Sonoma County Bankruptcy Lawyer Blog

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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.

In this interesting post, M. Jonathan Hayes addresses the problem of valuing businesses that really have no value.

I am listing the assets on schedule B at a value of zero but the exmeptions on schedule C as the full amount of the wildcard, roughly $23,000. So schedule C says, "Asset - interest in partnership - value zero. Amount claimed exempt - $23,000." I expect to get some guff from the trustee who will say there must be some value if we are exempting it and if no value, the exemption should be zero. I will point to Schwab and I am sure I am right.

Continue reading "Valuing a business without value" »

How high? Check this out.

Michael R. Mastro, the Seattle real-estate tycoon, filed for Chapter 7 of the U.S. Bankruptcy Code last summer reporting liabilities of $570 million. He then proceeded to take vacations in Italy, Paris, New York and Palm Springs, Calif., as well as ski trips to Switzerland and Jackson Hole, Wyo.

He has enjoyed $2,900 dinners at the plush Seattle restaurant Canlis and continues to roll around in his Rolls-Royce and Bentley, which cost him $8,000 a month. He also still lives in his $15 million waterfront home in Medina.

Yikes.

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.

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?" »

One of the things you have to declare in Chapter 7 is any current executory (not fully performed) leases - either as the landlord or the tenant - as well as your other contracts. If these are month-to-month leases, there's no problem. The tenant could move out with 30 days notice. But it's a different story when you've signed tenants, especially commercial tenants, to fixed-term leases.

I know of a case in the Santa Rosa, Calif. Bankruptcy Court where the debtors had signed two commercial tenants to above-market-rate leases with a commitment to three years, total. In that case, the trustee claimed the leases as property of BK estate. Total value of the leases was over $100,000 but the matter will likely settle for substantially less than that.

Often, the trustee won't want residential leases -- they come with liability! But commercial leases are far less risky. Here's a good summary of the issue from the University of Minnesota:

The trustee may assume or reject executory contracts and leases of the debtor. An executory contract is an agreement under which the obligations of both parties to the contract are unperformed. Common examples of such contracts in a farm setting include equipment leases and real property leases. Certain farm program contracts, such as Conservation Reserve Program contracts, are also executory contracts.

If the trustee elects to assume an executory contract, he must either cure any defaults in the contract or provide the other party to the contract with adequate assurances that he will cure the defaults. In a Chapter 7 case, the trustee has 60 days from the filing of the bankruptcy petition to make a determination as to whether such contracts or leases should be assumed. A contract for deed in which the debtor is the buyer has been determined by the courts not to constitute an executory contract under the Bankruptcy Code. Therefore, the trustee need not determine whether to assume such contracts or cure all defaults under such contracts immediately.