Salt Lake Law

Two Common Bankruptcy Myths

2012-02-07T15:09:00.000-07:00

There are a lot of myths surrounding bankruptcy, about what it can or can't do, who can file, who can't, that you can except certain debts, etc. Two of the more pervasive myths are (1) that you need a minimum amount of debt in order to file and (2) that you have to repay all your debts in Chapter 13. Both are false.

Anyone can file bankruptcy with any amount of debt. In theory if you owe someone $25 you can file, though you'd probably be committed because the filing fee is $306. But the truth is, there is no minimum amount of debt required. Whether you file is a personal decision. For some people, $5,000 is too much debt. For others, $500,000 is not too much. It all depends on the individual.

When it comes to Chapter 13, you do not have to repay all your debt. It would be a foolish program if it required full repayment. Think about it. If someone can't repay their debts NOW, how are they going to be able to repay them in only 60 months, the maximum time allowed under Chapter 13? What Chapter 13 does is look at what you can afford to pay and require you to pay that for the length of the plan, which is 36 or 60 months, depending on a number of factors. At the end of the plan, any remaining debt is discharged, just like in a Chapter 7. But Chapter 13 has advantages over Chapter 7: There is no means test, which disqualifies some debtors from Chapter 7; you get to keep assets that you might otherwise lose in Chapter 7 (such as cars, houses, stocks, etc.); and some debts that can't be discharged in Chapter 7 can be discharged in Chapter 13.

JP Morgan Chase Shuts Down Collection Arm

2012-01-27T09:15:00.000-07:00

An interesting article in American Banker just caught my eye. JP Morgan Chase, one of the bigggest of the big guys, has quietly shut down most of its consumer collection activities. As recently as mid-2011 this division was bringing in hundreds of millions of dollars a month in revenue for JPMC. Chase is mum about why it has stopped collection activities, but speculation is that it has something to do with similar problems faced by Chase, B of A and others in foreclosures: Lack of documentation for the debts.

It looks like the bank that was too big to fail is now too big to manage.

Saving Your Business in Chapter 13

2012-01-12T16:39:00.000-07:00

Most people think of Chapter 11 when they think of reorganizing a business. While it's true that you have to file Chapter 11 if you have a corporation or a limited liability company (LLC), if you're a sole proprietor you can reorganize through Chapter 13.

A sole proprietor simply means a person running a business without having incorporated or formed an LLC through which she conducts the business. If you're "doing business as" (d/b/a), you're probably a sole proprietor. There is no legal distinction between the business and the individual in a sole proprietorship. While this is often a disadvantage when it comes to protecting your personal assets (home, car, savings, etc.) from business debts, if it becomes necessary to reorganize the business being a sole proprietor lets you do so through Chapter 13.

Chapter 13 is only for individuals, which is why businesses generally don't file Chapter 13. But because there is no difference between the individual and the business in a sole proprietorship, solos can reorganize in Chapter 13. This means they can modify business leases, pay some debts, reject some contracts and often get all the advantages of Chapter 11 without the expense or hassle. So if your business is struggling Chapter 13 might be just what you need.

Bankruptcy Mills

2012-01-03T15:47:00.000-07:00

There is an interesting article on MSN about cut-rate bankruptcy lawyers, also known as bankruptcy mills. You can read it here:
http://articles.moneycentral.msn.com/Banking/BankruptcyGuide/BewareCutRateBankruptcyAdvice.aspx

What constitutes a "bankruptcy mill" is in the eye of the beholder. Filing hundreds or even thousands of bankruptcies a year doesn't make a firm or an attorney a mill in my opinion. What does make a bankruptcy mill is when the attorney doesn't give the client the personal service the client deserves. If the attorney is up front and says, in effect, "we'll do a bankruptcy for you for $XX, but realize that for that price you won't get return phone calls, we won't answer your questions and we won't do much more than prepare the forms and attend the meeting of creditors," the client can hardly complain. But unless the attorney makes such a disclosure, most clients expect, and I would say, deserve personal attention. Questions arise. Clients expect those questions to be answered. They also expect a certain amount of "hand-holding" through what is usually a traumatic event in their lives. When an attorney ignores a client WITHOUT FIRST DISCLOSING that the bargain-basement fee the client paid doesn't entitle the client to personal attention, then that firm is a bankruptcy mill.

Modifying a Mortgage in Chapter 13

2011-12-30T14:10:00.000-07:00

Lots of clients ask, "Can I modify my mortgage if I file Chapter 13?" Unfortunately the answer is usually "no". While automobile and other secured loans can be modified in Chapter 13, so far the mortgage industry lobbyists have convinced Congress that borrowers should be held to whatever bargain they made when they got their loan, even if their house is worth less than what they owe or if interest rates have dropped way below the rate they got. In most cases all a borrower can do is gain time to catch up any delinquent payments. However, the borrower must make all future payments (those coming due after she filed) when and as they are scheduled.

There are two cases where mortgages can be modified in Chapter 13. The first case is where there are more than one mortgage. The first mortgage cannot be modified, but if the house is worth so little that all or part of the second and subsequent mortgages are more than the value left after the first, those mortgages can be modified or "stripped down", meaning the unsecured portions get treated as unsecured debt.

The second case where a mortgage can be modified is if the bank has other collateral besides the house. For example, suppose the bank took not only a mortgage but also a security interest in a car, or some stock. In that case the mortgage can be modified even if the value of the house exceeds the amount of the mortgage.

If It's Good Enough for Steve Jobs, It's Good Enough for You

2011-10-10T09:32:00.000-06:00

We don't know for sure, and we probably never will, but it appears Steve Jobs has protected his estate, to the extent he can, through living trusts. A living trust is a trust established and funded during one's lifetime. Lots of trusts are established during the maker's life, but lots remain unfunded, meaning nothing was ever put into the trust. When that happens, the trust is like an empty basket -- good for nothing.

Forbes magazine reported on October 7 that real estate records from 2009 show that Jobs and his wife transferred three pieces of real estate into two separate trusts. This doesn't mean that he transferred all of his assets, such as his Disney stock, with an estimated value of $4.4 billion, because transfers of property other than real estate do not need to be recorded in public records. But it's likely he did. Someone as smart and as private as Steve Jobs probably took the proper steps to minimize his potential estate tax and protect his heirs from the publicity that would surround probate of his estate.

There is a long list of celebrities who failed to properly plan their estates. As a result, they unnecessarily lost a good part of their estates to the IRS. Some of these are Jimi Hendrix, James Brown, Steig Larsson (author of The Girl With the Dragon Tattoo), Gary Coleman, Sonny Bono and Michael Jackson.

Mortgage Rescue Scams

2011-10-06T09:31:00.000-06:00

With the mortgage foreclosure crisis hitting more people, scammers are out in force. One of the newer scams involves fraudulently attaching a mortgage to someone else's bankruptcy. Here's how it works.

Scammers know that one of the most powerful tools in the bankruptcy tool box is the automatic stay that prevents a creditor from taking any action against the debtor or property of the debtor's bankruptcy estate. The scammer approaches a borrower facing foreclosure and gives them the pitch that for a small fee, say $300-$500 per month, they scammer will "work with" the lender to prevent bankruptcy. The scammer tells the borrower that she needs to convey a small percentage, even 1%, of her house to another person. This other person is someone in bankruptcy, usually in another state, and has nothing to do with the scammer or the borrwer. In fact, this person is completely unaware of the scammer. But by transferring a small portion of the borrower's property to the bankrupt debtor, the borrower's property is now "property of the estate" of the innocent debtor. The scammer uses this to claim the protection of the automatic stay against the bank trying to foreclose on the borrower.

Sometimes the debtor becomes aware of this sudden new interest in real property that he never had before when the bankruptcy trustee accuses him of failing to disclose all his property. This usually happens when the bank asks for relief from the automatic stay so it can commence foreclosure against the borrower. If this happens, the scammer tells the borrower she needs to convey another fractional interest to another unknowing debtor somewhere else and the process starts again.

The bottom line is this for borrowers: It's unlikely that any of these so-called "rescue firms" can really legitimately help you. Beware of anyone who tells you that for a monthly fee they can stave off foreclosure.

Surrendering Real Property

2011-09-19T16:52:00.000-06:00

A question that has come up a few times recently is a variation of "how do I surrender my house in bankruptcy?" When someone files bankruptcy, she can surrender any property that secures a debt. To "surrender" means to turn the property over to the secured creditor and walk away, receiving a discharge for whatever is owed above the value of the property surrendered. This often happens when the debtor owes more on the loan that the property is worth (a condition known as being "under water"). With personal property, such as cars, boats, home furnishings, electronics, etc., surrender is usually a matter of giving the items to the bank.

A house or any real estate is more difficult. You can't just drop it off at the bank. Even sending the bank the keys to the house isn't good enough because title to the real estate is still in your name in the county recorder's office. If you're still the owner, you could be liable if someone slips and falls on the property. You will be liable for unpaid property taxes and assessments, and you could be fined for not maintaining the property, such as by shoveling the snow in winter or mowing the lawn in the summer.

Some people have tried signing a quitclaim deed and recording it. That might work, but there is a concept in real estate law that requires a deed to be accepted to be valid. Acceptance means the grantee (the bank in this case) willingly takes the deed. Simply recording the deed may not be valid acceptance.

As banks become overwhelmed with properties that are under water, many of them simply don't know what to do. As a result, they might not start and complete foreclosure in a timely manner. This leaves the surrendering borrower in limbo. She has said she doesn't want the property, but she can't get rid of it. The only solution might be to file a motion with the bankruptcy court to force the creditor to accept a deed, thereby getting it out of the debtor's name. The worst thing to do is ignore the situation.

Bankruptcy Exemptions

2011-08-30T20:15:00.000-06:00

I was faced with an interesting question from a client this week. Up until recently ago he lived in California. For six years he has owned a condo in Utah. Four months ago he moved to Utah and now lives in the condo. He needs to file bankruptcy and wants to know which state's exemptions, Utah or California, he can use. He wants to use California because their homestead exemption is $75,000 whereas Utah's is $20,000.

Section 522 of the Bankruptcy Code says that a person uses the exemptions in the state where he has had his domicile for the past 730 days (two years), unless the person hasn't lived in a single state for that time. If, like this person, a debtor has lived in two or more states in the past two years, then he uses the exemptions in the state where he lived the longest portion of the 180 days immediately preceding the two year period. This convoluted and confusing statute is part of the BAPCPA enacted in 2005 and its purpose is to prevent debtors from moving to states with more liberal exemption laws and then filing bankruptcy.

In this case, section 522 helps my potential client because he lived in California for the full 180 days prior to the two year period back to August 2009. So he will get to claim the California exemption even on his condo in Utah.

Bankruptcy Preparers

2011-08-18T17:04:00.001-06:00

I recently joined an online forum dedicated to answering questions about bankruptcy. One of the more common questions is along the lines of "Can I do a bankruptcy myself?" Underlying this question is the concern that a person already strapped for money is being asked to pay $1,000 - $3,000 or more to have a lawyer handle the bankruptcy. What clients often see is only the finished product, a stack of papers about 1/2" thick, that constitutes their petition and supporting schedules. How hard can it be to fill out some papers, they ask?

Some want to go even farther and get someone, called a bankruptcy preparer, to fill out the papers for them. Bankruptcy preparers are expressly permitted by the Bankruptcy Code, but there are a number of things preparers can't do, if they're following the rules. First, they can't give legal advice. In other words, they can't tell you what to put down. They can only put down what you tell them. Secondly, they can't go with you to court. You're on your own there. Third, once they finish preparing your schedules, they are done. They have no further interest in you or your case because they can't have an interest. All they can do is fill out paperwork.

Bankruptcy is one of the most complicated legal processes there are. It is far more complex than a divorce, a will, a DUI or most litigation. The 2005 Bankruptcy "Reform" Act made it even more complex. If you don't know what you are doing, you can fail to claim exemptions you're entitled to, meaning you can lose property you are able to keep; you can incorrectly fill out the Means Test, meaning you might think you don't qualify for Chapter 7 when you really do; you can fail to respond to a motion, resulting in something bad happening, such as having your discharge denied; and you can even be guilty of bankruptcy fraud, meaning you can lose your right to a discharge and even go to prison.

Think of it this way. You're trying to get rid of maybe hundreds of thousands of dollars of debt and gain a chance at starting your life over, a chance that comes along only once every eight years at best. Isn't it worth $2,000 to get it done right?

Living Reality?

2011-08-16T10:19:00.000-06:00

I follow a number of bankruptcy blogs and today read a great post by a bankruptcy attorney in Kansas City, Missouri, about reality and bankruptcy. Rachel Foley makes the point that the so-called "reality" shows have twisted our view of the world. Many of us try to emulate any number of people in these shows and end up both spiritually and financially bankrupt. You can read Rachel's entire post here:

http://www.bankruptcylawnetwork.com/trying-to-live-like-a-reality-star-may-lead-to-bankruptcy/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BankruptcyLawNetwork+%28Bankruptcy+Law+Network%29

One of the key points in her post is that bankruptcy is designed to give people a fresh start, and you can't make a fresh start by continuing to spend more than you make. You can get rid of your debt, but if you continue to live beyond your means, in five years you'll be in debt again. Bankruptcy requires some hard decisions and may involve some pain as you give up a lifestyle that you can't support. The client who says, "I want to get out of debt but I don't want to give up my boat" won't make a fresh start because he hasn't realized that owning a boat just isn't in the cards for him right now.

If you're not willing to engage in some soul-searching and make some hard choices, bankruptcy isn't a fresh start. That might sound harsh, but that is reality.

Common Estate Planning Mistakes

2011-06-27T16:59:00.000-06:00

When it comes to estate planning, people make mistakes most commonly in one of two areas: First, they fail to have any kind of estate plan at all. Secondly, once they have a plan, they forget about it.

An estate plan is not a static document because life isn't static. Circumstances change. Asset values go up or, as is more common in recent years, down. Divorces, remarriages, new children, deaths, selling assets, buying new assets -- all of these things can make the best estate plan meaningless. An outdated estate plan can leave your family vulnerable, unable to pay estate taxes, for example, or even unable to pay funeral expenses because of lack of liquidity.

Any time you have a change in your life you should review your estate plan. If this is done periodically, the changes will be minimal, but the savings, not only in dollars but in hurt feelings and even breaking up of a family, can be huge.

Surrendering a House

2011-06-21T15:22:00.000-06:00

In bankruptcy a debtor has three options when it comes to secured debt (debt where the creditor has collateral that can be repossessed): Surrender (give the collateral back), reaffirm (renew the contract, essentially excepting the debt from the bankruptcy), or redeem (paying the creditor a lump sum equal to the value of the collateral -- not a realistic option for obvious reasons). To surrender means you give back the collateral and walk away from the debt, not owing any deficiency that may exist after the creditor sells the collateral. With a car or any other personal property, surrender is fairly easy. Drive the car to the bank, drop the keys on the manager's desk and walk away. It's a bit more tricky with a house. How do you give a house back?

The issue is becoming more and more important because of the backlog of foreclosures. In years past, as soon as a person filed bankruptcy the bank filed a motion for relief from the automatic stay to get permissioin to foreclose. Now, banks are waiting several months to act, if they act at all. While this might seem like a great deal for the debtor because she gets to live in the house rent-free until the bank acts. there are some big downsides. If your bankruptcy schedules say you're going to surrender something, you are required to surrender within 45 days of the meeting of creditors. For a house, this means, at the very least, to leave and notify the bank that the property is vacant. But this doesn't solve everything. As long as the debtor still has legal title, she is considered the owner. That means if someone is hurt on the property (such as by slipping and falling on the ice), the debtor could be responsible. If there are dues, such as condominium fees, the debtor could be personally responsible. Same goes for assessments made by the city. If these things happen after you have filed (post-petition), the debts are not discharged by the bankruptcy.

If you plan to surrender your house in bankruptcy. talk to your attorney about how you actually accomplish that.

Taxes in Bankruptcy

2011-06-09T16:11:00.000-06:00

Will my tax debt be wiped out in a bankruptcy? For many, that's a huge question. It's also a question that a lot of professionals, bankruptcy attorneys included, don't have the answer to. In most cases, the answer is "No." Taxes are not discharged in a bankruptcy. That's because the same people who wrote the Bankruptcy Code, Congress, are the same people who wrote the Internal Revenue Code and the government takes care of itself. Letting people discharge taxes in bankruptcy would seriously hamper the government's ability to do business.

Tax debt CAN be discharged if all these conditions are met:
1. The taxes are income taxes. Other types of tax, such as payroll taxes or the "personal liability assessment" for officers and directors of a company that didn't pay over payroll taxes, tax penalties and the like are not dischargeable, ever.
2. You filed a return for the period in question. If you've been delaying filing a return, the taxes can't be discharged regardless of how old they are.
3. The taxes are at least three years past due. Since income taxes are not due until April 15 of the year following the calendar year for which the tax applies, this means three years after April 15 for the prior year.
4. You didn't commit fraud, such as wilfully evading paying, using a false social security number, etc.
5. You pass the "240-day" rule, which says the IRS must have assessed the tax more than 240 days before you file, or it hasn't yet assessed the tax. If you fall between those two deadlines, they can't be discharged.

WARNING: Even if you are able to discharge the taxes, if the IRS filed a tax lien against any property you own, that lien, just like other liens, such as mortgages or judgments, passes through bankruptcy unaffected and can still be enforced against the property.

If you are filing bankruptcy because of tax debt (this includes state taxes as well as federal), be sure you talk to a knowledgeable tax and bankruptcy professional before filing.

Court Asked to Exclude Busty Woman from Trial

2011-06-01T13:47:00.000-06:00

A Chicago lawyer has filed a novel motion in a small claims action involving a car dealership and a married couple. Thomas Gooch, who represents the dealership, filed a motion to exclude "a large-breasted woman" from sitting at the plaintiff's counsel table with the plaintiffs and their attorney, Dmitri Feofanov. According to CBS News, Gooch claims that the sole purpose of having this woman, who Feofanov identified as a paralegal, at counsel table is to distract the jury from the merits of the case. Although the motion described the woman as "large-breasted," Gooch reportedly told a local newspaper that he doesn't object to the fact that she's buxom ("Personally, I like big breasts" Gooch is quoted to have said) but he objects because she isn't a lawyer and has no business at counsel table "dressed in such a fashion as to call attention to herself."

This raises all sorts of interesting possibilities. Perhaps jurors who are deemed too attractive will be asked to be excused because their appearance may detract the other jurors from considering the case.

Incentive Trusts

2011-05-09T17:13:00.000-06:00

I've been following an interesting string of comments on "incentive trusts." These are trusts that tie distribution of the trust corpus (money) to the beneficiaries to the beneficiaries' achieving some benchmark, such as graduating from college, kicking a habit or otherwise conforming to some standard the donor wants. The discussion has centered around whether attorneys should get involved in these trusts. The biggest objection, from a drafting standpoint, is that such trusts have a great potential for litigation, especially where the standard to be achieved is somewhat nebulous. For example, what does it mean to kick a habit? Graduating from college is more concrete but even then there is wiggle room. A particular college? A particular major? A minimum GPA?

Perhaps the best comment was by someone who said, ask the client, "If your child won't do this for YOU, what makes you think she'll do it for your MONEY?" To that I would add, if your relationship with your child is so shallow that she will do it for your money but not for you, why would you want to leave her anything with strings attached in any case?

You Can't Escape a Good Constable

2011-04-29T16:32:00.000-06:00

I've been trying to serve a defendant (Mr. X) on behalf of a local bank for about six weeks. He's been lying to the constable about his whereabouts (strange, but true -- defendants sometimes lie to avoid being sued). His last story was that he was out of state for an extended period. A few days ago this constable went to an address to serve Mr. and Mrs. Y on behalf of a completely different law firm. The man who answered said that Mr. Y didn't live there, that this was his, Mr. X's home. The constable said "Hold on a minute," went to his car, retrieved my summons and served Mr. X at his new address, in a completely different city from his former address.

You just can't escape from a good constable.

Hiding Assets After Bankruptcy

2011-04-28T17:13:00.000-06:00

A few days ago I received a call from a credit union about one of my clients. Apparently my client is hiding his motorcycle, which was security for a loan from the credit union. The credit union asked for my help in getting it back.

Now there's not a lot I can do for the credit union. For one thing, my client and it are in an adversarial situation and my client comes first. I did agree to send my client a letter telling him that he needed to either pay for the motorcycle or give it back. That's the rule with secured debt. The personal liability for the debt goes away, meaning the credit union can't sue my client and try to collect money from him. But the security interest the credit union had in the collateral, in this case the motorcycle, is unaffected by the bankruptcy. It just passes through the case without being harmed.

The bottom line is, if you want to keep your stuff, whatever that stuff is, and that stuff is collateral for a loan, you are still going to have to pay the loan after the bankruptcy. If you aren't willing to or can't pay, you have to give it back. Hiding it is not an option.

Of Baseball, Divorce and Lawyers

2011-04-21T17:14:00.000-06:00

Major League Baseball's commissioner Bud Selig has announced that MLB will take over day to day control of the Los Angeles Dodgers because the team's owners, Frank and Jamie McCourt, are locked in a nasty divorce where ownership of the team is up for grabs. Frank McCourt is threatening to sue Bud Selig and MLB for this move that is, to use an overworked word, unprecedented.

Frank McCourt bought the Dodgers in 2004 in a deal that was described as "highly leveraged" (read, McCourt bet the ranch and then some). The Washington Post referred to McCourt as "McBankrupt" after he shelled out $430 million just so he could sit in the owners' box at Dodger Stadium. But, hey, the San Gabriel Mountains, Elysian Hills, sunny weather, 80 degrees? Who could resist? And the Dodgers have a storied history, going back to the days when they were the Yankees' cross town rivals as the Brooklyn Dodgers. Beginning with Sandy Koufax and Don Drysdale, who silenced the Yanks' bats in the '63 World Series, shutting them out 1-0 in Game Four for the sweep, and continuing with Steve Garvey and Ron Cey in the 1970s and 80s, the Dodgers were one of MLB's premier franchises.

But the Dodgers haven't won a series since 1988 and are reported to be in the position of having to borrow money to make payroll. With ownership on the block, the owners squabbling themselves, and now MLB stepping in, you can bet the ones really licking their chops are the lawyers. They're going to come out as the only real winners.

Gift Card from Blockbuster? Fuhgetabboudit

2011-04-11T10:14:00.005-06:00

Did you get a gift card to Blockbuster that you haven't used completely? If so, throw it away.

Blockbuster filed Chapter 11 bankruptcy last year, as was widely expected. Up until last week, it looked like Blockbuster might be destined to become one of those companies that just quietly fade away until one day you suddenly notice they aren't there anymore. But last week Dish Network offered $320 million for Blockbuster, a higher number than the liquidation value of the entire chain. So it looks like Blockbuster might live on.

If so, its gift cards are no longer accepted. Gift cards are a form of "executory contract" under the Bankruptcy Code. An executory contract is one that still has to be performed by one or both parties. In this case, Blockbuster still had to perform by renting movies to holders of the cards. In Chapter 11 a debtor can "reject" executory contracts, meaning the debtor simply says, "I'm not going to perform my obligation under the contract." And that's exactly what Blockbuster has done. Go into any of their retail outlets and you'll see signs posted that say that after April 6, 2011, gift cards are no longer accepted.

The other parties to rejected executory contracts, in this case holders of gift cards, become general unsecured creditors in the Chapter 11 case. General unsecured creditors are the lowest form of creditor life in a bankruptcy, entitled to be paid after virtually everyone else gets something, and then only if there is any money left. In reorganizations, general unsecured creditors sometimes get a few cents on the dollar. But in order to get paid, they have to file a proof of claim. In the case of Blockbuster gift cards, the potential return to holders probably isn't worth the price of a stamp to mail the claim in.

What Should a Bankruptcy Cost?

2011-03-24T09:02:00.003-06:00

Whenever I speak with a potential client, one of the questions always asked, often one of the first, is "how much will it cost?" This is a legitimate question, but, upon hearing my estimate (which varies from case to case) some potential clients never become clients. I am sure that in many cases they find someone willing to do the work cheaper.

Consumer bankruptcy attorneys all seem to compete on price. It's understandable that someone facing bankruptcy needs the lowest cost possible, but what clients often don't understand is that bankruptcies aren't like potatoes. In most cases, a pound of potatoes from one grocer is as good as a pound from another, so it makes sense to find the grocer with the lowest cost. But everybody's financial situation is different. It doesn't make sense to shop for a bankruptcy attorney solely on the basis of cost.

Many large-volume bankruptcy attorneys (or bankruptcy mills) churn out dozens of cases a week. In a consumer bankruptcy, about the only thing an attorney can't delegate to a paralegal is appearing in court, so those high volume attorneys spend their time in court and leave the rest to secretaries and paralegals. That means except for the few minutes when the client is actually in court or at the meeting of creditors, he or she doesn't speak directly to the attorney. Secretaries and paralegals can't give legal advice, which means they can't answer a client's questions in many cases. Is that what clients want, to pay the lowest fee and be run through a processor?

Bankruptcy is a serious step. It's a confusing process that goes on for months and, in Chapter 13, years. Clients should be willing to pay enough to get the attention they deserve.

Barry Bonds Goes on Trial

2011-03-22T16:51:00.003-06:00

The trial of Barry Bonds, major league baseball's home run king, for lying to a grand jury about whether he used steroids during his career, began today. But as Tom Verducci, columnist for Sports Illustrated, points out in his article on SI.com, this trial isn't about Bonds' legacy, which, according to Verducci (and whose opinion I share) is non-existent. The ones who have something at stake are the lawyers on both sides. The prosecutors have to gain a conviction to prove they haven't wasted eight years and countless thousands, if not millions, of taxpayer dollars chasing someone whose conviction or acquittal has little social importance. Society doesn't need protection from Barry Bonds and the Balco steroid shop was shut down years ago, so Bonds' conviction, if it comes, is a ho-hum deal legally. The defense attorneys need an acquittal because in the world of criminal defense, a high profile loss can end a lawyer's career almost as quickly as using steroids can end an athlete's career.

So Barry Bonds is all-time home run king and Mark McGwire, whose image is as tainted as Bonds', is the single season home run king. In a lot of people's eyes, Hank Aaron and Roger Maris are still the kings. And some die-hards even question Maris, because he hit his 61 season homers in 162 games instead of the 154 that Babe Ruth had. That debate will continue like it has for nearly 50 years, but no one ever accused any of those guys of playing juiced.

Facebook and Bankruptcy

2011-02-24T14:04:00.003-07:00

We've all heard of legal problems created by Facebook, such as employees who got fired for posting derogatory comments about bosses, customers and co-workers. Facebook could present legal problems in other ways as well.

In Pennsylvania last fall, a court ordered the plaintiff in a personal injury action to allow the defense attorney free access to all his Facebook pages. The purpose was to examine what the plaintiff might have said about his injuries and his life to attack his credibility that his injuries had affected his quality of life. For example, if the plaintiff had posted pictures of himself helping his girlfriend move, his claims that the accident had partially incapacitated him would be somewhat eroded.

It doesn't take a lot of imagination to make the next leap to a bankruptcy trustee wanting to examine a Facebook page. Is that a picture of the debtor on a new motorcycle? Wait, the motorcycle wasn't listed in his schedules and statement of financial affairs. Maybe there's some bankruptcy fraud going on. Or, is the debtor telling friends she's taking a cruise? Where did the money for that come from? Even if your privacy settings only allow Facebook friends to see what you post, if a trustee gets a court order, all bets are off.

The point of this is, be totally honest with your attorney about what you own. Don't try to game the system. It could come back to haunt you. At best your bankruptcy discharge might be denied. At worst, you could be facing prison for bankruptcy fraud.

Exemptions in Bankruptcy

2011-02-10T20:19:00.004-07:00

When you file bankruptcy, almost everything you own becomes part of your bankruptcy estate. The estate is the pile of stuff from which the trustee can sell or liquidate to raise money. With that money, he pays creditors on a pro-rata basis. Some of the property in the estate is exempt, meaning the trustee can't touch it.

Exemptions can be full or partial. Full exemptions are things like household furnishings (subject to their being included in the list of exemptions). These include things like washers, dryers, refrigerators, beds, personal clothing, most furniture and the like. Also included in a full exemption are IRAs and 401Ks and other qualified retirement accounts. In Utah contributions made to such accounts in the past year are not exempt, but under federal law, all contributions are exempt. Make sure your attorney claims the federal exemption as well as the state exemption or you could lose contributions made in the last 12 months.

Partial exemptions are exemptions based on dollar values. For example, Utah law exempts $2,500 for a vehicle, per person. It also exempts $20,000 for a homestead exemption. Both of these dollar amounts have been on the books for over 20 years and are woefully outdated. Who can get a reliable car for $2,500? Yet that's all Utah law allows a debtor to acquire a vehicle to get to and from work. And $20,000 ($40,000 if married and filing jointly) for a house? While that's a more generous amount due to the recent downturn in the housing market, truly what does $20,000 do to protect your home, which is the purpose of a homestead exemption.

Don't count on the Utah legislature to update exemptions any time soon, though. Utah is one of the most creditor-friendly states in the nation, which is one reason it has one of the highest percentages of bankruptcy filings.

Is the Sacred Cow of Home Mortgages About to be Slaughtered?

2011-02-02T10:38:00.003-07:00

For years, despite all the amendments to the Bankruptcy Code, one thing has remained untouchable: A debtor cannot modify the terms of her first mortgage that secures a debt on her primary residence. Debtors have been able to modify car loans, second mortgages, mortgages on vacation properties and a host of other loans for years, but first mortgage loans remained sacrosanct. All a debtor can do is catch up any arrearage through her plan, but she has to make all future payments (beginning with the payment that is next due after filing) on time and in the amount originally agreed.

The process of modifying a secured debt in bankruptcy is often called "cram down," from the graphic notion that the debtor crams the terms of the new loan down the creditor's throat with the help of the Bankruptcy Code. What happens is the debtor proposes a plan that repays the creditor only the value of its collateral. With cars, this is almost always less than what is owed. Since the housing crisis began three years ago, more and more homes are underwater and debtors want to be able to "refinance" their loans for lower principal amounts through the bankruptcy courts.

Senator Jeff Merkeley of Oregon is renewing the idea of allowing cram down for mortgages. The last attempt in 2009 failed, but this time there may be added ammunition: The housing market is still in the toilet, the job market stinks, the much-touted HAMP and other government programs to provide mortgage relief are dismal failures, and voluntary modifications by banks just don't happen. Stories of people sending the same documents a half dozen or more times and getting the runaround for months are legion. All of these things together might mean the economic and political climate are right to permit mortgage cram downs.

Donor's Remorse

2011-01-26T09:42:00.003-07:00

Now that 2010 finally ended and Congress finally acted with respect to the estate and gift tax, a lot of gift and estate tax lawyers and their clients are trying to figure out how to reverse taxable gifts they made in 2010. It's a classic case of "it seemed like a good idea at the time." And it did.

This was the situation: In 2010 there was no estate tax. It was scheduled to return in 2011, but with only a $1 million exemption, as opposed to the $3.5 million exemption that existed in 2009, and at a 55% tax rate. To avoid a 55% tax on estates over the $1 million exemption, many estate and gift tax lawyers advised their clients to make taxable gifts in 2010. The reasoning was, the gift tax is only 35%. Better to save 20% in taxes by making a gift now than risking dying in 2011 or after.

But in January, Congress amended the tax code to provide for a $5 million exemption ($10 million for couples) and imposed only a 35% tax rate. Now, many of those people who made taxable gifts last year are realizing that they could have avoided any tax simply by waiting. For those with estates between $1 million and $5 million, this is certainly true. So they and their attorneys are scrambling to see if there is a way to undo the gifts they made last year.

This is a classic case of people ignoring the sage advice my tax professor gave in law school: Never do anything solely for the tax consequences. Do something that makes sense from a business standpoint and deal with the tax issue at that time. The people who made taxable gifts in 2010 did so solely in hopes of avoiding a possible estate tax.

Beware of Short Sales

2011-01-20T09:14:00.002-07:00

I've addressed this topic before, but a client's situation brings it to the fore again. If you are upside down in your mortgage and thinking about a short sale, BEWARE! My clients had a real estate agent negotiate a short sale with their lender, who holds both a first and a second mortgage on their property. The combined mortgages are about $185,000 and, according to the agent, the property is worth about $90,000. The agent has presented a buyer for $90,000 and the lender has agreed to a short sale. So everything is great, right?

Not really, because the short sale agreement (written by the lender, of course) starts out by saying that the lender reserves its right to seek a deficiency against the borrowers (my clients). My clients are expected to contribute $8,000 in cash at closing (above the sales price, so this comes out of their pockets) and must give the lender a promissory note for another $7,000, payable at zero per cent interest for five years. At a minimum the short sale is costing my clients $15,000.

What my clients, and what most people doing a short sale, thought they were getting is a release from all liability to the lender upon sale for $90,000, plus the promissory note. They didn't realize they had to pony up cash, nor did they realize that all the lender is agreeing to do is to release its mortgages. The lender can still seek a deficiency against my clients for $95,000, the difference between the two mortgages ($185,000) and the sales price ($90,000).

And here's one last kick in the head. If the lender agrees to release my clients from the deficiency, the lender will undoubtedly file a form 1099 with the IRS, miscellaneous income, and my clients will get a hefty tax bill for the forgiven debt. Debt that is forgiven is income and you can be taxed on it.

Before you agree to a short sale, make sure you understand all of the ramifications of the deal.

Use of Trusts in Estate Planning, 2011

2010-12-27T15:38:00.002-07:00

The new tax law signed by President Obama prompted a sigh of relief from a lot of people because it increased the estate tax deduction to $5 million, instead of lowering it to $1 million as many feared, which is where it would have gone had Congress not acted before December 31. Now many people are predicting the end of testamentary trusts because there is no need to create a Family Trust to take advantage of marital deductions. Some are going so far as to say that testamentary trusts will disappear altogether.

This is probably a short-sighted view. While testamentary trusts may no longer be useful as estate TAX planning tools, they remain invaluable estate planning devices, especially where minor children or incapacitated individuals are involved. Where such individuals are among those to whom bequests would be left, use of a trust provides flexibility, professional management and peace of mind to the maker of the trust.

Don't assume that a trust has no place in your estate planning toolbox simply because the estate is under $5 million and no tax consequences will attach.

Credit Scores and Bankruptcy

2010-12-22T13:50:00.002-07:00

When you file bankruptcy of any kind, your credit score (sometimes called a FICO score) will immediately take a nosedive. Even if it was low to begin with, it will go lower. A credit score is supposed to be a prediction of whether or not you will pay back debt in the future. However, since no one, not even the big three credit reporting agencies, can predict the future, what a credit score really measures is the likelihood you will pay back existing debts. Since, once you file bankruptcy, you will most likely NEVER repay any existing debt, your credit score drops to reflect that.

If you think about it, someone filing bankruptcy is probably a better credit risk than another person with the same income and the same amount of debt, but who didn't file. That's because the person who filed has (1) gotten rid of a bunch of debt; and (2) now cannot file bankruptcy for several years (eight years if you filed Chapter 7 and receive a discharge). Car loan companies know this. That's why they have people who do nothing but see who has filed bankruptcy and then send them offers of credit if they buy a new car. The lenders are so sophisticated that they tailor their solicitations based on your ZIP code. If you live in an affluent ZIP code, you might get offers for a Lexus or a Corvette. If you live in a lower-income ZIP code, the offers might be for lower-end Fords or Hyundais. But one thing you can count on, besides the hit your credit score will take, is that you will get solicited to buy a new car. Three words about that: DON'T DO IT. More on that topic later.

Simple Wills and Living Wills

2010-12-15T14:42:00.003-07:00

Do you need a simple will or a living will?

Probably you need both. One is effective before you die, the other after death. A "simple willl" is a generic name given to a will that has only a few dispositive provisions. The typical simple will leaves everything to the surviving spouse, or, if the spouse does not survive, to certain specified beneficiaries, such as children. It's called a simple will because it is simple, meaning it isn't a complicated document. A simple will takes effect upon death.

A "living will," on the other hand, becomes effective during life; hence the word "living." A living will is designed to set forth your wishes and desires about certain end-of-life matters, such as the extent to which your family and medical personnel should go to keep you alive. Many people do not want to remain alive if they are in a permanent vegetative state, unresponsive, comatose and unable to care for themselves in any way. A living will directs that if you are in such a state, you want life support (such as food or breathing assistance) to be removed, and you want to be allowed to die. In Utah a living will has a formal name: Advance Medical Directive, and state law specifies exactly what needs to be in the Directive to make it legal.

Regardless of whether you have a simple (or other) will or a living will, both need to be executed with certain formalities, and either can be changed at any time before death.

Having Your Cake and Eating It Too

2010-12-08T14:13:00.004-07:00

No, you really can't have your cake and eat it too, but that's exactly what a lot of people want and even expect from bankruptcy. They look on bankruptcy as a magic potion that will solve all of their financial problems and let them live the lifestyle they dream of (and were probably living in the first place). Bankruptcy is a serious step and requires serious effort. It is possible, even likely, that when someone files bankruptcy they will lose their house, their car, their boat, and a lot of other things that they financed. The reason is, if they can't make the payments before filing, they won't be able to make the payments after filing.

Instead of focusing on what they lose by filing bankruptcy, they should look at what they gain: Freedom from debt collectors. Freedom from robbing Peter to pay Paul. Freedom from working two or three jobs to make ends meet. Freedom to spend more time with family and friends. The chance to start over.

Bankruptcy is intended as a second chance. The "fresh start" concept is central to bankruptcy. But a fresh start doesn't mean going back and doing the same things over again, making the same mistakes, incurring the same debt. It means starting over and doing it better this time. This probably means living within your means, absolutely, positively not buying anything you don't need and setting priorities among what you do buy. It's hard, but bankruptcy wasn't meant to be a simple solution. And in the end, it's worth it.

Deficit Commission Report Fails

2010-12-03T14:28:00.003-07:00

My Facebook page has been alive with comments from Realtors and those in the real estate profession about the Deficit Commission Report that proposes, among other things, to eliminate the mortgage interest deduction (MID) for taxpayers. As the tax code now reads, interest paid on mortgage loans is deductible from income in calculating income tax. Real estate professionals are afraid that, if the MID is eliminated, the real estate industry will crumble.

Fears that the sky is falling are premature. The report failed to gain enough votes from the Congressional committee to advance to Congress as a whole. It received 11 votes, three shy of the 14 needed for advancement. While any of the proposals in the report could be considered piecemeal, its rejection assures that the entire report will not be voted on.

In addition to eliminating the MID, the report also called for changes to Medicare, freezes on federal salaries, an increase in the federal gas tax and raising the retirement age for Social Security. If France is any indication, the last will be wildly unpopular.

Credit Cards or Retirement?

2010-11-29T12:21:00.004-07:00

One of the best reasons to file bankruptcy may be to plan for your retirement. If you're paying the minimum amount each month on credit card debt, you can't be saving for retirment. If you want to retire in any form, you have to start saving now.

Suppose you have $20,000 in credit card debt and all you're paying is the minimum amount each month. Under most credit card agreements, the minimum varies, based on the outstanding balance, and is often something like 1.5% of the balance. Paid at $300/month that $20,000 will take nearly 37.5 years to be paid in full at an 18% interest rate, which is pretty cheap for a credit card.

Now suppose that instead of paying the debt, you file bankruptcy and get a discharge. Then you pay $300/month into an IRA that earns 6% a year. At the end of 37.5 years, you will have over $500,000 in a retirement account.

Lots of people feel they are being irresponsible if they don't pay their debts. Being responsible also means that you have made adequate provision for retirement so you are not a burden to your family or society. Bankruptcy may be the responsible choice.

Last Minute Tax Planning

2010-11-23T11:17:00.003-07:00

This is the time of year that many people start last-minute tax planning. This year, because the estate tax was repealed for 2010 and the gift tax was reduced to 35%, last minute planning is even more important, and may really be last minute. There is a lot of uncertainty about whether Congress will retroactively reinstate the estate tax for 2010 and retroactively increase the gift tax to the scheduled 55% that will be imposed on January 1, 2011. While we don't recommend that anyone die before December 31 just to take advantage of the lack of an estate tax in 2010, gift planning should be considered.

Everyone can give up to $13,000 tax free to any other person, and the number of people to whom you can give $13,000 is not limited. Beyond that, if you want to give more to a single person, you have a $1 million lifetime exemption that was formerly tied to the estate tax exemption. To the extent you use the lifetime exemption for gifts, it isn't available to reduce the estate tax. If you choose not to use the lifetime exemption, gifts in excess of $13,000 are taxed at 35%. However, if the gift tax bumps up to 55% as scheduled on January 1, and especially if the estate tax exemption is lowered to $1 million, also as scheduled, it might make sense to give gifts this year and pay the 35% tax as opposed to using any part of the lifetime exemption or paying the 55% tax rate next year.

The prudent thing seems to be to plan for some gifts, but not actually make them until late December when Congress has adjourned for the year and any retroactive legislation might be a little clearer. Then consult with your tax professional.

Estate Tax Status

2010-11-10T11:57:00.004-07:00

We are fast approaching the end of 2010, and the end of the no-death-tax year. The estate tax went away on December 31, 2009, and hasn't been in effect since then. It is scheduled to return in 2011, with a higher rate and a lower exemption. Most observers don't believe that will happen, but Congressional gridlock might rule the day.

According to the Wall Street Journal, the most likely scenario is that Congress will enact a stop-gap measure that will reinstate the estate tax at 2009 levels. That means $3.5 million in exemption and a top rate of 45%, rather than the $1 million exemption and 55% rate now scheduled if Congress doesn't act. One thing that does seem certain is the estate tax will be back in 2011 in one form or another.

Debt Settlement Companies Prohibited from Collecting Advance Fees

2010-11-03T08:44:00.002-06:00

Under amendments to the Telemarketing Sales Act that took effect October 27, 2010, debt settlement agencies that offer to renegotiate or settle consumer debts for a fee are now prohibited from collecting advance fees from consumers. Before such an agency can collect a fee, three things must happen:

The company has settled, reduced, renegotiated or otherwise changed at least one of the consumer's debts.
There is a written agreement between the consumer and the debt settlement agency.
The consumer has made at least one payment under the terms of the negotiated or changed agreement with her creditor.

This law applies to credit card or other unsecured debt, and is not applicable to companies that claim to renegotiate mortgage loans.

What is Elder Law?

2010-10-18T17:09:00.002-06:00

Elder law is a special area of the law that deals with the needs of the elderly or disabled. It encompasses several areas of law, including estate planning (wills, trusts, etc.); so-called "end of life" issues such as living wills, durable powers of attorney and guardianships; estate and gift tax planning; Medicare and Medicaid; nursing home abuse; fraud against the elderly; long term care financing; retirement benefits; age discrimination; and disability planning and insurance, among others. Elder law attorneys are not specialists in all of these areas, but generally focus on two or three of the areas. Typically elder law attorneys approach a client from a holistic viewpoint, addressing legal, medical, social, financial and family needs at once.

Lindsay Lohan Settles E-Trade Lawsuit

2010-10-13T08:58:00.003-06:00

Lindsay Lohan sued E-Trade, an online brokerage company, over a Super Bowl ad that featured talking babies. In the ad, one of the babies, a male, apologizes to a female baby for not calling her the night before. Suspicious, the female asks if he had been with that "milkaholic Lindsay."

Ms. Lohan claimed that she had attained "one name recognition" like Madonna or Oprah, and that the use of the name Lindsay in the E-Trade ad used her celebrity status for its own profit. E-Trade responded that Lindsay is a popular name and happened to be the name of one of the ad team's members. It moved to dismiss the lawsuit as meritless.

Under the terms of the settlement, which is confidential, Ms. Lohan dismissed her lawsuit with prejudice. The settlement of the $100 million action came the same day a judge issued a bench warrant for her arrest. Settlement leaves her free to focus on her other legal problems, including the current probation-violation claim for failing multiple drug tests.

Bankruptcies Reach 5-Year High

2010-10-11T17:00:00.002-06:00

With data through the second quarter of 2010, bankruptcies have reached highs not seen since the fourth quarter of 2005, just before the dreaded BAPCPA, which was designed to halt a perceived flood of bankruptcies, became effective.

In the three month period ended June 30, there were over 422,000 filings in the United States, the highest since the October-December, 2005, period when 667,431 bankruptcies were filed. For the fiscal year ended June 30, 2010, consumer bankruptcies were up 20% while business bankruptcies rose 9% over 2008-2009 levels.

The obvious reasons are the prolonged financial crises, poor job market, rising mortgage foreclosures and ever-present medical emergencies, according to Deborah Thorne, an associate professor of sociology at Ohio State University. Until the economy improves, she expects bankruptcies to continue to rise.

For the year ended June 30, 2010, Utah ranks 12th in the nation, with 6.12 filings per 1,000 people. Nevada is first with 11.74 filings per 1,000 people.

Unbundled Legal Services

2010-09-10T09:27:00.002-06:00

The term "unbundled legal services" or "limited scope representation" as it's sometimes called is one of the hot new buzzwords in the legal profession. Simply put, unbundled legal services means that a client hires an attorney for a specific task and pays only for those services. For example, rather than retain an attorney to prosecute a lawsuit all the way from start to finish, the attorney might be retained only to draft the complaint. Later on, the client might ask the attorney for help with a procedural matter, or for some legal research. In between, the litigation is solely under the direction and control of the client, not the lawyer.

With the costs of litigation so high these days that only where hundreds of thousands of dollars are at stake, unbundled legal services might make sense. In Utah, the rules of civil procedure specifically allow for limited scope representation, so if your attorney tells you he ethically can't only represent you in part of a case, look for another lawyer.

Beware Short Sales

2010-08-31T18:27:00.003-06:00

We hear a lot about short sales these days. A "short sale" is a term that generally means a lender accepts less than what is owed on a mortgage loan and in return releases its mortgage. There's a lot of confusion about the effect of a short sale. Is the borrower free and clear after a short sale, or can the mortgage company still sue her for what wasn't paid in the short sale?

To understand this, you have to know there are two parts to a mortgage loan. The first part is the promissory note. That evidences the debt that was created when the borrower borrowed money from the bank. The second part is the mortgage, or lien (pronounced "lean") on the borrower's house. That is the security for the loan and is what lets the bank foreclose and sell the house if the borrower doesn't pay.

Most borrowers think that when the bank releases its mortgage, which is the point of a short sale, the underlying debt is fully paid. In some cases this is true. But it is possible for the bank to agree to release its collateral (the house) without considering the loan to be fully paid. In that case, the borrower remains liable for the unpaid balance and can be sued.

The lesson is, if you're considering a short sale, make sure that the bank will accept the proceeds of the sale in full satisfaction of the loan.

Blockbuster Headed to Bankruptcy?

2010-08-30T09:06:00.003-06:00

The Los Angeles Times reports that Blockbuster, the movie rental giant for the last decade, will file a "pre-planned" Chapter 11 as early as next month.

A pre-planned bankruptcy is one in which most, if not all, of a debtor's creditors agree to the reorganization plan before filing. The debtor is in and out of bankruptcy relatively quickly. In Blockbuster's case, it hopes this will be about five months. The presumed major benefit to Blockbuster will be the ability to shed its most burdensome store leases, those where the retail outlets aren't performing but the company remains saddled with long term leases with landlords. In a Chapter 11, a debtor can reject any unexpired leases, meaning it simply cancels the remaining term. The landlord has an unsecured claim for unpaid and future rents, but since most unsecured creditors receive very little in a reorganization, this is small consoloation to the landlords affected.

Beaten down by changing consumer tastes, Blockbuster, which once the the undisputed leader in DVD rentals, has seen its stock delisted by the New York Stock Exchange. The stock now trades on the OTC (over the counter) market and recently traded at 11 cents/share.

Is the U.S. Housing Market Headed for Collapse?

2010-08-26T13:12:00.003-06:00

There are some, and their numbers are growing, who feel the U.S. housing market is headed for collapse. Here are some of the reasons they cite:

New home sales are at an all-time low.
Because of this, construction of new homes has all but come to a standstill
The Mortgage Bankers' Association reports home loan applications are at a 13-year low
Foreclosures continue to rise. The glut of bank-owned properties further depresses real estate values.
Because of the number of foreclosures and bank losses, banks are tightening their credit standards to those last seen in the early 1970s, which will further depress the market.
Home prices are still far above 90% of Americans' ability to purchase a house. The law of supply and demand dictates prices will fall until demand matches supply.
People need jobs in order to buy houses, and with unemployment near 10%, that isn't happening.
Bankruptcies continue to rise, up 32% in 2009 over 2008.
The giant tax credit that artificially pumped up the housing market last year is gone, and the government can't continue to fund it.
Fannie Mae and Freddie Mac, the "twin pillars" of the housing market, are in total shambles. It's estimated it could take another $5 TRILLION to fix them. But Fannie, Freddie and the VA back over 90% of mortgages.
The overall U.S. economy is drowning in debt. Consumer, government and business debt is in the neighborhood of 360% of gross domestic product (GDP). This debt bubble is about to burst.

Any way you look at it, the forecast isn't good for the housing industry.

$85 Million in Legal Fees

2010-08-25T16:03:00.003-06:00

Chrysler's bankruptcy, which started in April, 2009, has generated nearly $85 million in legal fees and costs, most of it going to its lead attorneys, who billed an average of $500/hour.

Chrysler filed a Chapter 11 reorganization. This same chapter is available to small businesses and even individuals. However, because Chapter 11 has to be able to accommodate the likes of Chrysler and other huge corporations, filing a Chapter 11 isn't a viable option for most people or companies. While it's true that most debtors wouldn't incur $85 million in legal fees, the sheer size of that number for a year's work should demonstrate that bankruptcy isn't cheap.

Second (or Third or Fourth) Marriages Complicate Estate Planning

2010-08-16T16:18:00.003-06:00

It's human nature not to be alone. That's why the majority of people who lose a spouse, either through divorce or death, remarry. Second and subsequent marriages complicate estate planning in ways most people never consider before they say "I do." Here are a few of the problems:

Age difference. When one party is significantly older or younger, by 10 or more years, the problems are compounded because of the strong likelihood one party will outlive the other for a significant time period. This is espcially true if the husband is older, since women tend to live longer than men anyway.

Health issues. Many older people suffer significant health issues that have to be addressed as part of the overall estate plan.

Children from prior marriages. This is the one issue most people catch. The possibilities are endless. Husband has children; wife doesn't. Wife has children, husband doesn't. Both have children. The children get along (not only as between parents, but among themselves). The children don't get along. There are minor children. There are children with special needs. You get the picture.

Children vs. new spouse. This is the million dollar question. In virtually every second or subsequent marriage where there are children from a prior marriage there will be a conflict between the new spouse and the children of the prior marriage. The parent's loyalties are divided between his/her new spouse and his/her children.

Pre-Nuptial Agreements. While technically not part of "estate planning" as it is commonly understood, the existence or absence of a pre-nuptial agreement in a second marriage can have a significant estate planning impact. In most states, a surviving spouse has certain rights, called the spouse's pre-emptive share, that may allow her to reject the provisions under a will and claim what she is entitled to under intestacy laws. A properly drafted pre-nuptial agreement can go a long way toward avoiding this.

Attorney Fee Only Plan Not in Good Faith

2010-08-13T09:30:00.003-06:00

An attorney and his client came up with a novel, but ultimately unsuccessful, way to file immediately and pay attorneys' fees -- and nothing else.

In In re Buck, 2010 WL 2746217 (Bky.D.Mass. July 9, 2010), the problem for the Bucks was they couldn't pay the attorneys' fee of $2,000 for a Chapter 7 bankruptcy. They wanted immediate relief from the harrassing collection efforts they were subject to, but, understandably, their attorney wouldn't file for them until they paid his fee. So they agreed to file a Chapter 13, which cost $4,000, but those fees would be paid through the plan, at $130/month. This allowed them to file immediately. Sounded like a good plan.

That was until the bankruptcy court determined that the plan was not filed in good faith. It turns out that all of the Bucks' property was exempt and all of their debts were dischargeable in Chapter 7. As a result, no one other than the attorney would have received a distribution under the plan. The bankruptcy judge said that this was not a "good faith" plan, it exposed the debtors to 36 months of payments and delayed their discharge by that same time. As a result, he refused to confirm the plan. The Bucks converted to Chapter 7 and the court ordered that the attorney could not receive fees for either the Chapter 13 or the Chapter 7.

Steinbrenner 1, IRS 0

2010-07-15T09:08:00.003-06:00

George Steinbrenner, the bombastic boss of the New York Yankees, died this week. Many people only know George Steinbrenner from Seinfeld episodes, but to many baseball fans, he was the undisputed face of the Yankees from 1973 until his death. Steinbrenner was famous for hiring, firing and then re-hiring managers and meddling in their day-to-day operations.

By dying in 2010, Steinbrenner (actually his heirs) gets to keep an estimated $632 million from his reported $1.15 billion estate that otherwise would have gone to estate taxes. As Kelly Phillips Erb, a/k/a The Taxgirl, writes on her blog, that sum is enough to pay the entire budget of the Small Business Administration for all of 2009.

Congratulations George, you won another one.

Providing for Pets

2010-06-23T15:21:00.002-06:00

Many people have pets that become a part of the family. To some, a pet might be the only family they have. What can be done to provide for pets upon the owner's death?

Contrary to what TV might show, most states don't allow a person to leave money or property directly to a pet. However, there is nothing wrong with making provision for a pet in a trust and leaving money to the trust.

If a pet is to be provided for in a will, there are a couple of documents that, at a minimum, are necessary. First, obvioulsy there has to be a will that makes provision for the pet. Remember that you can't leave anything directly to the pet, so if there is a fund established for the pet, it will have to be given to a trust. And the will should provide for someone to take the pet. Make sure that person is willing to accept and care for the pet. Money given directly to an individual with instructions to use it for the pet is probably not enforceable. So you might want to consider establishing a trust. Finally, there should be a durable power of attorney that specifies that the attorney in fact named has the ability to decide what to do with the pet. Everyone should have a durable power of attorney in case they become incapacitated, anyway.

Is Bankruptcy Moral?

2010-06-17T15:53:00.002-06:00

A lot of people struggle with this question. Most people are fundamentally honest and the idea of not paying their just debts doesn't sit right with their upbringing. There is a lot of guilt associated with filing bankruptcy.

Bankruptcy goes back at least to the 14th century. The term "bankruptcy" probably comes from the Italian banco rotta, which means "broken bench." It was the custom to break the bench of a merchant who could not pay his creditors. "Bankruptcy" is also figuratively description of a ruptured bank, with a resulting loss of money. England has had a formal bankruptcy law since 1542.

Even earlier, the law of Moses in the Old Testament called for the sabbath year, a year occurring every seven years when debts were forgiven.

In America, bankruptcy is one of the few laws specifically mentioned in the United States Constitution, which provides that Congress shall have power to make and enforce a uniform law regarding bankruptcy.

The purpose of this historical review is to show that throughout history, humankind has found that a process by which debtors could be released from their debts and given a fresh start has a salutary effect. Bankruptcy is legal and while filing bankruptcy may not be the most desirable outcome, there is nothing immoral about it.

Estate Tax Update

2010-06-15T08:54:00.003-06:00

2010 is nearly half over and Congress still hasn't done anything about the estate tax. It expired on December 31, 2009, leaving the United States without an estate tax for the first time since 1916. It's scheduled to be resurrected in 2011 at levels unseen since the Clinton administration.

For now, someone like Dan Duncan, who died earlier this year leaving an estate worth an estimated $9 billion, can pass his estate free of any tax to his heirs. Had Mr. Duncan died in 2009, the estate would have been taxed at 45%, meaning just over $4 billion would have gone to the IRS. Had he survived until next year, when the estate tax is scheduled to come back at 55%, his heirs would have lost nearly $5 billion.

But the real losers in the estate tax mess are the merely rich, those with estates between $1 million and $3.5 million. In 2009, the estate tax exemption was $3.5 million, meaning estates under that amount didn't pay any tax. In 2011 the exemption will drop to $1 million and the 55% rate will kick in. Many of those people have set up their estate plans under 2009 rules on the assumption they would owe no tax. If they don't act quickly, they could end up losing a bundle.

Help! I don't qualify for Chapter 7 OR Chapter 13

2010-06-10T11:03:00.003-06:00

More people are being caught between the rock of the means test under Chapter 7 and the hard place of the debt limitations under Chapter 13, finding that they can't qualify for either.

The means test under Chapter 7 says, basically, if you make above a certain income (the state median income for a family of your size), you can't file Chapter 7. There are exceptions and other tests, but the bulk of Chapter 7s are filed by people who "pass the means test" by having income under the state median, or whose debts are not primarily consumer debts, in which case the means test doesn't apply. The means test was designed to force more people into Chapter 13 so they repaid at least some of their debt.

Less known are the debt limitations of Chapter 13. Under section 109 of the Bankruptcy Code, if a debtor (and spouse, if filing jointly) owes more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, they do not qualify for Chapter 13. What this means is that for a high debt, high income debtor, she cannot file for either Chapter 7 or Chapter 13.

Consider a debtor earning $100,000/year, single, who bought a house in 2007, at the height of the real estate market. In today's market that house is worth $400,000 and she owes $750,000. Since the house is only worth $400,000, $350,000 of that debt is unsecured. If she has in excess of $10,475 in other unsecured debt, such as credit cards, doctor bills, student loans, etc. this person doesn't qualify for Chapter 13. But due to her income, she can't file Chapter 7, either (and she might not want to for various reasons). Her only option is to file a consumer Chapter 11, a very expensive and time consuming proposition.

Family Meetings in Estate Planning

2010-06-08T08:54:00.003-06:00

One often overlooked tool of estate planning is to hold a family meeting. There are several good reasons for doing this, and a few reasons why many people don't hold a family meeting.

A family meeting first and foremost should be an opportunity to make wishes and desires known and acknowledged and documented so they are carried out. This last item, documentation, may require the services of a qualified attorney. Simply writing down that mom and dad want the house to go to a certain person might not be enough. Everyone might agree that is what mom and dad wanted, but unless there is a will or other legally effective device, it might not happen.

Another reason for a family meeting is to ease anxieties about what will happen. It's a time to discuss last wishes such as funeral arrangements, burial/cremation, etc. While this is hard to do, afterward everyone feels a sense of relief.

At a family meeting, tax advantageous strategies for passing wealth can be discussed, such as family trusts, limited liability companies, life insurance policies to provide cash flow to continue a business and the like.

A very important function, and one often overlooked, is to preserve family harmony. At a family meeting, everyone's viewpoints can be aired. While it is the prerogative of those whose estates are in issue to decide where and to whom they leave things, by getting everyone together to discuss things, when the will is finally read there should be no big surprises.

Don't overlook a family meeting as part of your estate plan.

Adversary Proceedings in Bankruptcy

2010-05-21T14:39:00.002-06:00

You may hear the term "adversary proceeding" and wonder what that is all about. An adversary proceeding is a lawsuit within a bankruptcy. Most of bankruptcy is an administrative matter. The trustee administers the assets by converting them to cash, usually by selling them, and then determining who is owed what and making a distribution of the cash she has to those claimants.

Sometimes there is a matter that needs to be litigated before the bankruptcy judge. An example might be if a creditor believes a debt was incurred fraudulently and wants to object to the discharge of that debt. The creditor would file an adversary proceeding by filing a complaint in the bankruptcy court. The adversary proceeding proceeds just like a lawsuit, with the debtor then filing an answer, discovery taking place, motions, and, ultimately, a trial.

Adversary proceedings are rare. In most cases, if an adversary proceeding is filed, the fee that you paid to your attorney for the bankruptcy will not cover the costs of defending the adversary proceeding.

Another reason to see a lawyer about a will

2010-04-26T08:40:00.002-06:00

Several posts back, I questioned the wisdom of using online will and trust forms, or the celebrity will and trust devices (like the Suze Orman documents). Here's a story out of New York in case you're still convinced that you don't need a lawyer to prepare your will.

Harry Wu served as one of two witnesses to his sister's will. Though he was not named as a beneficiary under the will, he was named as a beneficiary under a life insurance policy that his sister had. The will had a common clause that said that taxes, such as estate taxes, should be paid out of the "residuary estate," and not apportioned among those receiving property under the will. Despite this clause, the executor of the will challenged Harry's right not to have to share in payment of estate taxes because of a New York law that prohibits a witness of a will from benefitting from a distribution under the will. The court in New York agreed with the executor and Harry had to pay a share of the estate taxes on the $3 million estate.

It's little things like this New York law that the average person doesn't know about that make using an online form or one you got on a CD that comes with a book so dangerous. Yes, paying a lawyer to draw up your will is much more expensive than $29.95 for a book or a form you download from the Internet, but ask Harry Wu about hidden traps.

Family Limited Partnerships

2010-04-21T14:26:00.002-06:00

You may have heard of a family limited partnership, or FLP, as an estate planning device. A FLP is just a limited partnership formed for the benefit of family members. Limited partnerships have several benefits over general partnerships, the greatest of which is that limited partners are shielded from liability beyond the extent of their investment or contribution to the limited partnership. In addition, because a separate legal entity, the FLP, owns the assets that are transferred to it, those assets are out of the estate of the individuals, and need not pass through probate, nor be subjected to an estate tax, upon death. For these reasons, FLPs have gained popularity in recent years.

However, as an estate planning tool, FLPs are only for the wealthy. They require expertise to create, involve complex issues of valuation of property that is contributed, and they must be managed as long as they are in existence. In short, unless there are assets of around $1 million that can be put into the FLP, their cost and effort do not justify the benefits. For most people, a FLP is neither necessary nor desirable.

Debt Settlement Agencies

2010-04-19T16:38:00.002-06:00

You hear it on the radio or even late-night TV informercials: "Don't file bankruptcy; settle your debt for pennies on the dollar. Call us -- we know the secrets the credit card companies don't want you to know." Some of them even tell you that you have the "right" to settle for less. Do these work?

I can't speak for every such agency. Some are non-profit organizations that really do help SOME people. But most are nothing more than scams. They want you to send them money up front, and then they'll contact your creditors and work their magic. It almost never works. In the meantime, you stop paying your bills, your interest rates go up because you're in default, you start getting calls (if you weren't already), and eventually you get sued and your wages are garnished. Finally the debt settlement agency tells you they tried, it just didn't work.

Does this mean you should never try to work something out with your creditors? Absolutely not. By all means, if you can work out a settlement, do so. But before you pay someone to do it for you, look into it closely.

Creditors Should Read Their Mail

2010-03-25T09:09:00.003-06:00

On March 23 the Supreme Court of the United States issued an opinion in a bankruptcy case that, in essence, says creditors need to read their mail. The case is United Student Aid Funds, Inc. v. Espinosa. Justice Thomas delivered a unanimous opinion.

The facts are fairly simple. Espinosa had several student loans that totalled $13,000. In his Chapter 13 plan he proposed to pay principal only, no interest, which resulted in a discharge of the interest. Normally, any discharge of any part of a student loan requires an adversary proceeding and a finding of a "hardship discharge." In this case, neither the creditor nor the trustee objected to Espinosa's plan. Espinosa completed his plan and received a discharge.

Several years later, United Student Aid Funds attempted to collect by garnishing Espinosa's tax refund. Espinosa responded by reopening his bankruptcy case to obtain an order prohibiting United Student Aid Funds from trying to collect. The case eventually worked its way to the Supreme Court. There were several complicated legal issues involved in the case, but the bottom line is, where a creditor admittedly received a copy of the plan and failed to object, it can't come back years later and ask the court to fix its mistake.

Automobile Claims and Bankruptcy

2010-03-19T16:20:00.002-06:00

Toyota has recalled thousands of vehicles for accelerator problems. Now Honda has recalled over 400,000 vehicles for brake problems. With all of those recalls, it's certain that some owners of the recalled cars are contemplating filing or have filed bankruptcy.

In the case of Toyota, a few lawsuits seeking class action status for those involved in accidents allegedly caused by the defects have already been filed. Such lawsuits may be filed by Honda owners. If you are among those affected by these recalls and are in or considering bankruptcy, beware. You might have a claim against the manufacturer. If so, that claim is probably property of your bankruptcy estate and you are obligated to disclose it to the trustee, who may or may not decide to pursue it. Be sure to let your bankruptcy attorney know that you own a car covered by the recalls so he can investigate whether to list a potential lawsuit or participation in a class action in your bankruptcy filing.

Why is the Estate Tax So Controversial?

2010-03-02T15:45:00.002-07:00

Taxes are a fact of life, whether they are income tax, sales tax, property tax, or a tax on gasoline. We grumble about paying taxes, but accept them. Why, then, is the estate tax so controversial?

For starters, because Congress waffles back and forth about eliminating it. The estate tax was scheduled, in 2001, to disappear permanently in 2010. It has disappeared, but is slated to return in 2011. Like a bad penny, it keeps turning up.

But probably the biggest reason for controversy is over who (or what) the estate tax hits and how much it actually contributes to public revenue. By some estimates the estate tax only provies 1% or less of all public revenue. By contrast, it impacts to the point of destroying some small family businesses. When a small business owner dies his business may be asset-rich but cash-poor. The business may have inventory, equipment, land and other assets that give it a value, on paper, in excess of the exemption amount ($3.5 million the last time there was an estate tax). But there may be very little cash with which to pay the tax. So in many cases, the business has to be sold to pay the tax, leaving a pittance to heirs, compared to the value they would have received had the business been passed on intact.

A similar concern is the fact that the estate tax is one last gouge at a lifetime of savings. Consider, for example, an estate that consists of stocks and bonds that have paid dividends and interest. The money with which those stocks and bonds were purchased was taxed with an income tax before they were even bought. Then the income from the stocks and bonds (the dividends or interest payments) were taxed again as income. The dividends had already been taxed at the corporate level before they were paid. Finally, on death, there is an estate tax levied. That's up to four separate taxes imposed. To a lot of people, that's at least one tax too many.

Bankruptcy and Taxes

2010-02-17T16:54:00.002-07:00

If you thought death and taxes were bad, wait until you try bankruptcy and taxes. When you file bankruptcy, there is an estate created, which consists of all your property and all your debts at the instant you file. Included in that is taxes that you might later owe for income earned up to the point of filing, and refunds to which you might be entitled for overpayments through withholding as of the same date. A little known provision in the Internal Revenue Code allows you to create two taxable years. One for the part of the year prior to your bankruptcy filing date, which is the portion that is in your estate; and one for the remainder of the year. Whether or not to make this election depends on a number of things. So in addition to talking to a bankruptcy attorney before you file bankruptcy, talk to an accountant or tax attorney as well.

Review Your Estate Planning Documents

2010-01-20T15:37:00.003-07:00

In the last estate planning post, I noted that Congress had failed to extend the estate tax, and this was creating all sorts of uncertainty for planners in 2010. The uncertainty doesn't end with what might be done in the future. The repeal of the estate tax could throw a monkey wrench into existing estate plans.

This is because many plans were writtent to take advantage of the spousal exemption. Under the Internal Revenue Code, a certain amount of the estate was exempt if passed to a surviving spouse. As a result, many estate plans provided for a division of the estate, with a portion equal to the spouse's exemption going to the spouse, the rest going into a trust or somewhere else. With the repeal of the estate tax, these plans could be read such that the surviving spouse gets nothing, i.e., since there is no estate tax, there is no spousal exemption. Thus, everything goes into the trust or elsewhere, where the spouse can't get at it. This is clearly not what most people would want for a surviving spouse, but it might be exactly what happens.

Review your estate planning documents.

The Best Time to File Bankruptcy

2010-01-15T15:23:00.004-07:00

Since the passage of the Bankruptcy Abuse and Consumer Protection Act in 2005, timing a bankruptcy filing has become more important than ever. First is the means test, which we have discussed previously. The means test looks at a debtor's income over the past six months, so if you received a big bonus in the past six months, you might want to wait a month or two so that bonus isn't included in the calculation of average income. Secondly, if you're facing foreclosure or having wages garnished, you probably want to file as soon as possible, like yesterday. Thirdly, if you have some cash on hand or other assets that are subject to being taken by the bankruptcy trustee, you may want to delay filing while you engage in some exemption planning. There is nothing wrong with using non-exempt assets (such as cash or selling stocks) to acquire exempt assets (such as clothes, food, a new washer/dryer or refrigerator). All of these considerations have to be weighed to determine when is the best time for you to file.

Death and Taxes

2010-01-12T16:30:00.004-07:00

Nothing is certain but death and taxes, goes the old saying. But combine the two and nothing is certain but uncertainty. The new year came without Congress extending the estate tax (the House voted to extend the tax, but the Senate didn't act), so for 2010 it is gone. It's scheduled to revive at a higher rate (55% vs. 45% in 2009) and lower exemption ($1 million vs. $3.5 million in 2009). Most commentators expected Congress to extend the tax in 2010. Most commentators were wrong.

2010 marks the first year since 1916 that a person can die without an estate tax. That is making for a lot of macabre jokes about doing in a rich relative. The truth, though, is 2010 might not be such a great year to die anyway. In the Internal Revenue Code there is a provision for "stepped up basis," which means that when property passed by inheritance, the basis (amount at which the property was acquired) was stepped up to the date of death. That meant, for example, if Uncle Harry owned real estate that he purchased in 1950 for $10,000 and it is today worth $750,000, the basis to the heirs became $750,000, saving a bundle in capital gains taxes. But this provision went away with the estate tax. So now the heirs are looking at a capital gain tax on $740,000, the difference between the 1950 basis of $10,000, and today's value of $750,000 should they sell. Assuming values continue upward, that taxable gain will only get bigger.

What is the Meeting of Creditors?

2010-01-09T16:51:00.002-07:00

The meeting of creditors, also called a 341 meeting, because it is held pursuant to section 341 of the Bankruptcy Code, is often the only appearance that a debtor makes in his bankruptcy. The meeting is conducted by the bankruptcy trustee appointed to the case, not the bankruptcy judge. The purpose of the meeting is for the trustee to question the debtor under oath about the debtor's schedules and statement of affairs, and to allow creditors to question the debtor. In most cases, creditors don't appear at the meeting. This is because their appearance is useless in most cases, especially where the debt is unsecured. Occasionally a secured creditor will appear and ask about insurance, condition of the collateral or what the debtor intends to do (surrender, redeem or reaffirm the debt). In Utah, trustees hold meetings every hour with 10-12 debtors appearing each hour. This means the trustees allocate 5-6 minutes per case.

House Votes to Extend Death Tax

2009-12-04T14:44:00.002-07:00

The House of Representatives voted to extend the estate tax, which was set to expire in 2010 as part of the Bush-era tax cuts. The Senate still has to approve an extension, an unlikely event before December 31, given that the Senate is pre-occupied with the health care reform issue. A likely alternative is that the Senate votes to temporarily extend the estate tax until it can take up debate on a permanent extension.

As presently written, the estate tax would have expired in 2010, only to be revived in 2011 at a higher rate, 55% instead of the current 45%. The House extension maintains the maximum rate at 45% and applies only to estates over $3.5 million.

Republicans are unanimous in their support of repealing the estate tax, which, they say, hurts small businesses such as farmers and car dealerships that have substantial assets that bump the value above the exemption limit. Maintaining the estate tax burdens the transer and, therefore, the viability, of family owned businesses from one generation to the next.

Which Bankruptcy Lawyer?

2009-12-01T16:23:00.002-07:00

Bankruptcy is one area of the law that is booming right now. If you're thinking of filing, you have dozens, if not hundreds, of options when it comes to choosing a bankruptcy attorney. Any lawyer licensed to practice law and admitted to practice before the local federal court can file a bankruptcy for you. The question is, should she?

Congress, in its infinite wisdom, requires attorneys to tell their prospective bankruptcy clients that the client doesn't need an attorney to file bankruptcy. And the bankruptcy courts have done a good job of making the forms you need available online. But that's where the government's help ends. It's up to you to figure out how to fill out a form. Is that debt secured or unsecured? Does it go on Schedule D or Schedule F? What's an executory contract or lease? Should I mark the box "reaffirm," "surrender," or "redeem"? And did you know there is a fourth option that isn't on the form?

When choosing a bankruptcy attorney, as in most things, you get what you pay for. Someone's fees might be low because he just switched from doing divorces to bankruptcies last week. Don't automatically choose the attorney with the lowest rates or the biggest Yellow Pages ad.

Estate Planning or Successon Planning?

2009-11-18T13:40:00.002-07:00

Though often used synonomously, the terms "estate planning" and "succession planning" differ slightly. Estate planning often refers to planning for estate taxes, but can also mean planning for the distribution of your estate, that is, who gets what.

Succession planning means planning specifically for the succession of a family business to future generations. Succession planning may involve estate taxes, but they are secondary to the purpose of the planning, which is to allow a successful family business to be passed on intact to future generations. This can be very tricky because issues such as outstanding loans, employee relations and everything involved in running a business is involved in succession planning.

An estate plan might include a succession plan, or it might provide for the sale of the business.

Why Do People File Bankruptcy?

2009-11-12T17:16:00.002-07:00

This is a question that has puzzled those who study human behavior for years. Why do some people file bankruptcy while others don't? Lots of theories have been advanced: lack of education in money matters; crushing debt from unexpected medical bills; divorce or death; or just plain irresponsible behavior in running up credit card bills. Now a nationwide study has shown at least one contributing factor: The toughness of state collection laws.

It seems that in those states where creditors have more power to collect debts, such as through garnishment of wages, foreclosure of judgment liens on real property, attachment of personal property like cars, and the like, people are more prone to file bankruptcy than debtors in states where creditors can't make their lives as miserable.

Personal Assets at Risk in Business Bankruptcies

2009-10-30T09:21:00.002-06:00

Many entrepreneurs don't realize that their personal assets (homes, cars, savings, etc.) may be at risk if their business files bankruptcy. This is because many entrepreneurs do business as sole proprietorships, which, in the eyes of the law, is simply the individual doing business under an assumed name. When that happens, there is no business entity apart from the individual: they are one and the same. If business debts force the business to close, all of the assets of the individual are at risk to pay creditors' claims, and if the business files bankruptcy, it's really the individual who is filing, so all of his or her assets pass under the control of the bankruptcy trustee.

Incorporating or forming a limited liability company (LLC) is some protection, but not if banks and other creditors require personal guarantees from the officers, members or shareholders.

Do It Yourself Wills

2009-10-15T20:04:00.003-06:00

I just read a blog post from a woman touting an online legal service provider, telling the world how great and easy it is to do your own will online through this company. I've previously posted about the pitfalls of do it yourself bankruptcies, but a do it yourself will is even worse. At least if you make a mistake in your bankruptcy, you have a chance to fix it. If you screw up your will, not only can't you fix it, you won't even know something is wrong.

There are a host of potential problems with a do it yourself will and estate plan. Yes, you can provide for someone to have legal custody of your children. But what about providing for them? What instructions are you going to leave and how binding will those be about whatever they inherit. For example, you do have life insurance don't you? Do you plan to leave that to the kids outright? To a 12-year old? Or are you just going to name your BFF as the beneficiary under the policy and hope she knows what you would do?

Think about it. Would you feel comfortable about buying a kit and instructions to build a car or a house from an online company and do it yourself? Doesn't your family deserve better?

Estate Planning for Blended Families

2009-09-29T08:45:00.003-06:00

When a person remarries, either after a divorce or death of the former spouse, and children from the first marriage are involved, a whole host of estate planning problems crop up. Remarriage may not be the joyful event to the children that the marrying parent wants it to be. Questions naturally arise over who gets what. Here are some tips for making a second marriage smoother when it comes to estate planning.

First, discuss matters with your new spouse. He/she may also have children of a former marriage, which complicates the issue. Discuss your plans and hopes for your children and your new spouse's children.

Secondly, in your discussion, set some goals. Are your children minors who still need some form of support? If so, providing that support should be a major goal. If they are grown and have families of their own, what about grandchildren? Decide what you want to accomplish.

Third, consider a trust. In my view, anyone with an estate to pass to heirs should have a trust. It will allow flexibility in distributing your assets. When it comes to real estate, if the couple is older and one of the goals is to provide a place for the surviving spouse to live, consider a life estate to that spouse with the remainder passing to the trust.

Fourth, talk to your family. Don't surprise them after your death when the will is read.

Fifth, talk to a professional. Planning for blended families is one of the most complex tasks in estate planning. Don't try to do it yourself.

Credit Card and Medical Bankruptcy

2009-09-24T20:31:00.002-06:00

I just read an online article that talks about filing a "credit card bankruptcy." Over the years I've had people ask about "medical bankruptcies" as well. There seems to be some almost universal misunderstanding that leads people to believe they can file bankruptcy against certain types of debt, such as credit cards or medical bills, but leave out other debt, like home loans, car loans, etc.

Bankruptcy is an all or nothing proposition. You either file against all debt, whether you want to or not, or you file against none. You don't get to pick and choose. It is possible to exempt certain debt from your discharge -- that's called "reaffirming" the debt. But the creditor has to be listed in the first place, which means the creditor will receive notice of the bankruptcy.

A 529 Education Savings Plan as Estate Planning Tool

2009-09-21T17:34:00.002-06:00

A 529 education savings plan is a plan where you select the recipient ("beneficiary") and make contributions for that person's post-high school education. The beneficiary can be a child, grandchild, nephew, niece or just the neighbor's kid. You make the contributions in any amount you want. You can change the investment strategy or even the beneficiary. And those contributions can be used to reduce your overall estate for estate tax purposes.

The law currently allows a lump sum contribution of $65,000 per beneficiary, with an unlimited number of beneficiaries. That is money that won't be in your estate at the time of death, and therefore not subject to the estate tax. Remember that the current limit for estate tax is $3.5 million, but a lot of people expect the Obama Administration to push for a reduction back to the $1 million limit that existed nearly 20 years ago when Clinton was president.

There are some quirks about 529 contributions. For example, you cannot make other reportable gifts to the recipient during the five-year period after the gift, and, if you die during that five year period, a pro-rata share may come back to your estate. But it's a good way to reduce your estate.

If you're a grandparent and own the account (it is possible to set up the account in the beneficiary's name), the amount in the account is not counted when it comes to determining whether the recipient is eligible for student aid, such as grants and loans.

Will Bankruptcy Stop Foreclosure?

2009-08-20T14:30:00.002-06:00

This is a question that is asked frequently, and the short answer is, yes, filing bankruptcy will stop foreclosure, at least temporarily. The more important questions are, for how long, and will I be able to keep my house. The answers to those questions are maybe.

If you file Chapter 7, the bankruptcy will stop foreclosure only until the creditor gets relief from the automatic stay, which is a court order saying it can continue the foreclosure process. If you have equity in the house, the trustee will likely sell the house and use the equity to pay your creditors. Either way, unless you redeem the house (pay the equity to the trustee) or work out a repayment with the bank, you will lose the house.

If you file Chapter 13, you can keep your house as long as (1) you can make all the house payments in the future; and (2) you make up the past due payments in your Chapter 13 plan. For example, let's say you file on September 5, at which time you owe six past due payments, April through September, of $1,000 each. In your plan you must pay that $6,000 back and you must make each payment of $1,000 going forward, beginning with October.

Estate Tax "Patch" Likely

2009-08-18T16:42:00.002-06:00

The estate tax is scheduled to disappear in 2010, to be revived in 2011 at 2001 levels, which means a $1 million exemption instead of the 2009 exemption of $3.5 million, along with an increase to 55% tax from the current 45% bracket. However, recent news indicates that it is likely that Congress will extend the 2009 level through 2010, while it seeks a more permanent overhaul of the estate and gift tax code. It's almost a given that Congress will have to re-implement the estate and gift tax for 2010, because its disappearance, even for only a year, is a huge blow to tax revenue. Hopefully, though, when it is made "permanent" (whatever that means), it will not be at the low 2001 level of $1 million.

The 910-day Rule in Bankruptcy

2009-08-11T16:03:00.002-06:00

One of the most weird rules to come out of the 2005 amendments to the Bankruptcy Code is what is known as the 910-day rule. This is a rule for confirmation of a Chapter 13 plan. Essentially it says that if a debtor purchased a motor vehicle and financed it by giving the bank title within 910 days of filing bankruptcy, the debtor must pay the debt in full. The usual method of paying a car loan is to look at what the car is worth on the filing date and pay that to the creditor. The balance becomes an unsecured claim that is paid with all other unsecured claims, such as credit cards, doctors' bills, etc., at a few cents on the dollar.

The 910-day rule is a response to what Congress perceived as abuse of the bankruptcy system by a few debtors. Some unscrupulous debtors would buy a new, expensive car for $30,000 or more and then, in a year or two, after the car had depreciated to maybe half of its original value, file bankruptcy and pay only the current value. This practice is known as lien stripping. How Congress came up with 910 days is anybody's guess, but that is the law.

401k or Roth IRA

2009-07-15T16:26:00.002-06:00

Traditional wisdom is that you should max out your 401k before contributing to anything else. That depends on whether you believe taxes will go up or down in the future. In a 401k or traditional IRA, the contributions go in tax free (are deducted from your income) but come out and are taxed at whatever rate you are then subject to. In a Roth IRA, contributions are taxed at your normal rate, but withdrawals are tax free. The arguments for tax free contributions are (1) you're probably at a higher rate now than you will be after retirement; and (2) you'll be paying with future dollars that will likely be devalued due to inflation.

But think of this. Suppose you contribute $150,000 over your lifetime, $500 a month for 25 years. That $150,000 is deductible from your income taxes. When you retire, that $150,000 may have grown to $500,000 or more, depending on the success of your investments. Now instead of taxing only the $150,000 you contributed, Uncle Sam will collect taxes on the full $500,000. And you can't do anything about how much you withdraw, because the tax code requires certain minimum withdrawals beginning at age 70-1/2, regardless of how much you actually need.

Contributing to a 401k still makes sense in order to get your employer's match, assuming your employer still matches contributions. A match doubles your money up to the amount of the match. So be sure to contribute enough to get the full matching employer contribution. Beyond that, it might make sense to contribute the rest to a Roth IRA if you think taxes will go up in the future.

The King's Estate

2009-07-08T15:00:00.003-06:00

Now that Michael Jackson's funeral is over, speculation is rising over what kind of estate he left and who will get it. Both questions may take years to answer.

A figure widely bandied about is that the King of Pop owed upwards of $400 million at the time of his death. Add to that estate and inheritance taxes that will likely be due, and there might not be much left for his heirs, whoever they may be. On the other hand, he supposedly had some lucrative interests in record labels that could spin off money for years to come. One thing is certain: There will be litigation that could last for years. Jimi Hendrix, who died in 1970, left an estate that was in court for 35 years.

There was an interesting post on www.taxgirl.com asking the question whether Michael Jackson's funeral expenses are deductible to his estate. Rather than answer the question outright, the Taxgirl referred readers to another estate planning blog by David Shulman, a Florida attorney www.sofloridaestateplanning.com. Mr. Shulman's answer, in a nutshell, is "maybe".

America Leads the World in Bankruptcies

2009-07-01T14:15:00.002-06:00

In 2005, Congress revamped the Bankruptcy Code, the most significant overhaul in nearly 30 years, since the last big revision in 1979. One of the main purposes was to make filing more difficult. The number of filings dropped dramatically -- for two years. By 2007, Americans were filing at a rate nearly twice as great as that in Great Britain, the United States' closest competitor among industrialized nations.

America's public attitude toward bankruptcy, especially in this economic environment, is not as lenient as its laws, however. Most people still resent the fact that some debtors, most of whom were just plain irresponsible by taking on more debt than they could handle, get a free walk. "It isn't fair," people claim. And it isn't. But by the time people have reached the stage of bankruptcy, the time for fairness is past. Bankruptcy is a recognition that a company's or an individual's controls and ability to manage its affairs are beyond repair. Our system sets aside notions of fairness in these extreme circumstances for the benefit of all of us, by attempting to minimze the costs and maximize the potential recovery.

Don't Forget the Passwords

2009-06-26T17:26:00.002-06:00

Every estate plan should include a list of critical information that is easily accessible in the event of death or incapacity. This list should have on it a list of bank accounts, safe deposit boxes (and the location of the keys), other financial accounts (stocks and bonds, online accounts, etc.), the location of your estate planning documents and the like. While you're making it up, don't forget to include the passwords to your online presence, be that eBay, Amazon, Yahoo, LinkedIn, Facebook, everywhere you visit in cyberspace.

Death and Taxes

2009-06-17T16:41:00.003-06:00

To many people, estate planning is all about avoiding the estate and inheritance tax. That's why a lot of people give little thought to estate planning, because, as we've discussed, they don't consider themselves wealthy enough to have to worry about estate taxes. We discussed why estate planning is important even aside from taxes, but today we are discussing estate taxes.

There is a lifetime exemption amount for estate taxes. It's a combined estate and gift tax exemption, so to the extent that the exemption is used to give gifts tax free during life, it isn't available at death. But putting that aside, right now (2009) the estate tax exemption is $3.5 million. In 2010, the estate tax is slated to go away altogether. But Congress will probably renew it in 2011 and later, and there is talk that the exemption will be scaled back to the $1 million it was under the Clinton Administration.

Everything that you own at your death is included in your estate. This means all land (houses, rental properties, vacant land, vacation homes, etc.), bank accounts, CDs, stocks, bonds, vehicles, computers, everything down to your china and silverware. Even in today's depressed market, if you have a home, with everything else included, you could be bumping up against the $1 million mark. If that's the case, keep a close eye on the estate tax debates. And if you're up over $1 million, you definitely need to talk to an estate planning attorney.

Of course, everyone should have basic estate planning documents: will, durable power of attorney, and living will (medical directive).

Do It Yourself Bankruptcy

2009-06-12T14:27:00.002-06:00

Congress, in its wisdom, requires lawyers to tell potential clients that they (the clients) don't need an attorney to file bankruptcy. That is true; anyone can represent him or herself in any court in the nation. Making that statement, however, doesn't answer the question SHOULD you do it yourself.

Bankruptcy is a very technical area of the law. It's not an area that attorneys dabble in. They either are in it virtually full time or they don't touch it. And these are people who went to law school and have practiced law for years. Knowing that, the question I would ask is, why would anyone try to do it themselves when what they are talking about is their financial future? In the old days (pre-BAPCPA), if a bankruptcy got dismissed, it could be refiled, usually without penalty. So if someone tried a do it yourself bankruptcy and screwed things up, they could find an attorney the next time around. Now there are serious penalties that attach to second and third filings. If you mess up the first one, there might not be a second one.

A Trust as an Estate Planning Tool

2009-06-10T11:20:00.002-06:00

Many people think that because they are not wealthy, a trust isn't for them. In fact, a trust can be an effective estate planning tool, especially for families with younger children. A testamentary trust (see last week's post) can allow the trustee the flexibility to provide for the needs of the young children should something happen to the parents. Without a trust, any money (such as life insurance proceeds) would pass to the children. However, because they are minors, a guardianship would have to be established. The guardian's role is to preserve the money until the children reach the age of majority. This means a guardian lacks the ability to provide anything more than basic necessities. For example, if a child shows exceptional musical talent, a guardian may not be able to tap into the money to provide for private lessons. A trustee, on the other hand, given appropriate instructions and flexibility by the trustors, could do that very thing.

Don't assume that just because you aren't "wealthy" a trust isn't for you.

The Bankruptcy Means Test

2009-06-05T12:21:00.002-06:00

One of the more devious provisions of the 2005 Bankruptcy Code amendments is the means test. This test acts as a gatekeeper for those filing bankruptcy. Meet the means test and the promised land of Chapter 7 is available. Fail the means test and you are consigned to Chapter 13. Now, don't get me wrong; Chapter 13 has its place, especially if you're about to lose your house. But for millions of people who desperately need a fresh start, Chapter 7 is the goal.

The means test looks at the ability, or means, of an individual to pay back part or all of his debt. If your means allow you to repay, you are forced into Chapter 13. On its face, that isn't so bad because those who can pay, should pay, in the opinion of most people. But the way the means test works doesn't measure ability to pay. Under the means test, the debtor (person who is going to file) averages his income for the past six months and compares that to the state median income. If his average income is below the state median, he passes the means test and can file Chapter 7. If it's above, there are a couple of other tests, but the real key is the state median compared to the last six months' average.

But here's the problem. Suppose the debtor has been out of work (a not uncommon situation right now) for the last 60 days. Right now, he has no income, but for the four months before he lost his job, he had income; maybe a good income. If that four months of income averaged over six months exceeds the state median income, this person does not qualify for Chapter 7, even though he has absolutely no income right now with which to fund a Chapter 13 plan.

Just another of the anomalies forced on us by BAPCPA.

What Types of Trusts are There?

2009-06-02T08:43:00.002-06:00

As we discussed last week, a trust is just a way of holding and disposing of assets. I like to think of a trust as a basket to put things in. In general, there are four main types of trusts: Revocable, irrevocable, inter vivos, and testamentary. A trust is either revocable or irrevocable, and either inter vivos or testamentary, though it's possible for an inter vivos trust to be either revocable or irrevocable.

A revocable trust is one that can be revoked by the maker, usually called the trustor or settlor, at any time. An irrevocable trust is one that is permanent; it cannot be revoked once made. An inter vivos trust is a trust made during the trustor's life ("inter vivos" means "during life"). A testamentary trust, on the other hand, is one that is created by the trustor's last will and testament, and doesn't arise until after death. Because of this fact, a testamentary trust is of necessity an irrevocable trust.

A trust is a contract between the maker, the trustor, and another person, the trustee, who holds property given to him by the trustor for the benefit of third persons, called the beneficiaries. The trust agreement sets out the powers and duties of the trustee and usually specifies the conditions on which the trustee can use or give the trust property to the beneficiaries.

Should I File Bankruptcy?

2009-05-27T16:59:00.003-06:00

A question lawyers get a lot is, "should I file bankruptcy." That's a question to which there isn't a right or wrong answer, and it's not a legal question, so most lawyers will say it's up to you. Many people feel that it is immoral to file bankruptcy and walk away from thousands of dollars of debt. That is their right to feel that way; it doesn't make filing or not filing right or wrong.

If you're confronted with debt that you find impossible to pay, for whatever reason, bankruptcy is an option to consider. Like any big financial decision, you shouldn't make it blindly. Talk to an attorney. Learn your options. Find out what a bankruptcy could do to your credit rating. Then consider the alternatives. Is there a way to dig out of the hole you are in without sacrificing too much? What about your ongoing obligation to support your family? How will filing bankruptcy (or not) affect that?

One thing you should not do is file bankruptcy for the sole purpose of being able to incur more debt, with the idea that you can always file again in eight years. In my view, such a course of action would be immoral.

What Is a Trust?

2009-05-26T17:19:00.002-06:00

If you talk to anyone about estate planning, you're likely to hear the word "trust." What is a trust and what does it mean in estate planning?

A trust is simply a vehicle to hold assets. The reasons for creating trusts are varied, but usually including wanting to protect assets and avoid probate. Probate is the legal process by which title to assets are transferred upon the owner's death. By putting the assets into a trust during your lifetime, you can avoid probate.

However, merely creating a trust isn't enough. You still have to fund the trust, which means putting title to the assets in the name of the trust. Too often people create a trust but never fund it. In that case, the trust is like an empty basket. It would be more useful if there was something in the basket.

Whether or not a trust is right for you, and, if so, what kind, are questions best asked of a competent estate planning attorney.

Bad Lawyer

2009-05-22T11:59:00.002-06:00

An Illinois lawyer appealed a trial court's award of $80,000 in legal fees against him for vexatious claims he brought against defendants on behalf of his clients. The lawyer claimed that the court shouldn't award fees because he had no assets and didn't earn very much because he really wasn't a good lawyer and people weren't willing to pay for his services. The Illinois appeals court rejected his claim, saying that if he really couldn't earn a living as a lawyer, maybe it was time to find another profession.

Tax Refunds in Bankruptcy

2009-05-20T18:25:00.002-06:00

The question often arises about tax refunds when someone files bankruptcy. It usually arises in a Chapter 7, known as a liquidation. The rule is, if you are entitled to a tax refund at the time of filing, it belongs to your estate, which means the bankruptcy trustee might take it to pay creditors. So if you are filing before you get a refund, you should talk to your attorney about possibly delaying until you get the refund and have a chance to convert it to exempt assets. There is nothing illegal about converting cash (the refund) into an asset that is exempt from the trustee, such as buying food storage, or a new freezer. Your attorney can advise you what is best.

Even if you file after getting a refund, some trustees are now keeping your case open to see what kind of a refund you get next year (for the year in which you filed). Then they might claim a portion of it, based on what time of year you filed. For example, suppose you file on July 1, half way through 2009. When you file your 2009 taxes in 2010, the trustee might claim to be entitled to one half of that refund. Again, consult with your attorney.

Sorting Through the Mess

2009-05-18T17:01:00.002-06:00

A well executed estate plan is very little help if key documents can't be found. The most important are the will and any trusts that may have been executed. But besides these obvious documents, financial records are just as important. The executor of your estate or the trustees under the trust need to know what they are being called on to administer.

While most people don't want to think about dying, and few people sit around thinking of what a mess those left behind might have to deal with, the fact is that besides your estate plan, you should leave detailed instructions about what assets you owned. The simplest way to deal with this is to keep a loose leaf notebook that is current in terms of what you own (real property, bank accounts, stocks, vehicles, etc.) and where it is located. Then make sure those who will deal with your estate know where to find the notebook.

New Laws

2009-05-15T17:02:00.002-06:00

318 new laws went into effect on Tuesday, May 12. That's 60 days after the legislature adjourned and that is the usualy time period for new laws to take effect. Some of the more interesting are:

Marriage license fees went up $10
It is now illegal in Utah to text while driving. Talking on a cell phone is still legal.
An adult may be guilty of harboring a runaway if he/she gives shelter to a minor. So if your son's or daughter's friend starts living with you, you might be guilty.
It is now legal to brew up to 100 gallons of beer or wine every year in your own house.

Keeping Your House in Bankruptcy

2009-05-13T09:13:00.003-06:00

If you file a Chapter 7 bankruptcy, you might be able to keep your house. If there is substantial equity in the house (value above the mortgages and other liens) the trustee might force a sale to get money to pay creditors. But most states have a homestead exemption of some type. In Utah, it is $20,000; $40,000 for a married couple. In today's market, that plus the mortgages probably means there is no equity for the trustee and he will abandon the house. Then the issue is between you and the bank. If you're current on your payments, all you have to do is keep making the payments. If you're not current, you will need to negotiate a reaffirmation agreement with the bank, which means you and the bank agree on how you will get current. In some cases, the bank might be willing to reduce the interest rate to avoid having to foreclose on the house.

By the Numbers

2009-05-11T15:38:00.002-06:00

According to a 2007 survey of adult residents of the U.S. found that 55% don't have a will. Fifty-two percent of Anglos have wills, compared to only 32% of blacks and 26% of Hispanics. Forty-one percent of people have living wills, up from 31% in 2004, and 38% have designated someone as a health care attorney-in-fact, up from 27% in 2004. Ten percent of the people surveyed say they don't have a will because it's too depressing to think about. Another 9% say they don't know who to talk to, and 24% say they don't have enough assets to warrant estate planning.

Source: www.lawyers.com.

Stocks Worthless in Bankruptcy

2009-05-08T16:42:00.003-06:00

With all the talk about GM, Chrysler and other huge American icons filing bankruptcy, the question arises, what happens to my stock in these companies if they file? The answer, in most cases, is the stock becomes worthless. Stockholders are owners of the company. As such, they come last when a company is liquidated. Creditors get paid before owners, and only if anything is left after all the creditors are paid in full do owners get as much as a penny. Even if the company goes through reorganization, which is what many airlines did and GM and Chrysler are expected to do, very often the shareholders get almost nothing for their shares.

High Stakes Estate Planning

2009-04-11T12:50:00.002-06:00

Most of the time estate planning is boring and dull. But occasionally there is high drama. Take the case of Brooke Astor, matriarch of New York's high society and heir to the Astor name. Before she died at age 105 in 2007, Mrs. Astor changed her will to benefit her son, Anthony Marshall and her attorney, Francis X. Morrisey. Prosecutors in New York claim that Marshall and Morrisey exploited Mrs. Astor's Alzheimer's disease and induced her to sign amendments, known as codicils, to her will in the years before her death. They plan to paint a picture of a declining elderly women gradually losing touch with reality, through witnesses such as housekeepers and friends, among whom is expected to be Annette de la Renta, wife of fashion magnate Oscar de la Renta. The trial is expected to last two months.

However, the defendants claim that Mrs. Astor was not at all incompetent when she changed her will, and proving her incompetence may well be a difficult task. Alzheimer's patients often have moments of lucidity, and the prosecution will have to prove that Mrs. Astor was not in one of those moments at the exact instant that she signed her codicils.

Mrs. Astor's son, Anthony Marshall, is her only child. His father was Mrs. Astor's first husband. Her third husband, Vincent Astor, was the son of John Jacob Astor IV, who made his fortune in real estate and died in the sinking of the Titanic.

Bankruptcy Reform

2009-03-23T22:20:00.003-06:00

We've only had the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) for three and one-half years, since fall, 2005, and already Congress is starting to think about tinkering with it. As well they should. It should never have been enacted in the first place.

BAPCPA (fondly known as Bappa-Crappa) took nearly eight years to become law. Beginning in 1996, when bankruptcy filings took off, credit card companies moaned to Congress that too many people were filing bankruptcy willy-nilly, discharging billions of dollars of debt owed to those companies. Never mind that those same companies inundate people with three, four, five or more offers for pre-approved credit cards every week. They (the credit card companies) whined that something had to be done, that bankruptcy was out of control. After being derailed by President Clinton's impeachment, George Bush's election, 9-11, the dotcom bust and a few other items, in 2005, bankruptcy reform came at last. The economy was saved.

It took about three years, until the mortgage meltdown in 2008, for Congress to start looking at the billions of dollars the credit card companies were earning, and decide that maybe something needed to be done about "excess profits". Then everyone jumped on the bankruptcy reform bandwagon. Now the mortgage lenders are the bad guys and bankruptcy needs to be reformed yet again to let borrowers modify their mortgage loans. It seems Congress will never learn. Before Bappa-Crappa was enacted, dozens of law and economics professors signed a petition urging Congress not to play with the Bankruptcy Code. After three-plus years, the almost unanimous consensus is, Bappa-Crappa has lived up to its nickname. It is a poorly drafted law that is draconian in its scope.

The pendulum swung too far in favor of creditors and now, less than four years later, we are looking at another overhaul. Once again, many are urging Congress not to allow modification of mortgages in bankruptcy because of the damage it might do to the already fragile mortgage market. Will Congress listen this time?

Obama's Budget Proposal

2009-03-04T11:50:00.003-07:00

We got a first look at President Obama's proposed budget this past weekend. There are good and bad things in it. And a couple of really bad things.

An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.

Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.

Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.

Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.

It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.

Bankruptcy Law Changes

2009-02-20T16:06:00.003-07:00

There's a sense of inevitability that Congress will amend the Bankruptcy Code to allow judges to modify home mortgages. Currently, in a Chapter 13, all a debtor can do is catch up on his or her back payments. In the meantime, he has to keep his ongoing payments current. Under proposals in both theHouse and Senate, Chapter 13 would be amended to permit a judge to write down the amount of a loan to the value of the house, if the house is now worth less than what's owed on it. This is a process called "cram down", from the phrase "cram it down the throat of the creditor", that is, force the creditor (who usually objects) to accept the lower value.

There's a good deal of debate about the wisdom of such a proposal. Those opposed say it will raise the lending costs to everyone. Banks will never be sure that they will get paid in full or that they won't have a lower value crammed down on them. As a result, they will raise lending rates to everyone to spread the risk of the relatively few bankruptcies over all borrowers. Thus, we'll all end up paying for those people who can't pay for themselves. But that's what we're all doing with the bailout anyway. Those people who were responsible are going to pay for the $835 billion in new assistance that was just signed into law by President Obama.

Bankruptcy

2009-02-10T12:02:00.002-07:00

Today it's time for a change in topics. With the economy the way it is, bankruptcies are soaring in the United States. So we'll look at the different types of bankruptcy relief.

There are two types of bankruptcies avaialbe for individuals. The first is Chapter 7. This is also called a straight bankruptcy. In a Chapter 7, a trustee is appointed to take over all of the person's assets, sell them, and use the money to pay creditors. In reality, most Chapter 7s are what are called "no asset" cases, meaning there are no unencumbered assets for the trustee to sell. The trustee won't sell a house, for example, if it is worth less than the mortgage that is owed. Before a trustee can take any of the money he gets from selling assets, he first has to pay any secured creditors, those creditors, such as banks that hold mortgages, or credit unions that hold the title to a car, who have taken a pledge of property from the borrower. Only after secured creditors are paid can the trustee use any excess funds to pay other creditors. In most Chapter 7s, the trustee concludes that he can't get any funds to pay creditors other than those secured by the property, so he abandons the property and doesn't sell it.

In a Chapter 13, also called a wage earner plan, the debtor (person filing bankruptcy) pays his or her disposable income (that portion of income left after paying housing costs such as rent, food, utilities and other normal living expenses) to the Chapter 13 trustee, who then doles the money out to the creditors. A Chapter 13 plan goes on for as long as five years. At the end, the debtor gets a discharge from any debts that haven't been paid through the Chapter 13 (with some exceptions).

What's Happening with 401(k)s?

2009-01-16T15:24:00.002-07:00

Starbucks has announced that it is no longer matching employee contributions to their 401k plan. Fed Ex and Motorola have said they'll do the same. Smaller companies have or will follow suit. The reason, of course, is the economy. Employers are no different from individuals; in lean times they have to cut costs and cutting contributions to the 401(k) retirement plan is an easy call.

So what should you do? For starters, you SHOULD be contributing to a 401(k). If your employer is matching, contribute at least up to what the employer will match. You're doubling your money instantly. If you don't have a 401(k), shame on you. Start NOW. True, the market is down and the value of your 401(k) is also down, but unless you expect the end of the world, the market will rebound eventually. It always has. Contributions now mean you're buying cheap stock.

Secondly, watch how your employer matches your contribution. Remember Enron? Enron matched employees' contributions with Enron stock. When Enron tanked and the stock became worthless, so did thousands of 401(k) accounts. Diversify your investments. Most 401(k) sponsors have a menu of different investment options that mix what your contributions purchase based on your tolerance for risk. A simple 10-minute quiz created by the sponsor often points you to the right option.

Finally, watch out for vesting. At some employers, you must be employed a certain time, a year, five years, before their matching contributions "vest" (in other words, before you become entitled to them).