By Jeff Curl, San Francisco Bankruptcy Attorney
In reviewing the last 78 bankruptcy cases we filed, the statistics show our clients represent a wide spectrum of society. Their ages, income, education and other measurements really span across many cultural lines. Take a look at who files for bankruptcy.
By Jeff Curl, San Mateo Bankruptcy Attorney
This blog is not a compilation of statistics; this is observations of my clients’ stories. While we represent both creditors and debtors, I was thinking about the debtor-side of the equation and why people (I am excluding the business clients) find themselves in bankruptcy.
This topic has been discussed by my colleagues around the country, and reasons for filing bankruptcy vary by geography, marketing to clients and other factors. In other words, what may be true for my practice is not necessarily true for my colleagues.
How The Story is Told
When a new client makes an appointment, we have them fill out a short two-page questionnaire about family size, home ownership, debts, assets and income, among other information. They send this to us before the appointment so that we have a chance to review and consider their situation before meeting, and identify potential problems and solutions.
But before diving into the details or discussing the options, I usually set the questionnaire to the side and ask the client to tell me why they are meeting with me, and what they hope to do. And I shut my mouth and listen because everyone has a story to tell and I am interested in hearing what happened and what the client wants and hopes to accomplish.
Some stories are short, some are long. Some give great detail, some hesitate because verbalizing their debt problems is painful. But with a little prompting most are actually eager to share their plight. We’re humans, we like to talk about what happened, if not for therapeutic or legal reasons, simply for social contact.
Five Reasons I See People Filing Bankruptcy
What I have learned from my San Francisco area bankruptcy clients about how they came to find their way to my office is this:
It is extremely rare to encounter the client that is hoping to “work the system” or is casual about his or predicament. Even those that appear to be aloof are usually just masking a bruised ego.
There are many reasons people file that I have not described, but these are some categories that come to my mind. The thing I like about reflecting back on this is that I appreciate how much people want to repay their debts and struggle mightily — psychologically and financially — before seeing me. It is not taken lightly by my clients and the relief they feel at the end makes my practice area particularly gratifying.
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By Jeff Curl, San Francisco Bankruptcy Attorney
A real estate agent colleague of mine stated recently that a home for sale in Sunnyvale received 68 offers. This staggering number shows just how different the market is from five years ago when properties experienced a dramatic decline.
I am seeing an unfortunate trend in some of my bankruptcy cases where the clients own a home. Those who are procrastinating in filing bankruptcy, or delay for a legitimate reason are suffering a paradoxical penalty: equity.
The Loss of Equity and Recovery
Like the rest of the country, the Bay Area housing market took a hit starting in 2008. We had many clients with underwater homes for several years . The upside of this bad news is that in bankruptcy too much equity can be difficult to protect, and keeping the home can be problematic. With no equity, the issue kind of disappeared for many people.
But today’s reality is different. Home prices are soaring in the Bay Area. San Francisco is always competitive; with Silicon Valley money competing for limited real estate, the Peninsula and South Bay / San Jose area is also seeing a resurgence in prices and gain in equity. This good news can present a problem for those who still need bankruptcy relief.
Exemptions
In California, we have two primary exemption systems. Exemptions are ways of protecting and keeping your property in California. People who file for bankruptcy get to pick only one system. Both exemption systems have some similar exemptions for things like household goods, retirement savings and automobiles.
But there are some key differences, and one specifically affects homeowners.
The Exemption Dilemma
The biggest difference between the two exemption systems that most of my clients have to choose between home equity, and cash or other fairly liquid assets. One system has a homestead exemption for protecting up to what is currently $175,000 in equity in your primary residence. The other system has a wildcard of $26,425 that can be put on anything, including cash. The wildcard is a very flexible provision.
When most clients lost their equity after the housing market collapse, the wildcard was almost always the correct choice. Now, with homes recovering and in some instances gaining equity, clients can be put in a difficult position. They have equity in a home, and they have cash in a bank account, or a lot of equity in cars or other assets.
The Chapter 13 Solution
In cases where some assets are going to be left unprotected by having to choose one exemption system, Chapter 13 bankruptcy is often a very good solution. Chapter 7 bankruptcy risks the loss of an unprotected asset because the Chapter 7 trustee can take unexempt assets and sell them to pay back your creditors.
Chapter 13 does not run the same risk of losing assets because Chapter 13 trustees do not take assets from the person filing bankruptcy. While a Chapter 7 is typically faster than a Chapter 13, it is riskier when assets are in play. A Chapter 13 requires you to pay a certain amount to your creditors for what is typically 36 months or 60 months. Assume your Chapter 13 requires you to repay your unsecured creditors 20% of the $100,000 you owe them. When you have repaid this $20,000 over the life of your plan, the remaining 80% is discharged.
If you have exposed assets that you want to keep, consider the safety and flexibility of Chapter 13. While it is great that you have some equity in your home now, if you still need bankruptcy protection and want to keep your property, Chapter 13 may allow you to thread this needle.
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By Jeff Curl, San Mateo Bankruptcy Attorney
A colleague of mine attended a student loan webinar put on by collection companies that chase down student loan borrowers in default. He asked for an estimate of the percentage of student loans facing a discharge in bankruptcy court. In other words, How often do bankruptcy courts grant discharges of student loans?
The presenter’s response was that discharging student loans was the unicorn of the bankruptcy world.
Student loan lenders and the collection companies do not fear borrowers that declare bankruptcy because student loans are not dischargeable unless the borrower can show an “undue hardship.”
Proving an “undue hardship” first requires a debtor in bankruptcy to file an adversary proceeding to discharge student loans. An adversary proceeding is a lawsuit by the debtor/borrower against the lender.
This in itself is a barrier to entry that eliminates most borrowers from pursuing discharging student loans. The expense of pursuing a lawsuit is cost prohibitive. If you filed bankruptcy with large student loan debts in the first place, funding litigation against a bank or collection company is just not in the cards for most people.
Second, the burden on the debtor/borrower to prove that the student loan is an undue hardship is very difficult. There have been some cracks in this high burden, but the courts where we practice still are bound to follow a very strict standard.
This is not to say that there are not appropriate cases where an undue hardship exists. But when collection companies openly declare discharging student loans as the unicorn of the bankruptcy world, expect resistance and be prepared for a fight.
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By Jeff Curl, San Mateo Bankruptcy Attorney
If you have been reading up on Chapter 13 bankruptcy, you know that you have to make a monthly payment for a period of time. Once you complete your plan payments, the remaining amount owed to your unsecured creditors is discharged. Sometimes you pay them 0%, 100% or usually something in between. This number varies by each case.
The number one question I am asked about filing for Chapter 13 is “How much will my monthly payment be?”
This depends on a lot of things, including your income, expenses and assets for starters. The most common way a Chapter 13 payment is calculated is by taking your income and subtracting your expenses, yielding a monthly payment. It’s actually much more complex than that, but that is the gist of it.
This leads to the implied question in Chapter 13 and your monthly payment, i.e., what expenses are allowed and appropriate. Most of my clients will understate expenses, often stating little to zero is spent on clothing and entertainment. While there is some sense of austerity that comes with filing Chapter 13, you are not expected to go without clothing and catching a movie or visiting a museum.
That’s right, Chapter 13 does not make nudity and boredom mandatory.
There is a concern by my clients that they will be placed on the stand in the courtroom and crucified for every dollar they spent. It just does not work that way. That said, your budget must be reasonable. $1,000 a month for entertainment is not going to fly. And there are conventional truisms such as never driving a car nicer than the judge. I don’t know which car most judges drive, so that’s difficult to measure. But you get the idea.
But if you have a housecleaner, a nanny, a finely manicured topiary, weekly haircuts, and you are not willing to sacrifice any of these costs, Chapter 13 may not be for you. While you are not required to eat rice and beans, eating at Michelin rated restaurants with regularity is probably not going to happen.
The sacrifice you have to make is actually pretty reasonable: live within your means. Chapter 13 is essentially a structured economic environment designed to keep your finances in order so that you succeed.
So while some reasonableness is required to file and succeed in Chapter 13, starvation and nudity is not.
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