WARNING

Tax refunds are pledged to the Chapter 13 Plan in all orders confirming plans, and you must give your federal and state tax returns to the Chapter 13 Trustee each and every year you are in Chapter 13. So they know what you refund is and will demand it. Accordingly, it is not wise to over-withhold from your payroll during your Chapter 13 case. You should plan to owe the government slightly, but not too much, so that you can pay the small amount due at the same time you file your tax return. Don’t learn this the hard way. Discuss with your accountant the proper number of allowances to claim. Then make the necessary changes in your payroll department to the number of the allowances you claim as deductions.

I have lots of clients who only owe credit card debt to the big banks and pay them for years, and when it snowballs beyond their ability to pay from current earnings, they dip into their savings and retirement instead of even considering bankruptcy. They do so mainly to avoid feelings of guilt. So they pay Chase, Citibank, Bank of America, American Express instead of saving for their retirement or their childrens’ college fund, even depleting those resources already saved. It’s nothing short of a disaster. When I meet with them I truly wish I could time travel backward to make them avoid these mistakes.

No, your banker’s children will no go hungry if you default on your credit card debt and file bankruptcy. Have you noticed how in the past few years after we’ve bailed out the banks that bonuses for bankers are back in the stratosphere? Yet at the same time governors of many states are attempting to balance the budget deficits partly caused by the banker driven financial catastrophe on the backs of public sector workers, including teachers.

There is something perverse in the way our society favors the financial over the real work that needs to be done. We now have something like 20% of our GDP coming from the financial sector which is supposed to service the rest of the economy, not supplant it. Think of the game of Monopoly. The bank is only suppose to serve the players as they buy utilities, railroads and develop the neighborhoods. The player who takes on the banking role is merely counting out the phony money and doesn’t take exorbitant fees or make its own investments as the banker. It used to real banks were boring institutions that made safe but reliable profits. Now they’ve entered this casino phase which has only been mildly tempered by the new financial laws passed in 2010.

Yet somehow bankers have managed to keep their lofty pay and teachers and union workers are getting the squeeze. Folks, we need to use the laws to the extent we can to get our economy back in balance to reward the folks who actually do things that make us globally competitive. If you need to deleverage LeverLaw is here to help, using our laws to the best possible effect for your new financial beginning.

Magical thinking. In this age of jets and instant communication and the world wide web it is alive and well. In Washington Republicans think they can always cut taxes and Democrats always have more money for programs. A balanced budget is given lip service, but no one wants to spend the political capital to achieve it. A pundit like Fareed Zakaria can make the common sense prescription like he does here in this video, but can he get any politicians to follow his advice?

On the other hand, can we really blame politicians who more than anything want our votes? If they thought we wanted a balance budget and would reelect them once they brought it to us they might actually accomplish that laudable goal. However, when it comes to managing finances at the governmental level we want it to happen with someone else’s dollar, not ours. Keep our programs and don’t raise our taxes; do it elsewhere. But elsewhere to us is always somewhere to somebody else and they have votes too. So the politicians who can’t tell us what we need to hear give us the magical thinking –fiscal fairy tales. So like individuals, large groups usually need a traumatic event to change. David Stockman, the 34 year old budget director to Ronald Reagan who helped create the Republican myth that tax cuts create more government revenues in the 80s who has substantially grayed in the intervening 30 years, and is no longer in politics, has repented in what I surmise is an attempt too save his legacy by telling the truth before it’s too late.

Stockman compares what is going on around Washington to Chapter 11 bankruptcy. It’s more than merely an analogy, because the fiscal solvency of the United States is at risk. A nation like ours has far more resources than a mere individual or company, so I cannot say the U.S. is insolvent nor do I think anyone else can easily, but if the buyers of bonds start thinking so then the Federal Reserve will be forced to raise interest rates and it will choke off growth.

I mention all this in a blog devoted to personal finances and bankruptcy for two reasons. First, our microeconomics are greatly influenced by what occurs at the macroeconomic scale. For example, if the government’s borrowing cost go up, yours are likely to go up as well, whether it is for mortgages, student loans or credit cards. Also, your prospects for economic growth are tied in with the overall economy’s growth at least to some degree. Second, we also have a tendency to indulge in magical thinking without realizing that we’re doing it when we try and understand complex systems such as our own finances.

One of the most important things I bring to the table is an objective viewpoint that questions any mystical, magical or merely fuzzy thinking when analyzing your situation. It’s not that I’m smarter than anyone else. It’s just that I’m trained to ask the right questions to get at the objective reality of your fiscal situation. You’ll be surprised by the specificity in which I get into your case. It’s not as hard as going through the federal budget line by line. Shedding light on the problem may not be comfortable, but it’s the first step in doing something about it.

You fall behind on your debts. You’ve always paid your debts, so you’re worried. Finally, the calls start coming. Anxiety knaws at your intestines and your shoulders tense when the caller identifies himself or herself as the embodiment of your fears, and pulls at the strings of shame that have been left on the fringes of your tattered finances. “We have a past due account here that needs payment right now, and we need you to take action” says the collector, or something similar. “You know you owe this money, right?” he or she might add.

It feels very personal, even though the caller is an employee or representative of Citibank, Bank of America or some other large financial institution. You’ve had those shiny little cards that even sport dazzling holographic emblems on them that change with the angles to the light. They’ve been free passes that allow you to buy anything on the spot regardless of your bank balance. As the Visa slogan goes ““It’s everywhere you want to be.” You don’t want that ride to end, and you really believed it was part of your standing in society to have these shiny passes.

In reality, the debt collector on the other end of the line is being paid $10-12 hour to call you if they are calling from the U.S. or Canada. Or that much a week if they are calling from Mumbai or Manila and disguising their accents from a top-of-the-line call center in India or the Philippines. If they are lucky they have their own cubicle. They are attached to a headset and a computer that automatically dials your number contained in a database. They may or may not be incentivized with small bonuses on their collection results, although in the case of the foreign call center jobs, those are so coveted there that they do not need to pay bonuses.

Below is a video selling debt collection software to collect on delinquent debts. It is admittedly boring in its 6 minutes and 14 second duration, but even watch 3 minutes of it and you’ll get the picture of what it is like on the other side of the equation from where you sit. It is a numbers game being played quite coldly and impersonally with each call imbued with whatever drama you and the caller can muster, but I assure you, most of the drama is on your side with the guilt, not their side which is nothing more for them than a grind, a way to make their daily bread.

Think about whether you’d like to have their job. They are just adjuncts to the databases and computers putting a human voice to what essentially is connected to the corporate ledgers. It is not a role most of us would prefer. No little girl or boy grows up saying, “I want to be a debt collector someday.” If they had an independent source of living it is doubtful anyone would want to sit eight hours a day in front of a cubicle collecting debt. They are for their work lives the human equivalent of animals in CAFOs (Caged Animal Farm Operations). Yet paying their corporate overseers only makes more of them, not less.

Now, I don’t want to come across as some left wing socialist railing against the social order. Yes, if you have the ability to pay, then the corporations should get you to pay. Yet, if you are insolvent and unable to pay, the sooner you figure that out the less costly it will be for you. Nor should you take these call personally. They are not personal. They are business.

At LeverLaw, once we’ve diagnosed insolvency and have taken you on as a client, we start taking creditor calls right away and they have to stop calling you under the FDCPA or Federal Fair Debt Collection Practices Act. This is even before you file bankruptcy, as the automatic stay of bankruptcy is not necessary to stop the calls, and violations sof the FDCPA can be enforced through lawsuits.

Merely reacting to the squeaky wheels of debt collection without stepping back and realizing what is happening, either in the debt collection process to which I’ve given you a window to in this post and video, or your own financial situation is confusing, bewildering and ultimately wasteful. Deal with your creditors in good faith if you can, but when you cannot pay them without doing damage to your own family and finances, you need to get professional help, fast. Debt collection is a sign of insolvency you should not ignore.

SHOULD I TRANSFER THIS ASSET BEFORE I FILE?

Something along the lines of “Should I give asset X to my kids before we file” or “should I repay my friend before I file” are among the most frequent and most disconcerting questions I am asked on a regular basis from my clients and prospective clients. Given the regularity in which such questions are asked I put it high on the list of why clients need counsel to go through the bankruptcy process.

Before I go into the many reasons why such transfers are almost always a bad idea, let’s take a quick look at the impulse to do it. Let’s face it, you’re going into terra incognita when you’re filing bankruptcy. To you it seems like a black box or a dark tunnel that you’re entering because you don’t know how it works. Just like you hide your jewelry in your house from a potential thief, it is natural to want to hide assets from your creditors, or to prefer your friends and family. Not knowing there are other methods of protecting property and better ways to plan, you fall back on what you do know how to do.

However, the bankruptcy process puts the bright light of day onto all aspects of your financial condition and transactions, hopefully because you do it voluntarily, or in a worst case scenario because the Trustee or a creditor discovers it on their own inquiry.

Here are the three main reasons to avoid prepetition transfers.

FRAUDULENT TRANSFERS

Any transfer made within one to four years (or longer depending on the statute used and whether there was concealment) can be “avoided” or set aside if it was done with either (1) the intent to delay, hinder or defraud creditors, or (2) for less than adequate consideration (less than the value of the thing transferred). Either your intent or a big mismatch between what you gave and got is enough for a judge to “void” the transfer so that it is as if it had never happened.

So for example, you have a car free and clear that you transfer title to your daughter 11 months before filing. The Statement of Financial Affairs asks about any transfers in the last two years. You disclose it, thereby avoiding any Denial of Discharge issues (see section below), but the Trustee sues your daughter to get the car back and sells it for the benefit of your creditors anyway.

PREFERENCES

The bankruptcy laws and system is all about fairness, not just to debtors, but also creditors. That all creditors of the same class should be treated equally is a basic tenet of bankruptcy law and practice. To accomplish this if someone was paid a debt within 90 days, even if a complete stranger or in an arms length business transaction, then the trustee can sue the creditor who obtained this transfer deemed preferential and put it back into the estate for the benefit of all the general unsecured creditors. If the transferee (the one who received the money or property) is an “insider” such as a relative, business partner, or friend, then the “look back” period is a year. So these transfers can be set aside even if they are not fraudulent as described above.

DENIAL OF DISCHARGE

If an transfer is done in bad faith, such as a fraudulent transfer, or even of property that may have been available to pay creditors simply “disappears” without an adequate good faith explanation, then the entire discharge of a debtor can be denied. As a general floor my clients owe at least $30,000 and more often have six or even seven figures of unsecured debt to discharge in their bankruptcy. So having a discharge denied is very, very expensive. Moreover, much of that debt carries high interest, and so having your discharge denied is a financial death sentence for many debtors. It is not worth risking if you’re insolvent because the fact is that if you’re insolvent you almost by definition have less than you owe. The thing you would be tempted to conceal through transfer is almost certainly minimal compared to the value of your discharge.

THE GOOD NEWS

The good news is that there are perfectly legal ways to avoid the ill effects discussed above. For one thing, you’re in control of the timing of your case. Moreover, exemption planning is perfectly legal and expected. If you’re fully forthcoming with your attorney both about the facts and circumstances of your case, as well as what your goals are for the outcome, then there are proper ways to achieve those ends without taking any unnecessary risks in attempting to circumvent the bankruptcy system.

The prospect of a consumer protection agency being debated in Congress that protects consumers from predatory lending practices is a very welcome development in my view and experience. The world of finance has because more and more complex and the public has understandably not kept up with these developments. As long as one believes that the government should protect citizens health and wealth as it does by funding police, firefighters and the armed services, it should also protect them from sharp practices from sophisticated and rapacious lenders.

The best line of defense, however, should always the first line of defense. That first line should be education so that the fiscal fleecing doesn’t happen in the first instance. The government can only intervene after the damage is done, which may deter future fleecing if it is punitive enough, but the criminal justice system has been around for centuries and we still have criminals. Most crime is avoided by common sense like locking your car and house and hiding valuables, not by jails.

As a bankruptcy attorney the population I represent may not be indicative of the population as a whole, but neither are they very far removed from the overall practices of Californians. I don’t know too many people who don’t use credit cards these days, even if they’ve filed bankruptcy before. I know of very few people who really understand mortgages whether they are my clients are not. Basic concepts such as the time value of money and discounting to present value that are taught in every introductory finance course are alien concepts to most people I know who did not get an advanced degree or major in finance or accounting as undergraduates. I made it through my legal training without knowing anything about it. In fact, I practiced for 10 years as a financial attorney and only learned these concepts when I studied financial planning at UCI in the course of earning my Certificate in Personal Financial Planning.

I know believe that basic financial principles should be taught in high school. The new credit card laws restrict the solicitation of college age students because in our society even the students going beyond high school are deemed, with good cause, as not being able to understand the use of revolving credit. Why not immunize the largest part of our citizenry from financial abuses and the inefficiency of trial and error learning (which is what we have now) in financial matters?

The reasons this has not occurred and is not called for regularly are many, and are not good. One of them is that the financial industry makes money from our ignorance and its profitability would be hurt if there was widespread financial literacy. Moreover, many people in power outside the financial industry are only marginally more financially literate than the inner city and rural people who are the most financially illiterate. Bernie Madoff did not just scam the SEC, he also ruined many of the most financially astute, or at least wealthiest Americans there are.

The financial sector takes a larger part of our GDP now than it did in decades past with both beneficial and detrimental results. Like much of economics the financial sector is run on game theory. On the surface it is always portrayed as a win/win proposition for all the players, but just like the casinos make the rules on the tables, the companies that control the money also make the rules and they rig the game just as much as the casinos do. The same math principles that run casinos apply in the world of finance.

I don’t expect the public at large to study the world of finance like I have, but I plan at least in some respects to make it my life’s work to educate the public and my clients as best as I can so that the value they bring to society is not dissipated by sharp operators who don’t really bring any value to society, even if that operator is Wells Fargo Bank or some other big, branded player.

My clients are often the most in need of a financial education. As much as I hated the passing of BAPCPA in 2005 for making bankruptcy harder, it required every debtor to take at least a few hours of education to receive the discharge order. Most of my clients are really enlightened by the course we use which is taught by Dave Ramsey. That is good, and I wish the 2.5 to 3 hour course gave them all they need, but it doesn’t. Many more hours need to be devoted to actually gain financial literacy, as well as the motivation to achieve it. My job is to get my clients out of the critical care part of their financial problem and point them toward the long road to financial health and independence. Hopefully the federal government will also put some smart and dedicated people in charge of making sure the Wall Street sharpies don’t do their job too well.

Believe it or not, laughter is not uncommonly heard in my consultation conference room. We care deeply about the issues around debt and money, and it touches us down to our unconscious where our funny bone lies. Yes, tears are shed in that room too, but laughter is much more common, because not to laugh is more painful. It takes some courage to face the fact of insolvency (that you cannot repay your debt) and while it may be a serious step to file bankruptcy, it does no good whatsoever to leave your sense of humor at home while facing it. Perhaps it is only with a sense of humor that we can face the mistakes or misfortunes that brought us into this financial pickle.

I am linking to a comedian’s YouTube posting because he has done in a comedic “bit” what is a great list of dos and don’ts for bankruptcy. This routine by Timothy Clue recites things you wish you could do, but aren’t always advisable from a bankruptcy attorneys perspective.

One beautiful moment of the bit is when he has his moment of realizing he can never pay back this debt. The realization of “insolvency” has never been so well depicted. Where he goes from there is a comedic rather than legal perspective, so I’ll give the latter perspective after you’ve heard Tim’s comic perspective.

Once Tim realizes he’s insolvent he decides to “load up” (or as he calls it “living the Visa loco) and just go further into debt. If he were to file bankruptcy later in this scenario his creditor who proved he did it without intent to repay the debt can make in nondischargeable, which means the bankruptcy would have no effect on it and the debt would remain even after the bankruptcy remedy was attempted. The creditors have to sue you in the bankruptcy to get this exception to the discharge, but it is a real risk.

He brings up the fact that debt doesn’t just effect you, it impacts on your family as well, although he approaches it from the exact opposite perspective I would, which is what makes it funny.

If everyone could talk to debt collectors like Mr. Clue then my job would be a lot easier. It distresses my clients rather severely, but he has a lot of fun with it. I seriously doubt anyone can really have fun with it which is why we take the creditors calls so you don’t have to.

I can be a bankruptcy attorney and help people with money problems because while it is serious, it is not as bad as divorce or criminal work where people lose their family or liberty. It is just money. A sense of humor helps as long as you also get serious about solving your debt problem. We are Long Beach bankruptcy attorneys to help you get out of debt.

Declaring Bankruptcy

The phrase “declaring bankruptcy” has been with us a long time, but what does it really mean? If you start a voluntary case, which is over 99% of all cases, you are simply telling your creditors you cannot repay your debts because you are in an insolvent state.

Sometimes the pure absurdity of comedy can help make the point. Here the boss in The Office series decides to file bankruptcy as in the video clip below:

Indeed, Michael cannot just yell “I’m declaring bankruptcy” out into the office pool or hallway. He has to find the proper forum.

That forum of course is the United States Bankruptcy Court. Only then, under the auspices of the federal government will the bankruptcy have binding authority on all creditors everywhere in the United States and even other countries.

Moreover, there are very specific forms and very specific rules and laws in the conduct of “declaring bankruptcy.” It is not that simple to “declare bankruptcy”, but with good guidance it can be done for the right reasons and appropriate circumstances. You have to decide whether to file under Chapter 13 or Chapter 7. Let LeverLaw help you if you live in the Los Angeles, Riverside, San Bernardino or Orange County in California.

Sometimes bankruptcy can be used to get rid of older income taxes, but did you know it could be used to avoid future income taxes? It can if you get very good and timely advice on how to do that if the situation pertains to you.

To understand, you must first acquaint yourself with two concepts: “gross income” (“GI”) and “cancellation of debt” (“COD”). Gross income is the giant intake at the head of the tax hopper. It broadly includes everything that could possibly be taxable. Its inclusions and exclusions are codified in Internal Revenue Code Section 108. Among its inclusions are COD income.

This COD income is sometimes called “phantom income” because it may have never actually arrived in your bank account. However, according the IRS, you derived a benefit from it, ergo it is income.

One example to illustrate where the IRS has a definite point is where someone owns a company but does not take a salary. Instead the company gives them money as a loan. Later the company, owned by the same individual, forgives the loan, so the debt is canceled. Now that is obviously income disguised as a loan.

The same logic is applied to COD from mortgages as well. Let’s say you owned a commercial property that you rented out to a business. Now that business failed and moved out and you cannot find a tenant to move in and pay anywhere near the same rent, and the new market rent will not cover the mortgage payment. Additionally, you overpaid for the property during the boom and now it is worth far less than you paid for it (say $300,000 less), so you cannot sell it either. You stop paying the mortgage and let the bank foreclose. The following year, or maybe two or three years later the foreclosing bank issues you a 1099C for COD. Now the IRS has notice that you received $300,000 of debt forgiveness. You are in a marginal 1/3 tax bracket so that income has you owing the IRS $100,000.

IRC 108 has an exception inclusion of two things in GI; insolvency and bankruptcy. Your CPA can either prove you were insolvent when the COD occurred, which is subject to interpretation, or you could have filed bankruptcy and had the debt discharged before the COD occurred. The fact of bankruptcy is indisputable, whereas your insolvency is an argument your CPA makes and may wind up in tax court.

For now and the next few years homeowners do not have to worry about this COD tax problem if the house is worth less than $2 million because there is a temporary federal law that excepts personal residences from this type of tax obligation. Hitting homeowners for taxes after they have lost their home in foreclosure would be politically unpalatable, and literally millions of Americans are in this category now. The $2 million dollar ceiling helps prevent even well heeled homeowners who are losing their home, which can occur here in Long Beach, or elsewhere in Los Angeles and Orange Counties.

It is important to get the right advice when you’re in a defensive posture in your finances. These are complicated webs that we find ourselves in and getting the right advice can make the difference between solving problems or creating more problems.

The Cash for Keys program (or “CFK”) is something that can help you out if you have to leave your foreclosed residence.

When a foreclosure occurs the title changes from you to your lender, or whoever purchased the property at the foreclosure. Now they own the property, but they have no right to possession. You have the right to possession until they evict you through a process called “unlawful detainer.” Evicting you is costly and risky. It costs money to hire the attorney and pay the filing fee for the eviction. It is risky because the former owner could remove fixtures and damage the house or condo in the move out.

Therefore, a large percentage of new owners will come to an agreement with the former owner to vacate the property for a set sum, one that saves the new owner costs and helps the former owner afford the move. The way it works is you come to an agreement in writing, then there is a home inspection so the current condition of the house or condo is understood, and then if the house is left in that condition and “broom clean” the former owner is compensated a fair sum, often equivalent to the cost of the move or a first month’s rent upon move out.

At LeverLaw for our clients in this situation we often help negotiate the CFK if they have retained us for a bankruptcy case . We need to charge extra for this, but most of the time the banks offer a fair amount that offsets moving and we do not need to get involved.  We also keep you apprised of how the process works and its timing throughout the many months that it unfolds. We can do this regardless of whether you live near our office in Long Beach, or if you are in Los Angeles, Orange County or Riverside County.