Imagine that your best friend finds $100 on the sidewalk right outside your home.  It’s not your money, because you haven’t had that much money for awhile but your friend, feeling a little generous, decides to offer you a few bucks because it was near your property.  Let’s say he offers you $5 out of the hundred.  Would you take it?

The funny thing is that studies have indicated that most people would reject any amount below 50%.  Setting emotion aside, this seems completely irrational, because a minute ago, you didn’t have anything, and now, you could be $5 richer.  The reality is that many of us make decisions without separating our emotions from what might make financial sense. 

In my bankruptcy practice, I often see people wanting desperately to hang onto a home that is so completely upside down it would have to appreciate three times for them just to break even.  Emotionally my heart goes out to them and I understand they might have invested a huge down payment; it might be the first home they owned or the home where their kids grew up, etc.   From a financial standpoint though, it doesn’t make sense to keep hanging on when the financial numbers indicate otherwise.

As an attorney, my job is not to force you into a decision that you don’t want to make.  But, I do see my responsibility as one that includes giving my clients an impartial third party reality check.  By managing the emotions you feel towards a house, you might come to the recognition that the best option for you would be to let it go, because doing so will allow you to move forward without a debt burden, and to make a new financial life again. Making that decision is tough  but here are some questions that might help you decide whether you should let go of your home:

1)      What’s the value of the home based on comps in the neighborhood or what does Zillow estimate? How much do you owe?

2)      How much (percentage wise) does the home need to appreciate before you could even sell the home to break even? At the rate the market is appreciating how long do you estimate it will take to break even?

3)      If you were renting approximately this same home in your neighborhood how much would you be paying? If you could be paying less by renting what could you be doing with that money instead?

4)      Do you have an adjustable rate mortgage? How much more do you estimate you’ll pay once the rate adjusts? Do you have a plan in place as to how you are going to meet the difference between what you are paying now and what you’ll be paying in the future?

5)      Do you have a second on this property?  

6)      If you kept the home how much do the liens total up to?

7)      Do you owe any HOA dues?

8)      Are you currently behind 3 or more months?

9)      What’s the main benefit the home provides to you (i.e. mortgage deduction, shelter, investment, etc.)?

10)  How long do you estimate it would take before you were able to come up with another down payment on a home if you did let it go?

11)  How much of your monthly income is going towards paying the mortgage (percentage wise/ratio wise)?

 

Giving up (or even keeping) a home is not easy. But generally, one makes more sense the other depending on your specific situation. I’d be glad to connect with you about your specific situation and help you explore. And also, if you are thinking of filing bankruptcy don’t let the house be foreclosed on first (or short-sell the home) and then file bankruptcy because you may lose out on some advantages bankruptcy offers by filing bankruptcy before you are off title.

 

 

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There’s a new law that people are buzzing about here in California because the belief is that it’s a victory for homeowners who owe more on their homes than the property is worth. The new law, signed by Governor Brown in July 2011, basically prevents first and second lien holders from suing and going after home sellers for money owed after a short sale closes. Sounds great doesn’t it?

The reality will be much, much different (just like those horror movies where the good guys win but the last screen shot is of the monster popping out of the ground ready for a sequel).  Unfortunately, if you read the law closely, you’ll notice that both the first and second lien holders have to agree to the short sale in order for them to be barred from suing. What this ultimately means though is that there’s not much of an incentive for a second lien holder to agree to the sale and here’s an example showing why:

Let’s say you have a home worth $250,000.  You owe $350,000 on your primary mortgage (your “first”), and you owe $100,000 to a second lender (your “second).”  This means that you owe $200,000 more than the home is worth.  The bank tells you that if you short sell the home it is better than foreclosure and that the impact on your credit will be better if you short-sell. The challenge will be that under the new law, to sell the home, the lien holders (the first and the second) must now all agree and approve the sale. Now let’s say a buyer bids $240,000 for your house.  The first, to cut its losses, may be interested.  But let’s say that the second will only get $5,000 out of this transaction. Because the new law prevents both the first and second from suing the homeowner if they both sign off on this transaction, the likelihood of the second signing off is very low. Why would the second settle at a loss of $95,000 and only take $5,000? The chances of the second getting huge amounts out of the short sale are very slim because the first has a superior lien and is not going to want to give up too much (if any) of what they are getting out of the short sale. 

Most likely the second would prefer to let the home go into foreclosure and eventually sue the homeowner and get a judgment. With judgment in hand, it can eventually garnish the homeowner’s wages, attach a bank levy, etc. and get much more than they would have via the short sale.  

As you can see, this new law does not protect homeowners as much as some people would want you to believe. If anything my bet is that it will discourage seconds from signing off on a short sale and they’ll take their chances in collecting something post-foreclosure. For the estimated 33% of homeowners that are underwater in California they won’t find protection in this new law. Fortunately, sanctuary still lies in the Bankruptcy Code where the moment you file you are under the protection of the bankruptcy laws and can get your second discharged. 

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Every day I talk with people that have so much debt that they need to file bankruptcy.  For individuals, the two main options are Chapter 13 and Chapter 7.  Some people think they can just choose one over the other.  The reality is that there are rules, outlined by the Bankruptcy Code, that tell you what Chapter you are permitted to file for.

Most people I talk with want to file Chapter 7.  They think because they have an unbearable amount of debt, that they automatically qualify.  For a Chapter 7 though, the Bankruptcy Code doesn’t care how much you owe.  Instead, it focuses on your ability to repay creditors. In other words, it's looking to see whether you have “disposable income”. 

In order to qualify for a Chapter 7, you must average out your previous six months gross income, and then multiply that average by 12.  When making this calculation, do not include the current month's income; e.g. if it's July, only include January through June.  The biggest mistake people make when doing this calculation is using their net income instead of gross.  The reality is that ALL your income must be included – not just your take home pay, but your total salary prior to taxes.  You must also include unemployment, family contributions, contract work, bonuses, severances, even income received for items sold on Ebay. 

Once you multiply that six month average by 12, the total number you come up with needs to be compared to the state median income for the size of your household.  For example, as of April 2011, for a household of 1, the state of California median income is $48,009.  As long as your current annual gross income (calculated as described above) is below that, you qualify for a Chapter 7. Click here to see the state median income for other household sizes.

If your income is above that threshold, then a closer analysis needs to be made of your taxes, deductions and expenses.  If you make more than the state median income, the presumption is that you should have enough disposable income to pay your bills.  Yes, I know this doesn’t make too much sense when at the end of the month there’s more month than money, but unfortunately that is how the law is written.  But don’t despair! If you have sufficient taxes, deduction and eligible expenses (like utilities, mortgage, car payments), you may still qualify.  Give my office a call and I’d be glad to review your situation and help you determine if a Chapter 7 is a viable option for you.
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Here’s a scenario I see consistently.  A potential client calls me.  They qualify for a Chapter 7 bankruptcy.  They have no assets and want to file so they can start fresh.  The challenge is that they don't have the money to cover the legal and filing fees.  Though my fees are some of the lowest in town, the reality is that the client must come up with the money in order to file.  Sadly, many people decide not to file thinking they cannot afford it.

You can’t afford not to.  About a year ago, I talked with a potential client.  Because money was so tight, they decided to postpone filing.  A couple months back, they called me and told me they had been sued, gotten a default judgment against them, their wages had been garnished to the tune of $800 a month.  This is a classic scenario of what happens when you delay.  Realizing another few hundred more were about to be garnished, you can bet this client found a way to cover their bankruptcy fees.  Here, they relied on family for help.  Though they felt embarrassed to ask, their family was more than happy to help.  Their family told them had they asked sooner, they would have given them the money then too.  In this case, the client would have been $800 richer.

If you don’t have family to rely on, here are some other options:
  • set aside money on a monthly basis;
  • set up an installment plan with your attorney;
  • sell an asset or assets;
  • tap into your 401K or IRA,
  • use your tax refund;
  • borrow from your whole life insurance policy;
  • temporarily decrease the amount of taxes that are taken out of your paycheck so you have extra pay;
  • stop paying on your credit cards and set that money aside to cover the bankruptcy fees. 

All of these have upsides and downsides (e.g. tax implications as in the example of using retirement funds), so before you take any action, do brainstorm with your attorney.  I would be happy to discuss your options with you myself.  But remember this: where there’s a will, there’s a way.
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I will lose everything. Wrong.  I believe that people think they’ll lose their home, car, cash - everything - in a bankruptcy simply because they are required by the law to list all their assets on their bankruptcy paperwork.  This assumption, however, is wrong. 

The reality is that most of the items that Chapter 7 filers have (household goods, clothes, furniture, small amounts of cash) are “exempt,” a fancy word meaning the item is protected, up to a specific value, from being seized by the bankruptcy Trustee. These exemptions exist because the government doesn’t want to have to support you, so they don’t want to take everything you have away.* 

In California, under one list of exemptions (there are two; check with your attorney to find out which list is best for you), there’s a wonderful little exemption called the “wildcard.”  The wildcard allows you to protect close to $22,000 of equity in your home.  If you don’t have equity (and in this market very few people do) or have only a little, then you can use the unused portion towards ANY item you have.  So say you have a car (paid off) worth $13,000.  You can tap into the wildcard pot to protect that vehicle. Same with cash, stocks or any asset AS LONG as you stay at or below that wildcard limit.  There are many other exemptions besides the wildcard as well that will protect things like jewelry (up to a certain amount), business tools, retirement accounts, and household goods and clothing.

Most Chapter 7 filers don’t have much beyond a paid off vehicle that’s a few years old (not much of an asset there), maybe a few hundred in the bank, maybe a timeshare they can’t even sell (they’ve tried) - and as such, their assets are completely exempt.   This makes you what’s called a “no-asset” case. If you don’t have assets, then the Trustee is not going to take much interest in your case.

Due to the many exemptions, including the wildcard, the typical Chapter 7 bankruptcy case is a no-asset case.  And so, contrary to the rumors, you’ll most likely be able to keep what you have.

* Being the government, it will take away that which is not “exempt.”  If you have $40,000 in stocks, for example, not all of it will be protected.  But then, if you have that much stashed away, then maybe a Chapter 7 may not be right for you.  As always, talk with an attorney to get advice on the specifics of your case.
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There is nothing more frustrating than filing a Chapter 7 Petition and then learning that you’ve messed up in a major way because of something that could have easily been prevented.

As a bankruptcy attorney here in the San Francisco Bay Area, I have a checklist I go through with my clients to make sure that we identify any “red” or “yellow” flags.  These flags are items that the Bankruptcy Trustee may question you about at your Meeting of Creditors, and if not handled properly, could even cause dismissal of your case.  My experience is that if you identify, disclose, and prepare for the items listed below, you’ll greatly increase your chances of your case going through smoothly.

1)      Paying Debts Back to Family or Friends.  Paying debts back to family or friends can pose a huge problem for both you and your family member or friend.  The Bankruptcy Code requires that any payments over $600, made to family or friends within the past year, be disclosed on the bankruptcy paperwork.  Depending on your situation, the Trustee may demand that the money you re-paid your family/friend be turned over to the Trustee.  Imagine your loved one getting a letter from a Bankruptcy Trustee asking that they return the money you paid them.  This could cause embarrassment, as well as a financial mess for your loved one who would have to come up with the money.  If you’re considering bankruptcy and owe money to a loved one, the best thing is not to pay them back now.  If you’ve already made such a payment, talk with your attorney about disclosing this properly and how to handle it.

2)      Taking Cash Advances or Using Credit Cards Immediately Before Filing.   A huge red flag, especially with creditors, is using your credit cards fairly close to the date you file for bankruptcy.  If you are a debtor and have a bit of credit available on your credit cards, DO NOT decide to max it out and/or take a cash advance thinking you will be able to discharge it as part of your Petition.  Why? Because your creditors, and the Trustee, will likely see your actions as fraudulent.  This would then mean that your Petition could be dismissed and/or you may even face serious consequences such as criminal prosecution. Once you decide that bankruptcy is the path for you, stop using credit cards completely!

3)      Transferring, Giving Away or Hiding Assets.  Don’t transfer your assets to anyone else and definitely don’t hide anything (i.e. that second or third car, that timeshare in Cabo, that joint account with your girlfriend, etc.) because non-disclosure of assets is a HUGE no-no.  Failure to disclose all your assets could greatly, and negatively, affect your case.  For example, at a recent Meeting of Creditors, I witnessed the Trustee demanding that a debtor (not my client!) send the Trustee a check for $9,000 because the debtor could not explain why their reported bank balance did not match the bank statement.  In extreme cases, failure to report and/or hiding assets can cause the Trustee to dismiss your case.

4)      Your Income Is Greater Than Your Expenses.   When filing for bankruptcy, you’ll need to calculate your income and compare it with your expenses.  Your expenses must be reasonable, and what the law considers reasonable is sometimes surprising.  Clearly, expenses for your dog Mr. Muffins would not be legitimate expenses for you to take into account.  But even things like paying for your child’s college tuition might not be able to be included.  If from the get-go, your income is greater than your reasonable expenses, you clearly will have a problem.  The Trustee will wonder why you are not able to pay your bills, and could move to dismiss your case or have it converted to a Chapter 13 (the type of bankruptcy where you pay your debts back to creditors over time.)  So before you file, make sure that you do your calculations, and make sure you don’t have any expendable income.

5)      Banking With Your Creditors.  If you’re considering bankruptcy, and have a bank account with a company to whom you owe money, you need to take action fast.  Immediately close that account (make sure you have a paper trail) and open an account someplace else where you don’t owe money.  Why? Because the bank to whom you owe money can easily freeze your account and/or pay themselves what you owe from your account.  Yes, it seems unfair, but unfortunately, it frequently happens.  I recently had a client that banked with their mortgage holder, and who made the mistake of not closing their bank account (even though I urged them to do so).  Since the clients were behind on their mortgage, you can guess what happened to the $500 in their bank account.  That’s $500 they could have used to keep food in the fridge.

6)      Making Major Financial Decisions.  When you’re in financial distress, it often feels like you have to do something, anything, to regain control of your finances. And sometimes, unfortunately, people react without getting all the information about what a specific transaction may mean to them.  Example: Trying to avoid bankruptcy, Jane contacts a credit counseling service in order to deal with her $50,000 in credit card debt.  One of her creditors settles the account and forgives $15,000 worth of debt.  Without intending to or realizing it, Jane may be taking on a tax liability; any amount creditors have “forgiven” may be taxable.  Thus, Jane still owes $35,000 to other creditors, and may owe taxes down the line on a portion of the $15,000 that was forgiven.

Other major decisions that should be avoided if contemplating bankruptcy are short-sales, debt consolidation, tapping into retirement accounts, and selling a vehicle or home. The intent behind bankruptcy is to give people a clean slate as possible; in order to get that clean slate, avoid making any major financial decisions prior to consulting a bankruptcy attorney.

7)      Hiding Any Information That You Think Should Be Disclosed.  Please – when filing for bankruptcy, don’t lie, and don’t hide anything - because the Trustees have a pretty good knack for knowing when someone is not being truthful.  

A typical trustee sees about 10 cases per hour for about 6 hours a day, 2-3 times a week. That’s about 180 cases a week, 720 cases a month, 2160 cases a year! With those numbers, you can get the picture that the Trustees have seen it all, heard it all, and are really good at reading people.  When it comes to bankruptcy, not disclosing something is often worse than having it disclosed it the first place.  As a bankruptcy attorney, I always tell my clients – if in doubt about whether to disclose something, trust me – and tell me about it.  I can help you prepare for when it does come up.  To do otherwise is a huge risk, and frankly, not something I would consciously allow a client to do.  I work with people that need help, but I will not represent someone that is looking to lie, deceive, or abuse the system.

If you need a bankruptcy attorney in the San Francisco Bay Area, I would be honored to help you.  Please contact me at 925-415-6101. 

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 Some people decide to walk away from their properties because they are too far underwater on their mortgage payments.  They believe that since the lender now has the house, they are now off the hook for the money owed, and the lender can’t come after them. 

Is this true? Well - as with all things legal – it depends.

If you only have a first mortgage on the property, this strategy may work.  In California, a first mortgage is generally a non-recourse loan, which means a lender cannot get a deficiency judgment against a person in a non-judicial foreclosure (which most foreclosures are).   However, you may still be liable for income tax on the difference between the amount you owed, and the amount the lender sells the property for.  The reason for this? The IRS treats as income the amount you didn’t have to pay back.  If you’re thinking that’s pretty nutty, I agree. 
Check out this post for more information on the tax consequences of a foreclosure or short-shale versus a bankruptcy.   

Now, if you have a refinanced mortgage, an equity line of credit, or a second mortgage, those loans are most likely recourse loans.  This means that you are still personally liable for the amount you owe.  The lender can sue you – and eventually garnish your wages -   for something you thought you had walked away from. I’m seeing more and more people each day that are being hounded by collection companies coming after them for those recourse loans. 

 So, what are your options? They are: 1) pay the outstanding amount owed (good luck trying to negotiate with the bank); or 2) look into whether a Chapter 7 bankruptcy filing will wipe out the debt.  If you do not have significant assets, and don’t have disposable income each month, it likely will.


If you're in the San Francisco Bay Area and need a Chapter 7 bankruptcy attorney, the Law Office of Mauricio Ramos is always happy to help.



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Myth.  Many people see on their credit report that a debt has been “charged off” and believe they no longer owe the debt.  That belief is incorrect, and can cost you money.  A bank can still send a “charged off” debt to collections, sell the debt to another company, or even sue you for the amount owed.
 
Why is this? Because banks use the “accrual method” of accounting, which allows them to count income when it is earned and not received.  For example, credit card banks are allowed to count as income the interest that is due from a consumer, even if not yet paid.  When you stop paying on a debt, and enough time has gone by that it’s clear you are in default, the bank then “charges off” and stops counting as income the interest which it earned but did not receive.
 
A debt being “charged off” has nothing to do with you being off the hook for the debt.  You still owe the debt, and unless the Statue of Limitations (which determines whether a debtor can collect on  a debt) has passed, it is highly likely that the bank will do whatever it can to recoup what you owe.  If you file a Chapter 7 Bankruptcy Petition, make sure you list all debts that appear on your credit report, including ones that say “charged off,” because you are still responsible for those debts.

If you're in the San Francisco Bay Area and need a bankruptcy attorney, the Law Office of Mauricio Ramos is always happy to help.
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You might have heard that there is a new federal credit card law that has taken effect – the Credit Card Accountability, Responsibility and Disclosure Act of 2009. The intent is a great one because many of the profitable (and abusive) practices of the credit card companies are now banned. For example, interest rate increases can now only affect new purchases, not balances, and the new rate only goes into effect if you’ve missed a payment beyond 60 days. That’s great news. The bad news though is that these sorts of tactics are expected to cost the credit card industry over 12 billion a year in lost revenue and so now credit card companies are creating new ways to go after your money. Some, for example, are tacking annual fees to your account.  In reality, the new law really benefits people that don’t really have any credit right now. If you had a balance before the law took effect your debt may have just become more unmanageable. Here’s why:

 

Before the law took effect, credit card companies raised interest rates because they knew it was going to get much, much harder for them to raise rates.  In other words, there’s a good chance that you may already be paying a much higher interest rate than you were before the law took effect.

 

Take me for example. I had a CitiPremier credit card with an interest rate of about 9% and sometime at the end of 2009 I get this letter stating that the new interest rate is now going to be 29.99% on the current balance!  They gave no reason whatsoever. I’ve never been late, and I’ve paid more than the minimum.  You’d think they would want to do whatever they could to maintain my loyalty. Instead, they turn around and give me a 20% rate increase.  I immediately closed the account. Yes, many financial advisors will advise that closing credit card accounts is not a good idea, but in this case I felt the rate was obscene. So check your statements, because there is a good bet you’re paying a higher rate and may not even know it.

 

Say you owe $10,000 on a credit card, and prior to the changes in the law, the card had a rate of 9%.  The minimum payment was $150 a month. At that rate, it would have taken you about 7 ½ years to pay off your balance.  Now, let’s say your rate has been jacked up to 29.99%.  Given the much higher interest rate, you decide to pay more than the minimum each month.  Even paying $100 more than the minimum - $250 a month – it would now take you 20 years to pay off that same $10,000 balance!

 

I’m all for credit card companies giving people credit so they can buy items they need, but I believe it is outrageous that credit card companies have gotten away with raising rates on balances for items that you bought at a much lower rate! Imagine if car companies did that!

 

My advice – review your statements closely because credit card companies are now required to advise you what it will cost you to pay over the long term.  The credit card companies don’t like that because they know what’s going to happen. You’ll see the truth that they don’t want you to see. The truth of how much they are ripping you off. 

 

 

If you are finding that your credit card debt has now become unmanageable, bankruptcy may be something to consider.  Feel free to contact me to discuss your financial situation.  I’d be more than happy to help.

 

 

 

 
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Are you considering declaring bankruptcy, but are afraid you'll lose your tax refund? I get that question a lot  as the tax season approaches.

Let’s say you are contemplating filing a Chapter 7 bankruptcy, and have calculated that you’ll be receiving a $2,500 tax refund.  What should you do?  Should you file your taxes now? File your petition first? Not say anything?

My answer is the same each time. If it's tax season, than most likely the trustee (who acts as a sort of like a judge in a bankruptcy case) will consider the tax refund as property of your bankruptcy estate, regardless of whether or not you’ve filed your taxes.  The answer is the same regardless of when you file your case - the trustee will consider the refund whether you file your case before you receive the refund, or after.  You never want to hide any assets from the bankruptcy court, as this would be grounds for a dismissal of your bankruptcy petition.  Additionally, you could face formal charges and its simply just not good karma.   

Now for the good news:  There’s a good chance that you'll be able to keep your refund because it may be covered by exemption laws. These are the laws that allow you to keep some assets after bankruptcy.  (There’s a myth out there that if you declare bankruptcy, you are left with nothing but the clothes on your back. Biggest myth ever.)  Whether or not you can keep your refund will depend on the value of the other assets you own (car, savings, clothes, furniture, tools of the trade, equity in home, etc.).  These days, when so many families are upside down on their mortgages and/or have lost their homes, they have few assets - so they're able to keep their tax refund.

If you already have the refund in hand, don’t (I repeat don’t) use your tax refund to repay a debt. If you repay more than $600 to say, your aunt, the trustee will count that as a “preference” and can take money back.  Now, if you need to use the money for living expenses (i.e. food, gas, car repairs, etc.), that's a much better idea.

As always, facts make a world of difference, so always talk with an attorney to make sure you do what’s right in your specific situation.  If you're in the San Francisco Bay Area and need a bankruptcy attorney, I am always happy to help.
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