Archive for the ‘ Policy ’ Category

My wife and I were married for almost 20 years before one of our parents died. And then the floodgates opened; we lost three of our four parents in the last three years.

In each case, we hired a hospice team to help with the last weeks: two of the parents died of lung cancer, one of end-stage Parkinson’s Disease. In each case, I was struck by how little guidance the medical and hospice community gave us.

The most striking example of this was my 84-year-old father’s death. He lived with us; one Friday, we had dinner and he was very much alive, talking about politics, walking around. On Saturday, he collapsed. I brought him to the emergency room: he had been dehydrated, so the hospital rehydrated him. On Tuesday, he was set to return home the next day.

But the next day, he lost his mind. He became a different person. My gentle dad railed at me over the phone that I had abandoned him in a train station to beg for his food, and how could I do that after all he had done for his family? When I visited him at the hospital, he thought he was in a car, even to the extent of looking out an imaginary windshield and moving invisible controls. He could no longer walk, because his Parkinson’s tremors had gotten so bad, and he was awake for 72 straight hours. Clearly his brain no longer functioned correctly.

At 2 am Friday morning, the hospital called me: the nurses could no longer control him, he was trying to get out of bed every three minutes, no one could reason with him, tranquilizers weren’t working. They gave me the option of calling extra nurses from a private-sector business, or staying with him until the next nursing shift. I didn’t think I could hire more nurses at 2 am; after pacing my backyard, crying and yelling at the heavens, I decided to bring him home to die.

I showed up at the hospital at 3 am and announced that he was coming home with me now.

The nurses were stunned. No one had said he was “terminal.” I knew, however, that no one was going to tell me that they could nothing more; no one had yet thought to determine whether my father was curable; and that he was never going to get better. The nurses called the one doctor on site; the doctor asked why I wanted to do this. “The hospital can’t help him any more, and my job is just to make his last days as good as can be.” This was in front of my father, who was naked, mildly restrained, and appeared to be trying to complete a vivid and complicated chemistry experiment (he had been a research chemist for his working career, and even in his extreme dementia, intimidated the nurses with his intelligence). The doctor agreed, and made a point of telling me that I was doing the exact right thing, what he would have done in my shoes.

The doctor was able to transfer my dad into an intensive care unit with enough nursing resources to handle him until morning, when the hospice team could evaluate him. He came home that Friday, round-the-clock hospice care started then, and he passed away very peacefully exactly two weeks later.

When I told colleagues and friends about the response of the medical community to my dad’s situation, many were outraged: this is the problem with modern medicine, they said, the doctors are so afraid of litigation that they won’t tell you what to do; or they are so wedded to the “healing profession” that they won’t suggest ways to end the agony early. I did not share this outrage: the medical community showed me great respect in my father’s last days by not telling me what to do. I was able to care for my dad with neither regret for what I hadn’t done, nor anger at anyone else for their part in the drama.

How does this relate to my favorite clients?

Like a doctor, I am a professional who deals with some very intimate parts of my clients’ lives. Those lives belong to the clients; they are not mine to run or control. I can make recommendations; I can give options; I can foresee consequences of specific courses of action. I greatly enjoy these functions, and I am gratified when I can chart a plan for a client and reach the intended result. But there are decisions that are so personal that I cannot make them for the client.

My favorite clients are the ones who understand this, and who use me as an advisor and servant to formulate their goals and achieve them. Many clients seem to expect me to make their decisions, to step into their lives and make them better; that is a fool’s errand. I cannot live my clients’ lives for them, but I can make their lives better if they team up with me.

“You Had Me at Discharge”

There’s an almost rapturous feeling that my clients feel when they hear “discharged” about their debts in a Chapter 7 bankruptcy case. It’s a feeling like that which Renee Zellweger’s Dorothy Boyd feels in Jerry Maguire when Tom Cruise’s Jerry finally admits he loves her. However, Tom’s character is the ultimate fantasy – a fairy tale – someone who rescues Dorothy from the accumulated problems of her life.

Don’t fall into the same trap of believing that bankruptcy will be a fairy-tale happy ending. There are many reasons to avoid bankruptcy: legal cost, hit to your credit rating and, for many people, a decline in self-esteem. Yet many clients come to me after having avoided debt problems for years – which inevitably makes them worse.

Start by confronting your debts. It’s never a good strategy to avoid or deny problems that will surely catch up with you. At least half of my chapter 7 clients contact me but do nothing (other than trying to avoid debt collection calls) for years, hiring me only after they’re finally sued by a creditor and served with a summons. Many could have avoided bankruptcy by confronting and paying off their debts earlier or, when paying off debts isn’t possible, by getting organized and either seeking debt reductions or filing for bankruptcy sooner rather than later and getting on with their financial lives.

Do us both a favor by taking the following steps: (1) Pay off your debts, if at all possible. (2) Attempt to negotiate a reduction in your debt from your creditors (particularly credit card companies) if you don’t have the means to pay the full amount; there’s usually no reason to hire someone like me or a debt collector to do this for you or, if you’re unsure whether this will work in your particular situation, call me and I can advise you whether it’s feasible to self-negotiated and give you tips on how to do so. (3) Contact me or another bankruptcy attorney when you start to have issues with paying your debts. Most attorneys offer a free half-hour consultation, and if you look for someone in the Central District Consumer Bankruptcy Attorneys Association, you’re reasonably likely to find someone who is both competent and not self-interested – they’ll advise you correctly.

Remember: your best (and cheapest) recourse almost always is to confront your debt issues head-on and quickly, rather than denying their existence.

Section 523(a)(1) of the bankruptcy code distinguishes the nondischargeable taxes from those that may be discharged in bankruptcy.

In most cases, the analysis is pretty simple.  Generally, nondischargeable taxes are those where the return was due less than three years ago, where the return was actually filed less than two years ago, or where the tax was actually assessed less than 240 days ago (assuming the debtor is filing a bankruptcy petition today).  This is, in the end, numerical.

If the debtor made a “fraudulent return,” the taxes are not dischargeable.  This is also very easy to determine: did the IRS assert the fraud penalty and win?  It’s a rare case when a debtor files a bankruptcy petition and the first allegation of fraud comes when the debtor wants to discharge taxes.

But there is one phrase that invites interpretation, and that can trip up the most conscientious practitioner: 523(a)(1)(C) says that “A discharge . . . does not discharge an individual debtor from any debt for a tax with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.”

There are two main functions to the IRS: audit and collection.  Audit determines how much tax you owe; collection ensures that you actually pay it.  This subsection implicates both functions, and they have very different standards of bad behavior.

Because the subsection starts with the “fraudulent return” element, it’s a reasonable assumption to believe that fraudulent intent extends to the element of “willful attempt to evade or defeat tax.”  Not so.

“Willful evasion” includes both a conduct element (an attempt “in any manner”) and a mental state element (“willful” means “voluntary, conscious, and intentional”).  The conduct may be an affirmative act, such as transferring property to another family member for no consideration while tax debts hang over the owner’s head, or an omission, such as failure by a law partner’s failure to tell the accounting gal to withhold taxes.

The mental state is satisfied where the taxpayer had a duty to pay tax, knew he had that duty, and voluntarily and intentionally violated that duty.  Did your taxpayer pay $3,000 to help his son’s college tuition one year while he owed $100,000 in tax?  That payment would suffice for evasion in “any manner.”

This issue can arise at the last minute in a case.  A good bankruptcy practitioner will file an adversary proceeding, that is, a separate lawsuit in the bankruptcy, to get a judgment stating that the debtor’s taxes are discharged.  The IRS may never say anything about dischargeability of these taxes until it answers the lawsuit.  I had a case where the bankruptcy specialist told me she would discharge the debtor’s taxes “according to the formula,” suggesting she would only look at the three-year, two-year, and 240-day rule mentioned above, but then the IRS answered the dischargeability proceeding by denying dischargeability and showing me the 100-page history from the collection department.

If the government says that the tax is not dischargeable, the debtor can continue to prosecute the action and hope that the judge will render a decision in his favor.  That litigation will cost tens of thousands of dollars, however.  The debtor can also get out of bankruptcy and submit an offer in compromise to the IRS; that contract between the IRS and the debtor can deal with taxes and penalties due to fraud, and also taxes that the now-compliant taxpayer tried to evade in the past.  Sources tell me that this program has gotten much easier in the last six months, as well.

The Rule of Law

Here is an op-ed article that describes why I like being a lawyer.

I like civilization.  I like having a house, a car, access to food, a circle of friends, and the daily expectation that this unlikely to go away soon.  I like having a profession to work in that is reasonably predictable, so I can know what efforts to put in on any given day.  Sure, I might come down with cancer, or a random psychopath may target my family for some horrific crime.  I don’t have perfect security.  But I do live in a society that recognizes the rule of law, and the rule of law is so critical to the functioning of that society.

Chen Guangcheng illustrates what happens when the rule of law breaks down, or never existed in the first place.  Most Chinese people can figure out the rules that keep the government from cracking down on them, but these rules aren’t written or acknowledged openly.  And they can change without notice.

Laws allow neighbors to resolve conflicts without clubs.  And law allows the individual citizen some control over the government.  Without law, the government becomes focused mob rule.

The story is similar anyplace there is no law.  I recently read The Pillars of the Earth; it is a great description of England in a period when it was struggling to create the rule of law.  The novel describes noblemen trampling peasants’ crops, and it describes the King ordering the death of Thomas a Becket, that “troublesome priest.”  The climactic scene shows the King submitting to a symbolic caning from the brothers of a monastery: the church (and by extension here, the people) exerting power over the crown, calling it to justice in the wake of an unjust murder.

Somalia, Afghanistan, Iran, North Korea, Nigeria, our inner cities: each has differing reasons why law does not exist, but in each case, the lack of law hurts the inhabitants.

I am proud to be part of the process of ruling this country by laws and not men.

Bankruptcy: a moral option

Many clients feel shame about filing for bankruptcy protection. I can tell because they tell me repeatedly that they never thought they would be talking to a lawyer about bankruptcy, or that they fully intended to and still intend to pay their debts. “I’m not really like this,” I will hear, or “I always paid my debts until [I lost my job] [I lost my husband] or [I lost my health].” There is a notion out there that filing for bankruptcy is somehow wrong, a way of getting away with something for nothing.
The truth is that it is easy to get into a situation where your debt crushes you. And there is a long, noble tradition of debt forgiveness. According to the Hebrew scriptures, God counseled Moses to forgive debts every jubilee year. Scholars have found a similarity between the Hebrew debt forgiveness and a practice used by the Hittites.
Every market economy needs some mechanism for returning debt slaves to productive capacity. Without bankruptcy, according to Prof. Jack Ayer, debt collection for insolvent people and businesses will be conducted with the help of thugs wielding large iron pipes. In the United States, we have less of a social safety net than other developed countries; Megan McArdle of The Atlantic says that this explains why we have the most liberal bankruptcy laws of any developed country.
A capitalist, market system is a more moral system than anything else we know. Capitalist, market systems have winners and losers. We all hope to be winners. But we must deal with the losers too, and it is not immoral to recognize loss, face your problems, and find a solution to an otherwise-insoluble problem.

Bankruptcy and the self-employed worker

Self-employed persons face special challenges in filing bankruptcy. When I hear that a potential debtor has a business, a slew of questions come up: is the business incorporated, a partnership, or a sole proprietorship? Does the debtor want to reorganize and continue, or just let the business fold? Is the business a service business catering to walk-in customers? What kind of insurance does the business have? What kind of debts is the debtor discharging?
One solution – incorporation
One debtor had a computer repair shop that wasn’t doing well, but he wanted to keep it running. He had so little income he could qualify for a chapter 7 bankruptcy; however, a chapter 7 trustee might have required that he shut the business.
In this case, the debtor incorporated the business prior to the bankruptcy, and put all the business assets into the corporation. He then reported this transfer of assets on his bankruptcy schedules, and reported the corporation’s stock (rather than the individual assets, such as motherboard diagnostic stations) as his asset. Here, the trustee was convinced that the business had no value if sold as an ongoing business, and that the business assets and liabilities transferred into the corporation canceled each other out such that there was no value.
Another solution – shutting down
If the business does something dangerous, or caters to walk-in clientele, the trustee will probably shut it. One debtor had a business filling propane tanks for people living in the hills above Santa Barbara and Goleta. After I filed the case, the trustee called me and said: “John, this business scares the s*** out of me.” He was much relieved to hear that the debtor had stopped his activities, and would give him the keys to his warehouse at the creditors’ meeting.
The secret solution – ignoring the trustee
Another client had a consulting firm he ran from an office, advising people how to market their business. He spent most of his time meeting clients at their offices and working on their matters at his own office; no walk-in traffic. The business was a sole proprietorship (no corporation, no partners), and he used a fictitious name (for instance, “Aardvark Advertising”). The trustee told him in public that he needed to shut it down right away. I called the trustee back and asked what that would look like: does he have to stop visiting his office? His home office? May he mail out the billing statements he has ready? Does he have to swear not to turn on his computer, or make a phone call? The trustee replied that, under local guidelines, he has to tell people to shut down their businesses, but no one would be able to enforce this, so he should continue to work. And so I advised the client.
Had any of these clients filed bankruptcy on their own, they might not have been able to reach the discharge they eventually got. Using an attorney for a bankruptcy is just a very wise decision.