On Tuesday, Gary Busey filed Chapter 7 bankruptcy.  That’s not all that shocking–plenty of celebrities have sought bankruptcy protection.  Entertainers like Gary Coleman, Burt Reynolds and Jerry Lee Lewis, businessmen like P.T. Barnum and Donald Trump, socialites like Patricia Kluge, professional athletes like Lenny Dykstra and Lawrence Taylor.  Even Abraham Lincoln and Walt Disney filed bankruptcy.  Their reasons for filing bankruptcy, like those of ordinary non-celebrity folks, run the gamut:  bad investments, bad economies, getting swindled, or getting sick.  It can happen to anyone, if the wrong thing happens at the wrong time.

What was a little shocking to me about Gary Busey’s filing was that his bankruptcy petition reports less than $50,000 in assets.  Busey’s manager issued a statement calling the filing the final chapter in a process of “jettisoning the litter of past unfortunate choices, associations, events and circumstances….”  I’m guessing it was a long process, if all that’s left of a fairly lucrative career is $50k, but that’s fairly typical, too.  Most people wait until they have jettisoned their assets and savings, along with their unfortunate choices, before filing bankruptcy.  It kind of goes with the territory.  By the way, read the whole statement by Busey’s manager.  It’s priceless, and I wish I could hire this guy to write a statement explaining the circumstances of all my clients’ bankruptcies.  With this guy on your side, you couldn’t help but believe you were on your way to better things.

And that brings me to the real point of writing about another celebrity bankruptcy.  Celebrities, and regular people, use bankruptcy to get their lives and businesses back on track.  To make a fresh start.  To move on to more stable and productive lives.  That’s the lesson, folks.  If you’ve been slammed by a bad economy or an illness, or victimized by a swindler, or if you just need to jettison the litter of unfortunate choices and associations, and start over fresh, bankruptcy may help you, too.

It’s tax time and the hunt goes on for tax deductions to lower your income tax hit.

Tax deductions lurk in the most unlikely places.

If your Chapter 13 plan is catching up home loan arrears, look at your trustee’s annual report for some deductible mortgage interest.

Most likely, the lender’s filed proof of claim in the bankruptcy case is interest on the loan which accrued but was not paid before the case was filed.

Lender’s claim loaded with interest

Until very late in most 30 year mortgages, a substantial amount of each monthly  payment on your home loan  is interest.  That mortgage interest can be deducted if you itemize deductions.

For reasons that I can’t explain, mortgage lenders do not seem to provide a 1099 for mortgage interest paid through the trustee.  But then, the whole business of accounting for mortgage payments made through Chapter 13 seems to be beyond most loan servicers.

How to find the deductible amount

All Chapter 13 trustees have information available on line for debtors whose cases they are administering.  Usually, the instructions for how to access the information about your case is provided at the 341 meeting.

Find the section of the trustee’s site that shows disbursements or payments.  Locate the claim filed by your lender, or its servicer.  The report will show how much has been disbursed on that claim.  You’ll have to isolate what’s been paid in the last tax year.

If you can’t sort the information for disbursements in a given period, you can look at the ledger of all disbursements;  flag and total the payments to your lender.

Making a record

The IRS relies on 1099 forms sent to them, with copies to the taxpayer, to verify your right to the deduction.  Since the lenders don’t seem to acknowledge Chapter 13 payments as interest, you’re on your own to back up your claim for a tax deduction.

I suggest that you get a copy of the bank’s proof of claim, print off the trustee’s disbursement records, and save them along with a copy of your plan with your supporting tax documents.  You’ll want to be able to back up your tax deduction.

Other deductions hiding in the underbrush

The same principle, that payments by the trustee are really payments attributable to you, the tax payer, applies to any deductible taxes or business expenses that the trustee has disbursed.  There is no reason to let those tax deductions go to waste.

Happy hunting.

Image courtesy of bethanne.

So, are you looking for information on bankruptcy?  There are a number of reasons that people go to the internet for research if they are thinking of filing for bankruptcy, even before consulting a lawyer.

Many people turn to the web to find information.  What you find on the internet varies from excellent to terrible, and if you don’t understand the subject, you might not know the difference.

Why do people look on the internet for bankruptcy information?  There are lots of reasons, but here are a few:

• They might think they can file bankruptcy without a lawyer.
• They may like knowing as much as they can before taking the next step.
• They may not think a lawyer will spend enough time explaining it, so they want to learn what they can in advance.
• They might not want to see a lawyer until they have decided they “need one”, in other words, they try to figure out in advance whether or not they will file bankruptcy before going to the lawyer to find out.
• They might be trying to avoid filing bankruptcy.

Over 40 states have already signed on to the sellout deal the corrupt politicians negotiated, so they could run for office beating their chests bragging about their tremendous accomplishment, with their mortgage company liege lords, who should have already started their prison terms, to get them off the hook for the greatest financial crimes in our history.

Just in case you wonder where I stand.

Image by:  dreamstime

The Monday, February 6 deadline passed with some states still on the fence, including the big one, California.

There are holdouts to the sellout:  New York Attorney General Eric Schneiderman chief among those opposing the foreclosure settlement.

Though his resolve could be weakening:

“Schneiderman said Jan. 27 that the liability releases in the draft settlement had become narrow enough so that a full investigation by a new mortgage crisis unit that he will help lead could move forward.” (from the Hufifngton Post article linked to above)

Schneiderman was appointed to the Residential Mortgage-Backed Securities Working Group by the White House, which continued the pattern of our prior President in appointing the mortgage crooks (one of them pictured below)

Image by: Dreamstime

to government office, instead of prosecuting them.

Some of us think the commission is toothless, an election year ploy to make it look like something will happen; a commission with more mortgage industry representatives than consumer advocates.

I and others have written about the real solution to the foreclosure crisis, judicial mortgage cramdown in Chapter 13 cases, allowing the courts to cram-down the amount of the mortgage to the value of the home, and to change the interest rate and length of the loan.

But the bad guys seem to have purchased both political parties, so that died was killed by the Senate.

That is how to deal with the mess on the ground.  It is equally essential to punish the wrongdoers, or we just set ourselves up again for another disaster down the road.

When people are in a Chapter 13 bankruptcy and hit a snag in their case,  often they request a hardship discharge.  The name alone should indicate that this type of discharge is not given upon a mere request.  There are specific requirements that must be met before you can even be considered for this type of discharge. “I do not want to be in the bankruptcy case anymore” it not a good enough reason.

As attorneys we look to the bankruptcy code for guidance when seeking a discharge.  A hardship discharge can be found under 11 U.S.C. 1328 (b) for guidance as to who qualifies.  The attorney must first draft a motion requesting the hardship discharge and outlining specifically as to why you would qualify.  The first step in the analysis is whether or not your Plan is confirmed (approved by the court).  If the answer is yes the plan is confirmed and you qualify for a regular discharge  you can move on to the next step.

The attorney must determine whether or not you can continue to make the ongoing Plan payments.  The code describes this as a modification.  In layman’s terms it is what can you do to help your self?

Can you make the ongoing Plan payments?  If you cannot, why not?  If you surrendered something could you make the ongoing Plan payments?  If you reduced your expenses could you make the payments?  If you obtained another job could you make the payments?  These all may be considered when analyzing this step of a hardship discharge.  We must show that your failure to complete the Plan payments are due to circumstances for which you should not be held accountable for.  Once we complete this analysis we move on to the next step.

In filing a Chapter 13 you always have to consider what the trustee in the case would have been able to receive in the case if it were filed as a Chapter 7.   Let me try an illustrate this through an example.  You file a Chapter 13 and own a Hummer worth $20,000 at the time of filing the case.  The amount of money that you owe to the lender on the date of filing is $10,000.  This is known as lien against the vehicle and in this case the lien leaves $10,000 in equity in the Hummer if you sold the vehicle.  This $10,000 in  equity is an asset that belongs to the Chapter 13 at the time of filing.  If we use the State of Missouri exemptions I can protect $3,000 of that $10,000 equity.  This exemption will reduce the equity asset to $7,000.   $20,000 (value of Hummer) – $10,000 (debt owed to the lender to purchase the vehicle) – $3,000 (the amount of the exemption I am allowed to use to protect an asset) = $7,000 cash that may be used to pay down your debt if the Hummer was sold for value.

Therefore, in a Chapter 13 you must pay into your case $7,000 over the life of the case to be distributed to your unsecured creditors.  In a Chapter 7 you would either have to pay the Chapter 7 trustee the amount in equity ($7,000) or the trustee would take the Hummer and sell it.  Once the proceeds are received the trustee would pay off the lender first, pay you $3,000 because that is the amount protected and then take the remaining funds to pay  towards your unsecured creditors.

So in analyzing the hardship discharge qualification if the $7,000 had not already been paid into the court you would not qualify for a hardship discharge.  But what if you did not have any non-protected assets that you were paying to keep in a Chapter 13?  If under the Chapter 7 analysis the trustee would have received nothing then you would not have to pay anything into the Chapter 13 towards the unsecured creditors to receive a hardship discharge.  Bottom line if the Chapter 7 trustee would have received funds if this case was a Chapter 7, you will have had to pay in at least that amount to the unsecured creditors in the Chapter 13 case to be considered for a hardship discharge.

So if:

1. Your Plan is confirmed; and
2. You are eligible for a regular Chapter 13 discharge; and
3. Your current circumstances prevent you from making your ongoing Chapter 13 payments; and
4. The circumstances creating this inability to pay is out of your control; and
5. You have paid into the Chapter 13 towards the unsecured creditors the amount that would have been paid if you filed a Chapter 7; and
6. There are no changes you can make to allow you to make the ongoing Plan payment;
7. You just might qualify for a Chapter 13 Hardship Discharge.

Remember that knowledge is power.  The more knowledge you have about the bankruptcy code the more power you will have in obtaining a discharge in your bankruptcy case.

One of the most stubborn myths about bankruptcy is the one which says that chapter 13 requires full payment of all your debts over 60 months.  If true, this would indeed rule out chapter 13 for most consumers.  After all, what good would come from being granted 60 months to pay off all your debts?  If you can’t afford your payments now, how in the world could you afford your payments if you had only 60 months to pay them?  This myth about paying your debts in full in chapter 13 is, happily, only a myth.

In fact, the law says something quite different: in chapter 13, your monthly plan payment is based on what you can afford.  Then, and at the end of the chapter 13 case (either 36 or 60 months), all the remaining balances on your debts are wiped out, just like in chapter 7.

You might wonder how that can be fair to your creditors, but the answer is easy, and the law gives it full recognition – your creditors were slated to get absolutely no payment in a chapter 7, weren’t they?  So how could it be unfair to pay them a dividend consisting of what you can offord, in a chapter 13?  This is especially true when the law requires that you pay what you can afford into your chapter 13 plan, after paying all your reasonable monthly living expenses.

And no, there isn’t any catch-22 lurking in chapter 13.  Congress would not have bothered to enact chapter 13 if you had to pay more than you could afford as a monthly payment, because no one would be ever file chapter 13 if that were so.  Also, lawyers wouldn’t steer clients into chapter 13 if the monthly payments were not possible for clients living in the real world to pay.

So think about it — maybe chapter 13 wouldn’t be such a bad idea for you after all.  There’s no means test to worry about, you can get rid of more debts in a chapter 13, and your case is often subject to less scrutiny by creditors than a case under chapter 7.  And whatever your reason for choosing chapter 13, you can be sure it will solve your debt problems just as effectively as a chapter 7.

Photo used by permission from Fried Dough.

Being a judge isn’t a popular calling lately–at least during the Republican Presidential primary season. Courts are blamed for everything that ails society.

For example, Republican Presidential contender Rick Santorum laid out his view that the judicial branch of government is the least important branch.  He explains his view by stating:

Our founders intended for them to be the least consequential of the three branches of government . . . How do I know that for a fact? Because it’s Article III. Article I is Congress, Article II is the president and Article III is the courts. If it was the most important, they wouldn’t have put it third.

He apparently pulled out his pocket Constitution in support of the argument.  The late Senator Sam Ervin would have been proud–well, maybe not.

And as for the 9th Circuit Court of Appeals, Santorum is really fed up.  That Court, he says, should be shipped to Guam. I don’t know what the 9th Circuit Court of Appeals has done to deserve this, but I think it would certainly be unfair if we didn’t stop to ask the people of Guam if they want the 9th Circuit Court of Appeals. Don’t they have any say in this? Apparently not, according to Santorum.

But Santorum’s flawed–and downright bizarre–logic that the last mentioned is the least important got me thinking.

First, I wondered about where all that “checks and balances” stuff I learned about in Mrs. DeVore’s 8th grade civics class was going–apparently to Guam or some other place. Then I also wondered what this means for bankruptcy courts. Where do the bankruptcy courts fit in?

Clearly, bankruptcy courts are number 1 since they are Article I courts.  (Or do I say, “Bankruptcy courts are number I”?)

How do I know this? The U.S. Supreme Court said it in Stern v. Marshall.  Okay, we knew the Article I thing before that, but this decision really makes it clear. (Ignore the fact that the Supreme Court is an Article III Court and therefore part of the least important branch of government.)

“But Stern limits the jurisdiction of the bankruptcy courts,” you say.  True, but let’s not get bogged down in details.  I’m a glass-half-full kind of guy and think that bankruptcy judges should take some comfort in the fact that they are in first place in the “What-Branch-Matters-Most” contest.

So I say to bankruptcy judges: Hold your heads high! You really are number 1!

Postscript: Guam is, of course, a U.S. Territory. It also turns out that Guam is in the 9th Circuit already. Whether Guam should have more of the 9th Circuit than it already has will probably be fiercely debated during primary season among those candidates seeking to lead the free world. Still, it is the position of this author that Guam should be consulted prior to any changes being forced upon it it. Perhaps instead, the circuits should be changed so that, for example, the 9th Circuit switches places with the 6th Circuit, and so on. Of course, the question then becomes, do the Guamanians want the 6th Circuit?  If not, would anyone else want the 6th Circuit? Santorum may have opened up a real can of worms.

Still, Santorum’s views seem workable compared to those of Republican contender Newt Gingrich. Gingrich advocates sending U.S. Marshals to arrest judges–Article III judges, I’m sure, so bankruptcy judges relax!–and have them brought to Congress to justify their decisions in Congressional hearings. This can’t happen for a variety of reasons–most notably that we are not Nazi Germany–but still, it illustrates the point. 

I saw that Katie Porter over at Credit Slips posted a blog that new, simplified forms for consumer bankruptcy cases are being considered by the Bankruptcy Rules Advisory Committee.  The proposed forms can be accessed here and start at page 189 through page 315.  One item of note is that the forms are being divided into two categories:  a set of forms for “business” cases and a set of forms for “consumer” cases.

I looked through the forms and it seems as if the forms for “consumer” cases are designed to make it simpler for people to file bankruptcy without the assistance of an attorney.  I fully acknowledge that people are entitled to represent themselves in legal proceedings, of which, bankruptcy is one.  However, it bothers me a bit that the forms are billed as “simple”.  Without expressing an opinion on the forms themselves, bankruptcy is not a “simple” legal proceeding.

As a case in point, I met with a client who was elderly and could exempt $60,000 in his $80,000 house.  He also had a mortgage on his home of approximately $11,000, a judgment lien of about $11,000 against the house along with $50,000 in unsecured debt.  He stated that he did not wish to have his house involved in the bankruptcy and that his adult children would pay off the mortgage.  That way, when he came out of bankruptcy, he would have a place to live and not have to worry about creditors again.  Right?

Not exactly.  If the debtor paid off his mortgage, he would then have excess equity in his home.  The chapter 7 trustee would then seek to either sell the debtor’s home or demand the excess equity so that funds could be distributed to unsecured creditors.  Also, the judgment lien would be entitled to payment in full because the liens plus exemptions are less than the value of the property so the judgment lien could not be avoided.  The debtor has just put himself into a mess.

However, a bankruptcy lawyer could have avoided this mess.  The bankruptcy lawyer would tell the debtor not to pay off the mortgage but to file bankruptcy anyway.  This way, the the debtor’s allowed exemption and the liens against the property including the judgment lien exceed the value of the property (the debtor’s interest) so the judgment lien can be avoided in its entirety.  That is, the judgment lien is removed (or avoided) and treated as just another unsecured creditor.  The trustee has no excess equity to go after and the case is treated as a “no-asset” case.  The debtor’s debts are discharged, including the judgment lien, and his only debt remaining would be his mortgage debt.  Then, after the bankruptcy case is over, if the adult children want to pay off the mortgage, they are free to do so.

This example, I’m sure, occurs many times every day across the country.  It is the difference between obtaining the assistance of an experienced practitioner with trying to go it alone merely to save a couple thousand dollars in attorney’s fees (the adage penny wise but pound foolish springs to mind).  Simplified bankruptcy forms do not “simplify” the Bankruptcy Code and there are many, many pitfalls that a consumer may fall into if they try to go it alone.

Even though I applaud the efforts of the Rules Committee to “simplify” the forms (particularly the “consumer”/”business” distinction), simple forms should not be construed by a potential consumer debtor that bankrupcy is an easy process to navigate.  In that respect, an experienced bankruptcy attorney will be your best investment.

It is a real accomplishment to complete your Chapter 13 case.  In an environment where jobs come and go, unexpected expenses can pop up and more than two-thirds of all Chapter 13 plans fail, anyone who fulfills the terms of his Chapter 13 plan should take pride in this milestone.

Be aware, however, that making trustee payments for five years may not be enough to get your Chapter 13 discharge.  As I previously wrote on this blog, every Chapter 13 debtor must obtain a Financial Management certificate and submit through counsel a certificate of completion for this post-filing educational course.  If you do not submit the certificate, your case will be closed without the issuance of a discharge thereby potentially leaving your exposed to post-bankruptcy collection actions.   If you choose to ask the court to reopen your case so that you can file the financial management certificate you will incur additional time and cost.

A second possible hurdle arises from Bankruptcy Code Section 1328.  This Code Section precludes the judge from issuing a discharge if you do not certify that all domestic support obligations that have come due during the pendency of your case have been paid.   In the Northern District of Georgia, where I practice, every Chapter 13 debtor receives a Section 1328 certificate to complete as their case winds down.

If you state on your certificate that a domestic support (i.e. child support or alimony) was not paid, then the judge will have to hold a hearing to determine whether your failure to pay is beyond your control or not.  If the judge finds that your failure to pay these domestic support obligations is not excusable, your case will close and you will not get your discharge.

Sometimes it can be tempting to ignore an issue if no one is saying anything and no pressure is being applied.   In the case of child support in Chapter 13 you cannot ignore the obligation even if the custodial parent or child support enforcement is saying and doing nothing.  Otherwise you could end up with a sterling five year payment history in your Chapter 13 but no order of discharge to show for your efforts.

Happy Groundhog Day!

Lately the same refrain keeps cropping up in my practice:  why did you wait so long?  I understand that very few people want to file bankruptcy, and I agree that the decision to file bankruptcy is an important one.  And while it is common to hear that bankruptcy should be a last resort, it is also true that you can wait too long.  So, in honor of Groundhog Day, while we wait to find out when spring will arrive, here are some problems that might crop up if you wait too long to file bankruptcy.

You exhaust your reserves.  This is probably the most common consequence of just hanging on too long, trying to avoid bankruptcy.  You are trying to keep up with mortgage payments or credit card payments after a job loss, illness, divorce, or the like, and you exhaust your savings, tap into your 401k or IRAs, incur taxes and penalties as a result, which makes the whole financial situation still worse.  You use up the resources that would make it easier to make a fresh start, and make it harder to recover financially.  It is easy, and probably natural, to just try to hang on and keep doing what you have always done.  It’s smarter to take an honest look at your situation and ask yourself whether you are going to be able to deal with your debt without some help.

You may lose control of assets that might otherwise be used to help you make a fresh start.  That is often the case when creditors sue you and obtain judgments against you.  A judgment becomes a lien against real property, which can be especially significant if you have investment property, or have inherited property, or, God forbid, you are holding title to family property to “keep it safe.”  The effect of a judgment on property depends on several factors, including where the property is located, whether you are entitled to claim it as exempt, and even what state you are in, but you shouldn’t wait until its a done deal to figure out what the effect will be.  At that point it may be too late.

Other issues can be decided in a law suit that will affect your ability to make a fresh start.  The amount of a debt may be determined to be higher than you anticipate, for example, by the addition of attorney fees and expenses.  Or, the court may enter a finding a fraud against you that will allow a debt to survive bankruptcy.  Other findings may also impact your fresh start as well, and if you are already in financial distress, you may find that it is prohibitively expensive to fight a lawsuit, or worse, several lawsuits.

Don’t wait until the bitter end to consider bankruptcy, and seek out competent legal advice about your bankruptcy options.   You might think that if you go see a bankruptcy lawyer that lawyer is automatically going to recommend bankruptcy, but that is not the case.  Most reputable bankruptcy lawyers are also knowledgeable about alternatives, and will advise you about those options, as well as tell you what may happen if you do nothing.  I regularly advise clients against filing bankruptcy (and sometimes that advice is because there is nothing left to protect).  You have nothing to lose, and quite a bit to gain by talking to someone as soon as you recognize that there is a problem, rather than waiting until you have no options.