Tag Archives: bankruptcy

The Bad Side of When Only One Spouse Files Bankruptcy

One spouse, whether married or separated, can file bankruptcy alone, without the consent of the other spouse. Sometimes this is a good thing, because in California, the non-filing spouse can often obtain the benefit of the automatic stay as to themselves or their property, and a community discharge of certain debts, i.e., it’s possible that one spouse filing bankruptcy can discharges liability as both spouses.

However, when mixing California’s community property laws with the bankruptcy code, the non-filing spouse can find himself or herself in great jeopardy by design or accident.

In terms of harm, it helps to understand three concepts that affect the non-filing spouse: (1) the automatic stay; (2) property of estate, and; (3) discharging debts.

The Automatic Stay

The automatic stay is great for creating breathing room. Upon filing a bankruptcy, the automatic stay is triggered instantly. With a handful of exceptions, the stay prohibits numerous forms of creditor activities, such as wage garnishment, bank levies, foreclosures, repossessions and most lawsuits.

But what if you are separated or going through a divorce where you need to divide property or the sale of the home is part of the marital settlement agreement, and escrow is in a week? The bankruptcy just killed the deal because, in part, of the automatic stay. If you are in a bitterly contested divorce and that long awaited (but dreaded) trial is finally going to happen, the automatic stay will mess with that. Child support, alimony and visitation rights are not technically affected by the stay, and the court may proceed, but many family law judges will not proceed for fear of violating the automatic stay.

Property of Estate

Property of the estate is all interests you have in assets. This includes cars, homes, lawsuits, bank accounts, stocks and the list goes on. A few things are excluded like 401k accounts, but property is a very broad concept in bankruptcy.

This is by far the most damaging part of divorce intersecting with bankruptcy proceedings I see. The Bankruptcy Code says that all property of the person filing bankruptcy becomes property of the bankruptcy estate, including community property. Unless there is a nuptial agreement or other means of maintaining property separately, in California, all property acquired during marriage is community property and comes into the bankruptcy estate.

This is particularly dangerous in a Chapter 7. If your assets contain equity that can’t be protected or you engaged in financial transactions that can be attacked, a Chapter 7 trustee may be able to take property that belongs to the non-filing spouse. Chapter 7 trustees can take cars, sell homes and sue family members that were paid back money previously owed to the family members. That’s just a small sampling, as Chapter 7 trustees are granted fairly extraordinary powers in bankruptcy.

When only one spouse files bankruptcy, it is usually with the hope that only the filing spouse suffers a hit to the credit, or because one spouse ran up the majority of the debt, he or she should be the only one to file. While that separate filing may accomplish this, it may drag the other spouse through the mud asset-wise.

Of course, some spouses file bankruptcy during the pendency of a divorce to delay or stall the divorce in some manner. Or the spouse may try to discharge debts as to himself or herself, and leave the non-filing spouse on the hook, or force them into their own bankruptcy. The spiteful use of bankruptcy often harms the person filing bankruptcy. The spouse filing bankruptcy may laugh at sticking the non-filing ex with all the debt, only to have the non-filing ex successfully petition the family court for more support to pay for the increased debt load.

Community Discharge

The community discharge is quite powerful. If both spouses owe a debt, let’s say $25,000 to a credit card, then one spouse filing lets the other spouse enjoy the discharge too (and like everything else in the law, there are exceptions). That is quite a powerful tool. However, the key word is “community.” When you separate or divorce, there is no community anymore.

Now the spouse who never filed could be on the hook for the $25,000. In all practicality, creditors are not usually diligent enough to check to see if the person who filed bankruptcy later divorced. The notable exception to that is exes. Ex-spouses, ex-boyfriends, ex-girlfriends, ex-business partners: those with an axe to grind, who enjoy stalking you and making life miserable are the most likely to know and do something about it. But that is another blog for another day.

In the mean time, tread cautiously, whether you are filing alone with intent to benefit your spouse, or with the intent of harming her. You may find you bit off way more than you can chew.

Buzz Kill - No Bankruptcy Relief for Marijuana Grower

I always had a bit of a fascination with marijuana law, and now have seen it cross into the bankruptcy world a few times. As it continues to evolve, it’s been interesting from the legal perspective to watch it develop from an illegal and taboo topic, to a progressively acceptable business model, medical treatment and recreational activity in many parts of the country.

My state of residence California passed the Compassionate Use Act of 1996. This proposition permitted medicinal use of marijuana. But frankly, as far as I can tell, the majority of people using prescription marijuana use the medicinal card as a way to enjoy marijuana recreationally. And maybe that was what was needed in 1996: put the toes in the dirty bong water and see how it feels.

California is poised to place two marijuana initiatives on the ballot in 2016. Both the Marijuana Control, Legalization and Revenue Act of 2016 (MCLR) and California Cannabis Hemp Initiative seek full legalization and regulation of marijuana.

Even assuming one or both of these ballot measures pass, the federal Controlled Substances Act (“CSA”) lists marijuana (or “marihuana” as the CSA says), as a Schedule I drug. One can get licenses and permits from the Drug Enforcement Agency (“DEA”) to use scheduled substances under the CSA, though I am not aware of any recreational growers, distributors or sellers who have obtained such a permit. In other words, something can be perfectly legal under state law, but illegal under federal law or vice versa. And sometimes when the two conflict, there is concept called “preemption,” meaning the federal law overrides the state law.

Enter Frank Anthony Arenas and Sarah Eve Arenas. They are a married couple in Colorado, where recreational marijuana was legalized in 2012. Mr. Arenas obtained all appropriate permits and licenses to produce and distribute marijuana legally under Colorado law. In 2014, the couple filed for Chapter 7 bankruptcy.

The United States Trustee, which is a division of the Department of Justice (“DOJ”) that would actually prosecute the violations of the CSA, moved to dismiss the Chapter 7 bankruptcy. The court found that while the growing and distribution of marijuana under Colorado law was legal, the same conduct was a criminal offense under federal law via the CSA and dismissed the bankruptcy case.

The court pointed to two problematic issues that were triggered by the bankruptcy case.

First, a debtor in bankruptcy is seeking to avail himself or herself to the benefits and protections of federal bankruptcy law, while continuing to violate another federal law, the CSA. This was an internal inconsistency that the court could not reconcile.

Second — and I thought this was a more interesting point in the bankruptcy context — sometimes Chapter 7 bankruptcies like the one filed by the Arenas’ is what is referred to as an asset case. It means that a Chapter 7 trustee may take and liquidate some of your assets. In this case, the trustee was faced with the potential prospect of liquidating marijuana and marijuana business-related materials. By operation of the bankruptcy code and rules, the Chapter 7 trustee is a fiduciary charged with selling assets to pay back unsecured creditors. In other words, the Chapter 7 trustee would be forced to engage in the potential illegal activity of selling marijuana and marijuana business equipment in violation of the CSA in order to recover money for the creditors. The court found it to be a strange outcome that a trustee could be forced to engage in criminal activity, and thus dismissed the case.

The court referenced the infamous Cole memo from 2013. In that memo, James Cole, the Deputy Attorney General for the DOJ acknowledges that states are legalizing marijuana, and essentially states that the federal government will look the other way if certain conditions are met, such as not selling to minors, not shipping interstate into a state where it is not legal, etc. But as the Arenas court noted, it’s a memo, not the law. It provides no guarantees of any kind that compliance with state laws that legalize marijuana in various forms means the feds won’t be knocking on your door some day if you are taking advantage of such state laws.

The Arenas have appealed, so this will rear its head again the future.

There are growers all over California with pretty large swaths of land dedicated to marijuana growth and distribution. Businesses that were once black market only, continue to gain credibility, albeit under the guise of medicinal marijuana at the moment given the current restrictions in California.

I admire those who take the risk of openly operating such businesses in the face of a potential federal crackdown at any moment. It has a bit of Boardwalk Empire / prohibition, mixed with an entrepreneurial spirit. But I suspect bankruptcy courts will not blaze any new trails (pun totally intended) in favor of debtors operating businesses related to marijuana until the federal laws are changed.

Who Files for Bankruptcy?

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.

Why do People File 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:

Unemployment and underemployment. The job market is just really tough. And even if you are lucky enough to have a job, the Bay Area is so expensive that it may not be enough. Or I have many clients in that 50+ age group that are well educated and have a hard time finding a job in market that often worships youth.
Being a parent is expensive. Parents almost always want their children to succeed. I have parents that provide housing to kids into their adulthood. Parents are co-signing student loans and car loans when the kids cannot actually pay for them. They pay for private school tuition and piano lessons, going into debt trying to give their kids the best opportunities for success.
Life-changing events. Divorce, deaths, injuries, job loss and other unforeseen or just plain difficult situations can reap financial catastrophe upon anyone. Not only did something turbulent happen, but most people try to maintain the same lifestyle and expenses in hopes and expectations that things will return to normal. Sometimes this is just denial, sometimes it just doesn’t pan out after good faith efforts.
Entrepreneurial risk. Whether starting a business or flipping properties when real estate suddenly collapsed, many clients found their dreams turned to nightmares. Sure, some people did not calculate the risks carefully, and some got greedy. Most just got caught in a financial collapse or circumstances that most could not see coming. Failure is part of risk-taking, and sometimes it results in bankruptcy. But I think most of these people go on to succeed eventually.
Irresponsibility. While definitely a small minority, some clients will tell me with regret and embarrassment that they just screwed up. They overspent, under-saved and really had no plan or direction. Many were just financially illiterate. Replacing tires on the car which is really ordinary maintenance was suddenly a financial emergency. They rented a nicer apartment with a better view, had nice clothes and ate out too often. Now we were filing a Chapter 7 bankruptcy and they learned a very difficult lesson.

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.

Image Credit: Creative Commons

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.