Sonoma County Bankruptcy Lawyer Blog

Everyone knows bankruptcy is going up, but the numbers released by the U.S. Courts on Friday are pretty shocking.

The big picture: Consumer filings up 21 percent from a year ago, and Chapter 7 filings up 25 percent. Chapter 13 filings are up 10 percent.

Drilling down into California, we find the state definitely in the top 10 but not the worst-off. Nevada was No. 1 in Chapter 7 filings with 8.71 filings per 1,000 residents and a whopping 11.23 per 1000 people in all types of filings.

California came in 6th (5.05 per thousand) in Chapter 7s, 13th (1.44 per thousand) in Chap. 13s, and 7th overall.

In California's Northern District court, which includes the Bay Area, filings were up 39 percent, not quite as high as in the Central District, which includes LA, where filings were up an amazing 48 percent.

The 2005 bankruptcy reform act was supposed to put an end to "absusive" filings. But recent data shows that in bad times like these, filings have returned to pre-2005 levels. A study by Ronald C. Mann and Katherine Porter published in the Georgetown Law Review, entitled Saving Up for Bankruptcy reported this shocking statistic (from a 1998 study):

Bankruptcy relief would have afforded an economic benefit to about 15% of (the study group), but only about 0.66-1% sought relief any given year.

In other words, the authors point out:

Most families in serious financial distress do not file for bankruptcy.

Continue reading "The myth of bankruptcy abuse" »

If you're reading this blog but you're not yet ready to sign up for a consultation, feel free to post a question in the form to the right. I'll do my best to provide a basic understanding of the law. Obviously, I won't give specific legal counsel without having a solid understanding of your situation (that would require a face-to-face meeting in my Santa Rosa, CA offices -- or a phone meeting), but I encourage you to shoot me a question of comment here, and I'll try to provide some help.

Look forward to hearing from you.

Usually when I meet with people in my Sonoma County offices in Santa Rosa, one of the first questions they have is, how bad will filing for Chapter 7 bankruptcy be for my credit? Will I be able to rent again? Will I be able to buy a car?

Of course a bankruptcy stays on your credit report for 10 years, so it ain't great. But if you're sitting in a bankruptcy attorney's office -- the odds of you having stellar credit are pretty bad. In point of fact, you probably have a wave of late payments, nonpayments, credit cards sent to collections, perhaps a foreclosure ... you get the idea.

Putting yourself in a creditor's seat, would you rather work with someone who clearly can't pay their bills, or someone who declared bankruptcy and 6 months later is paying all their bills on time?

This article on the National Bankruptcy Forum points out that a key factor is your debt-to-income ratio.

If you have tens of thousands of debt, that ratio is going to look pretty bad. If you have declared bankruptcy, you have virtually no debt, so your debt-to-income looks great. Once you get a little new credit in place and make regular payments, you're on the way to a clean bill of health.

Santa Rosa, CA -- Back in 2005, Congress passed -- at the behest of credit card companies -- a dramatic overhaul of the bankruptcy laws, under the supposed need to stop debtor "fraud." In fact, the law was intended to protect the monied interests by making it harder to file bankruptcy.

The San Francisco Chronicle took a look at the effect of the law 5 years later. It's clear that the law had an immediate freezing effect on bankruptcy filings, but today in light of the Great Recession, filings have steadily and markedly marched upward.

This either proves, as Scott Talbott, with the Financial Services Roundtable, claims: "The fact that the numbers are up means people still have access to the bankruptcy courts."

Or that there are many people who can't afford bankruptcy who desperately need it.

The Government Accountability Office, the nonpartisan watchdog agency of Congress, told lawmakers in June 2008 that the 2005 law boosted Chapter 7 expenses from about $914 to $1,477, including legal, filing and counseling fees.

What's not clear from this data is how many of these increased filings are Chapter 13s instead of Chapter 7 bankruptcies, which provide a full discharge.

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.

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.

The bad: Sonoma continues to boast distressed real estate, government budget cuts and unemployment still above 10 percent

In other words, plenty of folks will be considering bankruptcy, if an expected new wave of foreclosures hits. In any case, recovery won't be soon enough to save many homes already near the brink.

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" »

Nice means test calculator at Nolo.com. As Nolo explains here, the means test is part of 2005 "reforms" of the bankruptcy law, designed to limit who can file for the Chapter 7 discharge.

The means test compares a debtor's income and expenses with regional standards, which makes it rather difficult to figure out if you qualify. Attorneys use software that figures these things out automatically, but the means test has made things difficult for individuals trying to do their own bankruptcies. Nolo's online calculator is a great tool for figuring out the calculations, but of course it doesn't compete with an attorney's know-how.

In any case, the means test is just one piece of your bankruptcy filing...

A question I get a lot is "Will I be able to rent if I declare bankruptcy?" Or "will I ever get credit again?" The answer is, a bankruptcy isn't great for your credit, of course, but it's a hell of a lot better than a never-ending cascade of late and nonpayments.

If you're considering a Chapter 7 or 13, then your credit has no doubt taken a nose dive already. Bankruptcy is a chance to restart with a clean slate. That means restarting your credit, too. With those credit card debts wiped out, can you live within your means? You should be able to obtain some credit, repay it on time and build from there.

When creditors see you've taken advantage of the clean start, you'll be in a good position, much better than you'd be without bankruptcy. But this is only true if you can truly make the most of the fresh start. If you're going to be back in the same boat, bankruptcy is only a Band-Aid-brand plastic bandage.

Bankruptcy filings in January 2010 were up a whopping 21% over last January, according to an automated review of court records, Bloomberg reported.

The number one state for personal bankruptcy: Nevada, followed by Georgia, Tennessee, Alabama, and Michigan.

Personal bankruptcy makes the most sense when done at the beginning of financial difficulties, not at the bitter end, as several attorneys tell the Kalamazoo News.

“Most people, being honest and decent, exhaust every possible resource and it’s only when they’re at the bitter end they come in” said Paul Davidoff, a Kalamazoo bankruptcy attorney. “Only when they are down to a couple of thousand left, and they can see the writing on the wall, do they think about bankruptcy.”

If people would realize that bankruptcy is a way to protect assets so that you can make a fresh start, rather than just calling uncle when they're already down and out, they would be a lot better off.

“We have been traditionally taught in America two things. The first thing we have been taught is that if you work hard, if you work harder than others ... you will succeed. The second thing we have been taught, taught throughout past generations, is that the future will be better than the past,” attorney Steve Rayman said. “The difficulty that we have today is that neither of those two premises are true.”

As with so many things, a consultation with a lawyer when a problem first appears leaves so many more options - including bankruptcy - available.

Divina Westerfield has a comprehensive list of 36 frequently asked questions about Chapter 7 that provides an excellent starting point to thinking through Chapter 7. For instance:

14. Can I keep my home and personal property?

As for real property in many states, dependent upon which exemption scheme is selected and your circumstances, you may exempt up to $100,000 in equity. When calculating your equity you should use a value that is based upon a forced liquidation as opposed to the best selling conditions to arrive at a value for your home. Once you determine this value, subtract the amount owed plus selling and transfer costs from the value to calculate the equity.

As for personal property, in California, you are permitted exemptions for a variety of personal property. This includes, automobiles, household furnishings and personal effects, jewelry, tools of the trade, retirement plans, unmatured life insurance, personal injury awards, earnings, animals and some other miscellaneous property. The value of each exemption and which exemptions can be used are determined by the statutory exemption scheme is selected. Again, state laws vary. Talk to an attorney in your state.

19. Will bankruptcy stop a foreclosure?

Yes. However, a home is an asset usually secured by a mortgage or deed of trust. The lender is entitled to apply to the court for relief from the automatic stay, the order preventing creditor action by virtue of the bankruptcy. Depending upon several factors, you may be able to prolong a foreclosure until you have received your discharge from bankruptcy. You usually have to make a deal with the lender in order to keep a home that is in foreclosure.