Sonoma County Bankruptcy Lawyer Blog

Small Business Bankruptcy Filings Take a Dive, the article is headlined and that seems like good news for the economy. A sign of a recovery, if small businesses are at least staying in business.

Then comes the kicker -- "The one exception was California, where economic turmoil remained high last year and accounted for nearly 20 percent of the country's business failures."

That is certainly the case in Santa Rosa and Sonoma County, where the local economy shows a lot of resistance to any forward movement. Just last month, The Santa Rosa Press Democrat reported on a local economist's findings that the local recovery is tepid at best.

"There's still a lot of uncertainty out there," Sonoma State economist Robert Eyler said. "That's what's keeping us from growing."

Speaking at the Economic Outlook Conference at the Sheraton Sonoma County hotel in Petaluma, Eyler said that the lack of bank lending was holding small businesses from hiring and growing.

That was exactly the story I was told by a restauranteur I recently did a Chapter 7 for. He had a successful small restaurant and things were going great until the credit crunch hit. Then he couldn't get enough credit to buy food and wine for the week and he couldn't pay the bills on his own. The inevitable result: a visit to a bankruptcy attorney.

No suprise then that small business filings aren't falling in Sonoma County.

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CNBC's recent report on student debt suggests that student debt is the next housing bubble. Most student loans are not dischargable in bankruptcy. But student loans are guaranteed by the government.

That has created massive incentives for for-profit schools like the University of Phoenix to push students into debt that they don't need and can't afford because the schools are going to get paid anyway. The CNBC report detailed in teary interviews the impact on people's lives when they're straddled with punishing debt.

Two-thirds of American college students will graduate with a sizeable debt; for the class of 2009, the average debt was $24,000. Add loans for graduate school and parent loans on behalf of their kids and the Kuipers' family estimate of $80,000 per student is typical, according to Lauren Asher, who directs the non-profit Project on Student Debt.

"The need to borrow has grown for all types of students at all types of schools," Asher said. "And the amount that students are borrowing is driven by the share of cost that students and families are expected to cover after aid. Now those costs have risen faster than family incomes, faster than available grant aid."

Continue reading "The crushing weight of student loan" »

Anyone who's tried to get a loan mod through HAMP (Home Affordable Modification Program) knows it's mostly a joke. The program is so voluntary for banks, that somehow most people wind up not qualifying. And then going into foreclosure.

But Bankruptcy Courts around the country are trying to use the power of the judiciary to force banks to modify loans. In Rhode Island and New York, courts have loss mitigation programs that require banks to be transparent in their loan mod programs, according to John Rao, an attorney with the National Consumer Law Center in Boston.

"These programs do not require servicers or lenders to implement a particular loss mitigation option," Rao said. "Instead, they set a standard for transparency and accountability in the foreclosure process that is often lacking without this intervention."

"We've known for some time that the large loan servicers play all sorts of games to slow down and derail the modification process, and earlier this month learned that they are playing fast and loose with the foreclosure process itself," Whitehouse said at the hearing, held at Rhode Island Housing's downtown offices.

Hmm, perhaps a similar program could be started in hard-hit California...

The Las Vegas Sun reports on the case of a Tiburon man who filed bankruptcy and tried to hide assets from the IRS and other creditors.

Really bad idea.

James Dennis Territo, 59, of Tiburon, Calif., was indicted Sept. 28 in Las Vegas on charges of bankruptcy fraud and concealment of assets, both felony offenses. If convicted, he faces up to five years in prison and a $250,000 fine on each count.

Continue reading "Marin County bankruptcy: Why you should not think about hiding assets" »

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" »

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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.

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" »