To download the pdf version, click here. 

Marriage is really important in bankruptcy and one of the most complicated and confusing areas of bankruptcy practice.

Can one spouse file without the other spouse?

In short, yes.  But your spouse’s income, expenses and property need to be accounted for in the bankruptcy filing.  In California we have two different ways to exempt and protect your property (that are supplemented by other state and federal protections). The majority of our exemptions are found under CCP 703 and CCP 704.  Those are California codes that permit people to protect and keep different types of property, such as your home, bank accounts, retirement or cars.  If you file bankruptcy and use CCP 703 exemptions, your non-filing spouse must sign a waiver permitting you to use these exemptions.  This can be difficult in circumstances where you are separated, estranged or your spouse is otherwise not cooperative.  No spousal waiver is required to use CCP 704.

All community property is included in the bankruptcy.

California follows community property rules.  With a few exceptions, that means that all property acquired during the marriage belongs to the community.  Even if only one spouse files, all community property goes into the bankruptcy estate.  The instant you file bankruptcy, a “bankruptcy estate” is created; all property you have an interest in goes into this estate.  In Chapter 7, the trustee controls the bankruptcy estate.  That means upon filing, all community property belongs to the trustee, so you need to understand the values and scope of the community property.  But by careful planning and wisely using the exemptions mentioned above, the trustee won’t be able to take any of your property.

One of the worst things to witness at the hearings with trustees is a spouse that files bankruptcy on his or her own without understanding community property (among many other things, but that’s another topic).  They leave out their spouse’s bank accounts or believe that having property titled in the non-filing spouse’s name only means it can be excluded from the bankruptcy.  This can lead to devastating results.  Part of your attorney’s job is planning, timing and protecting your property to avoid these problems.

Can creditors reach the non-filing spouse?

Maybe, but in a limited way.  There are two liabilities to consider: your personal liability, and liability against your property.  The bankruptcy protects all community property acquired after you file bankruptcy (think of future earnings, buying a home etc. as a married couple after bankruptcy is filed).  The non-filing spouse, however, remains personally liable.

Does the non-filing spouse have separate property?

Separate property is property acquired before the marriage or certain types of property during the marriage (such as an inheritance). If the non-filing spouse has separate property (for example, a car paid for before your marriage), or acquires separate property after marriage (such as an inheritance or because you separate or divorce), the creditors could reach this property.  If the non-filing spouse has no separate property and does not acquire any after the bankruptcy, the creditor could still potentially sue and get a judgment, i.e., personal liability.  But if there is no separate property to collect against, there is a judgment only; the creditor can’t take anything from you because future community property is protected as long as you remain married.

 Divorce is a real possibility.  Should I file before or after the divorce?

If you and your spouse are going through the painful process of separation, but it’s still amicable, you can file together if that is the best solution.  This can make the divorce a little easier in some circumstances by eliminating the debts shared by the spouses.  Given these economic times, it seems that spouses are often dividing debts instead of assets.

Timing-wise, many attorneys follow a rule that they will not file a bankruptcy for someone in a pending divorce proceeding until there is a marital settlement agreement that defines who gets what.  This is because a marital settlement agreement can alter the nature of your debts and/or assets.  Regarding debts, perhaps you and your spouse opened a joint credit card that now has a high balance.  This is dischargeable in bankruptcy.  Suppose, however, that one spouse files and the other spouse is on the hook for the debt.  The court can require the spouse that filed bankruptcy to pay off this debt in the form of spousal support.  Spousal support/alimony is a domestic support obligation (DSO) and not dischargeable.  Ouch.

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Confused?  Marriage and bankruptcy gets tricky, so please consult with an attorney and save yourself a lot of time, money and grief.

Image courtesy of duncan.

Life after bankruptcy – what does it look like?

Frequently, I’ll meet with clients who are (understandably) worried about life after bankruptcy. How bad is the worst case scenario? Will I have to live without credit for 10 years? Will I ever be able to rent again? Get a car loan? How about a mortgage?

Clients often associate bankruptcy with being thrown out on the street, all of his or her assets taken away, and picture printed on the front page of the newspaper announcing to the world that he or she filed for bankruptcy. It’s so easy to think  that you’ll be branded and you’ll have to wear a scarlet letter around your neck announcing to the world that you’ve filed.

I have news for you. Bankruptcy is about preservation of assets and discharge (forgiveness) of debt. Even though there are a lot of stereotypes and stigmas tied to bankruptcy, it is a perfectly legal and legitimate way for people (and businesses) to get out of overwhelming debt.

Shame, guilt and other emotions about debt

Some of the most common things I hear from my clients are:

I feel so guilty. I feel ashamed.
I am a responsible person.
I never thought I’d end up in this situation.

Being under crushing debt is emotionally draining, puts a lot of pressure on you, your marriage, and your family. (Not to mention, your wallet.) Debt brings up a lot of emotions, and whatever you feel – it’s perfectly normal!

After discharge, you’ll be able to continue to live your life – debt free. All of your future earnings or assets are yours to keep, free from creditors’ claims.

The downside of bankruptcy?

The bankruptcy will be reported on your credit report for up to 10 years. Despite popular belief, this does not mean you cannot acquire new credit for 10 years. Some of the negative impacts of bankruptcy start to diminish as your debt-to-income ratio is improved and your credit score begins to recover.

Most of our clients report being able to get new credit cards shortly after discharge, and in general, you can qualify for FHA mortgage after 2 years.

You may also experience difficulty trying to rent a new apartment immediately after bankruptcy. You can avoid this problem by moving prior to filing. In addition, many landlords will consider overlooking the bankruptcy if you increase your deposit or offer to pay for several months of rent up front. (Read more about renting after bankruptcy here.)

There will be adjustments and challenges. But the point of the fresh start principle that underlies bankruptcy is that there is life after bankruptcy.

Image credit: chrisinplymouth

The dictionary defines bankruptcy as utter ruin, failure, depletion, or the like. With such definition, it’s not surprising that most people associate bankruptcy with being tossed out on the street, stripped of all of his or her belongings. I think of it as a strategic decision about one’s debts, ability to pay those debts and preservation of assets.

We are very fortunate to live in a country with bankruptcy laws that allows individuals as well as corporations to survive by getting rid of debt it cannot afford to pay. Our bankruptcy system is unique in that it allows individuals and corporations to do this without any punishment.

So, let’s review exemption relating to bankruptcy. Each State can set its own exemptions or it can also opt in to the Federal exemption. California has opted out of the Federal exemption and has its own generous set of exemptions. There is two systems of exemptions in California. The first system (CCP 703) uses “Wildcard” which can be applied towards any property. The second system (CCP 704) uses the home equity exemption, which can only be applied towards equity in a home. There are other differences, but these are usually the two driving forces of selecting 703 or 704.

Keeping Home Through Bankruptcy

The threshold question when it comes to keeping homes through bankruptcy is equity. Equity is determined by taking the fair market value of your home and subtracting all liens against the home such mortgages, taxes, HOA liens, etc. Assuming you actually have equity in your home, you can protect:

(1) $75,000 if single debtor.
(2) $100,000 if debtor is family unit.
(3) $175,000 if debtor or spouse is at least 65 years old, or disabled, or if you are 55 years or older with an annual income less than $15,000 or $20,000 if married.

In many cases, the home is underwater, hence no equity.

Keeping Cars Through Bankruptcy

Under system 1 (CCP 703), we can protect up to $3,525 of equity in one vehicle. If your vehicle has more equity than the allowed amount, you can apply some of the Wildcard exemption of $23,250.

For example, if your car is worth $10,000 and you own it free of any loans, we would take:

$10,000
$3,525 (vehicle exemption)
$6,475 (Wildcard exemption)

Under system 2 (CCP 704), we can protect up to $2,725 in a personal vehicle and $7,175 in a business vehicle.

Keeping Retirements, Pensions, etc Through Bankruptcy

In most circumstances, all qualified retirement funds and pensions are protected through bankruptcy. This is one reason we advise against borrowing from or liquidating retirement funds to satisfy creditors. In effect, you are taking fully exempt (protected) funds and applying it towards dischargeable debt. (Discharge is another way of saying forgiven in bankruptcy.) Don’t throw away your hard-earned retirement money.

Keeping Household Items Through Bankruptcy

In general, most normal, everyday household items, clothing, appliances, etc. are fully protected through bankruptcy.

Under system 1 (CCP703), each item is protected up to $550. It is important to keep in mind that in valuing household items, it is not the new value but replacement value used to determine the value of each item. Think of what you could get for it on craigslist or eBay.

Under system 2 (CCP 704), household furnishings and personal effects are protected to the extent reasonably necessary.

Another common concern is keeping pets through bankruptcy. Most household pets are not worth anything unless they are “show” dogs. They are priceless to you – worthless to everyone else.

Keeping Jewelry Through Bankruptcy

Similar to household items, jewelry is also protected through bankruptcy. One common misconception is that the amount exempted should be the same as what you paid for the item. This is not an accurate value of the item. The value we use for the bankruptcy petition is replacement value, taking into consideration the condition of the item.

Under system 1 (CCP 703), we can protect up to $1,425 of jewelry. Similar to cars, if you have more jewelry than the exempted amount, we can apply some of the Wildcard.

Under system 2 (CCP 704), the protected amount is $7,175.

Keeping Cash Through Bankruptcy

When I say “cash” I am including money in bank accounts, stock account (not retirement account), and coin jars in  your home.

Under system 1 (CCP 703), Wildcard is used to protect cash up to $23,250.

System 2 (CCP 704) does not provide protections for cash.

Image credit: Leo Reynolds

10 ways to save money each month

January is a great time to start looking for ways to reduce your expenses, save, and develop improved spending habits. Here are our top 10 ways to reduce expenses in a two part podcast. Click here for part 1.

1. Get rid of cable and/or internet
2. Get rid of home land line
3. Shop around for insurance/ get rid of unnecessary insurance
4. Eat out less/ plan meals/ bring lunch to work/ STOP buying coffee every morning! (Calculate the cost of your coffee spending here.)
5. Reduce the amount of use of everyday items – paper towels, napkins, cleaning products, etc.
6. Timeshares
7. Storage units
8. Pet expenses
9. Fees – credit card, bank fees, other ongoing fees (like gym membership you never use)
10. Gas – check out this Gasbuddy app and find cheapest gas on the go

“Judgment debtor” is a term of art referring a party against whom a creditor obtained a judgment. I frequently get questions about lawsuits and judgments. Common questions includes:

• What happens if I ignore a lawsuit?
• Can I file for bankruptcy before or after judgment?
• Can I discharge a debt even after judgment has been entered?
• If there is a judgment, can they take my house?

Here is my general short answer.

The longer you wait, the more difficult it will be to fix your problems and the fewer your options will be.

How does the creditor get a Judgment?

First, let’s start with a basic scenario.

You owe Discover $15,000. You fall behind and at some point, Discover (or a debt collector) brings a lawsuit against you. A lawsuit is initiated by filing a summons and complaint with the county court. You must also be served with the summons and complaint. (In case you are wondering, in general, a “process server” will come to your home or work and hand you the summons and complaint.)

After you’ve been served, you have 30 days to respond to the complaint by filing an answer or attacking the complaint for defects. Let’s suppose you decide to ignore the lawsuit, and pretend that you didn’t see it. After the 30 days are up, Discover can move for a default judgment. The court will then enter or “order” a judgment against you.

What happens after the Judgment is entered?

Once Discover has the order in its hands, it can exercise several rights to satisfy its judgment. Most common methods include:

Wage garnishment – this is the most common. By law, your employer is required to withhold and remit up to 25% of your income.

• Judgment lien – Discover can also place a lien on your home or other property you own.
• Levy bank accounts

How do I fix this?

The short answer is that wage garnishments may be fixed in or outside of bankruptcy. A lawyer may be able to set aside the default judgment in State court and stop the wage garnishment. A judgment debtor can also request the wage garnishment amount be adjusted. But, ALL of this will cost you additional attorney fees and court costs.

If you do decide bankruptcy (either Chapter 7 or Chapter 13)  is the way to go, we can also “avoid” a judicial lien. It may also be possible to get some of the garnished or levied funds returned in bankruptcy. But only for funds were taken within 90 days prior to filing your bankruptcy. Bankruptcy also had the added advantage of the Automatic Stay (we have a link to something for this?), which stops all collection activities including wage garnishment the moment you file for bankruptcy.

So, if you are facing a lawsuit or a judgment, it is time to get off the internet and get a good lawyer. I mean run, do not walk and get some help!

Image credit: Leo Reynolds

Free Workshop at the San Francisco Law Library on February 6, 2012.

San Francisco Bankruptcy Lawyers Jeena Cho and Jeff Curl will address various ways to deal with your debt including:

• Debt settlement
• Chapter 7 or Chapter 13
• Dealing with underwater homes
• Consequences of doing nothing

San Francisco Law Library
401 Van Ness Ave, Room 400
San Francisco, CA 94102

10 ways to save money each month

January is a great time to start looking for ways to reduce your expenses, save, and develop improved spending habits. Here are our top 10 ways to reduce expenses in a two part podcast.

1. Get rid of cable and/or internet
2. Get rid of home land line
3. Shop around for insurance/ get rid of unnecessary insurance
4. Eat out less/ plan meals/ bring lunch to work/ STOP buying coffee every morning! (Calculate the cost of your coffee spending here.)
5. Reduce the amount of use of everyday items – paper towels, napkins, cleaning products, etc.

What’s on your list of ways to save and spend less this year?

Instant – I want it NOW!

We have a tendency to want (and expect) things to happen instantly. And we want those instant solutions to be without any negative consequences.

Frequently, I’ll meet with clients who will sit down and tell me (a) they do not want to file for bankruptcy and (b) they want to get out of debt instantly.

Here’s the thing. Despite what the lotto commercials say, for most people, getting out of debt and accumulating savings requires one simple formula:

Spend less than you earn.

But, here’s the problem – if you are like most of my clients, after all the bills are paid each month, you are at a negative number requiring you to use credit cards to make up the difference. Next month, you are even further behind and the cycle continues.

There comes a point where you’ve accumulated so much debt that no amount of belt tightening, reduction in expenses and instant ramen will get you out of debt. Bankruptcy laws exists so that you won’t be enslaved to your debt forever and gives you a chance to live a productive, successful, debt-free life.

Is bankruptcy an instant solution? No. But it’s probably as close to an instant solution as one can find with Chapter 7 taking about 3 – 4 months and Chapter 13 taking 3 – 5 years.

By the way, if your debt free strategy involves winning the lotto, you might want to read this article from Freakonomics. 

Image credit: Leo Reynolds

Jeff and Jeena discuss how Chapter 7 and Chapter 13 bankruptcy can save your home.

Image credit: derrickkwa