Author Archives: Jeff Curl

Waiting to File Bankruptcy in This Housing Market Can Be Dangerous

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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Discharging Student Loans - The Unicorn of the Bankruptcy World

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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Chapter 13 Does Not Require You to be Naked and Bored

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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New Year’s Resolutions for Those in Debt

My partner Jeena Cho and I have been discussing plans and strategies for 2014. Along with this comes the annual resolution pitch we all seem to give ourselves: eat better, go the gym, blah blah. There is something a little cheesy about this, but there is also something to be said for reflection and the vow to take action to better your life in the new year.

I will never stop harping on my number one problem I see with people in too much debt: waiting too long to take action. I know it is hard. Whether it is embarrassment, fear of the unknown or procrastination, waiting to act is one of the worst things you can do.

If you have too much debt, the interest and penalties that increase this out-of-control debt actually feed off of your very failure to act. You know the drill: the credit cards reach their limits and you can’t make the required payments.

Clients describe this sinking feeling in their stomachs when they realize they are over their heads. And when they can’t juggle things and make even all the minimum payments, the phone calls and collection letters are particularly intimidating.

One of my favorite parts of bankruptcy practice is seeing people rise again. The first sense of relief is our first meeting where the client realizes there is a viable strategy for getting themselves out of this mess. The second big step is completing the 341 meeting of creditors, and breathing a sigh of relief that it is over and not what they expected. The third step is getting a discharge. Getting out from underneath the debt and getting a fresh start brings about a much needed sense of hope.

So, back to the resolution. If you are suffering from too much debt, make the resolution to do something about it, and act. Do not just reflect, but take affirmative steps. Call a financial advisor, tax specialist or whatever professional you need. It’s so easy today that you can often just schedule appointments online. Regardless of how you go about it, talk to different professionals and make an informed opinion on how to proceed.

I’ve never had a consultation with someone that regretted getting good information.

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Divorce, Family Law, Child Support and Discharging Debts

There must be something in the air with the recent plight of family law and bankruptcy matters that have arisen. I represent both debtors and creditors in these cases. That means I have clients that are divorced and wish to get rid of some debts related to their divorces in bankruptcy. And I have clients who are the ex-spouses and want to prevent the debtor from discharging their debts in bankruptcy.

Sometimes it’s child support, an equalization payment, community reimbursement, attorney’s fees from the divorce or other similar debts. The interesting thing is that in some ways I should not be needed because either the debt is dischargeable or it is not as matter of law.

The law, however, evolves as it is amended and interpreted. This sometimes makes it necessary to get it before the court for a determination of dischargeability, and sometimes the court struggles with finding the right answer itself.

The bankruptcy code provides two provisions that make certain family debts non-dischargeable in certain circumstances (meaning even if the debtor files, the debtor will still owe that particular debt after the bankruptcy process is completed).

First, “domestic support obligations (DSO)” are not dischargeable, i.e., child support and alimony. While that is fairly straightforward, things can get tricky. For example, when the family law court orders debts divided in a certain manner, and one spouse responsible, sometimes the order for the spouse responsible for paying the debt is in the nature of support, sometimes not. A DSO is not dischargeable in either Chapter 7 or Chapter 13.

Second, debts “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record” are not dischargeable. Taken together with DSO, not a lot is dischargeable. Note, however, that a non-DSO debt arising in the course of a divorce or separation is dischargeable in Chapter 13 (it’s sometime referred to the Chapter 13 super discharge). So a debtor can get rid of some family law obligations in Chapter 13, just not DSO.

This second one involving separation and divorce can get tricky quickly. What about a debt to a third party such as an attorney that represented the debtor in a family law proceeding? What if the case was converted from a 7 to a 13? What if the divorce pre-dates the 2005 amendments to the Bankruptcy Code? It gets sticky quickly, and there is not always a straightforward answer.

If you are a creditor or debtor dealing with these kinds of debts, seek advice of counsel. Some things that may appear crystal clear, may cause you problems in the long run.

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