Law Office of Anna Sarrazin

Which of your debts are actually discharged in bankruptcy?

 Once your discharge is granted–there is frequently confusion as to which of debts were in fact discharged in the bankruptcy.  

The Discharge Notice

When the discharge is entered in a bankruptcy case the only document that is sent out by the court is a 2-page document that generically states that “the debtor is granted a discharge”.  The second page has a generic lists of debts are usually discharged, and which are not, but does not specify which debts in your particular case has been discharged.

Figuring Out Which Debts Are Discharged

The reason it does not state which debts are discharged is that it is simply impossible.  The bankruptcy code provides numerous exceptions to which debts are discharged.   These exceptions are codified in section 523 of the Bankruptcy Code.¹   Some of these exceptions, such as debts incurred through fraud require the creditor to actively object  within a very specific time frame,  and prevail at trial, in order for the debts to not be discharged.  But many others are automatically not discharged if certain (and in many cases very complicated) conditions are met, and those conditions frequently have many exceptions of their own.  A good example of this is tax obligations.   For a quick look at how income tax dischargeability is determined, click here.

A lot of the criteria for determining whether a debt is discharged is subject to argument and can only be decided by a Judge if brought in front of the judge by one of the parties specifically.  Without that, the best the court can do is issue a general discharge that applies to all those debts which do not have a specific exception from discharge in the bankruptcy code.

Consult with your attorney.

The bottom line is that most debts, such as credit card, medical, repossession and foreclosure deficiencies,  are in fact discharged.   But you need an attorney to really analyze your facts, preferably before you filed your case,  to let you know which debts might not have been discharged.  Ultimately, if there is a dispute, it will need to be decided by a Judge at trial.

How is my spouse affected if I file bankruptcy alone?

Since a bankruptcy can be filed by one spouse without the other, this is one of the most common bankruptcy questions. There are several aspects of the answer.

A bankruptcy filing by one spouse does not bring the other spouse into bankruptcy. Neither does the bankruptcy of a spouse give the non filing spouse the full protection of the automatic stay or the bankruptcy discharge.

Joint debts

If you and your spouse are jointly liable to a creditor, the bankruptcy of one spouse does not relieve the other of paying the debt. Upon a bankruptcy, the creditor may look to the other spouse for payment, unless the bankruptcy case is under Chapter 13. If the debt is a consumer debt to be paid 100% through the Chapter 13 plan, the co debtor is protected by the codebtor stay in §1301.

Generally, marriage alone doesn't make both spouses personally liable for a debt. Liability on contracts such as home loans and credit cards arises by agreement between the creditor and the debtor. Only persons who signed the loan or credit application are liable for the debt.

A joint tax return, however, makes both spouses liable for the total of the tax due.

If you have joint debts, you can expect the bankruptcy to be noted in some way on the credit record of the non filing spouse. There is uncertainty in the law at the moment as to whether it is proper to mention the bankruptcy of one debtor on the credit report of a debtor who is not in bankruptcy.

Joint property

If you and your spouse own property together, that property may be included in the bankruptcy estate and be potentially available to pay creditors. In community property jurisdictions such as California, both halves of the community property comes into the estate: all of the community property is available to pay community creditors and any other creditorsof the spouse who has filed. So the filing of one spouse could have significant impact on the other.

 

Community property discharge

When one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse's bankruptcy discharge. Section 524 of the Bankruptcy Code provides that any community property that the filing spouse and the non filer acquire after the bankrutpcy is protected from creditors of the non filer who held a claim against the non filing spouse as of the date of the filing.

A creditor with a claim against the non filing spouse can only collect its debt from the separate property of the non filing spouse. In California, that separate property is comprised of assets acquired before marriage; assets acquired by gift during marriage; or assets acquired by inheritance.

Creditors, despite the fact that the community property discharge has existed since at least the passage of the Bankruptcy Code in 1978, have a hard time believing that someone in a community property state gets the benefit of their spouse's bankruptcy discharge, but that's the law.

Credit reports

Each person has (or is supposed to have) a separate credit file for credit reporting purposes. Your debts, if yours alone, are not supposed to show in your spouse's credit file. Similarly, your bankruptcy should not show in your spouse's file if you have no joint debts.

Even so, it pays to monitor your credit file, since credit reporting, like so much else in life, does not always follow the law.

Future credit

The bankruptcy of one spouse will have some effect on the credit worthiness of the non filing spouse if they apply jointly in the future for a loan. The loan grantor will consider the credit rating of both applicants in making a lending decision. More on post bankruptcy credit.

Understanding the New Bankruptcy Law

On October 17, 2005, a new bankruptcy law went into effect. The purpose of the bankruptcy was to restore some fairness into the bankruptcy law in terms of who could qualify. Congress had become convinced that many people were taking advantage of the system under the old law in order to get out of paying debts they could afford to repay. The new law makes it more difficult to qualify for a bankruptcy, but it also places a heavier responsibility on the bankruptcy attorney.

The new bankruptcy law changed the old law in several important areas. For one thing, the new law resulted in more people qualifying for a chapter 13 filing rather than a chapter 7 filing. Under the chapter 7 filing, all of the debtor assets are liquidated and used to repay the creditors. In many cases, debtors have no assets except their house or car and so the creditor gets very little or nothing. A chapter 13 filing is a repayment plan which forces the debtor to repay as much debt as possible between 3 to 5 years.

The new bankruptcy law also established new calculation rules and made it more difficult to use the homestead exemption. The new calculation rule uses the IRS standard of living numbers to determine your net income figure. The IRS living standard amounts usually are often lower than what you actually spend. The homestead exemption refers to the fact the new law has placed greater restrictions on which state exemption you can use as determined by your length of residence. A bankruptcy attorney will carefully determine the status of your homestead exemption during the filing process.

Another addition to the new bankruptcy law is the requirement that debtors take a money management course and get 90 minutes of credit counseling. This process has been streamlined in that there are many ways to fulfill these requirements online.

One of the major changes in the new bankruptcy law is the establishment of an income means test. The means test is how the courts will determine if you should be allowed to file a chapter 7. Under the means test, your income will be compared to the state median income in the state in which you live. Then your income will also be used in a formula that will determine if you can pay at least 25% of your net income to pay off unsecured debt. If you can, and your income is over the median, then the court will probably make you file a chapter 13 unless you can prove you have unusual circumstances.

This is just a quick snapshot of the new bankruptcy law changes effective October 2005. Of course, there are many other complex aspects to the law that only an attorney is qualified to interpret. Though the new law is more stringent than the old, it still gives millions of people a fresh start.

Chapter 13

Chapter 13 is commonly referred to as an “Installment” or “Restructuring” Bankruptcy.

Chapter 13 bankruptcy is designed to help you keep your home, vehicle and other secured items so you can repay them over time.  What we do is set up a more reasonable arrangement through the court, called a “payment plan” for you so you can stay on top of your current monthly payments. This will help you to pay your bills easier.

Each month you make your single payment to the trustee. Under your plan, all of your creditors are given a priority and the trustee makes the payments creditors each month. Often at the end of the payment plan, which typically last three to five years, there is not enough money for all of the creditors. This can sometimes lead to the court stripping off a second mortgage or leaving many of your unsecured creditors such as credit card companies out of your life, but without them receiving a dime.

You may want to consider a Chapter 13 bankruptcy if any of the following describe your situation:

• You have had a sudden job loss or unexpected medical bills that have caused you to fall behind on your bills.

• You can afford your normal monthly payments but just cannot catch up on your past-due payments.

• You can afford to make some payment toward your bills but are unable to pay as much as your creditors want.

• Your home is facing foreclosure and you want to continue living there

While a Chapter 7 bankruptcy eliminates your debts quickly through a liquidation, the Chapter 13 bankruptcy is designed to help you keep your property while gradually catching up on past-due balances. Why feel the stress of a foreclosure or repossession when a Chapter 13 bankruptcy may take this pressure off of you by allowing you to catch up on your past due payments in a more reasonable repayment plan without losing your home or car?

To learn more about the services offered by The Law Office of Anna Sarrazin contact us on line a www.sarrazinlawoffice.com  or call us at (510) 834-7443.

Filing Taxes After Bankruptcy: Is Discharged Debt Income to You?

I received a 1099 from a Creditor After My Bankruptcy Case was Completed:  Is this Taxable Income?important question

A very I’m often asked this time of year by my clients is what effect does their bankruptcy have, if any, on their income taxes.    The exact question is whether or not debts discharged (forgiven) in a bankruptcy case must be included as income on federal or state income tax returns.

This often arises when a client receives a Form 1099 statement from a creditor after their discharge in bankruptcy has been granted.    Creditors send 1099 statements when they are required to, but this does not necessarily mean that the amount on the 1099 form must be included in the taxpayer’s gross income for that year.

Debts Discharged in Bankruptcy are NOT Included in the Taxpayer’s Income

In general, outside of bankruptcy, if a creditor forgives a debt that is owed by you, then that may need to be included in income.   However,  there is an exception to this rule pursuant to Internal Revenue Code section 108 which provides that  debts “forgiven” (i.e. discharged) in a bankruptcy case do NOT need to be included as income for forgiveness of debt.

However, even though the discharged debts are not part of a debtor’s gross income, the amount discharged can be required to reduce any tax attributes that the debtor/taxpayer may have, such as net operating losses, capital loss carryforwards, basis reductions and others.  It is important to discuss these issues with your accountant–preferably before filing bankruptcy, but certainly after.

FILE IRS FORM 982

The correct way to ensure that you do not have to pay taxes on any debt “forgiven” in bankruptcy, and properly allocate any tax attributes, is to file IRS Form 982 for the tax year in which you received your bankruptcy discharge.  See IRS Publication 4681 for detailed information explaining all the above.   Many people and even accountants are unaware of this form and the importance of filing it.   Be proactive and mention it to your accountant before filing your returns (or, file it as an amendment to your return).

Lien stripping in bankruptcy

Liens can be stripped off of the debtor's assets in a Chapter 11 or Chapter 13 when the equity in the asset, after deducting senior liens from the property's current market value, is less than the amount of the unsecured portion of the lien.

There is a special exception to this concept that limits lien stripping when the lien is a voluntary lien, like a mortgage, on property that is the debtor's principal residence. Under this exception, voluntary liens on a home can be stripped off only if there is no equity in the property at all, after totalling the senior liens, to which the lien in question could attach.

Unfortunately Congress has thus far failed to change to bankruptcy law to allowing the modification of home mortgages by reducing the amount of the lien to the current value of the property.

Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches.  To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured.

Contrast this procedure to lien avoidance pursuant to § 522, where only judicial liens such as judgment liens (or voluntary liens on household goods) can be avoided if the property would otherwise be exempt.  

Liens secured by vehicles

The most common application of lien stripping is the reduction of car loan liens to the present value of the car.  Thus a lender holding a $12,000 claim secured by a car now worth $10,000  has a secured claim of $10,000 and a unsecured claim for $2,000.  Two thousand dollars of the lien may be stripped off the asset (the car) in a reorganization.  The plan must provide for payment in full of the secured portion of the debt;  the unsecured portion can be paid little or nothing along with other unsecured claims.

Recent changes to the bankruptcy law attempt to limit lienstripping on vehicles purchased within 910 days of the bankruptcy filing. The amendment says that " §506 does not apply" to such vehicles. The intent was to compel payment of car loans made within 2 2/3 years of the filing payable in full, despite the fact that the collateral is often worth thousands of dollars less than the debt it secures. More on 910 cars.

Tax liens

Tax liens can be stripped off in reorganization proceedings (Chapters 11 and 13)  to the extent that the lien does not attach to equity in property.  Tax liens can't be avoided in Chapter 7 on the grounds that they impair exemptions because they are statutory liens, not judicial liens. 

If the tax underlying the lien is dischargeable in the Chapter 7, the bankruptcy court can determine the amount of the lien that is secured at the time of the filing. Payment of that sum entitles the debtor to the release of the lien.

What is Debt Reaffirmation?

Reaffirmation of old debt is rarely a wise choice.

Two things generally stop a creditor from being able to force collection of a debt: bankruptcy and time.

But sometimes, due to guilt or the coaxing of a debt collector, consumers are tempted to revive an uncollectable debt and agree to pay it. In the debt industry, it's called "reaffirmation."

Reaffirming old, dusty debt is usually not a wise move.  As a general rule for consumers, the presumption should be that it's never a good idea to reaffirm debt, particularly in bankruptcy.

Creditors encourage reaffirmation
Before and during a bankruptcy, creditors will encourage you to reaffirm your debts. What that means: This particular obligation won't be included in bankruptcy's debt-cleansing process. You'll go into the bankruptcy with the debt and, when you finish, you'll still have the debt. (See State by state bankruptcy filings and Bankruptcies creeping upward as economy sours)

It never makes sense to reaffirm a debt for anything except, conceivably, a car or mortgage if you want to keep your home. Contrary to popular belief, people who go into bankruptcy don't want to be there. Out of a feeling of obligation, often they will attempt to reaffirm too much, and the remedy process that bankruptcy provides is oftentimes not best for the individual.

In bankruptcy, court's OK needed to reaffirm
For that reason, if you want to reaffirm a debt in bankruptcy, you have to get the move blessed by the court. Ask yourself: Will you really be able to afford it? And do you have access to a less expensive option?  

If it was a bad deal before the bankruptcy, it's probably a bad deal now. 

With an auto loan, the court is more likely to approve the request because you need transportation. But try to reaffirm a frivolous purchase and you might have a problem."

There is one benefit to reaffirming a debt: If you reaffirm one debt and maintain a good payment history on it, you'll at least have one current loan showing in your credit report. That can build back your good credit that much faster after bankruptcy.

The car question
If your sole concern is keeping your wheels, reaffirmation isn't always necessary.

Some car companies, especially some of the foreign automakers, won't require reaffirmation.  As long as you keep making payments, you keep the car. A bankruptcy attorney can advise you as to which companies require reaffirmation.

"Japanese carmakers, for example, have figured out it's better to keep people making the payments than to get the car back.

After bankruptcy, if a collector contacts you about one of your discharged debts, call your bankruptcy attorney. The tactic is not legal and could signal a scam or illegal collection attempt.

Reaffirmation by any other name ...
Outside of bankruptcy, reaffirming a debt goes by many different names: reviving, re-establishing and, sometimes, re-aging. What it means: Even though the debt is so old that it's passed the statutes of limitations so the creditor can't sue to force payment, you have decided to acknowledge the debt, restart the statute of limitations on collection, and give the creditor every opportunity to use the legal system to obtain the money through judgments, liens and garnishments.

Sound like a smart financial idea? Probably not, according to most experts.

If you make a payment, any payment, you re-establish not only the debt, but the statute of limitations.  And they can sue you.

Purchasing debt for pennies and trying to collect is a multibillion dollar industry, and a new phenomenon within the last several years.

For debt buyers it's a very profitable lottery ticket. "And they don't have to collect a lot to make a lot of money."

What you need to know: The statutes of limitations for forced collection varies from state to state. For credit cards, the period is usually between three to six years. While the rules may differ slightly in each state, the clock will usually start when the consumer goes into default, usually about 30 days after the last payment.

A bad debt can also stay on your credit report for seven years. Because most creditors wait six months to charge off a debt, that winds up being seven years and six months after the first delinquency. The clock starts when the original account goes to collections (internal or a third-party) or is charged off (whichever is earlier), according to the Fair Credit Reporting Act. Even if the debt is sold and resold to third-party collectors, it still has to come off your credit report when the original debt reaches its expiration date.

Only in writing
In some states, acknowledging the debt in writing (or even by phone), will reset the statute of limitations on forced collection. This has led to a practice among third-party collectors called "duping," where the debt collector tricks the consumer into reviving a debt after the statute of limitations has expired.

One method: The consumer receives a letter informing him of a debt and neglecting to mention that the statute of limitations has already run out. At the end of the letter are multiple choice boxes: a) I owe the money, and here's the check; b) I owe the money, and here's a partial payment, or c) I owe the money, but I can't afford to pay right now. Check any box and you've just given the collector the means to sue you, he says.

Consumers could also get a phone call, with a very friendly debt collector who's very willing to help work out payment. They will be real solicitous of getting you to pay anything.

So if you're considering settling an old debt, don't admit to anything and get everything in writing before you pay the first dollar.

In collections, "verbal promises are often broken and difficult to prove after the fact.

What you want in writing is an assurance that the person you are dealing with has the authority to negotiate and that the amount you agree to will satisfy the debt in full. Also be clear on the language they will use to report the item to the credit bureaus. Have your agreement specify the original creditor, as well as the account number and delinquency date, so there's no question later over which debt you've paid.

But, too often, the consumer who is smart enough to demand a written agreement is forced to walk away from the debt. "Most collectors won't sign a release no matter what the circumstances.  If you're serious about repaying an old debt, contact an attorney.

You may find out that the move could actually worsen your financial situation or put critical assets, like a home, at risk. You could also discover that the clock for collection has expired or that the item will soon come off of your credit report.

Collectors sometimes try to take advantage of the notion that the debt still exists, however, in many cases, the consumer would be better off using their dispute rights to deal with the issue.

I would talk with an attorney to see if there's another way. 

 

Some Facts About Bankruptcy

BANKRUPTCY

Though it may not sound pretty, Bankruptcy is one of the quickest and most hassle-free ways to truly achieve a financial fresh start. From movie stars to business moguls to former professional athletes and everyday people, bankruptcy has helped millions of Americans to get back on track.

At the Law Office of Anna Sarrazin, we are very proud of our ability to help people reinvent their financial future through the Bankruptcy process.

Bankruptcy Misconceptions

Often times our clients have misconceptions about bankruptcy.  In Chapter 7 Bankruptcy you can exempt many assets including cash in the bank, retirement accounts, college savings accounts and many times can keep possessions such as cars.  Chapter 13 Bankruptcy allows for a restructuring of your debt.  Chapter 13 can help strip a second mortgage on your property as well as reduce your debt oblications to something you can actually afford. 

Bankruptcy and Credit

Many of our clients will noticed that their credit scores will increase after bankruptcy. The reason for this is simple... You no longer have debt bringing down your score!  Credit card companies will even issue new credit cards within months of filing and before long you can buy a home with an FHA loan.  Without 100% of your income going to your creditors you can now afford to put money away toward that down payment for a home.

Keep these facts in mind when deciding which method of debt reductions is best for you.

The Dreaded Bankruptcy "Means" Test

Some of you may be wondering what on earth is the "dreaded means test."  Well the new bankruptcy laws require that the potential debtor in bankruptcy must show whether or not he or she has the "financial means" to either stay off having to file bankruptcy; or whether he or she can "pay a percentage of the debt back to his or her unsecured creditors by comparing the person's monthly income and expenses to determine if he or she has the "financial means" to pay, for example, 50% or 20% or 10% on the dollar back to the unsecured creditors; or, as is in many instances "0" percent back on the dollar to unsecured creditors.

As many of you know, one of the bankruptcy eligibility threshold factors to determine which chapter of  bankruptcy one may file under - (e.g. Chapter 7, Chapter 13 or Chapter 11) - is this dreaded “means test."  In essence, the test uses income received in the six calendar months prior to filing your case and compares that to the census bureau’s “Median Income” for your State.

For the second period in a row, and for the most part due to the declining economy, the median income has dropped for bankruptcy cases filed after October 31, 2010.  In California, the median income for a 1-person household has been reduced to $3,936 per month; for 2-persons, $5,162 and a family of 4, $6,466.  Be sure to discuss the new median income figures with your attorney to maximize your chances of qualifying for Chapter 7 if possible, or reducing your obligations in a Chapter 13 case.

For more information about the "means test" or any other bankruptcy questions you may have, either send us an email at:  attorney.anna.sarrazin@gmail.com ; or you can call us (510) 834-7443.

We appreciate your business!

 

 

Thanksgiving Post

Today is just days before Thanksgiving and I am sure all of you are looking forward to a happy holiday with family and friends. In ancient times Thanksgiving was the day in which the people celebrated "Harvest Time."  In German the word for Thanksgiving is "Ernte Dankfest,"  which literally means: "Celebration in Thanks for the Harvest." The peasant farmers, for example, would celebrate this holiday as a way of both giving thanks to the earth and the heavens and the spirits for the bountiful harvest and luscious crops as they head into the long winter months - a time where nothing grows and all are "hunkered down" in the warm corners of their abodes. They celebrate and give thanks for the blessings of a "good harvest" which will provide enough grains and nuts and fruits and vegetables to keep their village people with plenty through the long cold winter months.

Thanksgiving is really one of those special holidays! And we here at The Law Office of Anna Sarrazin  wish that you have a very Happy Thanksgiving; and that you are able to share it with family and friends.  We also send our blessings to those of you who are not fortunate enough to be with family and friends on this Special Holiday; and for those of us in harms way in strange and foreign faraway places.  Let us give thanks on this Day for all of earth and humanity! 

HAPPY HOLIDAYS FROM THE LAW OFFICE OF ANNA SARRAZIN!