You’re filing a bankruptcy case.  You’re suing someone.  You don’t have anything yet.  Your lawyers says she’s not sure your suit is worth anything.  So you don’t have to schedule it on your bankruptcy papers.  Right?  Wrong!  Big time wrong!!  Your bankruptcy schedules constitute your statement under oath that you didn’t have a claim.  It is an admission that you had no lawsuit or claim at all.  So the doctrine of judicial estoppel will be used against you and you will be stiff out of luck. Too bad. No doubt you are strapped if you are filing bankruptcy.  Your suit might even be the reason you’re strapped.  Maybe you had big medical bills.  But if you don’t list your lawsuit, the trustee won’t know about it.  If the trustee doesn’t know about it, then he might file a no asset report.  Then you’re home free, right? Wrong again!  The defendant in the lawsuit will find out someday that you filed a bankruptcy.    Then what happens?  The defendant will tell your trustee.  Your trustee will reopen your case.  You will probably end up losing your discharge.  And even if the lawsuit results in enough money to pay your creditors in full, your failure to list the lawsuit in your bankruptcy papers will be used against you.

So if you are filing a bankruptcy case, list all your assets. And that includes all lawsuits you have against anyone for anything. It includes any claims you have even if you don’t know what their worth.  It includes any claims you have even if there are significant defenses to the suit.  Don’t get thrown out of court by playing it cute in your bankruptcy case.

Too often, parents forget to consider their children’s assets when filing bankruptcy.  For example, they may control accounts under the Uniform Transfers to Minors Acts.  They may have custodian accounts. They may serve as trustee under various trusts.  They may have established educational savings accounts under section 529 of the Internal Revenue Code.  

No matter, it’s very important to distinguish between things you own and things you hold for the benefit of your children.

You can’t use your children to shield your own assets from bankruptcy.  You certainly can’t transfer assets from your own name into your children’s name before you file a bankruptcy.  This would be a fraudulent transfer and you could lose your right to a discharge in bankruptcy.  Don’t do that!

But on the other hand, if you’ve been saving money for your kid’s college in a protected educational savings account, you’ll be fine.  If you put money away for your children in a trust before you got into financial problems, you’ll be fine too. If you’ve been saving gifts given by the grandparents for the children in a custodian account, you’ll be fine too.

Be sure to disclose all of this information to your bankruptcy attorney.  You’ll want to disclose every account you have, no matter for what purpose in your bankruptcy petition.  But you’ll also want to be able to explain why the account is in your name and why the account really belongs to or is for the benefit of your children.

The same logic applies when you  are holding assets for the benefit of your aging parents.  What’s theirs is theirs.  Be sure that you don’t muddy the waters and leave your parents’ assets vulnerable to a bankruptcy trustee in the event that you have to file a bankruptcy case.

Full disclosure to your attorney is always the right approach.

Before filing a chapter 13 bankruptcy, we need to figure out what you are paying.  Clients who have disposable income do have the choice to put their income to uses which are permitted by the Bankruptcy Code.  The means test is mechanical but not totally inflexible. If you have a choice of spending your money on life insurance, health insurance, disability insurance or long term care insurance as opposed to, let’s say, paying more to your unsecured creditors, I think the choice is rather obvious.

Recently, a married couple – both in their early 60′s – with a combined family income of $120,000 visited me. They do need to file a chapter 13 bankruptcy because they have a lot of unsecured credit card and medical debt.  The principal earner in the family was ill and out of work for close to a year.  They want to get their financial affairs in order before they retire.  They have pretty good income.  But so much of their income would go to pay creditors in chapter 13 because their current monthly income is rather high.  There is room in their budget for insurance. And boy do they need it. And under the Bankruptcy Code, it’s ok to buy term insurance. Check out line 22.  And health insurance is also deductible – including disability and even long term care insurance.  See line 39.  So if you can afford it, why not take care of yourself first?

So both husband and wife are going to get life insurance, supplemental health insurance and long term care insurance to protect them.  They will still pay a lot of money to their unsecured creditors under chapter 13.  The trustee won’t say a peep about this since insurance is a perfectly proper deduction from disposable income.

Moral of the story. You do have to take care of your creditors in chapter 13 bankruptcy. But you really ought to take care of yourself first.

Clients ask “What’s the difference between chapter 7 and chapter 13″?  Sometimes, they call chapter 7 “straight bankruptcy” or just “bankruptcy”.  Sometimes they call chapter 13 “wage earner plan” or “debt settlement plan” or “debt adjustment”.  Here’s what the National Association of Consumer Bankruptcy Attorneys advises you in general.

Here are the most important features of chapter 7:

• It’s fast – usually 3-4 months from start to finish.
• If you make less than most people, you can file a chapter 7 case
• If you make more most people, you can still file a chapter 7 case if  you “pass the means test“
• You don’t have to make monthly payments to a trustee
• You get to keep all your property which is exempt – exemptions vary from state to state.
• You get to keep your property like your house and car as long as you keep paying any loans due
• You have to give up any property which is not exempt – this can be a little or a lot depending on your particular case and state.

Here are the most important features of Chapter 13 bankruptcy:

• People who make more than half the people usually have to file a chapter 13 case unless most of their debts were not for personal purposes
• You have to make monthly payments based on a formula to a chapter 13 trustee for up to five years.
• You can catch up on overdue secured debt.  If you do, you can keep your house or car secured by that debt.
• You can stop a foreclosure or repossession
• You can get rid of a second mortgage on your house if the house is worth less than the first mortgage – this is called “lien stripping”
• You can settle your debts over time – usually without payment of interest.
• You can challenge your mortgage lender’s claim in the right sort of case.

Choosing one type of bankruptcy over another is difficult, which is why it’s always best to talk with someone who’s got a base of knowledge in the field.  Making the wrong choice can spell disaster for your financial situation.

Image credit:  Dee’lite/Flickr

As April 15 approaches, many people are receiving forms 1099 C from their banks.  It’s one last parting shot after bankruptcy and foreclosure.  It’s causing panic throughout the nation.  Why? My friend Dan Press wrote a nice article about this a few months ago.  But now that tax time is approaching, it is not a bad idea to mention a few cogent points.

How can it be that you have “made money” and have to pay income tax even though you just filed bankruptcy?

That’s because from the bank’s standpoint, it forgave debt to you.  The bank didn’t want to.  You  made them do so when you filed your bankruptcy case.  But since you don’t owe them money any more, and they can write off their loss, the Internal Revenue Service would ordinarily treat the bank’s loss as your gain.

Fortunately, you almost certainly won’t owe any taxes on account of the 1099C.  You’ll have to point your accountant in the right direction since far too many have no idea about this topic.

Here’s what you need to know.

• Section 108 of the Internal Revenue Code protects you
• Your accountant will have to fill out a form IRS 982 along with your income tax return. Make sure your accountant looks at the February 2011 revision.
• Information is available in 2009-37, 2009-36 I.R.B. 309 available with IRS Publication 908. 
• Cancellation of debt in connection with your residence should be excluded from income until 2012.

At Bankruptcy Law Network, we are bankruptcy attorneys and not tax attorneys.  But we have to know and understand tax consequences of bankruptcy and we want you to understand them too. So now you have the information you need to give to your accountants and I’m confident that you’ll have very little difficulty with this seemingly challenging problem.

Of course you love your sweetie.  Honeybunches is your best baby.  And I’m sure that snookums is true blue to you in every way. Have you checked your credit?

Financial infidelity is a leading cause for divorce, not to mention bankruptcy.  For better or worse, your marriage is a financial partnership as well as a legally recognized relationship.  While you are not necessarily liable for your spouse’s debts incurred during marriage, except in a community property state like California or Wisconsin, it’s really important to know where you and your spouse stand so far as money is concerned.  A third of American couples with combined finances say they have committed financial infidelity, with both sexes lying to their partners in equal numbers, according to a Harris Interactive poll released in January

During my first marriage, I frequently found myself unpleasantly surprised at the end of the year.  I’d get nice year-end bonuses and think that my family finances were in good shape. Then I would find out that my then-wife had been holding out on me the fact that she had run up substantial credit card bills.  Men are equally as bad as women in lying to their spouses about their finances.

Open and honest relationships are critical to the success of any marriage.  And openness and honesty about financial matters is just as important.

Here are some of my suggestions for a happy financial marriage:

• Both you and your spouse should have full on-line access to all financial accounts
• Both you and your spouse should review each other’s credit reports at least once a year
• Both you and your spouse should sit at the kitchen table periodically to agree upon the family’s financial objectives for the year.
• Both you and your spouse should design a mutually agreed upon family budget – maybe not down to the penny but at least as to the big items.
• Both you and your spouse should agree on major financial goals for the family and agree on actions you’ll take in order to reach them.

The family that saves together, plans together, and budgets together stays together – and avoids bankruptcy too.

Beware of Greeks bearing gifts. When Newt Gingrich suggests that states need the right to file bankruptcy, he can be up to no good. Who benefits from states filing bankruptcy?  The question is a matter of priorities.  Fat cat Wall Street bondholders are scared witless about the possibility of their triple-A municipal bonds going south if states default. On the other hand, reasonably well-paid state workers, including teachers covered by state pension plans, feel that they have vested rights to very handsome pensions after retiring at a relatively early age compared to workers in the private sector.

Remember when Ronald Reagan busted the air traffic controller’s union? They said it couldn’t be done, but it was and he did.  State bankruptcy cases would bust government worker unions on a scale unprecedented in American history.  All this would be done in the name of protecting the states against exorbitant pensions of state workers with bloated union contracts. I can hear the drumbeat from the extreme-right-wing think tanks already.

But who benefits from this?  Do you think that taxes will go down for the average person.  Heck no.  Do you think that this will help the financial condition of the average person? Heck no.  In fact, lots of families, including retirees who are on state funded pensions will find themselves in financial peril, facing personal bankruptcy, if states are allowed to go bankrupt and default on their public obligations.  No, the benefit will go to the Wall Street bondholders nicely clipping their tax-exempt coupons in their fancy houses and fancy country clubs.

Be careful what you wish for, you might just get it.

Clients frequently ask whether they need a social security number to file bankruptcy.

The answer is no.

Let’s explain this.  Nothing in the bankruptcy code requires that you have a social security number to file bankruptcy. Yet, the official bankruptcy forms ask for your social security number. Don’t use somebody else’s number.  Don’t use a number you have made up.  Don’t use a number unless it was issued by the Social Security Administration.

If you don’t have a social security number, you still want your taxes addressed properly, so use an individual tax identification number or ITIN.  You get this from the Internal Revenue Service at www.irs.gov

When you file a bankruptcy petition, you’ll be asked to sign a declaration about your social security number.  You can indicate one of the following choices:

• You have one – so provide it
• You have an individual tax identification number – so provide that
• You don’t have one – if you don’t just say so.

The worst choice is to make a false statement about your social security number in your bankruptcy petition.  Never, under any circumstances, do that.

People worry that their immigration status will be harmed by bankruptcy.  That’s almost never the case.  On the other hand, a false statement about a social security number is a crime. That can only hurt your immigration status.

People frequently ask  whether they can file a bankruptcy case without their spouse.

The simple answer is yes.  The complicated answer is that your spouse matters for several reasons.

Let’s assume that you and your spouse are married and living together.  Then you have one household. There are at least two of you and maybe more in your household.  If that’s the case, your spouse’s earnings count and must be considered to determine if you are eligible to file a chapter 7 case – straight liquidation – or whether you must file a chapter 13 debt adjustment case – along with payments to creditors for up to 5 years.

A married person must take into account his or her spouse’s income.  Of course, the spouse’s separate expenses, like personal credit card bills, are deducted.  But anything left over is considered disposable income which is placed to  household uses and therefor available, at least in theory, to pay the filing spouse’s debts.  If the non filing spouse makes enough money, then the filing spouse may be required to file a chapter 13 case or run the risk of having his or her chapter 7 case be subject to a motion to dismiss as abusive.

If you are married and living separately, you probably won’t have to include your non-filing spouse’s income.  Each of you now has your own household.  If you are married but estranged, you may be deemed to have separate households even if you live in the same dwelling.

The issue becomes more complex in community property states like Wisconsin or California, for example.  In such states, debts arising during marriage are typically considered community debts and property acquired during marriage is considered community property.  Community property can be subject to bankruptcy administration even if one of the spouses does not file jointly with the other.  On the other hand, the non-filing spouse benefits from the discharge of the filing spouse. That’s because if one spouse is discharged from a community debt, the other spouse is automatically discharged from that debt – this is called a “phantom discharge.”

So if you are married but are thinking of filing bankruptcy separately, ask a bankruptcy lawyer who understands marital law what this means to you and your non-filing spouse.

When you file a bankruptcy case, you need to list all your stuff.

That means all your stuff.

That means at fair market value.

That means don’t mess around.  In particular, don’t mess around with the Bankruptcy Court in Texas.

In a recent case, In re Peters, the debtor listed “Art” consisting of “six pictures” worth $500.  This was a great big fib.  The stuff included lithographs, serigraphs and other work appraised at close to $25,000.  What was even worse, the debtor had recently tried to sell one of the works for close to $5,000.

The court found that this wasn’t even a close call.  The debtor did more than fib. The debtor did more than incorrectly estimate the value of his stuff.  He out and out lied.

It’s not nice to lie to the bankruptcy court. In fact, it’s reason to bar your discharge under section 727 0f the bankruptcy code.  In fact, it’s enough to send you to jail for up to 5 years under 18 USC section 152.

So tell your bankruptcy lawyer the truth, the whole truth and nothing but the truth.  Don’t hide assets, and don’t mess with the Bankruptcy Court – whether in Texas or anywhere else.