California Bankruptcy Law

Be careful! Don't have money where you owe money.

Malcolm Ruthven — Sat, 24 Jul 2010 14:13:16 +0000

If you have money deposited where you also owe money, you might find that your deposited money is gone. I wrote over a year ago about how if you file bankruptcy, a place where you owe money might take the money you also have deposited there (article), but it doesn't necessarily take filing bankruptcy to trigger that result. If you're delinquent on a credit card debt, that credit-card bank may take the money owed from any deposits you also have with that bank without waiting for you to file bankruptcy. It's called a "right of set-off" and is a complex subject; the simple version is don't let yourself get caught by it.

But, you say, I'm current on my ABC Bank credit card; so what's wrong with also having money deposited with ABC Bank? Do you know that you'll always be current with that credit card? Do you know you won't get delinquent for some reason and, by that time, forget that you also have money deposited there. Do you want to take the risk?

It can get trickier than that. You have a deposit account at a branch of DEF Bank; you don't have any DEF Bank credit cards. Surprise! One day you find that your money is gone from that account. What happened? You have a delinquent credit card account with GHI Bank and some point GHI Bank was bought by or merged with DEF Bank. Bingo, DEF and GHI are the same bank and your money is gone. So be very careful out there.

http://ca-bankruptcylaw.com/2009/05/i-just-filed-bankruptcy-wheres-my-money/

Don't let a debt settlement company fleece you out of your last dollars.

Malcolm Ruthven — Sun, 20 Jun 2010 22:33:42 +0000

The New York Times says the proceeds of the debt settlement industry come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises. In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. I urge you to read this entire article on the New York Times website so you won't be taken in by these unethical companies who promise so much and produce so little.

Click here for the New York times article titled The New Poor: Peddling Relief, Firms Put Debtors in Deeper Hole.

Do I have to tell them everything?

Malcolm Ruthven — Wed, 09 Jun 2010 15:21:36 +0000

Do I have to tell them everything? It's very important to understand that bankruptcy includes, as does much of life, a basic bargain. This bargain is that in exchange for getting a discharge of your debts (or a payment plan) in bankruptcy, you must operate with full disclosure regarding your financial life in all your dealings with the court or trustee, throughout the entire process from your filing papers to your discharge. This definitely includes listing all assets (things you own) and debts (amounts you owe). That type of disclosure and openness may seem difficult for some people depending on their cultural background, but anything less than full disclosure throughout your case may result in not only being denied a discharge of debts, but also possible prosecution for perjury or federal bankruptcy crimes.

The U.S. Supreme Court used the phrase "honest but unfortunate debtor" in commenting on bankruptcy, and the above paragraph merely expands on that.

A simple summary of all this is that bankruptcy is for honest people, and any deviation from that course can get you in big trouble.

Loan mod process ruined credit

Malcolm Ruthven — Sun, 23 May 2010 03:19:00 +0000

This couple tried a mortgage loan modification. It didn't go through but ruined their credit in the process. It not only ruined their credit, their credit card companies slashed their spending limits and raised their interest rates. The rate on one card jumped from 9 percent to 29 percent. To read about this from the San Francisco Chronicle, click here.

Foreclosed? You may still owe your second mortgage.

Malcolm Ruthven — Mon, 19 Apr 2010 14:12:20 +0000

If you lost your home to foreclosure in California, you may still owe your second (and other) mortgages.

California is a "non-recourse" state, meaning that mortgages taken for the purpose of buying a home do not remain personal debts of the borrower after a foreclosure that doesn't fully pay those mortgages. But other loans that placed mortgages on that property, obtained for reasons other than the original purchase, do remain the personal debt of the borrower. The lender(s) may sue to collect the amounts remaining on those additional home loans, including money taken from home equity lines of credit (HELOC). This can be a very unpleasant surprise to people who have just lost their homes to foreclosure.

The good news, if any of this can be considered "good", is that personal debt remaining on home loans after a foreclosure may be discharged (eliminated) in bankruptcy just like other unsecured debt.

A San Francisco Chronicle article titled Homes lost, but some 2nd-mortgage debts remain, quotes Margot Saunders, attorney with the National Consumer Law Center:

"People with a second mortgage who are facing foreclosure should go to bankruptcy to get rid of the unsecured second-mortgage note," she said. "They should do it as soon as they're foreclosed upon, because that's when they're at rock-bottom, not when they've started to rebuild (their finances)."

Click here for that San Francisco Chronicle article.

The Bankruptcy Means Test and Benefits Income – A Short Course

Malcolm Ruthven — Sat, 03 Apr 2010 15:33:39 +0000

Is income from "benefits" included in the Means Test?

The Means Test became a part of bankruptcy law in 2005. The purpose of it is to prevent people with primarily consumer debts from discharging their debts in Chapter 7 bankruptcy if they are deemed to have enough income to use some of it to pay creditors. If debtors fail the Means Test, they must use another chapter of the bankruptcy code (probably Chapter 13) if they are to do bankruptcy at all.

Income for purposes of the Means Test is gross income during the six months prior to the month in which the bankruptcy petition is filed. Income from all sources is included unless excluded by the bankruptcy code. Sometimes the issue of what types of income are included or excluded determines whether a debtor may use Chapter 7 in bankruptcy.

That brings us to the question of whether "benefits income" is to be included as income for the Means Test. Benefits income is income from sources such as Social Security payments, unemployment compensation payments, and disability payments.

The general rule is that all income is to be included unless it derives from the federal Social Security Act. So let's see how that plays out for a few different types of benefits income.

- Social Security payments – These are definitely not included as income on the Means Test.

- Disability income – The prevailing opinion is that both state disability income and private-plan disability income are included as income on the Means Test.

- Unemployment compensation payments – There is a split from jurisdiction to jurisdiction on this one. I can only recommend that you consult with your bankruptcy attorney about the best course for you to take on this if it matters in your case. My current opinion is, unless you're in a federal court district where there is a decided case saying that unemployment compensation payments may be excluded from income on the Means Test, that you should include it. That is, unless you are willing to risk having your Chapter 7 case not allowed or you and your attorney are willing to assume the possibility of a lengthy and expensive appeal process with an uncertain outcome.

Does anyone still think people who file bankruptcy are bad people?

Malcolm Ruthven — Thu, 11 Mar 2010 21:50:51 +0000

If anyone out there still thinks that people who file bankruptcy are bad people or anything similar, I invite them to read the following portion of the first communication I received from a prospective client. I encounter similar stories all the time; that's a part of this work. But this introductory email was so moving that I thought I should share it with others. So I asked for permission which was granted. Here it is.

"I did tech support for a software product for 10 years, then quality assurance. I like helping people and am user friendly. Then one day my job went to India. In fact at the end of my illustrious career, I was laid off 4 times and lost all my savings and 401k just trying to survive. Since then I have been un-employed or under-employed. It looks like I will have to go down with my boots on. In 2003, finally homeless, I moved to [deleted] where my mother took me in. I switched hats and took up bookkeeping, which is needed here, or was, until the recession. I am now on Social Security, semi-retired, and having a hard time. I started a small business as a freelance bookkeeper when I turned 65, thinking I would finally be lay-off proof. What I didn't see coming was the recession. Now my business is failing. I can't pay my credit cards. I need to do a bankruptcy. I feel so ashamed. I was raised to pay my debts and to be honest."

Thinking of filing bankruptcy? It's time to get things together.

Malcolm Ruthven — Fri, 08 Jan 2010 12:55:51 +0000

Are you thinking of filing bankruptcy? If so, it's time to gather information and documents that will save you time later and will speed the process of your possible bankruptcy.

I send new clients a checklist of items they need to help them complete the bankruptcy questionnaire and also to bring to our in-person meeting. But bankruptcy attorney Jennifer Weil recently posted an online list that's a great one to use even before you contact a bankruptcy attorney. You'll save yourself time and prevent delays in your case if you follow her advice. Click here to read her article.

Can I "not file" on a credit card in my bankruptcy?

Malcolm Ruthven — Thu, 10 Dec 2009 03:54:26 +0000

I'm sometimes asked by a bankruptcy client if they can "not file" on or "not include" a particular credit card or other specific debts in their bankruptcy. Here's the deal…

1. You have to include all your debts in the bankruptcy petition and schedules. To fail to do so could result in not getting a bankruptcy discharge on any of your debts.

2. If the amount owed for a debt is less than $600, you are allowed to pay it off prior to the filing of the petition and therefore not list it because there would be no debt. If it's a credit card, the credit card company would probably cancel the account anyway after your bankruptcy. These days, credit card companies are taking a harder line than they used to. Therefore it doesn't make a lot of sense to use your scarce money to pay off that card.

3. After your bankruptcy discharge, you will probably get offers of new (low limit) credit cards. This is a good thing. Get one of those cards and use it to help rebuild your credit. Click here for an article about rebuilding your credit after bankruptcy.

Debt Cancellation service?

Malcolm Ruthven — Tue, 17 Nov 2009 15:42:21 +0000

You might be fooled into buying expensive insurance that pays out only 5% of its premiums. A telemarketer may try to sell you Debt Cancellation service for a bank or store credit card or account, or you may "accidentally" sign up for it when getting a new credit card or account. What you should know is (1) you'll pay a large monthly fee for this service, whether or not you pay off your account balance every month, (2) only about 5% of the fees collected are actually paid out in benefits, and (3) sellers of these services intentionally confuse cardholders about the programs and their costs. All this is from an actual telemarketer who sells the service and who told his story to msnbc.com. Click here to read the article.

Legal Aid of Marin Bankruptcy Presentation – September 30, 2009

Malcolm Ruthven — Thu, 01 Oct 2009 03:15:05 +0000

Malcolm Ruthven gave a bankruptcy presentation at Legal Aid of Marin on September 30, 2009. There were additional points to be covered at the end of the event and these items will be added here as comments.

Are you expecting a tax refund?

Malcolm Ruthven — Sat, 29 Aug 2009 04:01:05 +0000

Are you expecting a tax refund? As in life, timing is everything. If you're considering filing for bankruptcy in Chapter 7 to eliminate debts and you're expecting an income tax refund, you have some thinking to do.

If you file Chapter 7 before you receive the tax refund, that right to future income is an asset that becomes part of the bankruptcy estate under control of the bankruptcy trustee. In general, unless it qualifies as exempt under a "wildcard" type of exemption, the trustee can use it to pay off your creditors. That's probably not what you would want. So, it's often better to delay filing Chapter 7 until you receive your tax refund. That way you retain control over the refund and have an opportunity to use it in a way that benefits you. A few of those ways might be to spend it on normal living expenses and/or catch up on mortgage payments (of course before filing Chapter 7), or put it into an "exempt" place, like an ERISA-qualified plan within IRS limits. Note also that applying a refund amount to your future taxes still leaves that amount available as an asset to the bankruptcy trustee.

When do you acquire that right to the tax refund, the right that the bankruptcy trustee wants for the benefit of creditors? The general rule is that the right to receive a tax refund accrues every day taxes are withheld from your paycheck. That right doesn't wait to exist, for example, until you file a tax return. How might that play out in specific situations? Let's assume that you will get a refund for 2009 income taxes after the taxes are filed in 2010, and you want to file a Chapter 7 bankruptcy to discharge debts.

- If the bankruptcy is filed in 2009, the portion of the tax refund that becomes part of the bankruptcy estate is pro rated based upon the amount of income earned before bankruptcy filing compared to the total year's income. Of course, if you're still working, you might be able to reduce your withholding for the remainder of 2009 so there would either be no refund for the bankruptcy estate to get or a refund so small it wouldn't be worth the trustee's time to go after it.

- If the bankruptcy is filed in 2010 but before the tax refund is received, the entire amount of the refund would become part of the bankruptcy estate.

- If the bankruptcy is filed in 2010 but after the tax refund is received, the refund received becomes just another asset and may be used for normal living expenses or as described above prior to filing bankruptcy. Of course, if you will get a refund for 2010 taxes then the trustee can get the pro rated part of that, but there should be only very few months in 2010 before you file bankruptcy so that part of the refund should be small.

Delaying your bankruptcy filing may have other consequences, possibly worse than losing a part or all of a tax refund, especially if the refund is small. Because of these and other issues beyond this discussion, you should really consult a qualified bankruptcy attorney to discuss these issues as a part of your bankruptcy process.

Legal Aid of Marin Bankruptcy Presentation – August 17, 2009

Malcolm Ruthven — Tue, 18 Aug 2009 03:18:42 +0000

Malcolm Ruthven gave a bankruptcy presentation at Legal Aid of Marin on Monday, August 17, 2009. There were additional points to be covered at the end of the event and these items will be added here as comments.

You just negotiated a $10,000 debt down to $2,000!

Malcolm Ruthven — Thu, 13 Aug 2009 00:07:12 +0000

You just negotiated a $10,000 debt down to $2,000. Isn't that great? Well, maybe not. Here's the short version of a possible outcome.

1. That creates an $8,000 taxable event, which means that you have $8,000 additional taxable income.

2. You’ve just spent $2,000, you still have bad credit (actually, worse), and you still owe everything else including the additional income tax.

The moral of this story? Think very carefully before you start to negotiate debts with creditors. It might not be in your best interests to do so.

Bankruptcy due to medical problems? 62% of 2007 bankruptcies, says the American Journal of Medicine!

Malcolm Ruthven — Thu, 04 Jun 2009 18:49:25 +0000

The American Journal of Medicine today published a study showing that illness or medical expenses contributed to 62.1% of all bankruptcies in 2007. That will be scant comfort to anyone already in that category, but it's valuable to get these study results out into the world. There are many interesting numbers in that study, but two conclusions stand out:

- "The share of bankruptcies attributable to medical problems rose by 50% between 2001 and 2007."
- "Most medical debtors were well educated and middle class; three quarters had health insurance."

Here's "Table 2" from the study:

Medical Causes of Bankruptcy, 2007*
	Percent of All Bankruptcies
Debtor said medical bills were reason for bankruptcy	29.0%
Medical bills >$5000 or >10% of annual family income	34.7%
Mortgaged home to pay medical bills	5.7%
Medical bill problems (any of above 3)	57.1%
Debtor or spouse lost 2 weeks or more of income due to illness or became completely disabled	38.2%
Debtor or spouse lost 2 weeks or more of income to care for ill family member	6.8%
Income loss due to illness (either of above 2)	40.3%
Debtor said medical problem of self or spouse was reason for bankruptcy	32.1%
Debtor said medical problem of other family member was reason for bankruptcy	10.8%
Any of above	62.1%
*Percentage based on recent homeowners rather than all debtors.	(or Adobe

If you want to read the study itself, click here. You'll need to have Adobe Reader (or Adobe Acrobat) on your computer; to download Adobe Reader, click here.

Can't I just transfer the title of my car to my sister?

Malcolm Ruthven — Sun, 31 May 2009 14:05:04 +0000

I've heard that question, or one like it, many times. A similar version is "What if I just don't list my diamond ring?" The thought to somehow prevent certain assets from being a part of the bankruptcy process seems to be very common. My short and dramatic answer to these questions is "Do you like wearing an orange jump suit?" because bankruptcy fraud is a felony. Even if such actions didn't result in a felony charge in a particular case, they would very likely result in losing any bankruptcy exemptions (amounts not available to creditors) that would have been allowed on those items. Some courts have also held that the debtor can be charged with attorney fees and other costs incurred by the bankruptcy trustee as a result of the debtor’s attempt to conceal assets. If you're considering filing bankruptcy and have any thoughts such as those that started this article, you really need to change your thinking.

Don't wait too long!

Malcolm Ruthven — Tue, 26 May 2009 01:07:46 +0000

Most bankruptcy attorneys will tell you that the most frequent mistake clients make is to wait too long to file bankruptcy. There's a natural reluctance to consider and file bankruptcy, and in that "delay" period people in serious financial trouble often do some of the following things.

- Get loans based on home equity. This is very dangerous. If your financial situation is not remedied, you will be less able to make the payments on the now-increased debt secured by your home. That makes losing your home more likely.

- Withdraw funds from IRAs or other qualified retirement plans. Funds in these plans are in general protected from creditors in a bankruptcy proceeding, so withdrawing the funds removes money you could have kept safe for your retirement or other uses following bankruptcy.

- Continue to make payments on debts for which there is no reasonable possibility of paying off. Do you really want to spend your last dollars in a hopeless effort to pay off your debts, leaving nothing left for you to keep for your Fresh Start if you do decide to file bankruptcy?

For the above reasons and more, you really should explore what options would be best for you by consulting a bankruptcy attorney when you feel that you're in serious financial trouble.

The Case for Bankruptcy (Newsweek)

Malcolm Ruthven — Mon, 18 May 2009 23:11:13 +0000

Newsweek magazine, in their January 12, 2009, issue, published an article explaining the case for bankruptcy and the circumstances favoring that action.

In that article, the author Jane Bryant Quinn says "Most families, honorable to the end, struggle longer than they should, says Katie Porter, a law professor at the University of Iowa. By the time they give in, they've lost assets they could have used to start over again. That defeats the point of bankruptcy—to stop the self-blame and hopelessness that goes with bad luck and bad bills, and give yourself a second chance."

It's a good, short, read and makes very good points. Here it is for you on the web: click here

Important addition: There's a comment on that Newsweek article by Pennsylvania bankruptcy attorney Charles Bierbach. He is also a bankruptcy trustee so he's "seen it all". He said:

My constant advice to my clients and to debtors who appear in front of me at Meetings of Creditors, is "think with your wallet"… Borrowing from exempt assets, like retirement accounts and exemptable equity in your home, is a step backward. Get good legal advice about bankruptcy before you cash in everything you own, or before you throw good money after bad.

Bankruptcy, we don't want to do that!

Malcolm Ruthven — Mon, 18 May 2009 20:13:41 +0000

"Bankruptcy, we don't want to do that!" greeted me as I moved to the front of the room to give a presentation. I immediately said "Thank you! I invited you specifically to say that." and I meant every word.

First, it is important to notice that it is likely that all of us were taught that good people pay their bills and debts and bad people don't, and that bankruptcy is a shameful thing. It's also important to notice that being taught that is a good thing; it produces people who are responsible for their words and actions. So what are we to do? Let's take a look at this subject from a wider perspective and notice a few important points.

- The economy of this country, and of the world, depends on credit and the use of credit. If you question this, just take a look at the present economic condition (2009) to get a real-life example of what happens when the credit available and in use is greatly reduced.

- When you get and use credit, you're contributing to the success of the merchant from whom you purchased something and also contributing to the success of the bank that issued the credit, making more money available for that bank to lend. This is not to say that many of us don't abuse our use of credit; it's just the simple statement that credit and its use are a very important part of our economy.

- It's also important to note that you can always pay anyone you choose to pay following bankruptcy. You don't have to not pay anyone; it's up to you. If you've borrowed from a relative or friend, or have bills with local merchants, those are the type of debts that many people who go through bankruptcy choose to pay after that process is complete. It's all up to you.

Now hear this #1… This very important part of our economic system has built into it, by definition, the probability that a certain percentage of credit card users will, either by their own hand or by outside circumstances, be unable to repay their credit card debt. That is simply a fact of life for this type of business.

Now hear this #2… The banks that issue credit cards know this and it is part of their cost of doing business.

Now hear this #3… Congress and the Supreme Court did not enact and interpret the bankruptcy laws just to "be nice" to people in debt. It's way more important than that. People who are candidates for bankruptcy are generally not fully participating in the economy due to their financial situation. Bankruptcy's Fresh Start gives them the "clear field for future effort" that allows them to once again fully participate and contribute to our economy. Our bankruptcy laws were enacted by our representatives for a very good public policy reason.

Finally… Whether you actually should file for bankruptcy is another issue, and one you should discuss with a bankruptcy attorney, but know that the opportunity to do so was provided for a very good reason for the benefit of all citizens, not just the ones who file bankruptcy.

Quality-of-life signs that it may be time to file bankruptcy

Malcolm Ruthven — Thu, 14 May 2009 22:56:09 +0000

What are some warning signs of undesirable behavior and quality of life that might signal that it's time to think about filing bankruptcy?

Southern California attorney Carl Starrett published a blog article entitled 5 Signs That It May Be Time to File Bankruptcy. What struck me about this list is that four of the five items show a lessening of quality of life, for example "losing sleep and suffer stress-related health problems because of their financial struggles".

Click the link directly below and read that article and see if it might be time for different priorities in your life.

5 Signs That It May Be Time to File Bankruptcy

The above article is mostly about quality of life issues. For a short discussion of basic financial considerations that might favor bankruptcy, and a link to the Newsweek magazine article that covers the issues, click here.