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Income Tax Debt and Chapter 7 Bankruptcy Relief

A common question arises in many of my recent debt relief consultations: How will my income tax debt affect my attempts to completely wipe out my debt, both overall and as to the tax debt itself?

Taxes and Bypassing The Means Test

The first hurdle to proceed in filing under Chapter 7 is the “means test”, which is a formula designed to limit people with higher incomes from seeking Chapter 7 bankruptcy relief. The means test formula uses your last six (6) months’ household income, IRS Data and National Standards to calculate your monthly “disposable income.” While people with debt issues find themselves living paycheck-to-paycheck and regularly borrowing from Peter to pay Paul, many of these same people are often bewildered by the fact that the means test results in, at least on paper, a positive disposable income from which creditors can be paid.

An exception to the requirement of passing the means test to qualify for Chapter 7 relief is if your debts are not primarily “consumer” in nature. Consumer debt is defined as debt incurred for primarily personal, family or household purposes. Good news for people who have incurred substantial income tax debt over the years: most courts consider taxes to be non-consumer debt, even though such debt is almost always incurred for personal, family or household purposes. But who are we to complain about this characterization; bottom line is if your taxes represent more than fifty percent (50%) of your overall debt, you do not have to take the means test to file under Chapter 7.

Discharging Income Tax Debt

Whether your income tax debt is the majority of your debt or not, there are limitations on what income taxes can be discharged/wiped out. Generally, you can discharge/wipe out income tax debt in Chapter 7 bankruptcy only if all of the following conditions are met:

 

  1. The debt is at least three (3) years old. To eliminate an income tax debt, the tax return must have been originally due at least three (3) years before you filed for bankruptcy relief.
  2. You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two (2) years before filing for bankruptcy. In most courts if you failed to file a return and the IRS filed a substitute return on your behalf, you have not filed a “return” and cannot discharge the income tax.
  3. You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, your income tax liability cannot be wiped out.
  4. You pass the “240-day rule.” Your income tax debt must have been assessed by the tax agency at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. Note:       This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.

 Final Note – Slight Twist (Tax Liens)

 Even if you are able to wipe out your income taxes under Chapter 7, you may still end up paying at least a portion of your tax liability. While you will no longer have a personal obligation to pay such taxes, bankruptcy relief will not wipe out prior recorded tax liens against your real estate. The lien will remain on the property and you’ll have to pay off the tax lien in order to sell the property.

Overwhelmed by substantial debt or have any questions about the above topic? The Law Offices of Ian S. Topf, APC offer free consultation in a variety of issues, ranging from bankruptcy, family law/divorce, and estate planning to criminal/DUI matters and landlord/tenant disputes.

Think You Can’t Afford to File for Bankruptcy?

According to a new study by the Federal Reserve Bank of New York, changes originally enacted in 2005 to the Bankruptcy Abuse Prevention and Consumer Protection Act have made it substantially more difficult for “financially struggling people” to file for bankruptcy relief.

While it’s true that changes like these have made it tougher for people to seek bankruptcy protection in general, I don’t believe the additional hurdles put into place present a significantly greater financial hardship than before these changes were made. Remember, as stated in a couple of my prior blogs, there may be several different options to explore if you’re in need of debt relief.

The three common debt relief choices are:

Ignore the debt. Typically under California law, there’s a four-year statute of limitations for debts (except those made with an oral contract, for which the statute of limitations is two years). While I generally do not advise clients to go this route, especially if your debt(s) were incurred recently, you may just simply ignore your debt and hope the statute runs. In my experience, though, creditors are a pretty unforgiving bunch. Eventually you may get sued, which will eventually lead to having your wages garnished, liens attached to your property, and/or bank accounts/other property seized and forfeited to your creditor(s). Also, interest, penalties, and other fees for non-payment will keep accruing on your debts, worsening the situation.

Negotiate to settle the debt. In general, creditors are willing to reduce the overall balance owed on a debt, if they know they are going to get paid, especially if (1) you’ve missed at least a few payments and (2) you are willing to pay off the settled amount promptly (either lump-sum or over only a couple of months). The bad news is the government has made it a bit harder to negotiate with creditors. There is now a mandatory requirement that, with certain exceptions, creditors issue a 1099 Form for any balance forgiven in a settlement when the settlement amount equates to a more-than-$600 reduction from the balance you actually owe, You will then have to declare that 1099 amount on your taxes as if it were income (and pay taxes on said amount). Say, for example, you owe $2,000 and you negotiate a lump-sum settlement of $1,200, you will receive a 1099 for $800 to be added to your gross income for the year when tax time comes around.

File for bankruptcy relief. If neither of the first two options work, you will probably find yourself in bankruptcy court. In my opinion, in general, the greatest change that impacts one’s ability to file for bankruptcy relief has been the increase in allowable attorney fees in bankruptcy cases. For example, here in San Diego, California, bankruptcy attorneys can now initial fees of up to $3,600.00 for a Chapter 13 consumer bankruptcy filing, up from $1,700.00 in 2012. These fees usually do not include certain administrative costs and other miscellaneous fees for actions that may take place during the course of the bankruptcy case.

Where does this leave people in need of relief?

In general, if push came to shove, most people can come up with the requisite monies needed to hire a bankruptcy attorney to assist them in getting rid of a far more substantial amount of debt. For those who aren’t able to do so, there will always be attorneys (including myself) who usually don’t charge the allowable “standard” attorney’s fee.

There’s also the option of representing yourself in matters of bankruptcy relief, though of course, you’re held to the same standards and requirements as an attorney representing you in such an action. In my experience, those charged with monitoring your bankruptcy case (court websites, court clerks, the U.S. Trustees’ office) can be both understanding and helpful in providing information that may assist you with proceeding on your own.

A word of caution: There are individuals and businesses out there offering bankruptcy preparation services for “reduced fees.” Across the U.S., bankruptcy courts have had issues with such services, since they generally offer document preparation services with minimal instructions on how to file. The end-product is often incomplete and there’s usually no follow-up after the bankruptcy petition is filed. While not all such bankruptcy preparers operate this way, I urge you to carefully explore your options before choosing such a service.

In conclusion, while it is true that desperate times call for desperate measures, there are several non-drastic opportunities out there for debt relief, contrary to what the public is being led to believe by recent studies and news articles. So if you find yourself in a personal financial crisis, don’t just curl up into a ball and hope your problems will magically disappear; reach out to a skilled debt relief professional and explore your options.

Are you in need of legal counseling for bankruptcy or debt issues or have any questions regarding the above? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from bankruptcy, family law and estate planning to traffic violations and landlord/tenant disputes.

2015 Resolution: Take Care of Your Legal Needs

On behalf of all of us at the Law Offices of Ian S. Topf, APC, best wishes for a happy, healthy and prosperous 2015!

It’s not too late to make a New Year’s resolution that will benefit you and your family throughout the new year. This is a great time to take care of some essential legal planning responsibilities – and you’ll feel much better when you do.

Estate planning

Many people mistakenly think of an estate plan as something that matters only when they die, but there’s really much more to it than that. With a thorough and carefully prepared plan in place, your loved ones won’t have to experience the additional stress of wondering about your final wishes (health, financial, etc.) should you become physically incapacitated and unable to share those wishes during a highly emotional time.

If you already have an existing estate plan, the new year offers a perfect opportunity to review the plan so it reflects any changes that took place during 2014. Such changes might have included:

  • Got divorced or remarried
  • Blessed with the birth or adoption of an additional child in the family
  • Need to remove or replace an agent or beneficiary who passed away
  • New wishes for how you want to have your medical needs addressed

It’s also important to note that, depending on when you first created your estate plan, California law may have changed in ways that invalidate some provisions (or at least affected them so they’re no longer practical). In my legal practice, for example, I’ve come across very old estate plans that haven’t been modified to accommodate requirements under HIPAA (Health Insurance Portability and Accountability Act) and/or the California Probate Code. Without being updated, such plans could run into serious legal problems at a later date; the same problems you have sought to avoid by creating your estate plan in the first place.

In summary, now’s a good time to check with an experienced lawyer to make sure your estate plan is still legally valid and will sleeping aids carry out your wishes, and, if you do not have an estate plan in place, get to it!

Debt relief

Are you one of the many, many Americans who spent too much money during the holidays and find yourself starting the new year in considerable debt? Rather than wallow in this predicament, take advantage of free consultation offered by many debt relief attorneys (including myself)!

We can help you design pro-active ways to resolve your debt and gain control of your financial situation, so you can actually move forward in 2015 without this enormous weight on your shoulders. Don’t wait for debt collectors to start coming after you!

Take action

This brings me to what I think should be everyone’s most important New Year’s resolution: Stop procrastinating! It’s understandable that people put off their legal planning—after all, approaching a lawyer about estate planning or debt relief or any other legal matter seems like a severely negative thing, and most of us naturally drag our feet on these issues, sometimes until it is too late. But think how much better you’ll feel after you address and resolve these matters directly.
For families and individuals who have enrolled in legal insurance plans, I suggest you take a closer look at what these plans have to offer. Many plans provide full-service benefits for legal matters like estate planning and debt relief. They’re also very helpful for general legal advice on a wide range of legal matters.

Remember—you don’t have to wait until you’re facing a lawsuit (or initiating one) to get in touch with an attorney. We can help you cope with many of life’s challenges and free you up for other important goals in the coming year.

Are you in need of legal counseling or have any questions about the above topics? The Law Offices of Ian S. Topf, APC offer a free consultation in a variety of issues, ranging from family law/divorce, bankruptcy, and estate planning to criminal/DUI matters and landlord/tenant disputes.

How Does Foreclosure Work?

In today’s economy, many people find themselves underwater with regard to their monthly expenses. When their total monthly debts amount to more than the money they’ve got coming in—and, as is usually the case, the monthly mortgage payment represents their larges expense—people sometimes opt to neglect this big debt and pay off their smaller, more manageable debts instead.

In my opinion, this is the wrong action to take. Mortgage lenders (such as banks) generally prefer partial payment to no payment at all. If they feel an effort is being made to meet the mortgage obligation, they’re less likely to initiate the dreaded foreclosure proceedings, and may even reach out to the homeowner with possible loan modification options.

Foreclosure is the process wherein a mortgage lender attempts to take possession of real property (house, condominium). When you sign your mortgage paperwork, you give your lender the ability to proceed with a foreclosure action when you fail to make your required mortgage payment. As with all contracts, it is important to read all documents you sign to ensure clarity and understanding. I recommend that every homeowner reading this article go back and read your mortgage paperwork, specifically your Deed of Trust, to educate yourself on the actual rights and responsibilities of both you and your lender.

Most mortgage agreements grant the mortgage lender the right of acceleration of the loan after one or more missed payments, causing the loan to be completely due and payable upon the lender’s demand. The mortgage lender will mail the homeowner a “Notice of Default” and record a copy of the Notice with the County Recorder. This Notice gives the homeowner a period of time (90 days in California) to exercise their “right of redemption”, i.e. the right to catch up on any or all missed or partial payments and make themselves current.

If the homeowner is unable to become current on their loan, the lender may opt to proceed one of two ways:

  1. Pursue a judicial foreclosure (rarely done in California) by initiating a foreclosure action with the local Court; or
  2. Pursue a non-judicial foreclosure, where the property is placed in the hands of a foreclosure trustee and eventually sold at a Trustee’s Sale.

All of this is typically spelled out in your mortgage paperwork, which is why, again, I encourage people to review their mortgage documents very carefully.

Soul-search time

The foreclosure process generally takes a good deal of time, anywhere from four to six months or more after a notice of default is served.

At this point, it’s time to do a soul-searching, reality check to determine whether or not you truly believe you can keep the property. Is what caused you to miss your mortgage payment(s) the result of a temporary hardship that can be quickly remedied or part of a larger, more critical situation where you’ll continue have problems making allergy payments no matter what you do?

If you’ve missed payments because you were temporarily out of work but are once again resuming employment, aggressive negotiations with the mortgage lender may ease the situation and avoid foreclosure. Mortgage lenders generally don’t want to go through with foreclosure if they don’t have to and have some assurances that future mortgage payments will be made. They’ll typically respond favorably to a plan that results in making payments current and agree to halt the foreclosure process.

Actions a borrower can take

Many lenders offer loan modification programs and I encourage people facing the possibility of a future foreclosure to look into them sooner than later. That’s the good news. But it’s important to note that such programs may not necessarily solve the issues that caused problems with mortgage payment in the first place. A mortgage lender’s idea of a modification may only apply to a reduction in the overall interest rate or adding missed payments to the back end of your loan —with no actual reduction in your required monthly payment — and there’s no guarantee that this will alter your ability to comply with the terms of the mortgage in the future.

Also, please take note that a mortgage lender’s foreclosure department is not required to delay the foreclosure process while the loan modification process is pending. These are usually two separate departments and they typically do not communicate with each other automatically. (It’s usually the homeowner who needs to make sure that both departments are aware of the situation to avoid a foreclosure during attempts of loan modification).

If a person feels they can’t keep up with house payments, there may be actions to take to avoid having a foreclosure on your credit report. These actions include proceeding with selling your property, even if it is in a short sale due to little to no equity in the property. While a short sale is still a negative mark on your credit, it usually is much better than having a foreclosure on your record.

Another last-ditch effort is looking into your bankruptcy relief options. In a Chapter 13 bankruptcy action, the Court will allow you to make up your arrears so long as you are able to make your current monthly payments as well. Pursuing Chapter 13 bankruptcy relief with a good-faith plan (whereby you make up the missed payments) will not only help to stop the foreclosure process, but should also help you regain control of your household finances to keep the mortgage lender from further pursuit of foreclosure.

Foreclosure is a complicated legal process that can take a homeowner on a roller-coaster of confusion and extreme emotions. If you find yourself facing foreclosure, seek legal advice or assistance. A skilled attorney can offer the best guidance for finding the solution that works best for you.

Are You One of Three Americans Delinquent on Debt?

Recently, there was a flurry of headlines noting a disturbing trend in the U.S.—more than 30 percent of Americans have debt in collections, according to a study released by the Urban Institute. “Debt in collections” refers to money that’s owed well past an account’s due date (usually 180 days) and which has been turned over to debt collection agencies. The study looked at debts incurred through credit card bills, car loans, medical bills and child support payments, ranging from just $25 to $125,000 (average amount owed was $5,200).

When one in three Americans are delinquent on debt, you don’t have to be a financial expert to know we’ve got a real problem on our hands.

The sad truth is, as a society, we’re generally irresponsible when it comes to managing our finances. I think the main problem is our insatiable appetite for the American Dream—that is, to acquire more and more stuff. But most of the products and services we purchase on credit come and go …and at the end of the day, what do we have to show for it?

On the other hand, a contributing factor to this problem, I believe, are the predatory practices of creditors, many of whom impose outrageous interest rates on credit cards, loans and other opportunities for credit. Many times, people sign up for loans and credit cards in awe of their ability to have access to such high credit limits, without thoroughly reading the fine print, where these dangerously high interest rates are noted.

What you can do

The way most people get into debt—excluding emergency and medical situations where bills can pile up quickly on the spur of a moment—is through a failure to budget and save money for the future. Therefore, in order to avoid getting buried under a mountain of unmanageable debt without the means to get out, I think it’s necessary for us to get back to these basic but valuable concepts. By budgeting wisely and putting aside some money for a rainy day, we’re better prepared to maintain our credit, obtain much of the stuff we crave, and be able to weather a sudden, unexpected financial hardship.

Of course, some people just aren’t capable of handling their own budgets. I don’t mean this in a negative way; we’re not all equally adept at balancing numbers and making sure payments are made on time. The good news is, there are resources out there to help you get things under control. Even if you are not in financial distress at this time, it may be a good idea to talk to a financial advisor or debt relief professional as a preventative measure.

Three choices

If, however, you’re one of those three unfortunate Americans already seriously delinquent on debt, you will find generally three options to choose from to handle your situation:

Ignore the debt. Under California law, there’s typically a four-year statute of limitations for debts except those made with an oral contract (these have a two-year state of limitations). After this period of time (running from the date you last used the account and/or made a payment, whichever is more recent), creditors generally find themselves barred from trying to collect on your debt.

But ignoring your debt, wishing and hoping that your account will be the one that falls through the cracks long enough for the statute of limitations to run, is not a solution. Once you’ve stopped making payments on your credit card bills or outstanding loans, you will hear from collections agencies on a fairly consistent basis. Also, interest continues to accrue on each debt you have, compounded by late fees and other penalties for non-payment.

In other words, ignoring your debt won’t make it go away. It only gets bigger and bigger and more unmanageable over time.

Negotiate to settle the debt. Creditors are often willing to negotiate a settlement to a debt, on the principle that getting a reduced payment is better than no payment. The problem is, they will generally require a lump sum payment in order to make the rest of the debt go away. If you’re unable to do that, this option won’t work.

File for bankruptcy relief. If creditors consistently hassle you, threatening to attach your wages and/or property, and you don’t have the funds to make payments or settle the debt, the last-ditch option is applying for bankruptcy relief. But be forewarned: You can only attempt to completely wipe out your debts through Chapter 7 bankruptcy once every eight (8) years and it will always have a huge negative impact on your credit standing. Additionally, a person who seeks bankruptcy relief will also find it harder to rent an apartment, open a bank/credit union account or obtain credit in the future (though generally not impossible).

Getting out of debt isn’t easy but with the right strategy and guidance, it can be done. What’s the best way to start? Explore your options through a conversation with a skilled debt relief/ bankruptcy attorney.

Are you in need of legal counseling for bankruptcy or debt issues or have any questions regarding the above? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from bankruptcy, family law and estate planning to traffic violations and landlord/tenant disputes.

Do You Lose Everything If You Declare Bankruptcy?

Frequently I get questions from clients considering bankruptcy, who ask, “Can I keep my car? What about my house?” They have the impression that by filing for bankruptcy, they are guaranteed to lose everything they have.

This is not true.

Federal and state laws exist to protect certain assets and properties from creditors. Whatever type of bankruptcy you file, the court will allow you to invoke these provisions to allow you to keep at least some of what you own.

Under a Chapter 7 bankruptcy, these exemptions will determine whether what you own can be liquidated and paid to your various creditors. The Trustee handling the bankruptcy has the right to take possession of any assets not protected by an exemption—such as cash in an account or an extra car that’s not protected—and, after the sale of those assets, divide up the proceeds among creditors. In a Chapter 13 bankruptcy proceeding, there generally is no liquidation of assets; however, those items that do not fall under an allowable exemption may play a role in determining how much the Trustee is going to require to be paid to your creditors (“liquidation analysis”).

While in several states across the U.S., debtors can choose between federal and state exemptions, here in California, residents are not permitted to claim federal exemptions; they are limited to certain state exemptions. On the plus side, there are two types of state exemptions to choose from, as defined by the California Code of Civil Procedure: those under (1) Section 703 and (2) those under Section 704.

704 Exemptions

Under the 704 Homestead Exemption, a person declaring bankruptcy can protect a certain amount of equity deriving from their principal residence (such as house, mobile home, condominium, etc.). These current amounts include:

  •  Up to $75,000 if you are single and not disabled
  • Up to $100,000 for a family
  • Up to $175,000 if you are 65 or older or physically or mentally disabled
  • Up to $175,000 if creditors want to force the selling of your home and you’re either 55 or older; single and earn less than $25,000 a year; or 55 or older, married and earn less than $35,000 a year

Under the 704 Vehicle Exemption, a person can retain $2,900 worth of equity in their car, truck, motorcycle or other vehicle.

Other 704 exemptions include equity in wages, retirement and pensions, public benefits, tools of the trade and insurance.

703 Exemptions

 Under this system, exemptions only apply in bankruptcy—meaning, you’re not allowed to use them to guard your property against creditors outside of bankruptcy (e.g. defending against bank levies, other attempts at attachment of assets). So while the 703 exemptions generally provide more favorable protection than the 704 exemptions with respect to personal property that most people have (e.g. cars, furniture and furnishings, etc.), some California courts may not permit you to make use of them.

The 703 Vehicle Exemption allows the qualified individual to exempt up to $5,100 of equity in their motor vehicle. Additionally, under 703, there is a “wild-card” exemption of $25,575 for real or personal property that is not protected under any other 703 exemption.

 Selecting the right exemptions

 When a client seeks assistance in determining bankruptcy exemptions, the first thing we determine is if he or she has equity in assets such as a house or a car. If there is no equity – meaning the debt against the asset loan is more than that property’s fair market value – then there is a good chance the client will be able to keep the asset through the bankruptcy as long as:

  • Maintaining that asset does not constitute a continuing undue hardship, i.e., extreme monthly payments well above their ability to pay;
  • They continue to make the required payments on the secured debt; and
  • In most cases, the debtor is willing to sign a Reaffirmation Agreement with the creditor, which permits the debt to pass undischarged through the bankruptcy.

If a person does have equity in an asset, we explore the appropriate bankruptcy exemptions. Many times the exemptions line up and completely protect a client’s property. However, if the applicable exemption does not fully cover the equity of the asset, that property may be subject to liquidation (surrendering it to the Trustee to be liquidated). So, for example, if you’ve got $30,000 car with no loan against it, the trustee can sell it, give you $5,100 (under the 703 Vehicle Exemption) and use the rest of the net proceeds to pay off , at least in part, your debts.

Are you in need of legal counseling for bankruptcy or debt issues or have any questions regarding the above? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from bankruptcy, family law and estate planning to traffic violations and landlord/tenant disputes. 

Does Filing for Bankruptcy Get Rid of Support Obligations?

Is someone who relies upon support payments from his or her ex-spouse (either for themselves or for any children they may have) affected when their former spouse or partner files for bankruptcy?

When someone files for  bankruptcy relief under Chapter 7 or Chapter 13, that person’s creditors must immediately stop all collection efforts on their debt claims. This is known as an “automatic stay”—meaning, creditors are prohibited from actively pursuing the collection of an outstanding debt. Wage garnishments, foreclosures, and nagging phone calls from creditors all must stop.

But does the same principle apply when the issue relates to spousal or child support obligations?

The general answer is no—the automatic stay rule does not apply to domestic support obligations. In other words, regardless of the amounts involved or the reasons why a person decides to file for bankruptcy, alimony/spousal support and child support payments are considered priority debts and are therefore, in the eyes of the court, “non-dischargeable” and exceptions to the automatic stay.  The collection on these debts cannot be stopped by a bankruptcy filing, nor are the support obligations, both current and arrears, eliminated after a debtor completes his or her bankruptcy case.

In a Chapter 7 bankruptcy, ongoing support obligations must be paid during the pendency of the case. As for past payments due (arrearages), they will not only still be due and owing, but also they continue to accrue interest, even during a bankruptcy case, until paid in full.

With a Chapter 13 bankruptcy, things are a bit more complicated. Support obligations—both current and those in arrears—must be paid within the timeframe of the Chapter 13 plan, tramadol which is up to five (5) years. But under Chapter 13, you’re permitted to reorganize your debts in order to more effectively catch up with missed past payments (while of course meeting your current support obligations), which may lead to discharging at least a part of your non-support debt.

The challenge here is that if you enter Chapter 13 with significant back-support payments due, you will likely face high monthly payments due to a limit on the duration of a Chapter 13 plan to   five (5) years (60-months).

A related question I’m often asked: Can I (the debtor) avoid a request for an increase in support by filing for bankruptcy? Again, the general answer is no. In California, the automatic stay imposed by bankruptcy does not preclude a Family Court from determining new support obligations or modifying existing ones.

Bankruptcy is not a way to get out of meeting spousal and/or child support obligations. In any bankruptcy, the ex-spouse or child receiving support will always get priority status.

That’s why it’s in the best interest of all parties to make arrangements before bankruptcy sets in, so that support obligations continue to be met in a reasonable and reliable manner. Contact a family law attorney for advice on the best way to proceed in this situation.

Are you in need of legal counseling or have any questions about the above topic? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from family law/divorce, bankruptcy, and estate planning to criminal/DUI matters and landlord/tenant disputes.

How Can You Avoid Falling into the Bankruptcy Trap?

There’s a familiar—and dangerous—cycle I regularly see with regard to debt and bankruptcy relief.  Many people come to the conclusion that they’re carrying more debt than they can afford, so they file for bankruptcy, get relief from those debts under and then fall into the same debt-incurring behavior. Eight years pass (the legal period between filing for another Chapter 7 bankruptcy) and, because they lack any other options, they once again file for debt relief. This “bankruptcy trap” is a terrible spot to find yourself in and I advise clients to do everything possible to avoid it.

If you’ve experienced this situation and want to make some serious changes in your life, here are options for improving your chances of breaking the cycle:

Take the required classes in credit counseling seriously. Since 2005, it’s been mandatory in California that anyone seeking bankruptcy relief must attend two required classes. The first class, on credit counseling, actually takes place before your bankruptcy filing. In this class, counselors offer informal opinions about what course of action might be most beneficial for you—applying for debt relief, working out a household budget, etc. While in most cases, filing for bankruptcy is inevitable, I believe there’s value in getting a third party to objectively assess your situation.

The second class, taken during the bankruptcy process, is called a “debtor education class.” Individuals learn about moving forward following bankruptcy, receiving valuable advice on budgeting, rebuilding credit and avoiding credit scams and other pitfalls. I urge my clients—and anyone else in the same situation who reads this post—to take these classes very seriously. They can be very useful in helping you turn your life around.

Design a sensible budget. When you file for bankruptcy (especially Chapter 7), you’re showing the court that your net income is insufficient to pay your reasonable expenses. Chapter 7 helps you eliminate substantial debt, but you still walk out of the process with that same budget. Now it’s time to reassess your expenses, which is easier to do than reassessing your income. What expenses can you get rid of and what anti anxiety expenses should be paid first? Sticking to a sensible budget plan will take you a long way toward financial stability.

Schedule your payments. It’s vitally important to pay your bills on time, since prompt payment makes up a key portion of your credit score. Missing payments negatively affects that credit score and limits your opportunities to bounce back from bankruptcy. On the other hand, making payments on time improves your credit score, which in turn makes future credit opportunities easier to attain—and often with lower interest rates. This can be very helpful when the time comes to apply for a car loan or mortgage.

 Apply for credit. Many people mistakenly believe that if they file for bankruptcy, they’ll never be able to get a credit card again. On the contrary—credit card companies will see you as a “clean slate,” and do everything they can to get your credit card application. It’s OK to apply for a new credit card, as long as you read the fine print. Many so-called credit card opportunities come with astronomically high interest charges attached (as high as 25-30% annual rates!). Signing up for one of those will only send you back down the path to debt.

Fortunately, by doing your due diligence, you may find yourself eligible for lower interest-rate credit cards or a secured or pre-paid credit card. When you stay on top of your payment schedule, the bank (or other entity) that offers the card will report those positive payments—thus affecting your credit score in a positive way. Then you’re on the way to establishing your good credit.

Be smart. Know your limits. Create and maintain a workable budget. Then you’re much less likely to fall prey to the dreaded bankruptcy trap.

Are you in need of legal counseling for bankruptcy or debt issues or have any questions regarding the above? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from bankruptcy, family law and estate planning to traffic violations and landlord/tenant disputes.

Legal Resolutions You Can Make in 2014

There’s no better time than the start of a new year to get your legal and financial house in order. That’s why I advise all of my clients to make sure certain legal documents are in place and to take other precautions so there’s a better chance that 2014 will be a “legally hassle-free year.”

Here are some actions to take in the new year:

Run a credit report. Many people don’t realize that they’re entitled to one free credit report a year. I strongly recommend taking advantage of this. You may think you know everyone you owe money to, but if you run a credit report, the results might surprise you:

You may have forgotten about a debt you owe to a creditor.

  • A creditor may have made a mistake, identifying you as owing a debt when in fact that’s not the case.
  • A creditor may have failed to report that a particular debt has been satisfied.
  • You may be the unwitting victim of identity theft, possibly resulting in numerous debts you didn’t know about.

There are different ways to go about running a free credit report. To get started, check out www.annualcreditreport.com.

Create an estate plan. Thinking about one’s incapacity (e.g. coma) and eventual death is generally not a pleasant experience but, in this day and age, it’s become a necessity.  The overall extent of estate planning will depend on not only what you have but also what you want to do with it.  Without the requisite documents (e.g. living trust, will, power of attorney, health care directive), you and your loved ones may find yourselves in a serious legal situation.

Or update your estate plan. Most experts recommend reviewing your estate plan at least every five to seven years. Why? A lot can happen during that time-frame, including changes in the law and changes in your life – like having children, getting a divorce or inheriting some significant assets.

If you’re a renter, be sure to keep good records. Some recent “Topf of Mind” blog posts have covered tenants’ rights regarding apartment leases and security deposits. The underlying lesson weight loss here is to always keep copies of essential documents. If you don’t already possess a copy of the lease, contact the landlord and get a copy. While you’re at it, ask for copies of any other rules and regulations affecting your status as a tenant as well as other documents relating to your lease. For example, in order to preserve your rights in the event you have to vacate the property, obtain a copy of any inspection report of your residence (e.g. move-in inspection).

Review legal considerations before you get married. With the recent increase in marriages due to the legalization of same-sex marriage in California, we’re seeing again the need for everyone planning to get married to talk to an attorney before taking their vows. (Most couples don’t consult a lawyer until they’re considering a divorce).  Pre-nuptial agreements, for example, are an important consideration to think about prior to marriage.

Get help if you’re facing bankruptcy. This time of year, as people swarm the malls both before and after the holidays, I tend to get a lot of inquiries about bankruptcy. If you face an increasing mountain of debt, it’s definitely time to contact an attorney. And, as I’ve emphasized many times in the past, prior to making that appointment, put together all relevant documents (proof of income, estimates of monthly expenses, an inventory of your personal assets, list of creditors, etc.). Your time spent talking with an attorney will be far more productive if you have the necessary documentation at your fingertips.

This last point applies to all of the resolutions above. Whether the situation involves debt, a tenant’s issue, pre-nuptial or DUI, make contacting an attorney the first thing you do. This will help make 2014 a much better year for you and your family.

Happy New Year!

Are you in need of legal counseling or have any questions about the above topics? The Law Offices of Ian S. Topf offer a free consultation in a variety of issues, ranging from family law/divorce, bankruptcy, and estate planning to criminal/DUI matters and landlord/tenant disputes.

Homeowners’ Rights During the Foreclosure Process

The foreclosure process usually starts after a homeowner defaults on a loan or mortgage payment. That’s because most loans are secured by a deed of trust, which generally includes a built-clause stating that, in case of default, the lender has the right to proceed with foreclosure.

It’s not always understood that a similar clause in most mortgage agreements stipulates that even a secondary lender with secured mortgage interest can initiate foreclosure proceedings. So, for example, if you have three loans against your property, any of the three mortgage holders has the right to foreclose on their loan if and when payments aren’t made.

But this doesn’t mean every lender starts foreclosure proceedings when a payment is missed.  I’ve seen lenders go for years without foreclosing on a defaulted loan. Also, missing a payment doesn’t mean you automatically give up the right to live on the property. There’s no obligation to leave until you receive legal notice to vacate the premises.

Notice of Default

 In general, the foreclosure process starts when the lender and County Recorder serve you with a “Notice of Default.” (While this can happen after the homeowner misses one payment, many lenders wait until after a couple of payments are missed.) Since this document sets out your rights and responsibilities during the foreclosure process, it’s important that you read it very carefully.

The Notice of Default officially notifies you that you have 90 days from receipt of the notice to “cure” (redeem or make yourself current on payments). This can include having to pay all the money in which you are arrears, as well as other allowable costs the lender may have incurred.

If you make yourself current, the Notice of Default is withdrawn and you’re back in good standing. If not, you face foreclosure of your property.

Sometimes a lender will accept less than the amount stated in the notice (on the principle that some payment is better than none). So there is always the possibility that you can negotiate terms with the lender and have the default notice cancelled.

After foreclosure gets underway

 If you’re unable to make yourself current after the initial right-of-redemption period, the lender can post a Notice of Sale (as noted, not before 90 days have passed from the time the Notice of Default was issued). The Notice of Sale states that the lender (or “trustee”) can sell the home at auction within 21 days. According to the California Courts website, the Notice of Sale must, among other things:

  •  Be sent to you by certified mail.
  • Be published weekly by a newspaper in the county where your home is located (for three weeks before the sale date).
  • Be posted on your property, as well as in a public location (for example, the local courthouse).

During this time, you can try to make up payments, but the lender is not required to honor those payments after the right-of-redemption period has passed.

If the house is sold

 At the trustee sale, a buyer purchases the property and the deed is transferred to the new owner. This effectively makes you a “de facto” tenant. You can leave the property willingly or negotiate some other terms in order to stay. I’ve seen numerous examples of new owners entering into rental agreements with the prior owners that allows them to stay in the house. I’ve also seen situations where the new owner, wishing to avoid a lengthy eviction process, negotiates a payment to the prior owner so that he or she will depart in a timely and peaceful manner. (This is known as “cash for keys.”)

If you choose not to cooperate, the new owner can start the eviction process—which includes sending you a notice to vacate. Attempting to fight this in court can be difficult, time-consuming and expensive for both the new owner and the former owner.

Foreclosure is a complicated and occasionally highly emotional process. If you find yourself facing foreclosure, seek legal advice or assistance. A skilled attorney can offer the best guidance for finding the solution that works best for you.