Re-Paying friends and family prior to filing a BK!

One of the most common mistakes my clients make is repaying debts to friends and family before filing their bankruptcy case. In many cases this leads to extremely undesirable results.

The basic law as stated in the bankruptcy code (and in many state laws as well) is that anything repaid to a relative or other “insider” within twelve (12) months prior to filing a bankruptcy case can be recovered by the Trustee in that case. That means that the Trustee can (and, depending on the amounts involved, will) sue that relative to recover the money or property repaid to them during that period. This is known in legal parlance as a “preferential transfer” and the bankruptcy statute is 11 U.S.C. 547.

The law is the same with respect to any other non-relative creditor, except that for them the lookback period is only 90 days prior to filing the bankruptcy case, so it’s usually easy to wait the 90 days before filing. But obviously much harder if a relative has been recently repaid.

There is nothing that prevents the repayment of ANY debt AFTER the bankruptcy case is completed, so if you want to repay anyone, just do it after the bankruptcy case is completed, then there’s no problems. However, I suspect many of you will be reading this blog or obtaining your legal advice after you’ve already repaid them.

Another related issue, which will not be covered here, is simply transferring assets or money to someone prior to filing a bankruptcy case. In California, any such transfers done without receiving equivalent value in return is considered a “fraudulent transfer” and is recoverable for up to 7 years following the transfer.

Foreclosure or Short-sale?

There is an epidemic of people defaulting on their mortgage payments, as everyone knows. Real estate brokers are pushing hard to have people do “short sales” on their properties, instead of allowing them to go to foreclosure. In most circumstances, this is a very bad idea.

What is a short sale? A short sale occurs when you want to sell your property, but owe more to the lienholders (mortgages) on your property than a buyer is willing to pay to purchase the property. As a result, one (or more) of the lienholders secured by your property must agree to accept less than 100% of what is owed to them, in order to allow the sale to proceed. But who does this benefit? Certainly the mortgage broker, because he/she gets their commission.

Historically, a short sale was used in these circumstances in return for an elimination of any obligation that the seller has and an agreement that no negative marks will appear on their credit report as a result. NEITHER of these is true today. I am seeing increasing numbers of people who do these short sales, and then the lienholder who didn’t get paid in full seeks to collect from the seller for the deficiency amount. On top of that, the short sale appears on the credit report in the form of a negative defaulted loan mark.

Furthermore, doing a short sale can sometimes affect the ability to relieve the seller of certain tax burdens if they subsequently file a bankruptcy case.

Compare this with the foreclosure process. You end up with the same liabilities and negative credit marks, but you can usually live rent-free in your home for months, if not years, while the lenders go through the foreclosure process. Most lenders will wait as long as possible to foreclose in today’s market.

This is an extremely complicated area of law involving both tax and bankruptcy law, but suffice it to say that the optimal strategy is that if you are going to file a bankruptcy, it is usually best to allow your property to go to foreclosure, and file your case before the foreclosure sale takes place (and, even better, have the foreclosure sale occur DURING the bankruptcy, but this is difficult to achieve).

The price to go broke…

A bankruptcy client of ours recently made a statement that I obviously already knew, but had never heard it phrased quite the way he said it. The husband and wife’s situation had been deteriorating for a long time. They had amassed a large debt, which they previously had sufficient income to pay, but one of them lost their job, and the other had to take a pay cut, and the problems started mounting. They used all their savings, sold assets, borrowed from their retirement and survived as long as possible before seeking a bankruptcy consultation. By the time they got to me, they had exhausted all their resources.

After a lengthy consultation with them about their financial situation, analyzing their assets and debts and determining that bankruptcy would likely be their best option, I gave them a fee quote for my services (which was actually for a lower amount than normal for a case of their complexity). The husband said out loud–to nobody in particular–”Guess it costs money to go broke.” He said it with a slight smile, but I felt his pain.

The truth, however, was that they were already broke. What cost money was filing bankruptcy to get rid of their debts (or in other cases, to reorganize them). But the client raised an important point. Other than the moral kudos they get for paying their creditors as long as possible by depleting all their resources and assets, they simply waited far too long before seeking advice on their situation. All States have exemption laws which enable debtors, inside and outside of bankruptcy, to protect certain assets, including–at times–cash in bank accounts, etc. It rarely makes sense to deplete your assets below the applicable exemption amounts. (see more on California exemptions. You are going to need those assets! Not just because you may need to hire an attorney, but also to assist you in living as you try to rebuild after a bankruptcy case.

One recurring theme I see over and over again is clients that wait too long to seek advice. Whether it be out of guilt, fear, hope that circumstances will change, or whatever….it is important to analyze your options before your options have disappeared.

Lien Stripping..What you need to know!

On January 6, 2009, Senator Dick Durbin (D, IL) introduced Senate Bill 61 called the “Helping Families Save Their Homes in Bankruptcy Act of 2009.”   The bill has several provisions, which can be analyzed by following the above link, but the main purpose of the bill is to allow homeowners in a Chapter 13 bankruptcy case to reduce the amount of liens (mortgages) against their home down to the value of the home and modify the payments.  This is known as lien stripping in bankruptcy.

For example, if your home is worth $400,000 and you owe $350,000 to the First Mortgage and $100,000 to the second, you would theoretically be able to reduce the lien of the second mortgage down to $50,000, and then reamortize (modify) the payments based on that amount.  (The remaining $50,000 that was taken off would be treated as an unsecured claim and paid whatever percentage the other unsecured creditors were to receive in the case).

This is a potentially significant development and one can reasonably expect President Obama to sign this law if it passes both houses of Congress.  Check back often for the progress on this new legislation

SHOULD I FILE CHAPTER 7 OR CHAPTER 13?

HI:   This website is intentionally informal.  
Remember, you want to know what time it is; not
instructions on how to build a clock.   It is my hope
that this gives you specific information on many
important bankruptcy questions. If you think I
should include more send me an e-mail and I will
consider it.  Your feed back is important to me.  STOP – harassing phone calls – STOP
– lawsuits – garnishments
– IRS enforcement
–  do not do a short sale –Why should I file bankruptcy
instead of working with a debt relief clinic?cheapest, fastest, safest way to deal with your debt.MYTH:MANY PEOPLE ARE UNDER THE MISUNDERSTANDING THAT BANKRUPTCY
IS NOT FOR THEM.  THIS IS THE RESULT OF THE MEDIA AND “SIDEWALK”
LAWYERS (bartenders, nails and hair people, crossing guards) ADVISING
THAT “THE LAWS HAVE CHANGED” “YOU CAN’T FILE BANKRUPTCY
ANYMORE” – OR THAT YOU NEED A “MEDICAL DISCHARGE” OR THAT YOU
CAN NOT DISCHARGE TAXES OR CREDIT CARDS.  THIS IS ALL NONSENSE
AND THE SAD PART IS THAT PEOPLE ARE CONVINCED THAT BANKRUPTCY
IS NOT FOR THEM. THEY LOSE THE INCENTIVE TO JUST CALL AND FIND
OUT.FACT:THE NAME “BANKRUPTCY COURT” IS AN UNFORTUNATE TERM BECAUSE
MOST PEOPLE ASSOCIATE IT WITH THE IDEA OF “DEADBEAT”.  IN FACT,
THE BANKRUPTCY COURT IS THE STRONGEST TOOL FOR
REORGANIZATION OF PEOPLES AFFAIRS.  FOR INSTANCE A CHAPTER 13
REORGANIZATION STOPS THE IRS FROM ASSESSING PENALTIES AND
INTEREST THE DAY YOU FILE.  YOU CAN ALSO REDUCE YOUR VEHICLE
PAYMENTS AND STRIP OFF OVERBEARING SECOND MORTGAGES THAT
ARE NO LONGER SUPPORTED BY HOUSE VALUES.  
NO DEBT RELIEF CLINIC CAN DO THIS FOR YOU.
LARGE BUSINESS  HAS  BEEN USING THE BANKRUPTCY COURTS FOR
YEARS.  ABRAHAM LINCOLN, HENRY FORD, WALT DISNEY, DONALD TRUMP
AND NOW BUSINESS AFTER BUSINESS HAVE SOUGHT BANKRUPTCY
PROTECTION.    
WHY NOT  USE A NON-LAWYER SUPERVISED  “DEBT RELIEF CLINIC”?THE
WORST ARE THE “CHRISTIAN DEBT RELIEF CLINICS.”  They prey on guilt
and pretend to uphold the moral fabric.  It is just another leader getting to
people who want to do “right”.  Do not buy it.   THEY ARE NOT REGULATED
AND CONTROLLED LOCALLY.  ON THE OTHER HAND, LAWYERS  ARE LOCALLY REGULATED AND HAVE TOTAL ACCESS TO ALL STATE COURTS AND THE US BANKRUPTCY COURT.  WE LAWYERS ARE
HELD ACCOUNTABLE.REMEMBER THIS.  NOTHING, ABSOLUTELY NOTHING,
NOTHING,   IS CHEAPER AND MORE ACCOUNTABLE TO YOU
THAN THE BANKRUPTCY COURT FOR DEALING WITH DEBTS.YOU CAN NOT PROTECT YOUR CREDIT RATING
BY USING DEBT RELIEF CLINICS. SUCH A CLAIM  IS JUST
A LEADER.  ANY ENTRY ON YOUR CREDIT REPORT STATING THAT YOU “SETTLED” WITH A CREDITOR WILL
MAR YOUR CREDIT.  A “CHARGE OFF” DOES NOT MEAN NO ONE WILL COME AFTER YOU FOR THE DEBT; IT
DOES MEAN IT WILL NOW GO OUT TO A COLLECTION AGENCY.SHORT SALESMYTH:WHAT ABOUT SHORT SALES?  WON’T A “SHORT SALE” LOOK BETTER ON MY CREDIT
REPORT THAN A FORECLOSURE?FACT:  NO  NO  NOYOU GAIN ABSOLUTELY NO BENEFIT FROM ENGAGING IN A “SHORT SALE”.  BUT YOU
CERTAINLY INVITE PLENTY OF HASSLES.  FIRST FROM THE LENDER WHO GOT SHORTED
AND SECOND FROM THE IRS.  THE  ONLY ONE TO BENEFIT FROM THE SHORT SALE IS THE
LENDER AND THE REALTOR;  NOT YOU!!    IT IS BETTER TO LET YOUR PROPERTY GO INTO
FORECLOSURE THAN TO DO A SHORT SALE.  A SHORT SALE WILL NOT SAVE YOUR CREDIT
RATING.  THE “SHORTED” MONEY, THAT WHICH YOU OWE BUT CAN NOT BRING TO CLOSING,
WILL BE TREATED AS INCOME TO YOU BY THE IRS.  YOU WILL BE SENT A FORM 1099-A,
Acquisition or Abandonment of Secured Property BY THE LENDER WHO GOT “SHORTED”.  IT
WILL ALSO GO TO THE IRS AND YOU WILL BE HELD ACCOUNTABLE FOR THE “SHORT”
AMOUNT.   FURTHER,  NEVER SIGN A PROMISSORY NOTE FOR THE SHORT SALE AMOUNT.  
WHAT TO DO?  

YOU PROBABLY GOT HERE BY SEEING MY ADS ON MY CAR OR IN A POPULAR
LOCAL NEWSPAPER, SLICK MAGAZINE OR THE INTERNET, SO HERE WE GO:
                 
     GET DEBT RELIEF HERE

short answer:
1) Because you will get ripped off with a non-lawyer controlled  
or out of state debt relief clinic!!!     
                  and
2) Because you are  financially strapped and
3) Because filing in the UNITED STATES  BANKRUPTCY COURT
is the

DO NOT BE FOOLED BY “DEBT RELIEF CLINICS”  OR “DEBT
CONSOLIDATION” CLINICS THAT ARE NOT LAWYER DRIVEN – MOST ARE
OUT OF STATE AND PREY ON PEOPLE’S EMOTIONS AND FEAR.  

 

MOST PEOPLE MAKE MISTAKES BECAUSE THE ARE SCARED AND DON’T
KNOW WHAT TO DO.  THIS IS YOUR CHANCE TO GET THE FULL STORY.  CALL ME. IT
IS FREE.  WHY  FREE?  AND ONE MORE THING I HEAR –  “DISCOVER CARD called me
and offered to cut my balance from $11,000 to $5,750 if I could
pay them now.  Can’t I get all of my credit cards to reduce my
debt?”  First of all you still have to come up with the money.  
Second, what they do not tell you is that if you make the above
deal they will report, to the IRS, that you negotiated down your
debt.  Guess what.  

1) TO EDUCATE THE PUBLIC   and
2)  I WANT YOU TO PICK ME TO DO YOUR BANKRUPTCY

 

That $5,250 you think you saved will come
back to you as income for tax purposes.  

Just like the short sale balance.Everyone’s financial situation is different, but there
are a few indicators that your finances are already
in trouble, or on a fast track there. Often people do
not realize the seriousness of their financial
situation because of they are living week-to-week.
It is important to take a step back and assess your
financial situation, to help you decide if you should
have a consultation with a bankruptcy attorney.-You are not sure how much you owe. If this is the
case, gather all of your credit card bills and loans
together and add up the balances. You are entitled
to receive a free credit report from all three credit
reporting bureaus, once per year. If you can’t pay
the total amount off within five years then you have
a problem.-You only pay the minimum monthly payments on
your credit cards. Although credit card companies
recently increased minimum monthly payments,
you are not chipping away at the principal unless
you pay more than the minimum.  Because of the
interest rates, you could make minimum payments
for the rest of your life and still never completely
pay off the debt.-You use one credit card to pay off another or you
are using credit to pay your monthly expenses,
such as groceries or utility bills. If you don’t have
any cash left over for necessities after you pay your
credit card bills, you are getting deeper in debt
every week.  You should not be spending more than
twenty percent of your net income on credit card
bills.-You use one credit card to pay another. Although
low interest or no interest credit card offers come
in the mail every day, “surfing” your debt (moving
the balance of one card to another card) is a sign
you are carrying too much debt.  Also, using cash
advance checks from one card to deposit money
into your checking to pay on another card is a
serious sign that you are in trouble.-Creditors are harassing you or a creditor is suing
you. Collectors are persistent and not very
pleasant.  Getting calls from them can increase
your anxiety and even cause you to lose sleep.  If
you’re screening your phone calls – not answering
until you know whether or not the caller is a
collector – you’re in debt over your head.  
Furthermore, if the creditor sues your wages can
be garnished, your bank account can be frozen, or
a lien can be taken against your home.-You are dipping into your savings or your (401k)
retirement to pay bills. Your “golden years” will not
be golden if you have not protected the money you
set aside for retirement.-You are taking out “payday” loans or pawning your
belongings to come up with cash. These practices
cost you money – you pay a fee for the payday loan
and pawnbrokers do not give you full value on your
belongings.  Sadly, if you keep going down the
same road you will not have the funds to buy the
items back.-You “float” checks – or bounce them. Check
floating means you send a check to pay a bill,
hoping the vendor isn’t going to cash it until your
paycheck hits the bank.  This is illegal in some
states.  If the check is cashed before your
paycheck gets there you will have bounced a check
and have to pay bank fees.It’s free and in a few minutes I can help you
analyze your financial situation and recommend a
course of action that will help you get out of
trouble.  Once you have diagnosed the problem and
talked to an expert you will begin the process of
regaining your financial health.SHOULD I FILE CHAPTER 7 OR CHAPTER 13?Chapter  7 is a straight liquidation of your debt.  
You file and your debts are gone.  You pay for what
you keep and “dump” what you do not want.  All the
debts become discharged and you are done; but
you have to qualify (means test) and you lose the 4
advantages of Chapter 13.Chapter 13 Bankruptcy May Be Your Best OptionYour Chapter 13 payment is not dependent on the
amount you owe creditors; it is calculated by
subtracting your expenses from your income
leaving what is called “projected disposable
income”.You may only be required to pay a small percentage
on the dollar to your creditors, and  the payments
required to be paid with a Chapter 13 plan are
substantially smaller than if the debtor made
payments to the creditors directly.  This is in part
because the creditors will not be paid with the
contract and/or default rate of interest.   Unsecured
creditors will not be paid any interest.  Monthly
payments are made to the trustee of the bankruptcy
court over three to five years and the trustee is
responsible for disbursing the funds to the
creditors; sort of like debt consolidation but much
less expensive to you.  The unsecured creditors do
not get paid until the end of the plan.

REMEMBER: Non-attorneys cannot represent
people in bankruptcy court and companies that
promise otherwise are always in business to scam
consumers.

Are You in Financial Trouble???  Read the
following.  Based on years of experience these are
the signs.  

Below are some signs you may be in more financial
trouble than you think:

If you find you are doing even half of the things
listed above, you should make a telephone  call to
me.  

Chapter 13 has always been an option for
individuals, couples, and sole proprietors (not
corporations) who are struggling financially.  Since
the changes to the Bankruptcy Code under
BAPCPA in 2005, more people may have to opt to
file Chapter 13 rather than Chapter 7.  When a
debtor’s income exceeds the state’s median
income, (MEANS TEST) he/she may not be able to
file Chapter 7 because the law determines that
there is a surplus available to repay a portion of his
debt.  

Debtors are subjected to a calculation called “the
Means Test” if their current monthly income is
higher than the state median for a family of the
same size, as set by the U.S. Census Bureau.

I can “run” the Means Test, and if there is
disposable income remaining in your budget after
you have deducted allowable basic living expenses
set by the IRS, you will likely have to file Chapter 13
Bankruptcy.

Chapter 13 also provides a great opportunity to
bring past due mortgage payments current, to pay
priority tax debts in full but discharge the rest;  or
to catch up on unpaid child support obligations.

Speak with me for guidance on how Chapter 13
may be available to help you with your financial
problems.

Ask me about strip offs and cram downs.