It’s tax time and the hunt goes on for tax deductions to lower your income tax hit.

Tax deductions lurk in the most unlikely places.

If your Chapter 13 plan is catching up home loan arrears, look at your trustee’s annual report for some deductible mortgage interest.

Most likely, the lender’s filed proof of claim in the bankruptcy case is interest on the loan which accrued but was not paid before the case was filed.

Lender’s claim loaded with interest

Until very late in most 30 year mortgages, a substantial amount of each monthly  payment on your home loan  is interest.  That mortgage interest can be deducted if you itemize deductions.

For reasons that I can’t explain, mortgage lenders do not seem to provide a 1099 for mortgage interest paid through the trustee.  But then, the whole business of accounting for mortgage payments made through Chapter 13 seems to be beyond most loan servicers.

How to find the deductible amount

All Chapter 13 trustees have information available on line for debtors whose cases they are administering.  Usually, the instructions for how to access the information about your case is provided at the 341 meeting.

Find the section of the trustee’s site that shows disbursements or payments.  Locate the claim filed by your lender, or its servicer.  The report will show how much has been disbursed on that claim.  You’ll have to isolate what’s been paid in the last tax year.

If you can’t sort the information for disbursements in a given period, you can look at the ledger of all disbursements;  flag and total the payments to your lender.

Making a record

The IRS relies on 1099 forms sent to them, with copies to the taxpayer, to verify your right to the deduction.  Since the lenders don’t seem to acknowledge Chapter 13 payments as interest, you’re on your own to back up your claim for a tax deduction.

I suggest that you get a copy of the bank’s proof of claim, print off the trustee’s disbursement records, and save them along with a copy of your plan with your supporting tax documents.  You’ll want to be able to back up your tax deduction.

Other deductions hiding in the underbrush

The same principle, that payments by the trustee are really payments attributable to you, the tax payer, applies to any deductible taxes or business expenses that the trustee has disbursed.  There is no reason to let those tax deductions go to waste.

Happy hunting.

Image courtesy of bethanne.

The mail carrier brings a envelop with official looking papers that name you in a law suit.  It says something about U.S. Bankruptcy Court.

So what?  you think.  It’s not official til I’m served with papers by a human being.  Due process and all…

Think again.  One of the unique features of  Title 11  is service of process by first class mail.

That’s right.  You can be properly served with a bankruptcy law suit by the post man.  There won’t be a process server delivering bad news to your house.  All it takes is a postage stamp.

Timelines for response to a law suit in bankruptcy court are shorter than in most state courts.  The time for filing an answer starts to run, not with service of the summons, but from its issuance by the clerk of the bankruptcy court.  So time moves quickly if you are a defendant.  Get advice from an experienced attorney promptly.

The last time we got a major overhaul in insolvency law, 1978, the drafters tried to eliminate an entire world of pointless, time consuming legal fights about jurisdiction by giving the bankruptcy court nationwide jurisdiction.  That means that you could be party to an adversary proceeding  in a bankruptcy court in the next state or even on the far coast, if you have some connection to the debtor in that  case.

The reach of the bankruptcy courts gets magnified when you consider the tendency for large corporations to file their Chapter 11′s in Delaware, where the bankruptcy courts are supposed to be debtor friendly, or in Manhattan.  The venue rules in bankruptcy allow a wide choice for debtors who can file where ever they have assets.

The postmark on that oh-so-important envelop may be from courts far distant and it has local impact.

Nationwide service of process by mail works in favor of my debtor clients when we are trying to strip off a mortgage lien or challenge the dischargeability of a debt.  For the price of a postage stamp, my clients  can bring Chase, or Bank of America, or U.S. Bank to the San Francisco Bay Area bankruptcy court.  No need for expensive and time consuming personal service.  Put the summons and complaint in the mail, first class, post paid,  and let’s talk about the merits of our adversary.

So, respect the power of  a postage stamp if it brings you a bankruptcy summons and complaint.

Images courtesy of Smithsonian’s National Zoo.

Somewhere in our recent past, the holiday season became the shopping season.

Lots of people in financial trouble hang on through the holiday season before taking up bankruptcy as part of the New Year.  (I haven’t seen many people give themselves a bankruptcy filing for Christmas, though, for many, it would be objectively the best thing under the tree.)

If bankruptcy may be  in your  future after the holidays, it pays to know how credit card debt is treated in bankruptcy.  Welcome to the short list of ways to miss out on discharging credit cards in bankruptcy.

In the typical bankruptcy,  credit cards make up the largest part of the unsecured debt. The basic premise in bankruptcy is that unsecured  debt is dischargeable unless it appears on the list of non dischargeable debts in § 523(a).  As the heading to the statute says, non dischargeable debts are exceptions to the rule of dischargeability.

There are two basic ways to blow your chance to discharge the balance on your credit card in bankruptcy:

1. Lie on the credit application to get the credit
2. Use the card fraudulently

Lie to get the card

If credit was granted to you on the basis of a false application , there’s a risk that the entire balance on the account  could be non dischargeable.   Suppose  that you  misstated your income , assets, or employment status to look more credit worthy.  Those misstatements fall within the exception to discharge for debts created in reliance on a false statement in writing.

Practically, I’ve only seen this kind of challenge once in 31 years of bankruptcy practice.  The card application was submitted within months of the bankruptcy filing and the entire picture of the applicant in the application was a fabrication.

I have my doubts that most card issuers can retrieve a copy of the application or are much exercised about proving up misstatements, when there’s another route to saving their claim from discharge.

Use the card fraudulently

Credit card charges may survive a bankruptcy filing if they were incurred by false representations or actual fraud. Since no one plunks their card down with the announcement that they don’t really intend to pay  the issuer, courts have had to find ways to infer what’s in your head when you make that purchase with plastic.

The legal fiction that has grown up is that when you present your plastic  to pay for a purchase, you make a representation that you intend to pay the  issuer.  If that weren’t so, the entire credit card industry collapses.

Credit card issuers, then, are looking for evidence that the bankruptcy debtor didn’t intend to pay.  They look to the facts that appear on the card statement and ask courts to infer from those facts the debtor’s state of mind.

What triggers the assumption the  use was fraudulent?

• Dramatic run up in account balance shortly before bankruptcy filing
• Purchase of non essentials
• No payments after significant purchases
• Going over limit
• Continuing use right up to bankruptcy

This list isn’t exhaustive, but it touches the things the creditor can see from its records and use to form a conclusion that the debt wasn’t incured with an intention to repay.  Here’s more factors courts consider when looking for fraud.

Part of my charge to clients when we first meet to discuss bankruptcy is to stop the use of credit cards.  It is hard to argue to a judge that even though you’ve met with a bankruptcy lawyer, you really did intend to pay when you swiped your card the next week for a weekend getaway.

Another time, we’ll talk about responding to the charge that card use was fraudulent.

In the mean time, if you are considering filing bankruptcy, remember that your use of your credit cards, even within the card limits, is subject to scrutiny in your bankruptcy case.  If proven fraudulent, those charges may be with you for the New Year and beyond.

Image credit: © yellowj – Fotolia.com

Unlike red wine, the information you provide a bankruptcy lawyer does not improve with age.

Bankruptcy information is far more like fish:  no longer palatable after it sits for a while.

A bankruptcy filing is a snapshot of the client’s situation on the day the case is filed.  From the point when the case is filed,  bankruptcy law looks backward and forward.  The rights of all of the parties are driven by the passage of time.

For instance the statement of financial affairs  looks back at  recent financial history:

• Income year to date
• Income for the past two years
• Payments on old debts in 12 months
• Transfers or gifts in past 24 months

Spend money, when you’re broke, to go broke?  Seems counter-intuitive, but it could be the best money you spend.

Fear, pride, uncertainty, stubbornness, distraction, and cash flow keep people from getting their financial life  in order with a bankruptcy filing.

As a means of regaining control of your life and your pocketbook, however, it may be the best move you can make.

Inaction, however unpleasant, is easy.  It’s familiar and tolerable.  Like it or not, it’s a safe choice.

You can’t get more hurt by doing nothing, right?  It’s the devil you know, as opposed to the devil you don’t.

But what if the alternative is getting out from under your bill problems and jump starting your financial life?  Clearly, in that case it becomes far more attractive to leap than to stand still.

So if you’re having bill problems and are on the fence, these ten reasons that filing bankruptcy now may help you make your decision.

1. The stress of bills you can’t pay, collection calls, and worry about garnishment can ruin your health.
2. Current law and depressed property values may allow the voiding of junior liens on  your home.  If values increase in future, this opportunity may be unavailable.
3. No tax is generated by discharging debts in bankruptcy;  not so, if you settle debts outside of bankruptcy.
4. You can keep more of your assets when exemptions are applied to investments with depressed current value.
5. The federal tax exclusion for cancellation of debt on foreclosures of principal residences expires in 2012, is limited in scope, and doesn’t deal with state taxes.
6. Your credit report doesn’t start healing until the debts are paid off or discharged in bankruptcy.
7. Relationships suffer in times of financial distress.  Save your marriage, ditch your debts.
8. Anonymity in numbers:  there have been lots of bankruptcy filings over the past several years.  Your decision to file now makes you one of a crowd of people with the same problem.
9.  Wait to file  until your income improves and the means test may require that you file a repayment plan.
10. You aren’t getting any younger:  chances are you are poorly prepared for retirement.  Every dollar spent making minimum payments is a dollar you’re not saving for retirement.

For most of those buried in debt, neither inaction nor incremental solutions will solve the problem.  Many of the “reasons” that hold people back from the bankruptcy solution are based in myth and misunderstanding.  Think through my list, follow the links to read more, and imagine a life free of dischargeable debts.

See a bankruptcy lawyer and explore how these principals apply to your situation.  The financial return on a bankruptcy filing is eye popping.

Image courtesy of epsos.de.

Anti debtor attitudes in the “reformed” bankruptcy  law make Chapter 13 resemble debtor’s prison, claims my BLN colleague Carmen Dellutri.  Let me counter that being in debt is itself  debtor’s prison, and if the escape route out of debt has some rough spots, it’s still better to end up debt-free through Chapter 13.

As a society, we provide a legal means to walk away from debts in the form of bankruptcy because we believe that the society is better off if debtors can start over, financially.  People have an incentive to work; we don’t drive the indebted into an underground economy.

The supposed bankruptcy “reform” act is a Congressional expression of hostility to those in debt and the lawyers who help them, without doubt.  And how that hostility plays out in bankruptcy courtrooms across the country varies widely.

The atmosphere in the Northern California bankruptcy courts where I practice is not nearly as pinched and extractive as the atmosphere that Carmen describes.  Here, the debtor usually keeps any increase in income he experiences during the life of the plan.

Even if  my Chapter 13 trustees chased the debtor for every penny of improvement in their income during the plan, I’d still be advising clients to file Chapter 13. Remaining in debt is a virtual  life sentence.  Take a look at my analysis of how long it takes to retire a modest amount of credit card debt by making minimum payments:  37.5 years!

Suppose you could devote more than minimum payments to paying off your debt and you shortened the time it took to become debt-free in half.  That’s still  more than 18 years, years in which you probably save nothing for retirement, short your emergency fund, and sentence your kids to crippling student loans if they want to go to college.

Being in debt is extremely stressful and stress is deadly.  A Chapter 13 plan provides certainty and the protection of the bankruptcy court while the debtor with some disposable income makes payments to some fraction of his debt. The debtor can relax and focus on family and work.  The plan is completed in 3 to 5 years.

What is required to be paid to the plan is the money that  is left after a basic budget.  My experience with families trying to pay off their debts outside of bankruptcy is that they make terrible choices about which creditor to pay first, shorting the taxing authorities to pay the unsecured credit cards because the credit card collectors call multiple times a day.  That doesn’t happen in Chapter 13, where the debtor writes the plan, within the statutory rules, and the support and tax claims get paid first, before consumer debts.

Carmen has it right that too much of the change in the law is mean spirited and without compassion or perspective on the consequences of discouraging bankruptcy relief.  People get into debt for a variety of reasons, some by bad judgment and others by bad luck.  The recession around us wasn’t caused by any action of an individual, yet individuals are among its chief victims.

But the fact that the operation of Chapter 13 in some locales is less than optimal should not blind us to the positives of using the law to escape perpetual economic servitude.

 Image courtesy of XOZ.

If you’re a bankruptcy lawyer, would you like to master the essential skills every bankruptcy attorney must have … all by Labor Day?

Most outsiders think the practice of consumer bankruptcy law is nothing more than filling in a bunch of forms and collecting a fee from a client. But now that you’ve been doing it for a little while you realize just how off the mark that is.

I think the practice of consumer bankruptcy law is among the most difficult practice areas in terms of the amount of liability heaped on the debtor’s attorney, who is usually working under time and economic pressures. One slip and you’re staring at bar complaints, loss of standing with the court, and possible sanctions against you.

Beginning on Tuesday, June 28, 2011 I will be teaching through my educational program, Bankruptcy Mastery, a weekly Summer Lunch And Learn series focusing on ten essential skills that every consumer bankruptcy practitioner must have in order to successfully represent consumer debtors.

Each session will be done by teleconference line, will run about an hour (some slightly less, some a touch longer) and will be accompanied by real-world forms and easy-to-use practical resources to help you.

Each week on Tuesday at 1:00pm Pacific Time we will tackle one of the following topics until we’ve covered all of them:

• Defending motions for relief from stay
• How to strip a lien
• Analyzing tax issues in bankruptcy
• Geting hardship discharges in Chapter 13
• Objecting to claims
• How bankruptcy impacts a debtor’s business
• Avoiding liens impairing exemptions
• Avoiding automatic dismissals
• Reaffirmations – what to look out for, what to avoid, and how to handle them properly
• Dealing with stay violations

There’s an Early Bird discount if you sign up by Friday, June 17, 2011 at 5:00pm Pacific Time.  So if you’re a lawyer who’s looking to increase your base of knowledge, click here.

Filing bankruptcy does not predetermine what happens to the house after bankruptcy. 

In an era of underwater houses, the home may just pass through bankruptcy in the direction of your choosing thereafter.

The eventual fate of the property does not necessarily have to be decided before a bankruptcy case is filed;  if the house is either fully exempt or hopelessly underwater, there is time to make a decision.

The administration of assets in Chapter 7  bankruptcy is all about finding unencumbered, non exempt value in assets that can be turned into cash for the benefit of creditors.

In Chapter 13, the calculation of that unencumbered, non exempt equity is one determinant of how much the debtor must pay into the Chapter 13 plan.  The debtor keeps the assets, but effectively buys them back from creditors.

If the house has no non exempt equity, after deducting the costs of selling it, a bankruptcy trustee is not interested in administering the property.  The trustee has no desire to take property from a debtor just so the debtor keeps nothing:  the trustee hopes to find value for creditors.

So, what are the options for a house after bankruptcy:

1. Keep the house and continues making payments, just as before.
2. Surrender the house, and generally live there payment free until there is a foreclosure.
3. Seek  modification of one or more of the loans secured by the property.
4. Sell the property for its current value with the cooperation of the secured creditors.

Each choice has its advantages, but the choice is seldom dependent on how the bankruptcy plays out.

Pitfalls I encounter start with the client who believes she must, at any cost, keep the house.  Sometimes the fixation is wrapped in “we must do it for the kids”.

Sometimes it represents a fear that she will never get into the real estate market again.  Sometimes it’s the fear of change.  Seldom is the compulsion to keep an underwater, overly expensive house grounded in sound finances.  More about whether you should keep the house.

After a bankruptcy discharge, whatever choice the homeowner makes, the  concern about foreclosure or short sale triggering cancellation of debt income is gone.  The debt secured by the house  is wiped out by the bankruptcy as a personal liability of the borrower;  further developments with respect to the house won’t result in a tax debt.

So, take your time to make a good decision about in which direction you head.

Image courtesy of Mike Quinn.

Debt colllectors use the  threat of being sued  because it terrifies most people. Debt collectors know that, and use it.  Yet most of the things consumers fear are myths.

Among the myths I encounter among my clients:

• I can be sued and not know it.

• The creditor can come to my house and take my stuff.

• I’ll have to explain my situation to a judge  in open court.

• I may go to jail if I stop paying.

These fears are exploited by the  debt collection industry because they  galvanize people: the targets  either pay on a less important debt out of fear, or they  break down and consider bankruptcy.  As a bankruptcy lawyer, I’m torn.

On the one hand, I’m glad to see people and help them analyze how they can extract themselves from debt (they’ve usually waited far too long and should have thrown in the financial towel long ago); on the other hand, service of a summons and complaint is not an emergency .  There is plenty of time to make a plan and execute it before the suing creditor gets a judgment.

So, let’s walk through the steps in a collection law suit and see how it works.  My timelines are drawn from California law, and the details may differ elsewhere, but not substantially.

Creditor hires a lawyer Except in small claims court, a corporation must be represented by a lawyer.  So the decision to sue a delinquent card holder comes at a cost to the creditor.  They must either pay for legal counsel or give up a percentage to a collection firm working on a contingency.

Complaint drafted, filed with court and summons issued The complaint sets out briefly the facts and the law that the plaintiff, the party filing the suit, asserts entitle it to a judgment for money.  The summons is issued by the court and is the court’s written direction to the defendant that “yes, this suit is real, and there are legal consequences if you take no action”.

Summons & complaint served on defendant Our concept of due process requires that a person get notice and an opportunity to defend before the state puts its law enforcement mechanisms behind the claims of the party suing.  The rules for how service is accomplished vary, and in my experience, it is this aspect of the system that seems to be breaking down:  process servers, those people licensed to serve summons seem to be willing to attest to serving the named defendant without having done so.

Defendant gets a set time to answer The time when a written answer is due is set out in the summons.  In California, the summons says the answer is due 30 days from service of the complaint.  Served with the summons is a notice of a case management conference.  Too many people don’t read the documents word for word, spot the date for the conference and assume they don’t have to act before then.  WRONG!  If no timely answer is filed, the plaintiff can ask for a judgement long before the date set for the hearing.

Absent an answer, creditor asks for judgment The system is set up so that judges are entitled to conclude that you do not dispute the creditor’s right to a judgment if you don’t file an answer.  Your ability to pay the debt is not at issue at this point: the issue for decision is whether the law entitles the creditor to a judgment.  In California, the statute of limitations is a defense to an otherwise valid debt, but the creditor gets the judgment if no answer asserting the statute is filed.

Judgment is entered The judgment is the court’s determination that the creditor is in deed owed the money it claims and that the creditor can use the law and the mechanics of the government to levy and garnish to collect that judgment.  Judgments can be set aside if a court finds that there was no legally effective service or for other excuses.  The longer a judgment remains of record, the harder it is to get the default vacated.

A perfectly efficient creditor, who acted the very day that the next action in the sequence is permissible, needs 60-90 days from the filing of the complaint, to get a judgment, and longer to get a writ issued to enforce the judgment.  And collection lawyers are not perfectly efficient.

So, the point of this exercise is to hammer home the fact that a collection suit takes time and you will see it coming.  Rules surround the process.  We do not put people in jail for not paying.  (You might be jailed for failing to show up pursuant to a court order issued to collect the judgment, but jail is not the consequence of not paying, it’s the consequence of ignoring a judge’s order.)

Faced with a complaint, meet with a bankruptcy lawyer and explore the big picture in your financial situation.  Figure out where this lawsuit fits in the overall scheme of things.  Don’t let unfounded fear stop you.

Image courtesy of Wonderlane.

Why is it that bankruptcy lawyers value their work so little that they rush to be the cheapest attorney in the Yellow Pages?  Why do they meekly accept what the bench considers a “presumptively fair” fee?  Why is eye popping quality not the hall mark of  the consumer bankruptcy bar?

The court adopted no-look attorney’s fee has something to do with it.  In an effort to avoid having to review each and every consumer bankruptcy case, the courts publish a benchmark price, the no-look fee.  They announce up front that they won’t look at the reasonableness of fees if the price charged doesn’t exceed the benchmark.

So, in a twinkling, that becomes the price for a consumer case in the community.  Bankruptcy law has seen a huge influx of new lawyers, many with little experience, having little basis other than price on which to compete with the mass of lawyers.  So the price of a bankruptcy case gets pushed down further.

Of course, none of this price competition, which we usually think of as a positive in the economic arena, makes the representation of consumers in bankruptcy law any easier in actuality.  Filing a bankruptcy under the “reformed” law is long on hoops to jump through, short on logic, and complicated by the foibles of  the real live people who are filing bankruptcy.  If the fee is small, the lawyer delegates more and analyzes the facts less;  anything to get more cases out the door.

Judge Karen Jennemann “gets” it.   She took two days of testimony when the UST in Orlando challenged the flat fee charged by attorney Marilyn Hochman, who was accused of overcharging clients for relatively simple Chapter 7 cases.  Hochman had charged two clients almost double the average rate charged by high volume bankruptcy firms, and in exchange, “personally explaining a confusing process and personally helping them through the maze of a bankruptcy case.”  That personal service from an attorney was worth the fee paid, the judge concluded.

It helped that Hochman had time records to back up the amount of her time and that of her paralegal spent on cases.

The judge recounted the testimony of two attorneys with high volume practices. ” Many Chapter 7 attorneys currently charge fees less than the actual cost of providing legal services. Thus, many attorneys, even those with extensive experience, actually are losing money with every Chapter 7 case they file.” Hochman’s records showed that she and her paralegal spent more than 17 hours on each of the challenged cases, where the volume filers  spent 5-10 hours per case. Jennemann’s memorandum decision

Representation in a bankruptcy case is not a fungible commodity, and the quality of the practice is not enhanced when the courts are complicit in leading the public to think so.  When courts contrive to actively discourage practitioners from filing fee applications that seek more than the no- look fee, they cheer on the race to the bottom as far as quality.

Those considering filing bankruptcy should not conclude that the services of one bankruptcy lawyer is the same as the next. Those attorneys filing cases should learn to keep appropriate time records and present fee applications to the bench.  Otherwise, how long can you continue to lose money on every case, as the judge noted?  You can’t stay in business at that rate.