well despite owing more than $ 50,000 in credit card debt.

I was curious how she was able to work such magic and stay current on most of her bills.  After listening to her monthly budget, I got my answer.  She was living in a fantasy. 

She had no health insurance, no life insurance, budgeted no money for household maintenance (which typically runs 1 to 1.5% of a home’s value), no money for vehicle maintenance, and claimed to need only $ 75/ week for groceries. 

I had heard enough.  My advice to her was to file a Chapter 7 bankruptcy and get a fresh start immediately.

She was in survival mode.  She had walked this financial tight-rope for so long, she forgot how dangerous it really was.  She was jeopardizing her health (no health insurance) and the welfare of her children (no life insurance) all for a debt she would not be able to repay in this lifetime.

If you are struggling with more than $ 10,000 in unsecured debt, here is what you must understand.  Financial problems just don’t go away.  Most will worsen unless timely advice is sought.  Sometimes budgeting and repayment is the answer, while other times protection under the bankruptcy code should be considered.

If you are interested in having your financial problem diagnosed, you should contact a skilled financial attorney today.  He will take the time to understand your unique situation, then develop a plan to help you restore your financial health.

Violations of the automatic stay in bankruptcy are common.  Most consumers who have seen their rights violated in bankruptcy have lawyers who will sue for money damages.  For the most part, lawyers who sue creditors for violations of the automatic stay in bankruptcy also have the ability to get the creditor to pay their legal fees.  This makes it easier for people to sue to enforce their rights without having to worry about the cost involved.

For people who live in California, Alaska, Arizona, Guam, Hawaii, Idaho, Montana, Oregon, Northern Mariana Islands and Washington State, that may no longer be the case.

On October 1, 2009, the Ninth Circuit Court of Appeals issued its decision in Sternberg v. Johnston (clicking the link will take you to a PDF of the decision).  The court affirmed a violation of the automatic stay 11 USC 362, yet held that legal fees could only be recovered to the extent that they were incurred in connection with enforcing the automatic stay and remedying the violation, and not in the litigation of damages.

In other words, the lawyer could get paid for doing the work to make the creditor pay attention to the bankruptcy law.  But once the creditor fell back in line, the lawyer couldn’t recover any more fees.  Including, of course, the fees incurred in suing for fees and damages.

This decision now seems to over rule the Ninth Circuit BAP’s earlier decision inthe case of In re Walsh, Bkrtcy.N.D.Cal.1997, 208 B.R. 949, affirmed 219 B.R. 873, wherein it held that attorney fees asserted by a successful debtor in the prosecution of an appeal of a stay violation would also be entitled to recovery.

Thus, an individual debtor injured by a willful stay violation must be able to recover all damages arising from the willful stay violation, including any costs and attorney’s fees incurred on appeal.

So will this new decision from the Ninth Circuit stifle representation to debtors who prosecute these claims where no attorney fees are available for pursuing damages? Probably not.

To start, any prosecution of a violation of the automatic stay in bankruptcy over damages can usually be handled quickly via a motion as opposed to full blown adversary proceeding. To the extent an attorney seeks compensation for any motion practice solely related to the damages portion of the case, the attorney may simply substitute that portion of fees in exchange for a contingency fee basis in the final award.

Second, in most cases the bulk of attorney fees are actually incurred in attempting to force compliance with 362 on the creditor, not in determining damages. This is because such creditors often are ignorant of bankruptcy law and/or may technically believe the automatic stay does not apply to them. Thus, an initial correspondence from the debtor’s attorney is typically ignored and only after significant court intervention or final ruling will the creditor end violating the automatic stay. Thus in these circumstances, fees incurred in prosecuting the stay violation until the violation ceases at the end of the court proceeding are recoverable.

Third, 362 is not the only arrow in the debtor’s quiver of weapons to use against creditors who violate the automatic stay. Just as a discharge violation under 524 has its remedy under the Court’s contempt powers via 11 USC 105, so too do stay violations. Thus a debtor may desire instead to seek a contempt remedy under 105 instead of a private right of action under 362. Such a contempt remedy lies in the discretion of the court, and could include attorney fees in the prosecution of the contempt proceeding.

Indeed, the Ninth Circuit’s case of In re Dyer specifically provides that stay violations may be remedied via sanctions under the court’s 105 powers.

Finally, any prosecutions of 362 actions which used to expose creditors to attorneys fees in the damages portion of the case, still bring to the creditor the exposure of coercive sanctions. These coercive sanctions directly arise from compliance concerns that courts usually have where the automatic stay has been violated.

There is a price to be paid in lieu of being hauled into Bankruptcy Court and risk coercive sanctions. In the event such sanctions are entered, compliance costs could be substantial. This is because not only does a creditor now face additional attorney fees it pays in defense of such proceedings, but creating new policies and procedures with respect to the automatic stay of 362 and/or providing the court with evidence of the same could cost tens of thousands of dollars.

Indeed, locally in the Jacobsen case, the Court entered coercive sanctions to force a credit union to comply with privacy laws in the context of a proofs of claims.

Accordingly, that credit union had to create new policies, procedures, and maintenance protocols, to quickly and effectively eliminate its “glitches of disclosing social security numbers and other personal information in claims it filed, and provide evidence of the same to the court. These compliance costs were substantial and it is not uncommon to see compliance costs on large institutions amount to hundreds of thousands of dollars.

Thus while Sternberg v. Johnston has changed the playing field somewhat with respect to the prosecution of stay violations in terms of attorney fees, few cases should be impacted by its decision and creditor exposure to liability for the most part remains.

Image credit: timparkinson/Flickr

You just filed a bankruptcy.  You thought everything was under control.  Now you got a letter from the bankruptcy court.  Inside that letter is a notice from the court.  This notice contains all sorts of important things and you should read it.

What is in the notice? If you file a Chapter 7 Bankruptcy the notice will contain the following important information. This information can be relayed to creditors who still call.  This information helps you to know what is going on.

1. Your case number will appear in several spots.
2. The date your case was filed.
3. It will tell you who your Judge is.
4. It will tell you who your trustee is.
5. It will tell where and when you need to go to court for your meeting of creditors.
6. It will set a deadline for creditors to object to your bankruptcy. ( if no objection is filed usually your discharge will be mailed shortly.)
7. It sets the deadline for an objection to be filed to your exemptions.
8. It will set a deadline to file proof of claims if it is an asset case but usually the notice will reserve the setting of this deadline to a later date.
9. It all explains certain rights you have and your creditors have. The chapter 13 notice tells you some other things about your case too.
10. The chapter 13 notice will set out your case number, your Judge and your Trustee.
11. It will also tell you when you need to be in court and where to go.  This is known as your meeting of creditors.
12. It sets a deadline for proof of claims to be filed.
13. It sets a deadline for filing objections to your Chapter 13 plan and the value of your assets.
14. It sets the time and place for a hearing on Confirmation of your plan.This is a second important date for your calendar.  This is a date you need to review with your counsel.  You may not need to attend this hearing if no objection is filed or if the objection is resolved.  How confirmation hearing are handled vary throughout the country. The notice is an a very important document to review and understand.

When filing bankruptcy, a client’s first question often involves whether or not they can keep things they own, like their home, their car, or their 401(k).

These questions are important, and the answer to the question is two-fold:

1. Is there a lien against the property?

2. If no lien exists, what Bankruptcy Exemptions are available?

If there is a lien against the property, which is equal to, or more than the value of the property, as long as you remain current on the payments for that house or car, you will be able to keep the property.

If there is no lien, or the lien is less than the value of the property, you have some equity in the property. When you have equity in property, your attorney must review the exemptions available to you, and determine if there is an exemption available which will protect that asset.

Individual states have the right to use the Federal Bankruptcy Exemptions, or to set their own. In New York State, debtors in Bankruptcy are usually entitled to use the New York State Exemptions. There are rules regarding debtors who have not resided in New York for all of the last two years, and the exemptions they are required to use, so if you have recently moved to New York, discuss with your attorney what exemptions will be available to you.

Below is a list of the common exemptions available in New York State:

• $50,000 in equity in the home, condo or mobile home that you live in; a married couple will be entitled to a $100,000 exemption
• If you do not own a home, or if you have no equity in your home and do not need the homestead exemption, you may exempt $2,500 in cash or deposits in the bank, $5,000 for a couple
• $2,400 in equity in a vehicle
• 100% of valid 401(k), 403(b), IRA accounts, and other ERISA qualified retirement savings accounts
• Up to $5,000 in household goods, valuing those household goods with a craigslist or yard-sale value
• 100% of funds on deposit in a valid college tuition savings program trust fund for a child
• A wedding ring, no matter the value (though not an engagement ring)
• Tools necessary for your trade or business, up to $600
• Pension, social security or worker’s compensation benefits
• Child support and alimony payments, to the extent necessary for the support of the debtor and his or her children
• Up to $7,500 in a recovery from a personal injury action
• Domestic animals, and 60 days of food up to a value of $450

Additional exemptions do exist, so if you have an interest in any other types of property you are concerned about, be sure to discuss those assets with a qualified attorney, such as one of the attorneys on the Bankruptcy Law Network.

Bankruptcy exists to provide debtors with an opportunity to obtain a fresh start. Thanks to the Bankrutpcy Exemptions, that fresh start should include your home, your car, your favorite arm chair, and even—or especially—Fido the dog.

Recently I posted a Blog on the unfavorable In re Martinez decision recently handed down by the Ninth Circuit BAP on October 5, 2009.  Well, the Ninth Circuit BAP did it again that same day in another case with a slightly different twist in the Smith matter.

The BAP essentially issued almost the same opinion, but applied its rational to property that was being surrendered as opposed to being stripped.  Thus the BAP now holds that if a debtor will surrender vehicles, real estate, or other secured assets, one can no longer take a deduction on Form B22′s “projected disposable income” test.  Perhaps the BAP didn’t realize how absurd this new ruling would play out?

Such an absurdity now arises from the irreconcilability between the Chapter 7 “means” test and the Chapter 13 “projected disposable income” test since deductions are allowed in chapter 7 cases on secured debt whose collateral will be surrendered, yet not allowed in chapter 13.

An example best illustrates this fatuousness.  If a debtor proposes to surrender a vehicle in chapter 7 which provides a $300 per month deduction(assuming a $9,000 car with an $18,000.00 debt), he is still entitled to secured debt deductions on Form B22. Assuming Form B22 results in negative disposable monthly income of -($100.00),however, that same debtor would not be allowed the same deduction in chapter 13, which in turn would result in a positive $200.00/month for projected disposable income purposes.

Thus if this debtor had great intentions and desired to pay back creditors in chapter 13 instead of eliminating the same in chapter 7, he could be penalized a $200.00/month surcharge to unsecured creditors for 60 months simply by surrendering the vehicle.

Yet that same surrender in chapter 7 is completely proper and results in$0.00 to unsecured.  That’s right, pay a mandatory $12,000.00 in chapter 13 or $0.00 in chapter 7,  if you want to surrender the vehicle.  But wait, it gets worse!

If the same debtor chose not to surrender the vehicle in chapter 13 and kept the vehicle instead, he now avoids the $200.00 per month unsecured surcharge and will eventually own the car free and clear.  Instead, he pays about $150.00 per month with interest for 60 months and owns the car free and clear.  Huh?  Pay $200 per month and not own the car or pay $150 per month with interest and own the car????

If you think this is ridiculous, you are not alone.  Many attorneys are struggling to make sense of the BAP decision right now, and it is anticipated that many Bankruptcy Courts will disregard its decision.  But that is what happens when a court decides to stray away from the plan language of a statute and create its own interpretation solely based upon assumptions.

Due to assumptions, as in this case where property is being surrendered, it makes absolutely no sense to allow secured deductions in chapter 7 and disallow the same deductions in chapter 13.  Such a disparity between the chapters completely disregards Congress intent of incorporating the chapter 7 “means” test in chapter 13 via 1325(b)(3).

But its not over yet.  The BAP certified this case to the 9th circuit court of appeals.  Perhaps the 9th circuit will get it right and reverse.

Written by Michael Doan

On October 5th, 2009, the Ninth Circuit Bankruptcy Appellate Panel (BAP) published its decision in In re Martinez, wherein it concluded that debtors who strip junior liens off mortgages are not entitled to deduct those payments from the chapter 13 projected disposable income test.  While the decision was ordered published, the 3 judge panel disagreed with each other in a 2-1 split decision.  Unfortunately, it also technically comprised three seperate appeals, yet all of which were entirely unopposed by the debtors with only the Chatper 13 Trustee arguing the appeal in favor of eliminating the deduction.

To make matters worse, the decision now stands since no appeal was filed to the Ninth Circuit.  Nevertheless, BAP decisions are not binding upon other Courts, except perhaps the originating court.  Moreover, the BAP decision is also less persuasive than usual since the appeals were unnopposed.  In the Southern District case of In re Enriquez, 244 B.R. 156, (Bankr. S.D. Cal. 2000), Judge Bowie observed at 159:

In the context of the issue raised in Lam, the Court finds that decision less persuasive than usual, in part because there was no participation by the creditor in the appellate process. Those circumstances have apparently persuaded Judge Dorian, as well, that Lam is not persuasive. In re Ortiz, 241 B.R. 460 (Bankr. E.D. Cal. 1999).

Thus, In re Martinez was no different. In those three appeals, none of the debtors participated at all.  Accordingly, that decision is probably  “less persuasive than usual.”

Perhaps of greater significance is that the BAP just plain right got it wrong.  This is because the BAP attempted to interpret 1325(b)(2) and (b)(3) without looking at the plain language of the statute.  As the dissent in that opinion correctly observed:

One day this week, I got so angry at my potential clients.  I did not express this anger out loud, but I did  want to reach across my desk and say  YOU SHOULD HAVE COME HERE WEEKS OR MONTHS AGO.  Three new clients, and all three of them, would have had much better options had they been in my office before they made their situation worse with bad decisions.  I knew there is a stigma about filing bankruptcy. I knew you would rather see anyone but a bankruptcy lawyer, but we often have the information to make a bad situation better or at least to protect you better.  Come see what my clients did before you do the same.

Client one had worked out deal with some of his credit cards to get them to stop calling.  He gave two of them permission to debit his checking account to avoid the phone calls.  Then he fell behind on his  car payment and his car was repossessed  several months ago.  Now the car lender was threatening to garnish his wages.   I wanted to scream.  The client had lost his car and put his house in jeopardy.  Had he been to my offices early at the least I would have told him pay your secured debt first.  Do not allow a creditor to do automatic withdrawals from a checking account to stop phone calls.  The client might have even saved his car in a Chapter 13.  Now the car is gone and the house is in arrears.

Client two transferred his house and his car to hide them from his creditors.  Now he was being sued and his wages were being threatened.  Well that was a mistake as he has now lost his exemptions for his house and his car.  Turned out both would have been protected easily in a Chapter 13.  This client listened to the wrong information and would have been helped by seeing a bankruptcy attorney.

The third client had been sending money to a debt management company and a mortgage modification company.  The client was still being sued by the creditors.  The debt management company had settled a couple of the debts, but again, the client was being sued. No one had explained to the clients how the collection process works and how long it takes. The mortgage modification company was a scam.  The bankruptcy lawyer could have provided these options.

Each of these clients were afraid to come to a bankruptcy lawyer.  They were afraid that filing  bankruptcy was calling themselves a failure.  They were afraid they would ruin their credit and credit score.  Each of these clients would have been able to get themselves in a better position, held onto more assets and finally get themselves some relief if they had come into see a bankruptcy lawyer sooner then later. Bankruptcy lawyers spent all their time dealing with the problems people have with their creditors.  We have the experience and knowledge to explain all the options you have to deal with your creditors.  We do it everyday.  Bankruptcy may not be the best answer for you but the only way you are going to understand your best options is to see a bankruptcy lawyer and see the lawyer early.