What Is the Difference Between Avoiding a Junior Mortgage Lien and Discharging a Mortgage Loan in California Bankruptcy?

By Jon G. Brooks | Published: May 13, 2012
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Difference Between Discharge of Second Mortgage and Lien Stripping in California BankruptcyDepending on whether they are eligible for Chapter 7 bankruptcy or Chapter 13, homeowners who file bankruptcy in California with more than one loan secured by a deed of trust (which include home equity lines) may get very different types of debt relief when it comes to their second mortgage. Upon obtaining a bankruptcy discharge under either chapter, a California homeowner can rest assured that his recourse second mortgage loan will never be able to sue him. This is not the same thing as removing a second lien from the property, however. To understand this distinction requires some explanation of California deed of trust and foreclosure law.

Because residential foreclosures in California are nearly always “nonjudicial” foreclosures (really trustee sales) conducted by the servicer or trustee of the first mortgage lender, California’s anti-deficiency rule prohibits that lender from suing the homeowner for any balance still owed after foreclosing (a “deficiency judgment”). In other words, California homeowners who suffer a foreclosure are generally safe from further collections at least from their first mortgage lender even without filing bankruptcy. Read More »

Posted in Bankruptcy Discharge, Chapter 13 Bankruptcy, Chapter 13 Lien Stripping, Chapter 7 Bankruptcy | Tagged , , , , , | Comments closed

Keeping Student Loan Interest Rates Low Is Good, But What We Really Need Is to Reform the Law to Allow Discharge of Student Loans in Bankruptcy

By Jon G. Brooks | Published: May 2, 2012
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Student Loan Debt Ought to Be Discharged in BankruptcyIn my last post, I noted the fact that Americans are now saddled with over $1 Trillion in student loan debt, more than all of us combined owe to credit cards. And as I also wrote, Congress has made it next to impossible to discharge student loans in bankruptcy. To be discharged in bankruptcy, the debtor must prove that repaying student loans will impose an “undue hardship” (a legally opaque standard). This standard used to apply only to government backed student loans, but the 2005 BAPCPA changed this rule to likewise make private student loans nondischargeable except in the most extreme cases where debtors can prove present, and likely permanent, poverty. By placing the burden of proving the likelihood of future poverty on the bankruptcy debtor, this imposes an enormous chilling effect on debtors seeking debt relief from student loans because the debtor, who is already in bankruptcy, has to be able to afford to litigate this issue with the student loan lender. The absurd result is that it is easier to obtain a bankruptcy discharge of back income taxes owed to the federal government than it is to discharge private student loans owed to Citibank.

Keeping the present interest rate at 3.4% for federally subsidized Stafford loans rather than allowing that rate to double to 6.8% in July, will not prevent the coming crisis in student loan defaults. That won’t happen without amending the Bankruptcy Code to offer a common sense approach to debt relief from student loans for a greater number of bankruptcy debtors. But keeping the interest rate low on federal student loans will help curb student loan debt balances from ballooning even further than they otherwise will if the rate is allowed to double. Read More »

Posted in Bankruptcy in General, Bankruptcy Reform, Student Loans in Bankruptcy | Tagged , | Comments closed

The Bankruptcy Code’s (and the Courts’) Treatment of Student Loans Is the Gift to Lenders That Keeps on Giving

By Jon G. Brooks | Published: April 29, 2012
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Discharging Student Loan Debt in California BankruptcyIn 1976, Congress amended the Bankruptcy Code to make government backed student loans nondischargeable in bankruptcy unless the debtor could prove that being forced to repay her student loans would impose an “undue hardship.” This exceptional treatment of student loan debt ran counter to the general principle of bankruptcy law to favor a fresh start for the debtor and constituted special, preferential treatment for student loan lenders. In fact, this change was a solution in search of a problem, as the congressional record from the time shows that Congress was relying on just a few anecdotes of perceived abuse by students who had never attempted to repay their loans and ignored the empirical evidence then supplied by the General Accounting Office that less than one percent of student loans had previously been discharged in bankruptcy.

In 2005, when Congress passed the sweeping pro-creditor changes to bankruptcy law contained in the BAPCPA, Congress made even private student loans nondischargeable without a showing of “undue hardship.” This subversion of the Bankruptcy Code’s favoring of discharge of prebankruptcy debts was nothing but a shameless giveaway to the private student loan industry, according student loan lenders special treatment not given to any other type of creditors. Moreover, because “undue hardship” was never defined by Congress, the bankruptcy courts were left to create their own judicial test for what constitutes “undue hardship” sufficient to discharge student loans. Read More »

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Can Income Tax Debts Be Discharged in a Chapter 7 Bankruptcy in California?

By Jon G. Brooks | Published: April 15, 2012
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Discharge of Tax Debts in San Jose BankruptcyToday is April 15, and while taxpayers get two additional days to file their income tax returns this year, today presents the perfect opportunity to discuss one of the most vexing issues in consumer bankruptcy—whether or not taxes can be discharged in bankruptcy. The short answer is that while most tax debts cannot be discharged in Chapter 7 bankruptcy, some tax debt is dischargeable, if it meets several criteria. Analyzing whether a particular individual’s tax debts can be discharged is complicated, but I’ll present the basic rules outlined in Bankruptcy Code sections 507(a)(8) and 523 as they apply to individual income tax debts.

In addition to analyzing the threshold issues in any consumer bankruptcy case, such as determining whether or not the debtor’s income is above or below her state’s median income, and if above, whether her debt is primarily consumer debt, whether she passes the Means Test, and other critical issues, individuals with tax debts arising from past unpaid state and federal income taxes need to obtain a tax transcript from the IRS and all notices they’ve received from the California Franchise Tax Board and IRS. The IRS tax transcript provides a timeline with the all-important dates when tax returns were filed, when tax liabilities were assessed, and when any tax liens may have attached. Read More »

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Why You Should Never Give Away Assets Before Filing Bankruptcy

By Jon G. Brooks | Published: April 7, 2012
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Don't Give Away Anything Before Filing Bankruptcy in San JoseMy firm offers hundreds of free bankruptcy consultations in San Jose every year, and in doing so, we’ve seen just about everything. When I review a potential bankruptcy case and the topic turns to what assets the debtor has, I’ve lost count how many times I’ve been asked, “can’t I just give this car to my son? He drives it anyway.” Here we could just as easily substitute “car” for money, time share, or parcel of land. Whatever the asset, my answer is always an emphatic “no.” You cannot give away or transfer an asset for less than it is worth prior to filing bankruptcy. Such transfers will nearly always be deemed fraudulent transfers. A fraudulent transfer—also called a “fraudulent conveyance”—can result in the bankruptcy trustee “avoiding” the transfer (suing the person to whom the asset has been transferred to recover the asset), and in some cases can even result in denial of the debtor’s bankruptcy discharge.

Bankruptcy Code section 548 (11 U.S.C. §548) defines what constitutes a fraudulent transfer. Briefly, fraudulent transfers made before filing bankruptcy come in two varieties: those involving actual fraud and those where constructive fraud is found. Actual fraud occurs when the debtor made the transfer with “actual intent to hinder, delay, or defraud” the debtor’s creditors. Constructive fraud, on the other hand, most commonly occurs when the debtor transfers an asset for “less than a reasonably equivalent value” and the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer. The Bankruptcy Code also provides for a handful of technical definitions of “insolvency” in the business context. Read More »

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Thinking About Filing Chapter 13 Bankruptcy in San Jose? Be Sure to File Your 2011 Taxes Right Now!

By Jon G. Brooks | Published: March 25, 2012
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File Taxes Before Filing Chapter 13 Bankruptcy in San Jose, CAThe deadline to file your 2011 taxes (this year we have until April 17) is just about three weeks away. It happens every year around now. San Jose Chapter 13 Bankruptcy clients need to file their bankruptcy urgently to stave off a pending foreclosure, stop a lawsuit, bank levy or wage garnishment. But they haven’t yet filed their taxes for this year. April 17 is just around the corner. Outside of bankruptcy, the taxpayer might well file for an extension for this year’s tax returns.

However, Bankruptcy Code Section 1308 (11 U.S.C. §1308) requires that a debtor in Chapter 13 Bankruptcy must have filed his or her taxes for all taxable periods during the four year period leading up to the filing of the Chapter 13 bankruptcy case. The deadline is the day before the Chapter 13 bankruptcy debtor’s first Meeting of Creditors. The San Jose Chapter 13 trustee will file a motion to dismiss a Chapter 13 bankruptcy case if the debtor has not filed his or her taxes by the Meeting of Creditors. While we may be able to obtain a brief extension on this requirement, no Chapter 13 bankruptcy client should count on it! Read More »

Posted in Bankruptcy and Taxes, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy | Tagged , | Comments closed

Finally Found a Job? Now May Be The Best Time to File Bankruptcy

By Jon G. Brooks | Published: March 19, 2012
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Stop a wage garnishment in San Jose by Filing BankruptcyAs the recession has worn on, prolonged economic hardship has sometimes led people to feel that even bankruptcy will not offer much immediate relief. In the last year, I’ve met with an increasing number of folks considering filing bankruptcy in San Jose, who decide to put off filing despite their eligibility for Chapter 7 bankruptcy because they feel so defeated that they cannot even muster the hope and energy required to file for bankruptcy. That may sound counterintuitive, but seeking a fresh start free from debt through bankruptcy is an act of hope for the future. The fresh start offered by bankruptcy, particularly Chapter 7, is the light at the end of the tunnel.

Sadly, some have been unemployed for so long now that their unemployment benefits have run out. They may have already lost their home to foreclosure, and are in many cases living with parents, adult children, and even ex-spouses. Some of their creditors have already sued them after many months of nonpayment, but so what? They have no wages to garnish, no bank account to levy, and no property to attach with a lien. They are effectively, for the time being, “judgment proof.” Why even bother filing bankruptcy now? Read More »

Posted in Bankruptcy and Employment, Bankruptcy Basics, Chapter 7 Bankruptcy | Tagged , , , , , | Comments closed

Can I Get a Waiver of the Court’s Filing Fee if I File Chapter 7 Bankruptcy in San Jose?

By Jon G. Brooks | Published: March 10, 2012
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Waiver of Filing Fees in Chapter 7 bankruptcy in San JoseThe Bankruptcy Court’s filing fee for Chapter 7 cases, which is currently set at $306, can be waived by the court pursuant to 28 U.S.C. §1930(f). However, whether or not a debtor filing Chapter 7 bankruptcy in San Jose will be granted a fee waiver depends not only on the debtor’s ability to prove that he meets the criteria established in the Code; it also depends on the judge’s discretion. In order to obtain a waiver of Chapter 7 filing fees, the debtor must prove two things. First, the debtor must show that his income, together with the income of his spouse and any dependents, is less than 150% of the current official poverty line for the debtor’s family size. Second the Chapter 7 bankruptcy debtor must persuade the judge that she is unable to pay the Court’s filing fee in installments. The “official poverty line” for purposes of a Chapter 7 bankruptcy fee waiver is that published by annually by the U.S. Dept. of Health and Human Services (DHHS).

The Chapter 7 filer who seeks a fee waiver must file Official Form 3B together with his Chapter 7 bankruptcy petition and schedules. The bankruptcy judge will then rule on whether the Chapter 7 debtor may proceed “in forma pauperis” without paying the filing fee, or whether the Chapter 7 debtor must pay the fee in installments (usually four), or whether the debtor must pay the fee in its entirety promptly or have her case dismissed. Read More »

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Do I Need to Answer a Lawsuit if I’ve Decided to File Bankruptcy in California?

By Jon G. Brooks | Published: March 4, 2012
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Should You Answer a Lawsuit Before Filing Personal Bankruptcy in San Jose?As with so many other questions pertaining to bankruptcy law, the best answer to the question of whether a person intending to file bankruptcy must file an Answer to a new civil suit is: “it depends.” I am often asked by the prospective client considering filing personal bankruptcy whether he should first go ahead and file an Answer to a civil lawsuit. Most often this person has recently been served with a summons and complaint filed in Santa Clara County Superior Court or another Bay Area superior court. Assuming that the individual has been properly served, a defendant in a California civil suit must file a formal Answer in the court where the complaint was filed within 30 calendar days of being served. If a defendant fails to file an Answer within this 30-day period, the plaintiff may first enter the defendant’s default, and subsequently obtain a default judgment against the defendant. The problem arises where the person is unable to file bankruptcy within this short timeframe because, for example, there has been a preferential payment to an insider, or a fraudulent transfer, and the debtor needs to allow more time to pass before filing bankruptcy.

Assuming the client is ultimately eligible for bankruptcy relief, most civil judgments in California can be discharged in bankruptcy. If that debt would otherwise be dischargeable, the mere fact that the plaintiff obtained a court judgment against the debtor does not change the dischargeability of the debt. However, it is always important to remember that bankruptcy only discharges personal liability—a bankruptcy discharge by itself does not remove liens from property. If, for example, a debtor allows a judgment creditor to obtain a judgment and then record a judicial lien against the debtor’s home, then it may or may not be possible to remove that judgment lien in the debtor’s California bankruptcy. A judgment lien can be avoided by the debtor in Chapter 7 bankruptcy only to the extent that lien “impairs” the debtor’s homestead exemption. Read More »

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California’s “Wild Card” Exemption Protects Miscellaneous Assets in Chapter 7 Bankruptcy

By Jon G. Brooks | Published: February 20, 2012
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California Chapter 7 bankruptcy wild card exemptionMyths and misunderstandings about bankruptcy abound among the general public. In fact, misinformation about bankruptcy law is so prevalent that it often seems that I spend much of the time I offer in free bankruptcy consultations just dispelling such myths. Countering bankruptcy myths served as my major motivation in starting this bankruptcy blog.

One of the most common myths surrounding bankruptcy is the idea that one cannot file Chapter 7 bankruptcy if he has a home, a car, any savings, or any assets at all. Or, put another way, that if he does file Chapter 7, he will lose all of these assets to the bankruptcy trustee. Well, I’m here to tell you that it just isn’t so. Everyone filing Chapter 7 bankruptcy in California is entitled to claim assets up to certain values as exempt from seizure by the bankruptcy trustee. In California, we have two sets of such exemptions available in Chapter 7 bankruptcy—the “704″ or “homestead” exemptions and the “703″ or “wild card” exemptions. Ever since home values in the Bay Area began their precipitous decline, however, we rarely need to claim the homestead exemptions because our Chapter 7 clients rarely have any home equity left to protect. So, in this post I’ll focus on the California wild card exemptions. Read More »

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