Archive for the ‘ Pre-Bankruptcy Planning ’ Category

You file bankruptcy to get rid of debts you can’t afford to pay and to get the fresh financial start in life that you so desperately need. But remember … not all debts can be wiped out in your bankruptcy.

The Bankruptcy Code lists several types of debts that can’t be discharged in bankruptcy. These are things like:
•    Child support payments
•    Spousal support
•    Most student loans
•    Certain tax debts
•    Injuries caused by driving under the influence
•    Debts which are the subject of a divorce judgment

•    Civil penalties from government entities

Traffic tickets and parking tickets fall under the last category, “civil penalties.”

Chapter 7 Bankruptcy

523(a)(7) forbids the discharge of civil penalties or criminal fines. Therefore, in a Chapter 7 bankruptcy government fines aren’t wiped out.

Chapter 13 Bankruptcy

Ahhh … Good News! (Maybe).

Bankruptcy Code 1328(a)(3) allow a Chapter 13 debtor to discharge non-criminal government fines if he completes all the court approved plan payments.

What is included in these “civil penalties” or “civil infractions”? This can be minor offenses such as speeding, failing to stop at a stop sign, or parking tickets. These claims are places with the rest of the unsecured creditors in a Chapter 13 plan. They are paid over the next 3 to 5 years from what is affordable to the debtor. Whatever isn’t paid through the 3 to 5 years plan is discharged at the end.

One more practical pointer … Even if you have a criminal fine that isn’t wiped out by bankruptcy, you can include it in a Chapter 13 plan. This stops the creditor (which is usually the government) from collecting from you during the course of the Chapter 13 bankruptcy. And that means the State Government is stopped from taking your drivers license or sending you to jail for non-payment of this fine. Yes, at the completion of the 3 to 5 year Chapter 13 plan the balance due remains due and the State Government can then collect from you. But you are safe during the time the chapter 13 bankruptcy is in effect.

So …
•    If the fine is for a criminal action, it’s not wiped out in either a Chapter 7 or a Chapter 13 bankruptcy.
•    But if your fine is a civil penalty it’s not wiped out in a Chapter 7 bankruptcy, but it can be discharged in a Chapter 13 bankruptcy.
•    And even if can’t be discharged in either a Chapter 7 or a Chapter13 bankruptcy, you can get protection from revocation of drivers license or being sent to jail for non-payment while the Chapter 13 proceeds.

Credit: Stephen Brittain of Victorville

http://highdesertbankruptcycenter.com/

Asset protection versus bankruptcy

A well-to-do friend called me for some planning.  He invited me to his beautiful, five-bedroom home in the hills above Westlake Village.  We sat at poolside as he described his predicament.

While he was quite wealthy, he could see losing almost all of that wealth in a snap.  He owned an insurance brokerage; one of his clients had sued him for millions of dollars, claiming that he had sold a bad policy.  Insurance malpractice, I guess.  Trial was in another two weeks, and if he lost, he would have to pay an eight-figure verdict with only seven figures of assets.  Should he file bankruptcy if that came to pass?  Should he do anything right now to protect his assets and lifestyle?

I thought it very wise to talk to me before anything happened.  I was able to explain what would happen to his house (he’d keep it, because he had such a large mortgage on it) and his other assets in bankruptcy (the trustee would take his annuity and his life insurance policies, because they were more valuable than the appropriate exemptions, but the trustee would leave most of his insurance company because it depended on his personal services to have any value).

Could he do any asset protection?  Well, yes.  But he’d need to make a decision early as to whether he was going to combine asset protection with bankruptcy.  There are some things one can do to protect assets that work only if one never files bankruptcy.

We bankruptcy attorneys shy away from fraudulent transfers.  Cathy Moran in Redwood City gives a good explanation why this is.    And certainly “fraudulent transfer” sounds only a little less loathsome than a lung disease.   But there are advantages to making a fraudulent transfer, particularly if you are trying to defeat a private creditor: the transfer creates another legal hurdle to the creditor’s ultimate recovery.  It’s essentially a bargaining chip.  Don’t try this if you owe money to the IRS, or if you want to eventually discharge your taxes in bankruptcy.

That’s something I learned from Jacob Stein, one of the few lawyers I know with his own Wikipedia page.  So when my friend asked what he should do, I told him to call Jacob, who knows a whole lot more about asset protection than I do.

There is also asset protection that works in bankruptcy.  It’s called planning.  Put as much money as you can into exempt assets: 401k, IRA, a homestead.  Insure yourself so you don’t face a multi-million verdict.  Cathy Moran talks about these strategies here.

Asset planning can go spectacularly badly in bankruptcy.  I once represented a trustee who had a debtor who thought she could buy a condo in Mulege, Baja California, then file bankruptcy in California, discharge her debts here, and retire to Mexico.   Her life’s plans changed drastically when we were able to seize and sell her condo.  She got a good lawyer, who was able to talk us out of pressing criminal charges.

If you’re facing the possibility of sudden loss, go talk to an attorney who knows something about bankruptcy and collection law.  I’ll be happy to help you out.

Why the FreeCreditReport.Com ads are a scam

When is FREE not FREE?

In a world seemingly driven in all matters by credit reports, getting that report for nothing ought to be a good thing,

But the commercial entities beat the federal government to the web address freecreditreport.com.

And they also got a better ad agency that wrote catchy tunes promoting their product, under the guise of free credit report.

But freecreditreport.com provides you a free credit report only if you surrender personal information, wait for it to come by snail-mail  and sign up for a monthly service billed to your credit card.

They bank on you not cancelling that subscription.

Cha ching!

It’s not really free.

There is a free credit report

The three big credit reporting agencies do provide a no-strings attached credit report to everyone, once a year.

Unfortunately, the URL doesn’t mention free, and doesn’t come with a catchy, banjo driven jingle;

Annualcreditreport.com

But it does provide simple, and free, access to your credit file.

The right to know

Federal law enacted in 2003 gives everyone the right to request a free credit report each year from each of the three national credit reporting agencies:  Experian, Equifax, and Transunion.

For nothing (that is: free) you can examine your credit report once every four months, if you request your free report sequentially from the CRA’s.

Repeat after me:  annualcreditreport.com.

What to do if you find errors

The Federal Trade Commission website walks you through how to challenge inaccurate information on your credit report.  They’ve even included a sample dispute letter.

ConsumerHelpCentral.com sorts out your remedies if the CRA doesn’t correct the information.

Sing the chorus

Here’s the game plan:

  • Click on www.annualcreditreport.com
  • Order a copy of your report from one agency
  • Look for errors and inaccuracies
  • Challenge bad information
  • Mark your calendar for 4 months to order a report from one of the other national CRA’s

 

 

 

Credit: Cathy Moran of Redwood City

http://www.bankruptcysoapbox.com/get-annual-credit-report/

Occasionally, clients come to me with a big student loan problem.  These are tough to discharge in bankruptcy: you have to show that your life is almost hopeless, that even though you got educated, there is no way for you to make a living beyond the poverty level for the rest of your natural life.

Enter Jay Fleischman.  Jay is a bankruptcy lawyer who also handles other credit issues.  He recently gave a sterling presentation on student loan issues to a gathering of bankruptcy lawyers; what I took away is that negotiation is a far better way to handle student loans than bankruptcy.  So when clients ask me how to handle student loans, I generally refer them to Jay – I’d rather focus on clients dealing with the IRS and with problems that the standard bankruptcy discharge can handle.

Why incorporate a sole proprietorship?

Bankruptcy guru Cathy Moran writes again about corporate debt.  What’s the point of incorporating?  It’s usually more effective at protecting the business from the owner’s debts than it is in protecting the owner from the business’s debts.  Click here to read her article.

The flip side of this is when a corporation incurs a huge judgment against it.  Then the incorporation does protect the owner from the corporation’s debts.  That scenario is usually more dramatic, but occurs less often.

Pigs Get Fat, and Hogs Get Slaughtered

That’s a great saying, and it applies well to pre-bankruptcy planning.  It is perfectly acceptable to move assets around before a bankruptcy, within reason.  It’s a little like the difference between tax avoidance and tax evasion: there are legal limits to avoiding taxes, and there are legal limits to avoiding your creditors.  Stay within those limits, and you’re being pretty smart.  Eric Busby, Houston bankruptcy lawyer, explains it a bit more.

Living in semi-arid California, I’ve gotten used to seeing large columns of smoke on hot, windy days.  Most recently, I could see the Springs Fire burning between Camarillo and Malibu from a distance; happily, it did little damage to structures, and no one died from it.  This one was not caused by arson, but it sparked my curiosity: if authorities determined that someone was responsible for the fire, and fined him, could he discharge that fine in bankruptcy?

I am honestly a little surprised at the lack of hot air that has been expended on this topic elsewhere.  At the risk of fanning controversy, I think that a careless arsonist would probably be able to discharge his debt relating to a wildfire.

Dischargeability of debt depends on its nature.  The bankruptcy code assumes that debts are dischargeable; a nondischargeable debt is the exception, not the rule.

We saw the extreme in punishment for an act of wildfire arson in January this year: a state judge sentenced a methamphetamine addict to death for setting the Old Fire in San Bernardino County back in 2003.  That debt won’t be discharged by a bankruptcy; it will only be extinguished at the same time as the criminal’s life.

California does have provisions for fining arsonists: Cal. Penal Codes 452 and 456 prescribe a fine of up to $50,000 for arson, “unless a greater amount is provided by law.”  Where the arson is done for pecuniary gain, the court may impose a fine of up to twice the amount of the gain expected.  This would handle cases like the guy who made $80,000 renting equipment to the Forest Service to put out the fire he had paid $2,000 to have set ((I’m betting that he wasn’t able to report the $2,000 as a business expense on his Schedule C, either).

These fines are not dischargeable in bankruptcy: you can’t discharge a debt for a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” that is not compensation for actual pecuniary loss.  11 U.S.C. § 523(a)(7).

But the big bucks in fire bills come from judgments for fire suppression.  Cal. Health and Safety Code 13009 provides for payment of the full amount of fire suppression by anyone who sets a fire, negligently or otherwise, or doesn’t clean up a fire hazard in a reasonable time.  Huffington Post reports that the Springs Fire cost $10 million to fight.  The state was awarded $7.6 million from a construction company in fire suppression costs for a 2002 fire in the Angeles National Forest.

These judgments are dischargeable in bankruptcy: the Health and Safety Code section says that they are to be treated as a contractual liability.  They are for pecuniary losses, therefore not subject to the “governmental fines” exception to discharge.

Who knew?  And now we do.

Bankruptcy isn’t a “get out of jail free” card

Here’s a great little loophole being closed. Get your car impounded, file bankruptcy, get your car back, dismiss the case. Easy! Until the FBI comes knocking on your door.

Lesson: Bankruptcy may seem like a free lunch.  It isn’t. There are benefits and burdens to it.  File with a reputable lawyer who knows what he is doing.

It used to be that a medical degree was a ticket to a relatively secure life: in exchange for spending years achieving at school and amassing formidable learning, and just showing up at your practice for 50 or more hours a week, a doctor could be guaranteed a comfortable income, if not outright wealth.  No longer.

On the left, regulation hampers their free exercise of their business and practice.  On the right, insurance companies lower their income by cutting benefits. The general practitioner, like Marcus Welby, is a relic from another time and place: fierce competition among medical providers leads to ever-narrower specializations, while some segments of society become more skeptical about the benefits of empirically-based western medicine.  Medical professionals who focus only on the practice of medicine, and ignore the business climate, get trampled by more nimble actors.  And they are filing for bankruptcy protection.

I enjoy helping doctors and medical professionals to wind down their practices, file for bankruptcy, or otherwise handle their crushing debts.  I feel a kinship, because there are a lot of similarities to a law practice and a medical practice: lots of education, a profession focused on helping people, and a changing economic scene that requires thinking outside the boxes we learned in graduate school for a successful practice.

34 Things Not to Do before Filing Bankruptcy

1. Do not leave out any Bank, Checking, Savings, Brokerage, Credit Union accounts from your schedules.

2. Do not file if your income is greater than your expenses.

3. Do not use your credit cards.

4. Do not take Credit Card Cash Advances.

5. Do not use convenience checks offered from any credit cards.

6. Do not do balance transfers between credit cards.

7. Do not pay money owed to Family Members.

8. Do not pay money owed to Friends.

9. Do not tell a creditor that you intend to pay.

10. Do not leave assets off of your paperwork.

11. Do not file if you are about to receive a tax return or an inheritance. Discuss the timing with your attorney.

12. Do not fail to tell your attorney about your small business, sole proprietorship, partnership, LLC, LLP, LC, corporation, or hobby.

13. Do not purchase a home shortly before filing bankruptcy without consulting your attorney.

14. Do not give away or gift any property to anyone.

15. Do not pay more than $600 on any past due bill without first consulting your attorney.

16. Do not transfer (title or deed) property to anyone.

17. Do not cash out retirement plans or 401k’s.

18. Do not take out a second mortgage.

19. Do not gamble.

20. Do not hide your assets or debts.

21. Do not take out “payday loans.”

22. Do not put your money in your kids’ bank accounts.

23. Do not omit or ‘save’ a credit card for you to use after your bankruptcy.

24. Do not fail to list debt to family or other “insiders.”

25. Do not write bad checks.

26. Do not borrow money.

27. Do not forget to tell your attorney about liens you may have on your home or unpaid judgments. They may be avoided.

28. Do not make major financial decisions without talking to your attorney.

29. Do not get married before filing if your spouse has a high income.

30. Do not misrepresent facts to your attorney.

31. Do not run up your credit cards in advance of filing bankruptcy.

32. Do not fail to appear at State court hearings, trial or proceedings; coordinate this with your attorney.

33. Do not hide from your attorney. Keep them up-to-date with your address, phone number and email address.

34. Do not bank where you owe money. Close the account and reestablish an account somewhere else. Social Security debtors who do this have a lag time of a few months because it sometimes takes that long for SS to get it done. If you are pressed to file then clear out the account as soon as the deposit hits the bank. This also happens with payday loans. Many of these companies will have a debtor sign a form to permit them to withdraw money from the account on a regular basis and these are nearly impossible to stop.

Note: Ask your attorney about accounts that might get frozen whether or not you owe that institution money or not.

Credit: National Association of Consumer Bankruptcy Attorneys