Sonoma County Bankruptcy Lawyer Blog

All consumer debtors contemplating Chapter 7 (full discharge) bankruptcy have to tackle the Means Test. Back in the distant days before 2005, this wasn't the case - you could file Chapter 7 regardless of income. These days, some fairly complex calculations are involved to figure out if you have disposable income that could be used to pay creditors.

(Of course, if your debt is more than 51 percent business debt, for instance if you are defaulting on mortgages on homes you ran for rental income, you're exempt from the Means Test.)

As this Nolo.com article points out, the first issue is whether your income is above the median for Sonoma County, California, for your household. If not, you're golden. Even if it is above the median, we then look at "allowed monthly expenses" for your family size in Sonoma County.

If you don't pass the means test, you are limited to Chapter 13 -- which is essentially a court-monitored repayment plan. But all is not lost, if you are close to qualifying, some judicious choices about expenses or waiting to file can help make it work. There are no sure things, but working with you attorney can make the difference between qualifying for a Chapter 7 and a 13.

Fannie Mae says it will crack down on homeowners who "walk away" from the mortgages on their underwater homes. Borrowers who have the means to pay on their loans but engage in "strategic defaults," won't be able to get another mortgage for seven years, according to news reports.

In states that allow deficiency judgments - California does not - Fannie Mae will sue walkaways, the mortgage guarantor said.

In Sonoma County, property values have fallen so hard in the real estate crash that one third of all homes are underwater, the Press Democrat reported this winter. That's some 34,000 borrowers looking at an average of $70,000 in "negative equity."

If Fannie Mae is going to be suing walkaways, it would seem they're just going to be driving up the number of bankruptcies. Until banks are ready to seriously modify loans to reflect market reality, people will still walk away from underwater loans. Renting for seven years is still going to look better than funding a permanently underwater home.

There's a fascinating article on Avvo's Naked Law site, titled 8 Reasons College Tuition is the Next Bubble to Burst.

It's of particular interest to me not only because I have a son about to enter 11th grade but also because the article implicates the 2005 "reform" of bankruptcy law in the Tuition Bubble.

Here's the theory in a nutshell: Private colleges have been riding the same debt bubble that real estate and derivatives were riding - spiking profits based on consumers getting easy credit. And since student loans are nondischargable in bankruptcy, the lenders take no risks that students will default. In other words, we have a system that encourages private schools to hike tuition rates, since students can always get those giant loans, and encourages banks to lend the money, since they know they will not be left holding the BK bag.

Continue reading "Is college tuition a bubble that's about to burst?" »

Economists are predicting a steady but slow - very slow - economic recovery for Sonoma County, the Press Democrat reports. The good news: Job growth, corporate profits and housing affordability are up in Sonoma County.

Continue reading "Sonoma County economic recovery? A slow but steady race" »

Sonoma County debtors with substantial income may be able to skip the means test if more than half their debit is "business debt."

The bankruptcy means test - created in 2005 - is meant to identify debtors who have enough nonexempt assets to pay their creditors. If you fail the means test, you may be forced into Chapter 13 or even blocked entirely from bankruptcy protection.

But do you even have to take the means test?

I recently handled a Chapter 7 bankruptcy for a Sonoma County couple who owned half a dozen homes, mostly in the South, in addition to their primary residence. While they may have been able to pass the means test in any case - since their income had plummeted - we didn't have to worry about it.

Since they were operating the homes as rental properties, all of the mortgages were considered business debt. If more than 51 percent of debt is business debt, as opposed to consumer debt, you don't have to take the means test!

Continue reading "Can Sonoma County debtors skip the Means Test?" »

ABC News reports that BP itself may suffer a "top kill" as a result of the horrendous environmental disaster created by the explosion of the oil rig.

BP might have thought itself safe because a Louisiana law limited liability to under a billion dollars, but Obama extracted a promise - in writing - from BP CEO Tony Heyward to pay the whole bill for the cleanup. That's an amount beyond even BP's ability to pay.

Thus, BP's share price keeps getting dragged down and the BK rumors are swirling like the gooey stuff on the ocean waves. What's all this have to do with consumer bankruptcies? Just that whether you're an individual or a megacorp, one's fortunes can turn quickly - whether it's a real estate investment that goes south (in the case of many an individual these days) or one project that suffers a "perfect storm" of negligence, malfeasance and bad luck.

Continue reading "BP bankruptcy rumors swirling over oil slick" »