Category Archives: Debt

Help! I Got Notice That an Old Judgment Has Been Renewed

gavel over money istockASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

About five years ago I moved to Nebraska from California. I just got a notice in the mail that a judgment obtained against me about 20 years ago has been renewed. It previously got renewed ten years ago. The amount now due is almost $10,000. I incurred this debt almost 20 years ago when I was 19 and have been ignoring it all these years. I just bought a house and don’t want this messing up my credit. How did the creditor find me? I spoke to a Nebraska lawyer who told me I will need a California lawyer to handle this. 

What can I do? 

Yours truly, 

Joanne

Dear Joanne,

California law provides that a judgment is enforceable for ten years. Before it expires, the plaintiff can renew it for another ten years. And then before that ten years expires, the plaintiff can renew the judgment again, for another ten years.

I assume the notice that was mailed to you came from the plaintiff. The fact that you recently bought a house might explain how the plaintiff found you.

How the Creditor Can Collect the Judgment

You can’t go into court to “fight” the judgment. It is too late for that. The judgment is valid proof that you owe the money. I expect the plaintiff (also called the judgment creditor or judgment holder) will file its judgment in the Nebraska court to obtain a “sister state judgment.” That will allow it to enforce the judgment against you in Nebraska. Enforcement may include a wage garnishment, seizure of bank accounts, and placing a lien on your house. (Learn more about the ways that judgment creditors can collect against you.)

Options for Dealing With Old Judgments

Your options are quite limited.

Attack the Judgment Creditor’s Standing

You might try to attack the judgment holder’s standing to enforce the judgment by demanding proof that it is the rightful owner of the judgment. Debt paper is bought and sold all the time. I would not be surprised if this debt has not already been sold many times over. Often the paperwork to prove the rightful ownership of the debt is inadequate or nonexistent.

However, the legal fees you would incur to do something like that may be a waste of good money. The court may rule that your time to attack the judgment’s ownership has already expired. Or, if you are allowed to make what we call a “collateral attack” on the judgment, the court might find that the plaintiff’s proof of ownership is beyond dispute.

Negotiate a Settlement

Your strategy to ignore this and refuse payment has been very successful for almost 20 years. That is, until now. If this is your only debt problem, your other option is to negotiate a settlement. Often these things can be settled for a lump sum payment of 50% or less. (Get strategies for negotiating with creditors.)

File for Bankruptcy

But if you have other troublesome debts, go and see a local bankruptcy lawyer for advice.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Biggest Payday Loan Rip Offs: Idaho, South Dakota, Wisconsin, and Nevada

Customer service satisfaction surveyThe Pew Charitable Trusts recently released a study of payday loan rates across the country. While payday loans are exorbitantly expensive wherever they are allowed (15 states don’t allow them), a number of states have incredibly high average rates.  Those states and their average interest rates on payday loans are:

  • Idaho – 582%
  • South Dakota and Wisconsin – 574%
  • Nevada – 521%
  • Delaware – 517%
  • Utah – 474%

Notably, none of these states have laws that cap the amount of interest that payday loan lenders can charge. Rates in these states are often double those in states that do a better job of regulating the payday loan industry. (If these numbers aren’t sufficient to make you run the other way, read more about why you should avoid payday loans.)

Competition Does Not Bring Rates Down

The Pew study also found that competition does nothing to bring rates down. Those states with the highest rates also often had the highest number of payday loan storefronts.

To get information about the study results, check out the Pew Charitable Trust’s Fact Sheet:  How State Rate Limits Affect Payday Loan Prices.

Preventing World War III: What Happens If Your Ex Gets a Tax Bill After You File for Bankruptcy?

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Hi Leon,

My domestic partner and I used to own a house together — we were both on the first mortgage and second mortgage home equity loan. We split up, and she transferred her share of the house to me in a settlement agreement. She remained on the mortgages because the lender would not take her name off and I couldn’t refinance in my name only because the home had no equity.

Eventually, I filed personal bankruptcy and lost the home in foreclosure to the first mortgage holder. The second mortgage holder forgave the debt on the second mortgage and then issued an IRS 1099 to my ex-partner. The second mortgage holder would not issue a 1099 to me because it said I am protected by the bankruptcy.

My ex is now trying to get me to pay her income taxes. She has contacted a lawyer who is trying to get the loan file from the lender.

Can you think of some way to unwind all this craziness before it erupts into World War III with litigation and big lawyer fees? 

Many thanks and have a good evening.

Best,

Diane

Dear Diane,

Most likely, you have no legal obligation to repay your ex for any income taxes she might owe. If that’s the case, she may be in violation of the bankruptcy’s discharge order if she comes after you. A simple reminder of that (from a lawyer) will hopefully stem World Word III.

And your ex might not even owe income tax on the forgiven mortgage debt. If that’s the case, there would be no reason for her to even start World War III.

No Tax on Forgiven Debt If Your Ex Was Insolvent

As you and your ex are aware, the IRS treats forgiven mortgage debt as income. That’s why the mortgage lender issued the IRS 1099 to your ex.

However, if your ex was financially insolvent in the year that the debt was forgiven, she won’t have to pay any income tax on that debt. If she can establish that (she should consult with a CPA), she may be able to amend her tax return so that she doesn’t owe the extra tax. (I hope it is not too late for her to amend her return, assuming she was insolvent.)

What does it mean to be insolvent? To determine if she was insolvent at the time, she would add up the value of her assets and compare that number to the amount of her outstanding debts, including the old second mortgage. If her debts were greater than her assets, then she was insolvent. Here is the link to the IRS Publication explaining all of that in simple language. I suspect she had no significant assets? If so, she should be “home free.” (Nice pun?)

Another Way to Avoid Tax on Forgiven Mortgage Debt?

Depending on what you and your ex used the second mortgage for, she also might be off the hook for the tax.  Congress created an exception to the mortgage forgiveness tax if you used the mortgage money to purchase or improve your home. If that’s the case, you don’t have to pay tax on the forgiven debt.  (Learn more about the Mortgage Forgiveness Debt Relief Act.)

But here’s the catch:  That exception ended on December 31, 2013. If your second mortgage lender forgave the debt 2013 or before, and you used the money to improve your home, your ex is probably off the hook.

If the debt was forgiven in 2014, it’s still possible (some say likely) that Congress will extend the mortgage forgiveness tax exception through 2017, and make the extension retroactive.

You Are Not Liable for Taxes on the Forgiven Debt

It was legally correct for the lender to issue the 1099 to your ex instead of to you. That is because your bankruptcy got rid of your personal liability for the debt on the second mortgage, so there was no debt to forgive. It is actually refreshing that hear that the lender is following the law (for a change).

Do You Have to Reimburse Your Ex for Any Extra Taxes She Has to Pay?

But even though you don’t owe taxes to the IRS, must you reimburse your ex for any taxes she has to pay to the IRS? It’s likely your domestic settlement agreement says yes, but, as we discuss below, your obligation to her was probably discharged in your bankruptcy.

Your domestic settlement agreement. A domestic settlement agreement will usually operate just like a marital settlement agreement. It divides up all of your joint assets, and assigns responsibility between each of you for payment of joint debts. Because you kept the house, the agreement probably required you to pay the mortgages and hold your ex harmless from the mortgages and any other debts assigned to you.

But any obligation to reimburse your ex was probably discharge in the bankruptcy. Here’s why.

If You Listed Your Ex in Your Bankruptcy

You should have listed your ex as a creditor in your bankruptcy because she was the co-obligor on your mortgage debts. If listed, your liability to her may have been discharged in the bankruptcy (assuming the debt was dischargeable, see below).

If You Didn’t List Your Ex in Your Bankruptcy

Even if you didn’t list your ex in your bankruptcy, you’re probably still OK. The bankruptcy law says that unlisted debts are also discharged provided a few conditions are met:

  • the unlisted debt was the type of debt that would be normally be dischargeable, and
  • the bankruptcy was a “no asset bankruptcy case.”

Dischargeable debts in Chapter 7 are generally anything except most kind of taxes, student loans, family support, and debts arising from intentional misconduct.

A no asset case means the court never set a deadline for creditors to file claims because there was no money to be distributed. Most Chapter 7 bankruptcies are “no asset” cases, and it is a fair assumption that yours was, too.

Was the Debt Arising From Your Domestic Settlement Agreement Dischargeable? 

Normally, obligations arising from a divorce or separation agreement are not dischargeable in bankruptcy. (See the list of debts that are not wiped out in Chapter 7.) But, this is only if the agreement was made with a spouse, a former spouse, or child.

But since you called your ex your “partner” I assume you were not married. If so, that is a good thing for you in this case. You can discharge your obligations under the domestic settlement agreement because you did not make the agreement with a spouse or former spouse.

In summary, any obligation to hold your ex harmless from the mortgage debts was dischargeable in your bankruptcy provided that:

  • she was not your spouse, and
  • the claim was listed in your bankruptcy, or if not listed, your bankruptcy was a “no asset” case.

Preventing World War III

If your ex lawyers up and comes after you to pay her tax debt, she may be held in contempt of the bankruptcy court’s discharge order. A creditor cannot pursue collection of a debt that has been discharged in bankruptcy.

A well written “lawyer letter” defending your position should be enough to make the other side back down. See if your former bankruptcy lawyer can help you with that, or find one right away who can do that for you.

–Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Filing Your Income Taxes & Bankruptcy: What You Need to Know

Tax Return 1040The April 15th deadline is looming — it’s almost time to file your 2013 tax return. If you are struggling with debt and thinking about filing for bankruptcy, you may have some questions about how your tax return and bankruptcy will affect each other. For example:

  • Should you file your tax return if you are considering bankruptcy?
  • If you owe taxes this year, can you get rid of the debt in bankruptcy?
  • Will you get to keep your tax refund if you file for Chapter 7 bankruptcy?

Here are answers to some common questions about tax filing time and bankruptcy.

Should I File a Tax Return If I am Thinking About Bankruptcy?

Yep. When you file for Chapter 7 or Chapter 13 bankruptcy, you are supposed to provide the bankruptcy trustee with copies of your tax returns for the previous two years. If you don’t have a good reason for not filing those returns, the trustee will likely require that you file them before your bankruptcy gets under way. (To learn more, see Nolo’s article Gathering Your Documents for Bankruptcy.) So you might as well do it now. If you have a good reason why you can’t file your tax return this year, talk to a bankruptcy attorney.

If you file for Chapter 13 bankruptcy, the trustee will probably require that you provide him or her with your tax return for each year that you remain in the bankruptcy case.

If I Owe Taxes This Year and Can’t Pay Them, Can I Wipe Them Out in Chapter 7 Bankruptcy?

Wouldn’t that be great? But no, you cannot discharge (eliminate) recent income tax debts in bankruptcy. So if you owe a bundle this year and don’t pay up, that debt to the IRS will survive your bankruptcy. You can, however, discharge older income tax debts if they meet certain criteria. (For details, see Nolo’s article Eliminating Tax Debts in Bankruptcy.)

Most people know that credit card debt is discharged in Chapter 7 bankruptcy (with a few exceptions). But if you’re thinking about getting rid of tax debt by paying your tax bill with your credit card, think again. Bankruptcy laws specifically state that if you put nondischargeable income tax debt on your credit card, that part of your credit card debt won’t be wiped out in bankruptcy. (See Can I discharge credit card charges used to pay off income tax debt?)

What Happens to My Tax Debts in Chapter 13 Bankruptcy?

If you file for Chapter 13 bankruptcy, you pay tax debts through your plan (which lasts from three to five years). You repay nonpriority tax debts at a discount, and the remainder is discharged at the end of your case. You have to repay priority tax debts in full, but you often pay them at 0% interest and because you pay them over the life of your plan, this gives you more time for repayment. (To learn more, including which tax debts are priority and which are nonpriority, see Nolo’s article Tax Debts in Chapter 13 Bankruptcy.)

If I Get a Tax Refund This Year, Will I Lose It if I File for Chapter 7 Bankruptcy?

If your concern is not tax debt, but your tax refund, then a little planning is in order. Here’s why.

When you file for Chapter 7 bankruptcy, all of your property and assets become part of the bankruptcy estate. Unless your property is protected by law (the laws that allow you to keep certain property in bankruptcy are called exemptions), the bankruptcy trustee can sell it and use the proceeds to repay your creditors. (You can learn how this works in Nolo’s article Exemptions in Chapter 7 Bankruptcy.)

If you get a tax refund this year and then file for bankruptcy, that refund becomes part of the bankruptcy estate. You may be able to protect the money by using an exemption. Most states don’t have a specific exemption that covers tax refunds, but some allow you to exempt a certain amount of cash. And many states have a wildcard exemption that you can use to protect any type of property. (You can find your state’s exemptions in Bankruptcy Exemptions by State – choose the link for your state.)

But if you stand to lose your tax refund in bankruptcy, you could use another strategy to keep the money – delaying your bankruptcy filing. After you get your tax refund, spend it on necessities (like your rent or food). Once it’s gone, then file for bankruptcy. If you plan to do this, however, speak with a local bankruptcy attorney first. Bankruptcy courts vary as to what types of expenses count as “necessities.” And some attorneys may advise you to keep your tax refund in a separate account. (To learn more, see Nolo’s article How to Spend Down Tax Refunds in Chapter 7 Bankruptcy.)

Can a Credit Card Debt Be Reported on a Child’s Credit Report?

Real bank or piggy-bank?ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I got a Chapter 7 discharge about a year ago. Long before filing bankruptcy I got an extra credit card for my daughter to use. At that time the bank assured me that I would be the only person liable for charges on the card. My daughter just got her credit report and the credit card account appears as a charge off. 

How did the company get her social security number? And didn’t it violate the agreement it made with me? My daughter is now 17 years old, and I’m sick over the thought that I ruined her credit. 

Yours truly, 

Marjorie

Dear Marjorie,

I suggest that your daughter dispute the debt on her credit report. It’s not hard to do. You can learn how in Nolo’s article How to Dispute Errors on Your Credit Report.

In her dispute, she should state two things:

  • that the credit card account is not hers, and
  • that even if it was, she is under age 18 and is now voiding the contract, so does not owe the credit card company anything

I think this credit dispute will be quickly resolved in her favor. If it is, that annoying item will disappear from her credit report.

Here is a little background on each of these arguments.

The Credit Card Account Is Not Hers

The credit card company told you that you would be the only one liable for the charges, so the account never belonged to your daughter. Your daughter should state these facts in her dispute.

What If the Agreement Did Hold Your Daughter Liable?

But what if the credit card agreement did hold your daughter liable?  It’s likely you no longer have documents proving the contrary. And credit card companies do issue extra cards to authorized users and hold the user liable. In this case, because the bank has her social security number, is it possible the agreement said she would be liable?

A Minor Can Void a Contract

Even if the credit card agreement did hold your daughter liable for the credit card debt, she can void the contract before she turns 18.

Because the law says that minors lack the capacity to enter into a contract, it gives minors the option to either (1) honor the contract, or (2) void the contract before he or she turns 18.  (There are a few exceptions: Minors cannot void contracts for necessities, like food and shelter.)

Your daughter should immediately notify the credit card company and the credit repair agency that she is voiding the contract.  She can do this by stating:

“While I believe that I never had a contract with [credit card company], if I did, I am now voiding the contract.  I am under the age of 18.”

At that point, since there is no contract in place, your daughter does not owe the credit card company anything, and she can dispute the entry on her credit report.

A Novel Argument?

And if you want to try something new, consider this. Last July, the new Children’s Online Privacy Protection Act Rule (COPPA Rule) took effect in California. If you use the above tactics and still cannot get the item removed, you could hit the credit card company with a demand to remove the item on the ground that it is violating COPPA by publishing information pertaining to the identity of a minor.  It might be a stretch to say that a credit report (which has a limited viewing audience) is “publishing” information about a minor and therefore violating COPPA, but it doesn’t hurt to make the argument. Rather than test new legal waters, perhaps the credit card company (or the credit reporting agency) will back down and remove the item.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Payday Loan Terror Tactics

Devil with piggybankASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I plan on filing for bankruptcy soon. I have a few payday loans that I have been rolling over and paying interest on. The payday loan people said if I try to stop payment on my check to them, it is the same as writing a bad check and they will have the district attorney press charges against me. If I don’t pay them am I going to be in serious trouble? They also said I can’t discharge a payday loan in bankruptcy. I am so worried that I can’t sleep.  

Thanks, 

Steve 

Dear Steve,

Your failure to pay the payday loan “people” (I use that term loosely), will not get you in trouble. I am assuming that your bankruptcy case will be filed very soon.

How a Payday Loan Works

Here’s how a payday loan works. You give the payday loan company a post-dated check (the payday loan company actually creates an electronic check for you with a specific check number, just as if it were a paper check.) In return it gives you cash in an amount less than the face value of the check. The payday loan company holds the check for a few weeks (often until your payday). At this time, you must pay the company the face value of the check, usually by allowing it to cash the check. If you can’t make good on the check, the lender requires you to pay another fee.

(Here are some reasons why it’s best to avoid payday loans.)

Stopping Payment on a Payday Loan Check Is Not Bad Check Fraud

Putting a stop payment order on a post-dated check you gave to a payday loan company is not the same as writing a bad check. A “bad check” is a check that you knew was not good at the time you wrote it, but the payee did not. In contrast, when you give a post-dated check to a payday loan company as security for a payday loan, both you and the company know the check was not good on the day you gave it.

Here’s an example. I give a bad check at the grocery store and walk out with a bag of groceries. I might face prosecution for writing a bad check if it can be shown that I knew I had no money in the account when I wrote the check. A payday loan is different. The company knew you had no money to back up your check on the date you borrowed the money. So long as you had the honest belief at the time you borrowed the money that you would repay it when due, there has been no wrongdoing. In fact, the payday loan people consented to your delay in payment by letting you pay extra interest to roll over the loans.

The Payday Folks Lied to Scare You. Now Get Some Sleep

Doctors have recently proven that sleep is good for you. Get some. The payday folks have lied to scare you. They are the ones who should be losing sleep. In your case I don’t think they will ever get paid.

In my 34 years of bankruptcy law experience, I have never seen a payday lender so much as try to challenge anyone’s bankruptcy.

Go ahead and stop payment on the checks that you gave to the payday loan “people.” Tell them I said “Merry Christmas.”

– Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+


FICO Provides Insight Into the Impact of Foreclosure, Bankruptcy, and Short-Sale on Your FICO Score

exitsigncreditThe other day I listened in on a Making Home Affordable training webinar entitled The Impact of Mortgage Assistance on Credit. The training was particularly noteworthy because of its presenter:  Joanne Gaskin, Senior Director of Scores and Analytics at FICO. Yes, Joanne did a great job presenting the material. But even more exciting — she was willing to answer listener questions about FICO scores.  It was clear that the audience was salivating — I mean, when do you get to ask FICO what goes on in their score-making world!

Here are some interesting tidbits I gleaned from Ms. Gaskin’s presentation:

“Simulated Statistics”

Ms. Gaskin presented a “simulated” chart of the impact of  the following on consumer scores:

  • late payments
  • foreclosure
  • short sale with deficiency
  • short sale without deficiency, and
  • bankruptcy.

The statistics were simulated because they weren’t based on actual consumers, but were FICO’s approximation of what would happen to the average consumer going through the various events. The chart presented the impacts for consumers starting with different scores.

Here’s what I learned:

Bankruptcy Is the Worst, Followed by Foreclosure

Bankruptcy had a slightly worse impact on scores than any of the other events.  Foreclosure was second to last in terms of the biggest negative impact. Short-sellers did slightly better — those without a deficiency faring better than those without. But there wasn’t a huge difference between all of these events.

Late Payments Have a Huge Negative Impact

Surprisingly, having a 30-day, 60-day, or 90-day late payment had a big negative impact on a score.  Granted, it was not as large as going through foreclosure, but scores dropped significantly all the same.  For example, a consumer with a starting score of 680 dropped to 600 with one 90-day late payment.  Foreclosure for the same consumer dropped the score to 575. That means that the late payment caused an 80-point drop; from there it was just a 25-point drop once the foreclosure happened.

The Jury is Out on the Impact of Loan Modifications

According to Ms. Gaskin, loan modifications are currently reported as CN and CO on credit reports. For now, the FICO score bypasses these codes, which means they are viewed neither positively or negatively. However, FICO will consider  whether you were paying as agreed prior to and post modification. If a lender reports a loan modification as “paying under a partial payment agreement,” this will be a negative for your FICO score.

The Higher Your Score, the Bigger the Plunge

Those with higher scores lost more points in each of the various events. For example, a consumer with a starting score of 820 had a 100 point drop with just one 30-day late payment. A consumer with a score of 680 dropped only 80 points with a 30-day late payment.  If the same consumers filed for bankruptcy, the first (starting score of 820), dropped about 270 points to end up with a score of 550. The second (starting score of 680) dropped only about 150 points, to end with a score of 530.

Each Case Is Individual

Keep in mind that these simulated numbers were just that, simulated. Each person’s situation is different. Your score may drop more or less than the average consumer based on your prior credit history and how the delinquency or negative event is reported.

To learn more about the individual factors that influence your FICO score after a negative event, see Nolo’s article Which Is Worse for Your FICO Score: Bankruptcy, Foreclosure, Short-Sale, or Loan Modification?

For tips on rebuilding your credit, visit our Credit Repair topic area.

Paying Off Credit Card Debt v. Filing for Bankruptcy

CreditCard2ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am making my credit card payments on time, but they are a substantial amount each month. Would it be a good idea to file for Chapter 13 bankruptcy to pay them back? Would that look better on my credit report than if I filed for Chapter 7 bankruptcy? And will the credit card accounts have to be closed once they’ve been paid in full, or will I get to keep them? 

Thanks, 

Wally

Dear Wally,

I predict you’re going to feel great by the time you finish reading the bankruptcy advice I have for you.

The Credit Card Debt Trap

You make your credit card payments on time, but you don’t see any progress in getting them paid off. You are not the only person in this situation, and that’s because of credit card interest. Consider this: If you have a balance of $5,000 on your credit card and are paying 14% APR, it will take you 22 years to pay it off. That assumes you always make the minimum requested payment, on time.

Can I cheer you up some more? Over that 22-year period, you will end up paying a whopping $5,887 in interest, on top of the original $5,000 balance. That’s a total of $10,887 to buy something that cost only $5,000. (And it’s likely that whatever you bought is long gone by the time you pay off the balance.)

Paying the Debt Off Outside of Bankruptcy

So what’s the best way to avoid this scenario? My first choice for you would be to avoid bankruptcy by paying the debt down yourself. To do this, however, you’ve got to make more than the minimum payment each month.

Let’s go back to the example above. Let’s say your minimum monthly payment on the balance was $100.  If you paid $240 per month, you would pay the debt off in just two years. You’d still pay $761 in interest, but you’d save yourself 20 years of debt payments, and $5,126 in interest.

(For tips and strategies to get out of high credit card debt, visit Nolo’s Managing Credit Card Debt topic area.)

Discharging the Debt in Bankruptcy

If you can’t step up your monthly payments, and you have no better alternative, bankruptcy can be a great way to deal with debts. It’s true that bankruptcy will damage your credit. However, almost all of my clients already had miserable credit by the time they began considering bankruptcy. Thus, they had nothing left to lose.

Keep this in mind though:  If good credit is extremely important to you, then do not file any kind of a bankruptcy case. If getting out of debt is more important than your credit, you should consider Chapter 7 or Chapter 13 bankruptcy. Your credit will look the same regardless of which chapter you file. The credit card accounts will remain closed, even if you pay them back under Chapter 13.  (To learn more about what happens to credit card debt in bankruptcy, visit Nolo’s Credit Card Debt and Bankruptcy topic area.)

For further guidance on your particular situation, consult with one or two experienced bankruptcy lawyers. You should be able to find lawyers who will give you free consultations.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer. 

Find Leon on Google+

Bankruptcy v. Debt Settlement

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I’ve got trouble. I just got sued by a credit card company for around $9,000. I have one other delinquent credit card debt for about $15,000. I make around $32,000 per year. It takes all my money just to live. Those are my debt issues, but here’s the real trouble. I have leukemia again, after being in remission for almost five years. I live in California. 

I will be starting chemotherapy soon. I am physically reaching the point where I have to go on disability. My life savings is about $7,000 in an IRA account. That’s all I’ve got, plus really excellent health coverage from my job. I would like to settle with my two creditors, provided they remove anything derogatory from my credit report. I can get a letter from my doctor to show the creditors if that will help me get settlements. I understand that if I make settlements, I might owe some extra income taxes? 

So, what in the world do I do? Any insights from you would be a huge help to me right now. 

Thanks, 

Keith C.

Dear Keith,

Thank you for reading our bankruptcy blog. I understand what a pernicious disease you have. I hope you will knock it down and get back into remission. You have asked if I can explain your legal options. I know you don’t expect a perfect answer to such tough questions, but I’ll do my best to help.

Debt settlement is certainly an option for you. Bankruptcy is another option. Let’s analyze them both.

Bankruptcy

Based on what you mention, bankruptcy is probably an option. You have just a couple of old debts that should be dischargeable, you have no assets to lose, (your IRA account will be protected) and you already live pay check to pay check. You sound like a perfect candidate for Chapter 7 bankruptcy.

My only hesitancy over bankruptcy is that you might be stuck with large future medical debts if you lose your insurance. Also, the best of medical plans could leave a person owing a lot of money under some circumstances. Hopefully that won’t happen to you. However, a lawyer should be able to point out all possible outcomes that are reasonably foreseeable.

Debt Settlement

Now, let’s analyze debt settlement. My law partner Jeffrey Wishman is an absolute wizard at settling debts. He feels that given your financial and medical circumstances, settlements as low as 25% of the total owed may be possible, especially if your doctor provides a diagnosis letter with a grim prognosis. Sharing a letter like that with your creditors can be extremely helpful during the negotiation process. If successful, debt settlement will free you from your present debt worries.

However, even a 25% debt settlement is going to use up all the money that you have. I really don’t want you losing all your savings to pay for debt settlements, especially since you have no present ability to replace your savings. Also, you will soon be on disability which may provide less income than your normal salary.

Taxes Owed on Forgiven Amounts in Debt Settlement

Let’s examine the possibility of you owing income taxes on the amount of debt that gets forgiven. Forgiven debt is counted as income, and normally you would owe incomes taxes on that money, just the same if it had been earned in that amount at your job. Fortunately, there is an exception to that rule, and the exception is in your favor.

An individual will not owe any income tax on the forgiven portion of debt, provided that you were financially insolvent. Insolvency is measured by the value of all your assets and comparing that to the total of your debts. If you owe more money than the value of all your assets, you are insolvent. Based on what you said in your question, you are insolvent unless you own something of value that you haven’t mentioned. I am assuming that all of your personal property such as clothing, furniture, appliances and personal effects have no real value. You do have $7,000 in your IRA, but that is less than the total of all your debts. Hence, you are probably insolvent.

(To learn more, see Nolo’s article Tax Consequences When a Creditor Writes Off or Settles a Debt.)

Can You Get Derogatory Information Removed From Your Credit Report?

Now let’s examine your request that any settlement include a deletion of negative information from your credit reports. That will not happen. Here’s why that is.

Credit reporting is a big business. Credit bureaus sell your credit report to financial institutions. Those banks and other institutions rely on the accuracy of the reports in making decisions to extend credit to you. You can’t manipulate your report by deleting true but derogatory information. To learn more, see our articles on Credit Repair.

The Best Option for Now:  Do Nothing

Now, for the BIG question:  What should you do? My advice – do nothing right now. Absolutely nothing. Here is my thinking. If you file for bankruptcy now, you might have more debt from medical bills later. And if you settle your debts, you won’t have any money left.

Both your disability income and your IRA can’t be touched by creditors. In the meantime, the creditors can all have fun going to court, but you don’t have anything they can take from you. When you are out of the woods and back to work, it will probably be the right time for you to file bankruptcy.

I hope you are well soon. Consult bankruptcy lawyers whenever questions arise.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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California Bankruptcy Exemption Amounts Increase

Changes to California bankruptcy exemption laws, effective January 1, 2013, have increased some of the exemption amounts available to people filing for bankruptcy in California.

What Are Bankruptcy Exemptions?

Most people who file for Chapter 7 bankruptcy in California are able to discharge most or all of their debts. In return, they must turn over certain property to the bankruptcy trustee, which the trustee will use to repay creditors. However, California law allows you to protect certain types of property in bankruptcy — meaning you don’t have to give the property to the bankruptcy trustee. These laws are called exemptions. Exemptions play a role in Chapter 13 bankruptcy as well.

To learn more about how exemptions work in bankruptcy and the exemption amounts in each of the 50 states, visit Nolo’s  Bankruptcy Exemptions topic area.

2013 Changes to California Bankruptcy Exemptions

California Assembly Bill 929, which took effect on January 1, 2013, made some changes to California bankruptcy exemptions.  Here are some of the highlights of those changes:

  • the motor vehicle exemption increased to $4,800 and you can now exempt more than one vehicle (previously you could only exempt the equity in one vehicle)
  • the homestead exemption amount increased to $24,060
  • the tools of the trade exemption amount increased to $7,175
  • the wildcard exemption increased to $1,280, and
  • you can now exempt personal injury recoveries for pain, suffering, and actual pecuniary loss (before these types of damages were excluded from the personal injury recovery exemption) and the total exemption amount increased to $24, 060.

To learn more about the California bankruptcy exemptions, as well as a list of other common exemption amounts, see Nolo’s article California Bankruptcy Exemptions.

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