Bankruptcy Exemptions

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

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?

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

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

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

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

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.