Automatic stay and bankruptcy protection

All About the Automatic Stay, the Ultimate Bankruptcy Protection

Table of Contents

All About the Automatic Stay, the Ultimate Bankruptcy Protection

What is the Automatic Stay definition or meaning?

Automatic stay is the bankruptcy protection when a new petition is filed with the court. It protects against starting or continuing any debt collection. It’s a powerful provision, and stops all collection activity, maintaining the status quo on the day the bankruptcy papers are filed. Failure to respect the bankruptcy protection can lead to sanctions against the collecting creditor.

The Automatic Stay definition from the text of Section 362(a)

The official definition of the bankruptcy automatic stay is in 11 USC 362. Section 362(a) says:

“…a petition filed under section 301, 302, or 303 of this title… operates as a stay, applicable to all entities of:

  • the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
  • the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
  • any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate…”

The section goes on, but the quote above is where most of the action in bankruptcy protection comes from.

Interpreting the automatic stay meaning in simple terms

Let’s break down what the meaning of the automatic stay is in plain English. Section 362 says that the mere filing of a what?  A petition that’s either voluntary, involuntary, or joint  (301-303).  That pretty much covers most bankruptcy filings. Then what? It stops (stays) the start or continuing most every collection, including enforcing a judgment or trying to take anything from you.

Bankruptcy protection automatic stay is like a dome over a city
The bankruptcy protection of the automatic stay is like a magical dome or enchanted shield over you & your stuff

That’s really broad, and covers almost anything you can think of.  It’s like a protective shield around you, your things, and your life against all your debts doing anything to you, the person who filed bankruptcy.  Or, to use another simile, the automatic stay is like a dome over a city, where the sun only shines and the birds sing, but outside the shield it’s stormy and dangerous.

There are a few limits to it, which I explain below.

When does the Automatic Stay begin?

The automatic stay is tremendous in that it begins the second the bankruptcy is filed. Why? It’s automatic. File a bankruptcy case, and boom, you’re safe. The fact that the bankruptcy protection starts the moment you file bankruptcy is extraordinary, in a sense.

“It is elementary that the automatic stay comes into existence automatically and immediately upon the filing of a petition in bankruptcy.” Webb Mtn, 414 B.R.308 (Bankr Ct, Tenn, 2009).

Normally, in law, if you want something to stop, you have to request that separately. Think of a temporary restraining order. That requires work, time, a justification, and approval. But bankruptcy protection, because it’s automatic, that is, no additional papers need to be filed to get it to kick in, it’s one of the rare exceptions in law.

You get all the benefits of safety, protection, and peace of mind at the beginning of this legal process. Your creditors have to file lawsuits, wait months or years, get the judgment, and then try to execute on the judgment to take action against you and your stuff. You merely have to begin the bankruptcy legal case before they can finish theirs against you. This is a huge time advantage for the debtor filing bankruptcy.

How long does the Automatic Stay last?

The automatic stay starts when you file bankruptcy, and typically lasts for the duration of the case.

What can end the bankruptcy protection?

There are a few things that can end the automatic stay:

  • Discharge: When a normal case ends successfully, the debtor gets a bankruptcy discharge and the case is usually closed soon after that.  When the discharge is entered, the stay is over.
  • Dismissal: If a bankruptcy case ends unsuccessfully, the automatic stay is over also. The magic dome of sunshine disappears, and the storm clouds come right back.  For that reason, dismissal is usually bad.
  • Motion for Relief of the Automatic Stay (MRS or RFS): Creditors have rights also, and if the stay is hurting them unfairly, they can make it go away. Repeat after me: “There is no free car or free house in bankruptcy.” If you stop paying for the house, the mortgage can get through the automatic stay and take your house. Or put differently, if there is a house or car or something you’re financing and you want to keep it, stay current with the payments.

Wait, back up. After bankruptcy discharge, the stay ends and creditors can collect against me?

Yes, and no. It’s true that the automatic stay ends when the case concludes with a discharge. The bankruptcy discharge triggers a few legally significant events. First, the discharged debts are no longer legally your obligations. Second, if you had a bankruptcy attorney help you, their representation, per contract, is likely ended. They completed their task and are no longer your lawyer.  Third, the automatic stay is also ended, as there is no more active or open bankruptcy case.

However, the good news is there is something powerful replacing the terminated automatic stay. This new protection is the Order of Discharge.

Section 524(a) says that a discharge in bankruptcy:

operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived

The court order that says your debts are gone, and any attempt to collect a discharged debt is a violation. It’s not a violation of the automatic stay, but instead, a violation of a court order. You can and should inform the creditor of this, and if they don’t back off, reopen the bankruptcy and seek sanctions for a discharge violation.

Violation of the Automatic Stay

Definition of an Automatic Stay Violation

A violation of the automatic stay is when a creditor willfully collects after they knew of the bankruptcy protection. The creditor has to have known of the bankruptcy and the automatic stay, or else they can claim as a defense that they had no notice. For this reason, it’s important to document notice of the automatic stay. When the collection company claims they didn’t know of the bankruptcy — and they will — you’ll need to have ample and abundant evidence that they did know, and that they didn’t care and collected against you anyway.

What if the Creditor doesn’t have Intent to Violate the Automatic Stay?

Creditor, after being caught with its hand in the cookie jar, may claim that golly, it didn’t intend to violate the automatic stay.  The Ninth Circuit Court of Appeals has said, too bad, you intended to do the act.  Intent to violate the automatic stay isn’t a requirement. Intent to do the act that violated the stay is all that’s needed. In re Pinkstaff, 974 F.2d 113 (9th Cir, 1992), quoting In re Bloom, 875 F.2d 224, 227 (9th Cir, 1989), In re Pace, 67 F.3d 187 (9th Cir, 1995).

Examples of Automatic Stay Violations

Filing a Lawsuit

One example of violating the automatic stay is where you file bankruptcy, serve the creditor notice of the automatic stay, and maybe even a letter for good measure. Then, three months later, the creditor files a lawsuit against the debtor.

The lawsuit is the commencement of a judicial proceeding against the debtor that could have been commenced before the commencement of the case  or to recover a claim against the debtor that arose before the commencement of the case under this title. Slamdunk violation of the bankruptcy protection.

Starting a Wage Garnishment

Another example of an automatic stay violation is where the creditor has already sued the debtor and won in court. Now, armed with a judgment, they’re closing in on collecting. The debtor files bankruptcy, and provides notice of the automatic stay to the debt collector. Next, the collection agent contacts debtor’s employer and starts garnishing the wages.

In this case, the wage garnishment is an enforcement, against the debtor and against property of the estate (the paycheck), of a judgment obtained before the commencement of the case.  Again, another obvious and textbook violation of the automatic stay.

Foreclosing on a home

Finally, let’s say the debtor has fallen behind on his or her mortgage. The home loan company is getting cranky, and finally files a Notice of Default and Notice of Sale. Next thing you know, there’s a scheduled foreclosure sale. Debtor then files a Chapter 13 bankruptcy to repay the mortgage arrearages, and provides notice of the automatic stay to the lender. Mortgage company goes ahead with the foreclosure sale, and someone buys the house.

The home foreclosure is an act to obtain possession of property of the estate (the house) or to exercise control over property of the estate.  Straight violation of Section 362 of the Bankruptcy Code. Check and mate, house lender. Automatic stay violation.

Effect of the Automatic Stay on Acts that Violate it

In that last example, the home has already been sold to someone else at a foreclosure sale. But it was the result of a stay violation. What is the effect of the sale?

In California, stay violations are void. The Ninth Circuit Court of Appeals has said that “actions taken in violation of the bankruptcy stay are void.” In Re Gruntz, 202 F.3d 1074, 1081-82 (9th Cir, 2000).  Not voidable, void. In re Schwartz, 954 F.2d 569 at 571 (9th Cir, 1992). No action is required by debtor to undo the act. Id. 

The law imposes an affirmative duty on creditors to remedy stay violations by restoring the status quo, and also to establish administrative safeguards to prevent stay violations from occurring in the first instance.  In re Dyer, 322 F.3d 1178, 1192 (9th Cir. 2003).

What if the Stay Violation happens Before Notice is Received

Knowledge of bankruptcy sufficient for stay; notice doesn’t have to be official

There is no requirement that a creditor be given an official Court-issued notice or form regarding the bankruptcy case.  “[A] party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay.” In re Dyer, 322 F.3d 1178, 1191 (9th Cir. 2003).

Seizing the property doesn’t make it yours

Now that we have established stay violations are void, what if creditor didn’t know when they violated it? Courts have clearly answered: Petition date controls, not notice.

The U.S. Supreme Court has ruled that property seized prepetition to collect a debt doesn’t transfer ownership, and it must be returned, pursuant to Section 542(a), even if seized by the IRS.  United States v Whiting Pools, Inc, 462 U.S. 198 (Sup Ct 1983).

Even property taken by the mighty IRS before filing must be returned. With that backdrop, let’s look at cases where property is wrongfully taken after filing, but before creditor had notice of the filing.

Keeping property seized after filing but before notice is a stay violation

In the Ninth Circuit, the Bankruptcy Appellate Panel ruled that retention of repossessed car after receiving notice of stay is a willful violation of the automatic stay. “[R]epossession of the debtors’ automobile, while initially inadvertent, became a willful violation of the automatic stay when appellees failed to take any reasonable steps to remedy their violation upon learning of the debtors’ bankruptcy.” In re Abrams, 127 B.R. 239 (B.A.P. 9th Cir, 1991).

The Ninth Circuit also has held that the knowing retention of estate property violates § 362(a)(3).  In re Del Mission Ltd., 98 F.3d 1147, 1151 (9th Cir.1996)(citing Abrams). The appellate court rejected the argument that creditor had no obligation to turn over the property until specifically requested.  Id. at 1152.

“When a creditor lacks notice of a debtor’s bankruptcy, acts in violation of the stay may be inadvertent; however, such acts become willful stay violations when the creditor learns of the debtor’s bankruptcy but fails to take reasonable steps to remedy the violation.” In re Calloway, No. 08-18561SSC, 2009 WL 1564207, (Bankr. D. AZ. 2009) (citing Abrams)

Other courts outside the Ninth Circuit agree

Other bankruptcy courts have ruled that even if the creditor didn’t have knowledge, it must take steps to void the violation or face damages. Just to pick one: “Despite having this knowledge, Hunt deliberately refused to cooperate in voiding the sale and reconveying the Trenton property to the Debtor at any time after this date.

Clearly, these actions were willful and constitute a violation of the automatic stay for which the imposition of damages is appropriate under § 362(k).”   In re Tyson, 450 B.R. 754 (Bankr Ct, Tenn, 2011), where buyer of home sold at foreclosure had no notice of automatic stay at time of foreclosure sale, failed to return home, and violated stay and paid damages.

Wrongful repo cases: repossession after filing without notice violates stay

A wrongful repo happened after a case was filed but before the repo company had notice. What it did next is what matters: “Rather than comply with its affirmative duty to remedy its stay violation and restore the status quo, Arizona Fleet chose to remain non-responsive, took no steps to confirm or inquire as to the pendency of this bankruptcy case, filed nothing with this Court requesting any form of stay relief, sent the Debtor a notice that it intended to sell the Vehicle, wrongfully continued to maintain possession of the Vehicle, and, without merit, continues to maintain that it was incumbent upon the Debtor to retrieve his wrongfully repossessed Vehicle.” In re Altamirano,  Case No. 4:20-bk-11836-BMW (Bankr Ct, AZ, 2022).

In re Carrigg, 216 B.R. 303 (B.A.P. 1st Cir, 1998), where the repo happened after the bankruptcy was filed without the creditor knowing about it, but creditor failed to return repossessed vehicle after notice of case.  The creditor was sanctioned with a willful violation of stay, even though creditor had no had notice of case when vehicle was repossessed.

Chicago v Fulton, and the Automatic Stay

What 362 Giveth, Fulton Taketh Away

It used to be that if someone took something to collect a debt, filing bankruptcy created an obligation for them to return it. All that changed in 2021 when a case percolated up through the courts. The City of Chicago makes quite a pretty penny on impounding vehicles. One person lost their car, filed bankruptcy, and asked for the car back. Chicago didn’t budge. Automatic stay violation? In many places, including here in California and the Ninth Circuit, until now, yes. The Sup Court read the statute, and limited the scope and power of the automatic stay.

The car repossession taken before filing

The above repo cases involve a car taken after the case was filed. However, if the car was taken before the case was filed, from now on, it doesn’t have to be returned upon as a possible violation of the automatic stay with notice of the bankruptcy.  Chicago v Fulton (In re Fulton), 141 S Ct. 585 (2021).

In Fulton, the Court said that mere retention, to exercise control, of the property taken before filing (prepetition), without some act that would disturb the status quo, is not a violation of the automatic stay. This means that retention of the car (in this case) isn’t a stay violation, and that something else has to be done to get it back. The Court suggests that Section 542 (turnover) is invoked for an adversary proceeding for turnover of the property. The problem with that is that can take months to resolve.  Justice Sotomayor, in a concurrence focusing on simple motions instead, writes that “bankruptcy courts may find it prudent to expedite proceedings or order preliminary relief requiring temporary turnover.” Fulton at 594.

Not just cars: other seized property falls under Fulton

When the Supreme Court first decided the case in early 2021, there was the thought (hope?) that maybe Fulton was limited to cars seized by tow yards. That it would be a limited, narrow exception which wouldn’t really impact us here with Los Angeles bankruptcy cases in California and the Ninth Circuit.  That’s turning out to not be the case.

Bank Levy of Accounts and Fulton

Later in 2021, we saw a court extend it to bank accounts. In Pennsylvania, a lender sued a debtor, won a judgment, and filed a pre-petition attachment lien on bank accounts of the debtor. Debtor filed bankruptcy and then demanded creditor withdraw the attachment as a violation of the stay. A key difference is that, unlike Fulton, creditor was not in possession of property of the estate. No matter. The court said that Fulton requires an act that disrupts the status quo to find a stay violation when it wrote, “the Court finds that Defendants’ refusal to withdraw the valid state court pre-petition attachment of the Penn East Accounts does not violate §362(a)(3). Defendants admittedly took no post-petition affirmative action as to the garnished accounts.” In re Margavitch, 5:19-05353 MJC (Bankr Ct, MD 2021).

The Ninth Circuit BAP followed Margavitch when it had a bank levy case of its own. The facts were similar: a prepetition lawsuit, and a writ of garnishment on three bank accounts. Later, debtor filed bankruptcy and demanded the creditor instruct the bank to release the funds. After a refusal, debtor claimed it was a violation of the stay. The BAP found that the city’s inaction that merely maintains the status quo does not violate the automatic stay. In re Stuart, 632 BR 531 (9th Cir BAP, 2021).

The BAP made the point again in 2022 when it said that a lien that existed on petition date where an order granted postpetition about summary judgment regarding it did not disturb the status quo and thus, did not violate Section 362(a)(3). In re Censo, 638 BR 416 (9th Cir BAP, 2022).

Wage Garnishments and Fulton

While Stuart above was a bank account case, the BAP said in footnote 12 that, if it were a wage garnishment case where the creditor captured funds postpetition, the result would be different and a stay violation.  Stuart v City of Scottsdale, 632 BR 531 (9th Cir BAP, 2021), citing In re LeGrand, 612 BR 604 (Bankr Ct EDCA, 2020).

Chapter 13 Codebtor Stay

What is the Co-debtor Stay?

Chapter 13 has a codebtor stay, while Chapter 7 doesn’t. Section 1301 and its co-debor stay protects the person who may owe on a debt without that other person having to file bankruptcy. For this reason, Chapter 13 can protect a non-filing spouse better than a Chapter 7 bankruptcy.

Community liability: you both owe the debts of the marriage

California’s Family Code 910 says:

Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.

 

Further, Calif Family Code 914 says:

…a married person is personally liable for the following debts incurred by the person’s spouse during marriage …a debt incurred for necessaries of life of the person’s spouse before the date of separation of the spouses.

Translating that, because California is a community property state, both spouses owe a debt during the marriage, regardless of who is managing the budget, or racking up the debt. You’re in this together.

So, if one half of a married couple incurred a lot of debt and files bankruptcy in Chapter 13, the other innocent spouse is protected by an automatic codebtor stay. In Chapter 7, the innocent spouse can still be called and harassed and risk losing any separate property (if any) to the spouse’s collecting creditors. Why? FC 914(b) says that the “separate property of a married person may be applied to the satisfaction of a debt for which the person is personally liable pursuant to this section.”

Section 1301 Co-debtor stay to the rescue

Now we know that a spouse (or other person who may owe on a debt) is liable for debts during a marriage, even though they didn’t incur them or even have any credit cards. If the spending spouse files bankruptcy, the innocent spouse may be left hanging in Chapter 7. But Chapter 13 has a solution.

Section 1301 says

creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor

There it is. A creditor may not act, start or keep doing something to someone liable on a debt with a debtor. In California, that’s typically a spouse. Automatic stay for the nonfiling spouse in the form of the co-debtor stay is a big benefit to Chapter 13 bankruptcy.

The hitch: creditors claim to not know about spouses & the codebtor stay

Amazingly, with all their fancy computers, creditors and their collection companies don’t have a way to know about or track nonfiling spouses. If John Doe files bankruptcy, they’ll flag his account, but they don’t know about Jane Doe, even though she’s listed as a Codebtor in the bankruptcy paper’s Schedule H. They do a scrub or routine check but will say they don’t know Jane’s SSN as a way to flag her, too. So they keep collecting against her, which pressures John, but golly, it’s just an accident.

This can require “educating” the creditor with notice of the stay before bringing an action for violation of the stay against them for harassing the spouse, in our example, Jane.  The fallback position of the fancy slick credit card company will default to becoming Barney Fife. The billion-dollar corporation will morph into bumbling inept two-bit outfit in court who just didn’t know about the spouse and therefore didn’t have notice or any way to possibly avoid this and and thus will seek mercy from the bankruptcy judge for its incompetence. Thus, more notice, more evidence that the creditor knew about the spouse and the bankruptcy, will help you bring your violation of codebtor stay action and prevail.

Damages: the Penalty for Automatic Stay Violations

The automatic stay is one of the few areas in bankruptcy where debtors can get their attorney fees paid by the creditor. The Bankruptcy Code provides at Section 362(k) that:

an individual injured by any willful violation of a Stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

Let’s look at these one at a time.

Compensatory: Actual Damages

Costs

Actual damages comes in a couple different flavors. First, it’s whatever the debtor is truly, actually out-of-pocket as a result of the violation of the automatic stay. Judges typically want to see receipts. It can include as mundane things as copying costs, doctor visit copays, and so on.

Attorney Fees

In addition, the statute explicitly calls for the debtor getting reimbursed by the creditor for attorney’s fees. The lodestar method for attorney compensation is used in the Ninth Circuit bankruptcy cases. In re Yermakov, 718 F.2d 1465, 1471 (9th Cir. 1983). Lodestar compensation is “strongly” presumed to be reasonable. Burgess v. Klenske, 853 F.2d 687, 691-92 (9th Cir. 1988). The only limit on attorney’s fees is if the work was unnecessary or plainly excessive. The Ninth Circuit Court of Appeals, sitting en banc, concluded that Section 362 authorizes an award of attorney fees incurred in prosecuting an action for damages under the statute, limited by unnecessary or plainly excessive fees. In re Schwartz-Tallard, 803 F.3d 1095, 1101 (9th Cir 2015)(en banc), overturning Sternberg v Johnston, 595 F.3d 937 (9th Cir, 2010).

Emotional Distress

Emotional distress damages are available in the Ninth Circuit “if the individual provides clear evidence to establish that significant harm occurred as a result of the violation.” In re Dawson, 390 F3d 1139, 1148-1149 (9th Cir, 2004).

Punitive Damages

The statute calls for punitive damages in appropriate circumstances. The definition of “appropriate circumstances” varies by judicial circuit. Here in the Ninth Circuit, it means that punitive damages for violations of the Automatic Stay require “some showing of reckless or callous disregard for the law or rights of others.” In re Bloom, 875 F.2d 224, 227 (9th Cir., 1989).

The dreaded Wells Fargo case

Wells Fargo is notorious for their national policy of administrative freeze or holds, officially called “temporary administrative pledges” (which I wrote about in my list of 12 crucial things to do before filing bankruptcy). This is where someone files bankruptcy and has money on account at Wells Fargo. Then the bank freezes the account so the debtor can’t buy groceries. One would think this is a violation of the automatic stay, but it’s not an attempt to collect a debt, but to protect assets of the estate.

The Ninth Circuit BAP ruled that because defendant exercised control of debtor’s assets postpetition, debtors “have standing to seek sanctions against Wells Fargo pursuant to § 362(k) for willful violation of the stay with respect to their interest in estate property.”  In re Mwangi, 432 BR 812, 825 (9th Cir BAP, 2010). But on appeal, the Ninth Circuit Court of Appeals said that the property, while exempt, is property of the estate, but somehow does not immediately revest to the debtor, but must wait 30 days for the FRBP 4003(b)(1) exemption objection time period to lapse. In re Mwangi, 764 F3d 1168 (9th Cir, 2014).

The court analyzed it as a 362(a)(3) situation (control of property), but if it were the more common commencement or continuance of an action of 362(a)(1), the result likely would’ve been different. So, the Wells Fargo case is not an erosion of the automatic stay.

Conclusion

The automatic stay is a powerful tool to protect your client in a bankruptcy. However, you must enforce it, and have proper documentation of evidence. I’ve successfully brought actions against major credit cards for violating the stay; it can be done. if you found this helpful and are faced with a stay violation issue, consider hitting the figurative tip jar. Regardless, thank you for reading, and never stop fighting for your client and the debtor’s rights. You have significant tools and bankruptcy protections here, and you should not hesitate to hold the creditor accountable for flaunting them.

 

Remote 341(a) meeting of creditors

Remote 341(a) Meeting & Zoom: What to Expect, post-COVID (2022)

Remote 341(a) Meeting of Creditors by Zoom: What to Expect in 2022

Los Angeles Bankruptcy lawyer explains remote 341(a) meetings post-COVID

Post-COVID, a remote 341(a) Meeting of Creditors in bankruptcy is becoming the standard, instead of in-person. Here’s what to expect. They can be terrifying, nerve-wracking, and unpredictable. As someone who has attended thousands of these in person (after coaching my clients with my list of prefiling do’s and don’ts), I answer your 341(a) questions and share with you what to expect at your 341(a) meeting in a post-COVID pandemic world where Zoom 341(a) meetings are more common.

What is the 341(a) Meeting of Creditors?

The 341a Meeting of Creditors is a requirement in every bankruptcy where the debtor (you) gets put under oath and is required to answer questions truthfully about your assets and financial condition. It’s a gathering, like a conference call. While it’s called a 341(a) meeting, it’s not really a meeting, but more like a polite, professional, semi-aggressive grilling.

Who attends the 341a Meeting?

You, the debtor, must attend the 341a meeting. Also, there will be a bankruptcy trustee. And of course, all of your creditors will get notified about it. Let’s break it down.

First, of course you must show up at your 341 meeting, which post-pandemic will likely be a remote 341(a) meeting. Again, this is done by telephone, Zoom, or some other technology. This choice is at the discretion of your Chapter 7 trustee. It varies trustee to trustee, so that’s why this is general; there is no one uniform set way how a trustee runs his or her 341(a) meeting.

Second, the Chapter 7 trustee will attend. It’s their show, and they will aggressively pursue assets you have or used to have, within the boundaries of the law. They run the meeting, which is more or less like a court deposition, with 20-40 other people able to hear or watch you on the phone or Skype.

bankruptcy 341(a) meeting of creditors sign
Bankruptcy 341(a) Meeting of Creditors sign back in the old days pre-2020 when 341a meetings were held in person instead of remote 341(a) by Zoom

Third, creditors can attend. These are the people to whom you owe money, and they have every right to show up, dial in or call and grill you under oath.

Fourth, the United States Trustee may call in or attend your remote 341(a) meeting of creditors.  The Office of the US Trustee (UST or OUST) is the arm of the Department of Justice responsible for administering bankruptcies fairly and justly. They work with the FBI in the DOJ to investigate bankruptcy crimes, like hiding assets. The goal of the UST is to ensure that justice is being done, and  everyone seeking relief is the “honest but unfortunate debtor.” If the US Trustee shows up at your Zoom 341(a), there’s a suspicion of mischief, such as moving your stuff around, lying about income, or some other thing where maybe you’re not entitled to a Chapter 7 bankruptcy discharge… or worse.

Fifth, other debtors will be waiting their turn for their remote 341(a) meetings. There will be about 30 people or so, all listening in, waiting their turn, trying to learn the standard 341(a) questions.

Finally, your bankruptcy attorney (and a bunch of other bankruptcy lawyers) will be there. This is probably (hopefully!) the only time in your life where you’ll be testifying under oath, with penalty of perjury. You can wing it and hope for the best, but you really want a lawyer who’s personally handled thousands of 341(a) meetings to be with you.

Do my creditors actually show up at the 341(a) Meeting?

Generally, your creditors won’t attend. This is because they know the bankruptcy trustee is representing their interests, and will ask you all the questions they would have asked.  But they might. They know about the meeting because you have an obligation to list in your bankruptcy petitions or schedules (the bankruptcy papers) every debt you owe, or even might owe. You listed their addresses. When you filed the bankruptcy papers, the court clerk sent them all a notice.  It’s each one’s choice if they want to show up and ask you questions under penalty of perjury.

So, who is the bankruptcy trustee who will be asking me questions?

In Chapter 7 bankruptcy, the trustee is an attorney, accountant, or other professional who is appointed by the Department of Justice to seek assets of yours they can take for the benefit of your creditors.  They are bound by duty to follow the US Trustee handbooks and reference materials.

Wait, they can take my stuff?

You bet. That’s the trustee’s primary goal, and what Chapter 7 bankruptcy is all about. You read about “Liquidation bankruptcy” on boring websites, but that’s the whole idea. They can liquidate (fancy word for “sell”) your assets (fancy word for “stuff”), if those assets are beyond the exemptions in your state.

Then I’ll just give away or sell that thing to a good friend or relative.

You don’t want to do that. Transfers before a bankruptcy are often fraudulent transfers, and can end up causing a lawsuit for your friend or family, and you’ll lose the thing anyway.

Where is the 341(a) Meeting of Creditors?

Ever since the 2020 pandemic, you can usually attend your 341(a) meeting remotely by phone or Zoom.

So this could be just a phone call. This is super easy.

Don’t let the format deceive you. The remote 341(a) meeting should be treated like a formal court hearing, as if you’re under oath standing in front of a federal judge.  Because if things go wrong, you very well might be.

How do they even know it’s me?

The bankruptcy trustee verifies your identity with two forms of identification. When 341(a) meetings were done in person, you would physically hand the trustee or their administrator your unexpired original photo ID and a Social Security card. Now that the hearings are done remotely, you or your bankruptcy attorney will have to provide a copy of these documents (picture ID and proof of SSN) to the trustee. When you go on Zoom, they’ll ask you or your bankruptcy attorney if these are really your documents.

What do I have to do before a 341(a) meeting?

Because the meetings are now done remotely, it’s not so simple anymore as just handing over documents. You now have to get the papers and identification to the bankruptcy trustee beforehand. They’ll typically email your bankruptcy attorney how and where to upload the documents. If you gambled and filed bankruptcy without a lawyer, you’ll likely get something in the U.S. mail.  Most Chapter 7 trustees use an online portal where documents are uploaded, though it’s possible some will accept them by email.

What documents do I have to provide to the bankruptcy trustee?

You already know you need to get proof of your identity to the bankruptcy trustee, one with a picture of your face, and another that verifies your Social Security number. Most bankruptcy trustees have a bankruptcy debtor’s questionnaire. Back when the 341(a) meetings were done in person, you’d fill it out while sitting and waiting your turn. Now that we have remote 341a meeting of creditors, you’ll need to complete this in advance, and return it to the trustee. You also must provide your tax return for the last year filed. Many Chapter 7 trustees want to see your bank statements for all accounts for the months prior to filing. It’s possible the bankruptcy trustee will ask you for more documents like mortgage or car loan statements, property deeds, closing statements from refinances or sales you did years ago, etc. so be prepared for some homework.

What happens at the 341(a) Meeting?

On the day of the 341(a) hearing, you’ll connect to the Zoom 341(a) meeting of creditors, or phone in. You’ll mute your line so it’s not chaos and noisy. They call your name, they swear you in, the trustee then questions you like at a deposition, then invites your creditors who attended if they wish to examine you under oath. They often conclude your meeting, but sometimes continue it to a different date so that the trustee can get more documents or information as he or she does due diligence.  Oh, and just in case you forgot already: mute your line until your name is called.

What does a US Trustee 341(a) Meeting Room look like?

The US Trustee 341(a) Meeting room is a room with chairs facing forward with this Department of Justice seal prominently in the room. This should impress upon you the seriousness and solemnity of the event. Because you’re attending the 341(a) meeting in your pajamas in the comfort of your own home you may be led to believe this is a very casual process. It is not. Look at the seal below. Now, imagine getting a formal letter from the Department of Justice with this picture at the top of it mailed to your house, with a deadline, because of something you said at the 341(a) meeting or put in (or left out) of your bankruptcy papers.  This is a serious formal proceeding. Tell the truth about everything.

DOJ seal for bankruptcy 341(a) meeting rooms
DOJ seal displayed at bankruptcy 341(a) meeting rooms

What are the questions they ask at a 341(a) Meeting of Creditors?

There are questions every person must answer at a remote or Zoom 341(a) Meeting, and often the questions are custom-tailored to you and your situation. When it’s your turn, they call your name. You then and only then unmute yourself. First, they’ll tell you to raise your right hand and then ask, “Do you solemnly swear or affirm to tell the truth, the whole truth, and nothing but the truth?”

The bankruptcy trustee will then ask some of the following questions. This is not intended to be a complete list, but just to give you an idea of what you may be asked.

“State your name. Is the address on the petition your current address?”

Did you sign the petition, schedules, statements, and related documents and is the
signature your own? Did you read the petition, schedules, statements, and related
documents before you signed them?

“Are you personally familiar with the information contained in the petition, schedules, statements and related documents? To the best of your knowledge, is the information contained in the petition, schedules, statements, and related documents true and correct? Are there any errors or omissions to bring to my attention at this time?”

“Are all of your assets identified on the schedules? Have you listed all of your creditors on the schedules?”

“Have you previously filed bankruptcy?

“What is the address of your current employer?”

“Is the copy of the tax return you provided a true copy of the most recent tax return you filed?”

“Do you have a domestic support obligation, and to whom?”

Have you read the Bankruptcy Information Sheet provided by the United States Trustee?

Do you own or have any interest whatsoever in any real estate?

“Have you made any transfers of any property or given any property away within the last four years?”

“Have you been engaged in any business during the last six years?”

Note that business can be as small as that side gig you have selling things on Ebay or Etsy, or driving for Lyft. If you do have a business or business income, that opens up other questions. You’ll also get other questions if you own a car, own real estate, bitcoin, life insurance proceeds, claims against anyone, and so on. 

Always tell the truth, and again, even if you think you have nothing to hide, you really want to have an attorney representing you when you’re put under oath, and in any legal proceeding such as bankruptcy.

How do I prepare for a Meeting of Creditors?

You already know the bankruptcy petition, schedules, and statement of affairs, as it’s all about you, your life, and your financial condition. And of course, it’s all truthful and complete, listing all your assets, debts, and income. Because of that, there’s nothing to memorize.

You’ll want to get a good night’s sleep, and get to bed early so you’re well-rested.  Before you go to bed, have the Zoom meeting number and password (or phone number and pin pass code) the chapter 7 trustee provided you ready so you’re not scrambling in the morning.

Also, read the bankruptcy information sheet. It’s often called the green brochure, green sheet, or green pamphlet, since back in the days of covered wagons when we were in person, that’s what it looks like.

Do I have to tell the truth at the 341(a) meeting?

I know what you’re thinking.

What?

You’re wondering about maybe telling a couple of little white lies and not disclosing assets or income or that one debt to see if you can beat the system.

Maybe.

That’s not going to work. You’re under oath in a federal legal proceeding. Tell the truth, and the full truth.

Yeah but how will they know if I don’t?

The bankruptcy trustee has government resources, databases, and records, and the UST and Dept of Justice have a budget and resources far greater than yours.

Also, FBI agents like this investigate bankruptcy crimes.

FBI agents investigating bankruptcy crimes, maybe.
FBI agents busy investigating a bankruptcy crime, maybe.

I was just kidding anyway.

Just tell the truth, about everything.  Do you want to go to jail for bankruptcy crimes like Boris Becker?

No.

Then there’s your answer.

What about Chapter 13 Bankruptcy 341(a) Meeting of Creditors?

The Chapter 13 bankruptcy 341(a) Meeting of Creditors is similar, but there’s an entirely different focus than the Chapter 7 kind described above. This is because Chapter 13 bankruptcy is different. A Chapter 13 is administered by a (you guessed it) Chapter 13 trustee. Since the purpose of this chapter is to repay debts in a sort of federally-run debt consolidation program, there’s an emphasis on your cash flow, your budget, and your ability to repay. The 341a questions will be similar, but much of it will focus on your paystubs, number of people in your household, employment, and monthly spending. You will almost certainly get a to-do list when the meeting is complete. This punchlist must be completed if your case will get through to confirmation.

Is a bankruptcy trustee the same as the bankruptcy judge?

No, they serve different roles. A bankruptcy trustee is an administrator of sorts, and much more closely aligned with your creditors and debts. They are not your attorney, nor advocating for you.  Your attorney is of course zealously fighting for you and your rights, and to help you get the best result with the facts presented to them. The bankruptcy judge — and each case is assigned to a bankruptcy judge — is a neutral person whose job is to decide disputes between your attorney and the trustee (or creditors).

I read that I don’t need an attorney for bankruptcy.

This is true. Just because you can file bankruptcy without an attorney, it doesn’t mean that you should. Same goes for self-surgery. Please strongly consider retaining one to help you with every step of this process. At the very least, arrange a consultation with an experienced bankruptcy lawyer.

Summing up 341(a) Meetings

Remote 341(a) Meeting of Creditors are new, and have their own sets of traps, especially in that it appears so casual and deceptively easy. With these tips and pointers, I hope this helps you navigate the terrain a little bit better.

And if you already have filed your case, relax, answer the Zoom 341(a) meeting questions honestly, and I hope the process works out for you and that you get the bankruptcy discharge you deserve.

Thank you for reading.

sb1099 new california exemptions home lock

SB1099: New 2022 California Bankruptcy Exemptions Increase

SB1099: New California Bankruptcy Exemptions Increase (2022) | 5 Major Wins

SB1099, the new California exemptions increase which gives debtors in bankruptcy more protections, is now law.  The new California exemptions in 2022 help people in bankruptcy keep more of their assets, including their cars, their home, money, support pay, and sick leave. The bill was signed by the governor yesterday, and takes effect 1/1/2023.

Note that SB 1099 and the 2022 California exemptions are different from the 2021 increase in the California homestead exemption which is tied to Los Angeles County median home prices. Last year’s homestead exemption boost strictly involved homes. The 2022 exemption hikes for California improves protection homes, cars, savings, support, and accrued leave and wages.

While the changes in the new California exemptions of SB 1099 are many and wide-ranging, below are some key highlights.

Home equity appreciation now goes to debtor, not the estate

A key provision of the new California exemptions law is that postpetition appreciation in the home equity of debtors cannot be taken to repay debts.  Section 2 of the SB 1099 says:

[I]n a case where the debtor’s equity in a residence is less than or equal to the amount of the debtor’s allowed homestead exemption as of the date the bankruptcy petition is filed, any appreciation in the value of the debtor’s interest in the property during the pendency of the case is exempt.

This addresses the horrible, terrible, no-good decision of In re Jacobson, 676 F.3d 1193 (9th Cir, 2012)  which provided the perverse result that debtors had a contingent homestead exemption. The

New California exemptions provide more protection for home and appreciation
New California exemptions provide more protection for homes and their appreciation

Ninth Circuit there ruled, “That right was contingent on their reinvesting the proceeds in a new homestead within six months of receipt. Cal.Civ.Proc.Code § 704.720(b). The Jacobsons did not abide by that condition and thus forfeited the exemption.” Jacobson at 1199.

Now, with SB1099 becoming law, regardless which way the housing market goes after homeowners file bankruptcy, appreciation in their house is theirs, and not the trustee who previously could take it to pay their debts.

Ridethrough for Cars is Back in California

In 2005, the bankruptcy reform known as BAPCPA required debtors in Chapter 7 bankruptcy to sign reaffirmation agreements if their lender provided one. This meant that the debtor owed the car loan, even if they lost the car to repossession after bankruptcy. With SB 1099, the debtor doesn’t need to sign the reaffirmation agreement, and the car loan can “ride-through” the bankruptcy case. Ridethrough was the norm before BAPCPA, and now in California, it has returned. The ride-through policy protects debtors from being liable for a big debt if they eventually default on the car loan.

The “ride-through” bankruptcy part from the new CA law helps debtors. In short, no longer is the person in bankruptcy gambling that they won’t suffer some future hardship and lose the car, and still be stuck post-bankruptcy with thousands of dollars in a car loan they can’t afford. Ride-through in bankruptcy for cars is back in California.

Car Exemption is Increased to $7,500

The new SB1099 law also increases the car exemption amount to $7500, regardless of which exemption scheme is chosen. The California exemptions have two tracks, in the 703 and 703 sections of the California Code of Civil Procedure. Each section previously has a different amount for protecting equity in a vehicle. Now, regardless which scheme debtors choose, they can protect $7,500 of equity. This is crucially important in this era of record prices for used cars.

Sick leave & family leave time protected up to $7500

Family leave, sick leave, and vacation credits are now exempted up to $7,500, as these terms are defined in Section 200 of the Labor Code.

Alimony and support

Pre-existing law included an alternative exemption for the debtor’s right to receive alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. This new California exemption adds a general exemption matching the existing alternative exemption.

And there are more.

New California Exemptions of SB1099 help debtors … a lot.

While the list goes on and on, these are the key provisions. It amends Section 2983.3 of the Civil Code, Sections 703.140, 704.010, 704.050, and 704.113 of, and to add Section 704.111 to, the Code of Civil Procedure, and amends Section 22329 of the Financial Code, which relates to bankruptcy. The bottom line is the newly-enacted SB 1099 California exemptions protect homeowners, car owners, people receiving support, and sick pay. It’s a win for Californians, and those who lose out are the credit card companies. Rejoice, California!

 

fraudulent transfer California

Fraudulent Transfer California: Top Keys

Fraudulent Transfer in California: Top Keys

Fraudulent transfers. Voidable or fraudulent conveyances. They go with these 17 words: “Have you sold, transferred, or given away anything worth more than $3,000 in the last four years?” It’s a 341(a) question bankruptcy attorneys can recite in their sleep, and one that can cause our debtor clients to have nightmares. The reason is the trap known as fraudulent transfers, voidable transfers, fraudulent conveyances, and the like.

Fraudulent transfer in California comes up typically here in Chapter 7 bankruptcy. Also known as a fraudulent conveyance, it can get your friends and family in hot water. It’s one of the top tips recommended to do or avoid before filing bankruptcy. Fraudulent transfer grief can even include the recipient being taken to court in a lawsuit, and forced to give up something they own. It’s terrifying and a nightmare. Worst of all, it can all happen with the purest of intentions.

That’s right: fraudulent conveyance doesn’t even require fraud.  More on that in a bit.

What is a Fraudulent Transfer?

With all this talk about voidable transfers or fraudulent conveyances, we should probably define the terms.  What’s a transfer? The Bankruptcy Code defines a transfer, for our purposes, as “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property, or an interest in property.” 11 USC 101(54D).

voidable transfers
Transfers in bankruptcy are defined as broadly as possible

You can’t get more all-inclusive of a definition than that. Direct or indirect. Definitely or maybe. Voluntary or not. Parting with property, or even just an potential stake in property. It “literally encompasses every mode of parting with an interest in property.” Matter of Besing, 981 F2d 1488 (5th Cir, 1993). Basically, if there’s something you had or could have had (or even had the possibility of maybe one day having), and… now you don’t, that’s a transfer.

So that’s a transfer. Now, what’s a fraudulent transfer?

Fraudulent conveyance or transfer isn’t defined in the Bankruptcy Code. However, case law defines fraudulent transfer in California (and the Ninth Circuit) as a transfer of “some property interest with the object or effect of preventing creditors from reaching that interest to satisfy their claims” or “an act which has the effect of improperly placing assets beyond the reach of creditors.” In re First Alliance Mortgage Company, 471 F3d 977, 1008 (9th Cir, 2006).

A fraudulent transfer as defined by the Ninth Circuit Court of Appeals is some act that stops your debts from getting something that would satisfy their claims. Note that the action can have either the “object or effect.” That means what you did has was to stop the creditors from getting it as the intended goal (object), or even just the unintended impact (effect).  But the appellate court went on. In the alternative, an act of putting something where the creditors can’t get it, and here the 9th Circuit adds the term “improperly.” Again, there’s talk of effect, which means you didn’t even have to do the act on purpose.

Summing that up, a transfer is pretty much anything you had but now don’t. A fraudulent transfer in the 9th Circuit is a transfer which had the goal or even just the unintended effect of making it so your creditors couldn’t get to the thing.  When you step back, this seems super broad and a trap that pretty much anyone can fall into without even meaning to, just because they sold their paid-off pickup truck a few years ago. And it can be, but for some limitations in the state and federal law.

The Law on California Fraudulent Transfer

Fraudulent transfers in California are governed by the Uniform Voidable Transactions Act (UVTA). The UVTA is Calif Civil Code 3439.04.  Notice the name: voidable transactions. This should get your attention, because it implies that someone can void, that is, undo or erase the transaction or conveyance. And that is exactly what can happen.  Let’s look at what the law says.

What California UVTA says about Fraudulent Transfers

The text of the fraudulent conveyance law in California:

(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

There are a couple of things to point out about this.

First, with California voidable transfers, the transfer is voidable.  That is, it can be made as though it never happened, if some conditions are met. Second, actual intent has to be shown the giver tried to hinder or defraud a creditor.  This sounds like a high bar, which can be a good thing for debtors.  Third, the debtor didn’t get equivalent value in return, and either was in a business or transaction and got in return something small in exchange, or intended to get debt or reasonably should have believed he’d have to get debts he’d be unable to repay.

That last sentence, number three, is a mouthful. It combines (2) and (A) or (B) from the UVTA statute. The gist of it is this: no intent needs to be shown, only that the debtor gave away or sold something for less than its value, and couldn’t pay his debts he was about to get.

So, using the California fraudulent transfer law, actual intent to hinder doesn’t have to be shown. The trustee or creditor needs to demonstrate that the debtor believed, or should have believed debtor would be unable to pay the debts.

(Note that the statute used to be called the UFTA or California Uniform Fraudulent Transfer Act. The old UFTA applies to transfers before 12/31/2015. With the new UVTA, the standard of proof became lower, and there’s no need to prove actual intent, as we’re about to see. But look to the date of the transfer; if you’re in California, and it’s before 1/1/2016, debtor may have an easier road utilizing the  old UFTA.)

Let’s now turn to how they prove actual intent. It helps to have a smoking gun letter that states, “I  declare that I actually intend to defraud this creditor.” But that doesn’t come up very much.

California Badges of Fraud under UVTA (Civil Code 3439.04)

Badges of Fraud for California Voidable Transfers

To prove actual intent, the California fraudulent conveyance law says the following

In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:

(1) Whether the transfer or obligation was to an insider
(2) Whether the debtor retained possession or control of the property transferred after the transfer
(3) Whether the transfer or obligation was disclosed or concealed
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit
(5) Whether the transfer was of substantially all the debtor’s assets.
(6) Whether the debtor absconded
(7) Whether the debtor removed or concealed assets
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred
(11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor

A few thoughts about all those badges of fraud. Some badges of fraud clearly show someone had bad intentions: absconding sounds pretty guilty, as does concealing, or even keeping control after you supposedly give something away.

However, other California badges of fraud some a bit more innocent: being insolvent at the time or even after the transfer, or was sued or even threatened with a lawsuit, and whether the value received was reasonably equivalent.

How many Badges of Fraud are Needed

In 2021, Bankruptcy Judge William Lafferty wrote in In re Fox Ortega Enterprises, 631 B.R. 425 (NDCA, 2021) that “only one or two badges of fraud may suffice to find a transfer was made with actual fraudulent intent.  In re Ezra, 537 B.R. 924, 931 (9th Cir BAP, 2015); Filip v. Bucurenciu, 129 Cal. App. 4th 825, 834 (2005).” The Ninth Circuit BAP earlier found that the “UFTA list of ‘badges of fraud’ provides neither a counting rule, nor a mathematical formula. No minimum number of factors tips the scales toward actual intent. A trier of fact is entitled to find actual intent based on the evidence in the case, even if no ‘badges of fraud’ are present.” In re Beverly, 374 BR 221 (9th Cir BAP, 2007). Depending how these fraud badges are weighed, insolvency pretty much covers everyone in Chapter 7 bankruptcy, and doesn’t really require actual intent.

Proving insolvency under UVTA

Insolvency is proved under the UVTA using the “balance sheet test.”  The balance sheet test is traditionally “whether debts are greater than assets, at a fair evaluation, exclusive of exempted property.”  In re Koubourlis, 869 F. 2d 1319 (9th Cir 1989), citing 11 USC 101 (now subsection 32A). Therefore, a homeowner with equity and maybe $20,000 of credit card debt may pass the balance sheet test.

However, while we’re here discussing the UVTA state law, there’s also a rebuttable presumption against the debtor. See California Civil Code 3439.02: “A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent.”  Because of this statutory “cash flow test” on the books, it’s on the debtor to show that he or she was paying their debts at the time of the transfer to get it back to the potentially more favorable balance sheet test.

So all of that is fraudulent transfers in California. Let’s turn to the federal standard.

Federal Fraudulent Transfer Law

The Bankruptcy Code’s fraudulent transfer provisions are in Section 548, which is its own version of the UFTA.  Section 548 is titled “Fraudulent Transfers and Obligations.” The Bankruptcy Code, at Section 544, gives a bankruptcy trustee the power to avoid transfers made with actual intent to defraud and transfers made without reasonably equivalent value.

The key provision is in subsection (a), which is presented here:

The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily [either]

  • made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; OR
  • received less than a reasonably equivalent value in exchange for such transfer or obligation; AND [one of the following]
      • was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
      • was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
      • intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
      • made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

In short, the trustee has to show either actual intent to hinder, or less than value along with  either insolvency, giving away most of debtor’s stuff, about to incur debts, or helped an insider (family member).

Actual Intent of Section 548 Fraudulent Transfers

We see, then, from the first part of Section 548, that there has to be actual intent to hinder, delay, or defraud.  This is hard to prove, as the 9th Circuit pointed out in Kupetz v Wolf, 845 F2d 842 (9th Cir, 1988).  In that case, the circuit court analyze the leveraged buyout (LBO) of a mannequin company.  It went back on a history trip to the Statute of 13 Elizabeth passed by Parliament in 1571. Then, the appellate court explained how, for four centuries, courts relied on badges of fraud to try to infer intent. It then concluded that absent proof of actual intent, one can “assume fraudulent intent when an insolvent debtor makes a transfer and gets nothing or very little in return.” Kupetz at 846.

Constructive fraud alternative: No proof of actual intent

The other part of Section 548 provides a path for a trustee if actual intent can’t be shown, relying on “constructively fraudulent transfers.” The trustee would have to show debtor got less than value, along with one of four factors. Note that not all four are needed. The typical way to get here in a bankruptcy is where less than full value is received by a debtor who is insolvent. (see discussion on insolvency standards elsewhere on this page).

Some fraudulent conveyance examples

1. Selling a vehicle for value

Let’s say debtor a year ago prepetition was struggling to pay their debts as they came due. To make ends meet, debtor sold a vehicle by placing an ad while insolvent. They haggled and finally sold the vehicle to a stranger.  Voidable transfer? Probably not, because while debtor was insolvent, didn’t receive less than the reasonably equivalent value.

2.  Selling the asset to a family member

Now assume the debtor sold the item prepetition to a family member, and was even insolvent while doing so. Ah, we’re missing information: was there a sweetheart deal or was there reasonably equivalent value?  Let’s go with less than value, because heck, it’s family. Voidable conveyance, because less than value and transferred to an insider. The fact that debtor was insolvent, while not necessary in the 548 UFTA constructive fraud variables, actually hurts his argument. If he was struggling to pay his bills and insolvent, it makes one wonder why he’d settle for less than value and sure looks like a sweetheart deal and fraudulent transfer.

3. Divorce agreement transfers can be troublesome

Husband is debtor and has judgments against him. He structures his divorce’s marriage settlement agreement (MSA) to transfer basically all the assets to his soon-to-be ex-wife.  He can’t later say there was a “good faith for reasonably equivalent value.” Further, moving assets beyond the reach of creditors was explicitly part of the MSA negotiations as an actually fraudulent transfer.  In re Beverly, 374 BR 221 (9th Cir BAP, 2007)

4.  Quitclaiming half of debtor’s home to their adult child for estate planning

Debtor is advanced in age, has a home with some equity, and wants to put her adult child on title as a joint owner. The purpose is innocent: for estate planning, when debtor passes away, the child gets the other half of the real estate without having to create a will or trust. Debtor then quitclaims half of her home to the child, and files bankruptcy a year later. Fraudulent transfer, as it was for the benefit of a family member (insider), without receiving reasonably equivalent value in return.

That last example is interesting. What if the equity could have been exempted before the transfer?  The California homestead exemption is now very generous. Let’s say the entire equity or even the transfer amount was smaller than the broad exemption coverage for the homestead.  In California, the fraudulent transfer can still be avoided even if exempt. Read on for why.

Exemption status irrelevant

But wait, you might say. If debtor still had the asset, it could have been exempted!  That sounds persuasive, and in some states it would be. However, with fraudulent transfers in California in the Ninth Circuit, that’s not the case. In fact, the transfer of property waives the right to exempt it. Further, the recipient can’t claim it exempt for debtor, either. Gladstone v US Bancorp, 811 F3d 1133 (9th Cir, 2016).

Reachback period for fraudulent transfers and voidable conveyances

What’s the reachback period for fraudulent transfers or voidable conveyances in California? Like most things, it depends. For California fraudulent transfers, it helps to understand how far back in time the trustee can go, since when it happened can make all the difference between avoiding the transfer and getting the asset or it being safe.

The fraudulent transfer reachback time period varies, depending on which statute (the Calif UVTA or 548) is being used, when the transfer happened, and the type of asset it was.

  • 1 year: for cases commenced before 4/21/2006 per Section 548
  • 2 years: Section 548, for current cases and California’s UFTA for transfers before 2016
  • 4 years : using California fraudulent transfer statute 3439.09(b) for transfers after 12/31/2015
  • 7 years: using Section 544(b) and California 3439.09(c), but note 546(a) in bankruptcy, so maybe longer than 7 years, as equitable tolling applies In re EPD Inv Co, 523 BR 680, 691 (9th Cir BAP, 2015). Los Angeles Bankruptcy Judge Robert Kwan has an interesting discussion of this in In re Art & Architecture Books, 2:13-bk-14135-RK, Adv 2:15-ap-01679-RK, opinion dated May 5, 2021.
  • 10 years for Self-settled trusts (SST) using Section 548(e)

The 341(a) question asking have you sold, transferred or given away anything of value in the past four years isn’t really the end of the story. Even if it’s been five or six years, there may still be ways for the trustee to avoid the California fraudulent transfer and sell the asset. Is the voidable transfer reachback period clear as mud? You bet.

Burden of Proof for Fraudulent Transfers

After reviewing the reachback periods for fraudulent conveyances, you get a sense that it makes a difference whether the trustee is relying on the federal section 548 or California state 3439.04. Not only do they have different time frames, the burden of proof is different.

A creditor making a claim for relief under 548 subdivision (a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.  Under California’s UFTA (or UVTA), the burden of proof can be on the debtor if they weren’t paying debts as they became due. Calf CC 3439.02.

In short

A transfer is something you had before and don’t have anymore. If you file Chapter 7 bankruptcy, you will almost certainly be asked about it. This also applies to cash apps Zelle and Venmo with transfers of cash in and out of your bank account.  The Chapter 7 trustee, using one of the above tools, can go after the person or people who received the transfer and force them to give up the thing or money, even subjecting them to a lawsuit to force it to happen.  With fraudulent transfers in California, consider all your options, including Chapter 13 bankruptcy, as Chapter 7 can be a risky bet where assets have gone away.

    bankruptcy dos and don'ts

    12 Crucial Tips Before Filing Bankruptcy

    12 Crucial Tips to Do (and Avoid) Before Filing Bankruptcy

    Los Angeles Bankruptcy lawyer explains what to do and don’t before seeking a fresh start

    If you’re thinking about filing bankruptcy, what you do you beforehand has more of a bearing on the success of your case than how well the papers are completed. As a longtime Los Angeles bankruptcy attorney, I must make the best of the circumstances that are presented to me. Sometimes these situations are, shall we say, less than ideal.

    What follows, in no particular order, are just some of the things I wish the people I meet with had done, or avoided doing, before we met for the consultation.

    Do disclose all your income, asset, and debts

    Just before we meet, in the brief questionnaire I send you, disclose to me all the various income streams you have, all the things you own, and all the people and companies you owe. All means all.  Tell me about that small online business. Share me with me that 1967 classic car in showroom condition. Inform me about that embarrassing gambling debt. This way, I can give you the best advice. This prevents before us both being surprised when the vast investigative power of the government finds it and brings it to our attention. Then it’s too late (ask Boris Becker). Tell me now so I can help you strategize and navigate, honestly and ethically.

    Dos and Don'ts

    Don’t repay loans to your family

    Look, we all get it. You don’t want to hurt your loved ones, and bankruptcy will wipe out that debt to your Aunt Gertrude.  But taking care of family and not repaying your other debts sure seems a lot like playing favorites. Which it is. And the Bankruptcy Code has a fancy word for that: insider. When you repay the debt owed to a relative in the months before you file bankruptcy, it creates a situation where the Chapter 7 trustee can go after the money and spread it out more fairly.

    File all your tax returns

    If you’re going to benefit from bankruptcy, you need to show you’ve been satisfying your obligations to the federal government, including reporting your income. It’s understandable that you’ve been falling behind on filing your tax returns each year. Maybe you’re a year behind.  Maybe you’re four.  It’s easy to get into avoidance, and then you feel guilty, because you know if you submit your 1040s it’ll just say you have even more debt you can’t pay. But file them. All the returns. If you owe, you don’t need to send a check in with the return. But let’s find out what you owe. And this also prevents the very bad situation of the IRS filing a return for you (called a substitute for return or SFR). Just do it, let’s find out what you owe, and craft a strategy.

    No spending sprees

    This one is simple: don’t run up your credit cards. The fact that you still have thousands of dollars left under your credit limit is irrelevant. Just say no. Avoid large purchases. Stop luxury spending. No cash advances. You don’t get a spending spree. In fact, using your credit cards prior to filing bankruptcy is evidence of fraud, particularly if the credit card files a lawsuit in the bankruptcy.  Fraud doesn’t go away with the Chapter 7 bankruptcy discharge; it remains your debt after the case is closed.  So, don’t use your credit cards before you file bankruptcy.

    Read my Ultimate Chapter 7 Bankruptcy Guide.

    Don’t give away, sell, or transfer anything to anyone

    Fraudulent transfer sounds pretty scary — and it is — and it doesn’t even require fraud or bad intent. Because most bankruptcy cases focus on assets, making an asset go away in the months and years prior to filing bankruptcy gets a lot of scrutiny. The trustee has the power to go after the person you gave or sold the thing to and take it away and sell it for your debts. The sad irony is in many cases, the asset could’ve been protected had it stayed in your name. In short, don’t try to game the system: the system has been around for centuries, most trustees for decades, and they have the investigative power of the government behind them. Tell me about the asset, don’t move anything around before filing, and let’s see if I can use a bankruptcy exemption to protect it.

    Stay away from Zelle, Venmo, and cash apps

    Here in the 2020s, cash apps like Venmo and Zelle are common.  They’re convenient, and make it super easy to transfer money to and from your bank accounts. That’s also the downside: all that money flowing in and out and being exchanged with your friends and relatives at the very least looks like extra income & unnecessary expenses, and at worst, like transfers. And what did we just learn about transfers in the last paragraph? That’s right, they’re bad.  You don’t want to explain each and every transfer on your bank statements to your lawyer, and then, to the trustee. You’re better off using your debit card to pay for things, or even a personal check like a primitive cave-dweller.

    Think twice about buying a car before you file bankruptcy

    A car debt is different from the spending spree tip, in a few ways. It’s just one purchase, though it’s a big one. Also, it’s a secured debt attached to a collateral (the vehicle). And, in bankruptcy, you don’t get a free car, or house. If you want to keep the thing, you need to stay current on the payments. However, some courts or trustees may look at a brand new car payment from a contract entered into on the eve of bankruptcy with a suspicious eye. It lowers the amount you have available to repay your debt. The Supreme Court in Milavetz weighed this very issue (examining 526a4). You’re at a bankruptcy website, so you’re clearly thinking about filing. So, before getting a vehicle loan, you probably should meet with a bankruptcy attorney.

    Don’t make the big chunk of money disappear

    Few things can complicate a bankruptcy more than a massive sum of cash you had two years ago being completely spent. It could be that pandemic relief PPP or SBA loan. Maybe you cashed out a home refinance, or a 401k or other retirement account. Or perhaps you sold a house and put the proceeds in the bank. Or got a recovery from a car accident. The issue is that you didn’t use this money to repay debt, but instead, funded a luxurious lifestyle and now you want to wipe out debt you chose not to repay. When asked where the cash sum went, the guaranteed answer: “it’s all gone.” The Office of the United States Trustee (OUST) will be very interested where the all-gone money went, and you should be prepared to provide a line-item analysis showing how every dollar was spent, using bank statements as supporting evidence.

    Documents: get your ducks in a row

    In bankruptcy, you’ll be testifying under oath. However, documents can be used as evidence. So, you should have ready (or be prepared to get ready), a year’s worth of bank statements, a Zillow printout to see if your home is over the median home price, a credit report (they can be obtained for free), at least two years of tax returns, and at least six months of pay stubs for the means test. Sure, we can sit down at your consultation and rip open all your untouched credit card statements you bring to us in a crumpled paper bag in one big cathartic unsealing ceremony. But the more efficient option is to have all these documents downloaded or saved as PDF files.

    Scan documents or use a free phone scanning app

    Speaking of which, your bankruptcy lawyer will love you if you can scan documents in PDF format to email to them as attachments. This is not the same thing as taking a picture of each page of your tax return. This also does not mean a screenshot of your bank balance. And, for the love of all things holy, don’t use the cell phone to take a picture of the computer monitor showing the credit report. Instead, either invest in a scanner, or, more affordably, a free PDF scanning app for your Android or Apple device. With these free PDF scanning programs, you can use the camera to capture pages of a document, and then make it a PDF for your bankruptcy attorney. A little bit of effort here will make you your bankruptcy attorney’s favorite client.

    Don’t bank where you owe, and avoid Wells Fargo

    Don’t have a checking or savings bank account at the same bank where you have a debt. Why? Because you have already or will soon start missing credit card payments to that bank’s credit card.  When that happens, they likely have the right or authorization to take your money from the bank account to pay the debt in a bank setoff. You don’t necessarily need to close the account, but just don’t keep money in there you’d be upset about if they took it.

    Also, do you know what bankruptcy attorneys talk about when we socialize? Our agreed-upon and utter dislike for Wells Fargo Bank. Why do some of us bankruptcy lawyers hate Wells Fargo with the fire of a thousand suns? Because they’re one of the very few banks that will freeze our clients’ money, even if there’s no WF credit card with them. They don’t take it, only freeze it. But that distinction is unimportant when you need to pay rent or buy food and you can’t get at your own money because Wells Fargo has has a policy which amounts to punishing you for filing bankruptcy. Wells Fargo and bankruptcy don’t mix.

    Do meet with an experienced bankruptcy attorney

    Get a consultation from a skilled bankruptcy lawyer. Most will charge a reduced rate to meet with you, and it’s worth every penny given the hazards you face if you don’t. It’s true you can file your own bankruptcy, and do not need to retain counsel. However, given all the risks and dangers you face, the time spent completing a bankruptcy attorney’s intake questionnaire and then answering their questions while they advise you is worth 1,000 times what you give. They’ll tell you if a Chapter 13 bankruptcy is a better option, what you could lose in a 7, or if waiting is best. You’re not under any obligation to hire that lawyer, but when you feel the relief and peace of mind, I’m pretty confident you just might want to.  If you’re in the greater Los Angeles area, give me a call or send me a message; I’ll be happy to help.

      2021 median income limits

      2022 Median Income Limits to Nail Bankruptcy Means Test in Calif

      Median Income Limits to Nail the Bankruptcy Means Test | New for 2022

      The government updated the numbers for 2022 median income limits. Using median household income, it again got easier to qualify for bankruptcy Chapter 7, because of another means test adjustment.  And while bankruptcy may seem to be “just forms,” make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

      The means test for bankruptcy decides who qualifies for Chapter 7 bankruptcy eligibility. The first step of this process is comparing your median household income against the California median income limits set by the Department Of Justice guidelines to see if you earn less than bankruptcy median income limits.

      Update for 2022:  The Department of Justice announced in November that it “will not post updated median income totals until a Consumer Price Index adjustment in spring 2022.” Normally it moves the bar that we’re trying to get under twice a year. For the first time in recent memory, there is no Autumn update. This could be good news or bad news, depending on your individual situation.

      Because of the above statement, these will be the first 2022 median income limits.

      The means test limits adjusts over time.  So, someone may not qualify according to the bankruptcy means test in one month but after the changes they do, or vice-verse. The last updates were in May 2022, and may change again in 2022 . Here are the May 2022 bankruptcy median income figures to determine who can file Chapter 7 bankruptcy.

      Means Test: 2022 Median Income Adjustments

      2021 median income limits
      2022 median income numbers are much higher than in years past

      Every now and then, the government updates the bankruptcy median income limits. They last did it in May 2021. Good news: the California 2022 median income numbers are now even higher, increasing household income for bankruptcy means test qualifying. This means that more people could qualify for Chapter 7 bankruptcy using the California median income numbers below.

      2022 Median Income for California Households

      Because the California median income changes maybe once or twice a year, these recent changes late last year will be the first numbers used for 2022 median income. You’ll see below there’s talk about household size. Notice also that larger families also get a break, as the amount for each additional member after 4 increases another $9,900. This is helpful for households of five people or more.

      What is Median Household Income

      When reviewing median household income, we start splitting hairs, since not every home is a traditional household. So, things start getting kind of cloudy on what is or isn’t a household. It isn’t always clear who counts in a household. There may be a difference if you have a roommate who pays rent. What if you’re married? Or have kids but they’re adults. Do you live with your significant other, who has their own finances? Would the answer be different if you had kids together, but weren’t married? Maybe they’d all be considered by the government to be in your household. Or, maybe they’re not. Call and let’s meet to talk about it.

      But below are the California median income limits for the various household sizes.

      California household size and California median income for Bankruptcy
      • 1-person household: $65,895
      • 2-person household: $87,355
      • 3-person household: $97,092
      • 4-person household: $111,535
      • Each additional person: $9,900

      These are the California median income numbers as of September 2022. If it’s later in the year or you’re looking for the median household income for a different state, please review the DOJ link above.

      Read Our Means Test Guide.

       

      Can you file bankruptcy if your household income is over the median?

      If you’re over the bankruptcy median, there’s still hope

      Yes. The means test and 2022 median income isn’t the “end all be all.” It’s just a starting point. A person can still file Chapter 7 bankruptcy, in some cases, even if they earn more than the median income. The bankruptcy means test would just need to be filled out completely. It’s still possible to qualify.

      Over the years, this Los Angeles bankruptcy attorney has helped people who earn over the California median income limits still qualify for Chapter 7. In one case, we even helped a family whose annual income was almost double the median household income. They were earning around $150,000 a year, and we helped them get a Chapter 7 discharge (your mileage may vary). However, even if someone isn’t eligible, debt consolidation is still a solution in Chapter 13 bankruptcy.

      Being Under the Bankruptcy Median Income Doesn’t Guarantee Success

      On the other hand, just because someone is earning less than the California median income, it’s possible that they’re not eligible for Chapter 7 bankruptcy.  Bankruptcy is all about whether someone can afford to repay their debt or not, and the means test is just one factor.

      Note: the median income numbers are not to be confused with the Los Angeles County median home price figures, and each has a different place in evaluating Chapter 7.

      Finally, as the economy is always changing, so does California median household income. We don’t know the next time changes to the median income limits will happen again. So, be sure to check before relying on these California median income limits in the future.

      Contact Us and Let’s Find out If you Qualify



        chapter 13 debt limits

        Chapter 13 Debt Limits (2022 update)

        Chapter 13 Debt Limits (2022 update)

        Debt Limits in Chapter 13 Bankruptcy

        June 2022 Update: The President has just signed into law changes which, among other things, increases the Chapter 13 debt limit to $2.75 million dollars, for secured and unsecured debt combined. This is about double what the Chapter 13 debt limits had been, and is extremely helpful for Los Angeles residents who have a second property and mortgage debt that exceeds $1.5 million. These changes are temporary and intended to sunset in 2024.

        March 2022: The Senate has introduced a bipartisan bill which would increase the Chapter 13 debt limits significantly if it passes. S3823, the Bankruptcy Threshold Adjustment and Technical Corrections Act (BTATCA) would almost double the amount of debt you can have in Chapter 13.

        Chapter 13 debt limits limits who can seek relief in Chapter 13 bankruptcy. These eligibility figures are set by law and are adjusted regularly, and restrict which cases can be in Chapter 13 bankruptcy. As you might know, Chapter 13 bankruptcy involves repaying some or all of your debt. People will sometimes ask, “do I qualify for chapter 13?” The answer, like to many legal questions is, “it depends.”

        The purpose is so that the Chapter 13 trustee doesn’t administer cases that are too large and burdensome. At some point, the line is drawn, and let’s face it, in Southern California where this Los Angeles bankruptcy attorney practices, the secured Chapter 13 debt limit is inadequate. If someone has a rental property, they’re probably over the line and don’t qualify, which is hardly fair.

        To qualify for Chapter 13 bankruptcy, the reorganization bankruptcy, a few things have to be looked at. First, a good Los Angeles bankruptcy attorney will examine your cash flow. That is, can you afford to repay your debts? Or are you struggling to keep your lights on?

        Unsecured and Secured: the Chapter 13 Debt Limits

        Second, you have to compare your debts against the debt limits. These numbers constantly change. And to be honest, we bankruptcy lawyers have to look them up, since in most cases they’re not a factor. And just when we learn them, they change again.

        2022 Updated Chapter 13 Bankruptcy Debt Limits

        Note: the following is superseded by temporary changes in the law effective June 2022 described at the top of this page.

        So, as of April 1, 2022, the Chapter 13 debt limits are

        • Unsecured debt: $465,275 (up from $419,275)
        • Secured debt: $1,395,875 (up from 1,257,850)

        These values are effective 4/1/2022, and seem to be still be the most current. Normally, you’d check a government website for updated values. However, as of this writing, even the courts are still listing the chapter 13 debt limits that are from before 2019. Other sites, though, seem to be more current.

        Some Blurred Line Debt Limit Examples

        Even this is oversimplifying things, because where do lawsuits against you fall? That is, if someone has taken you to court, is it a secured debt or an unsecured one? What if you think you’ll win: does it count as a debt at all?

        Another issue arises with student loans, particularly if you cosigned as a parent plus loan and it’s not really your debt. Or is it?

        Further, tax debt is another tricky one. Is it unsecured, secured  or both? And what if it’s priority, can it also count against the unsecured debt? What if you dispute it?

        There are a lot more issues that can arise, so you’ll want to consult with a skilled Los Angeles bankruptcy attorney who specializes in Chapter 13 bankruptcy. I’d be honored to work with you.

        Contact us for a consultation

        If you’re in the Los Angeles County area, contact us and let’s arrange for a no-obligation Zoom consultation to see how bankruptcy would help you, and to determine your Chapter 13 eligibility.


          student loan forbearance ends 2022

          Student Loan Payment Pause Extended: Deferment Thru August 2022

          Student Loan Deferment Extended to August 2022

          Student Loan forbearance and payment pause extended to Aug 2022; there are still options

          April 2022 update: The student loan payment pause was set to end May 1, 2022, but the Biden administration extended it through August 31, 2022.  It was previously set to end on May 1, 2022. Since March 2020, millions of student loans were given forbearance and deferment with no payments due, interest stopped accruing, and there have been no collections against those in default due to the student loan payment pause.

          Now, all that student loan relief changes back to normal on Sept 1, 2022.

          Will student loans be deferred again in 2022?

          As we get closer to election season, it looks like there may be more student loan deferments.  Back in August 2021, the Department of Education called the student loan pause a “final extension.” In December 2021, the White House confirmed that the student loan payment pause will not be extended. Then earlier this year and again, today, that’s exactly what the Biden administration did.

          What action items should I do?

          Update your contact information with your student loan servicer. While you’re there, let them know that you want to resume automatic payments if that’s your goal.

          Alternatives to paying unaffordable student loans

          Apply for student loan forbearance

          If you can’t afford to pay your student loans, you can still apply for student loan deferment or forbearance. While it’s been automatic the past two years, student loan forbearance or deferment is still an option in 2022.

          Income-driven student loan repayment plans

          Also, there are income-driven repayment plans such as IBR, ICR, PAYE, or REPAYE. These programs set your student loan payment based on what you can afford, which state you reside in, and family size. These income-based repayment plans are not guaranteed acceptance, and not every loan type is eligible for each program.

          Will bankruptcy help with my student loans?

          You probably heard that, as a rule, you cannot discharge student loan debt in bankruptcy.  However, there are three things to consider with student loans and bankruptcy.

          First, in extremely rare situations, you can discharge student loan debt in bankruptcy. You may have heard that the standard is undue hardship, and that’s exactly what you’ve got. However, courts have ruled that everyone filing bankruptcy has a hardship, and to show it’s undue is difficult, challenging, and very unlikely in most cases.

          Second, filing Chapter 13 bankruptcy gets you a five-year deferment on repaying your student loans directly. You don’t generally need to apply or ask for the forbearance; it’s automatic. The student loan debt shares in the debt consolidation plan payments.

          Third, there’s a Fresh Start bill in Congress which may change student loan forgiveness and allow some student loans to be discharged in bankruptcy. As 2022 begins, this S2598 bill is still in the Senate and hasn’t moved since August.

          Contact us for a consultation

          If you’re in the Los Angeles County area, contact us and let’s arrange for a no-obligation Zoom consultation to see if bankruptcy would help your student loan situation.


            California bankruptcy exemptions can save your house.

            California Homestead Exemption to Save Your Home (2022 update)

            California Homestead Exemption – 2022 update

            The California homestead exemption can help you save your home from creditors. Chapter 7 bankruptcy is liquidation; the bankruptcy trustee can take your stuff. They don’t take the shirt off your back, but at some point they draw the line regarding what you can keep. These are the bankruptcy exemptions, and each state has its own. The California exemptions include a way to protect home equity.

            There are two sets of California bankruptcy exemptions. California bankruptcy attorneys call these the 703s and 704s. The California homestead exemption is found in the 704s, at California Code of Civil Procedure 704.730.

            2022 update:  the 2021 homestead exemption amount adjusts each year, and due to inflation, the 2022 California homestead exemption is now higher.  CCP 704.730 (b) says: “The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.” In June 2021, the CPI was 297.447, a 4.4% increase from the June the previous year. Applying that factor to the homestead amounts, that would increase both ends of the spectrum to $313,200 and $626,400. As inflation in 2022 is higher yet again, it looks like the 2023 California homestead exemption will be even more than that.

            The California Homestead Exemption 2022

            In 2021, California homestead exemption increased dramatically. What this means to the person contemplating filing bankruptcy is that more of their home equity can be protected. They really do take houses in Chapter 7 bankruptcy. Previously (see below), the amount of home equity which could be protected was inadequate and hardly kept up with the inflated Calif real estate.

            But then in 2020, COVID-19 struck, and people were suddenly unable to pay their rent and mortgages. Partially in response to the pandemic, the state legislature passed and the governor signed a dramatic increase to the California homestead exemption.

            The result is a system which depends upon the location where the house is, and has nothing to do with marital status or age. And this makes sense, as a homeowner in Ventura County probably has a higher home value than someone who owns a home in Lancaster.  So, now homeowners who’ve lived at a home for 4 years or more get a minimum of $300,000 of home equity protection, and a maximum of $600,000 of California homestead exemption.

            Some guidance on the Los Angeles County median home price 2020

             

             

            Spoiler alert on the above link: The trick is no one knows for sure what the data source for county median is. And if you haven’t lived at the property long enough, you don’t get the above protections. So you will want to consult with a qualified bankruptcy attorney before you risk your house.

             

            The Three Homestead Exemptions in California Before 2021

            The California homestead exemption can save your house.
            Don’t risk losing your house in Chapter 7. Talk to a experienced bankruptcy attorney about the bankruptcy exemptions and homestead exemption in California.

            Firstly, there’s the bankruptcy exemption that a single homeowner gets. This is in subsection (a)(1). In 2020, a single person who lives in a house gets to protect $75,000 of home equity under the California exemptions.

            Secondly, there’s a higher exemption for a married person’s residence. This is in (a)(2). The California homestead exemption for a married person is $100,000.

            Finally, if you can tick one of three boxes, you get the superduper $175,000 homestead exemption in California’s bankruptcy exemptions. To level-up and qualify for this, you have to either be:

            • 65 years old;
            • have a disability that prevents gainful employment; or,
            • 55 years old, and make below a certain income level that changes from time to time

            This may seem simple, but what is “disabled?” What is “as a result of?” What is the income level, and which time period is measured? You’ll want to speak to a qualified bankruptcy attorney in your area. But in the right circumstances, someone filing consumer bankruptcy can protect a lot more house equity under this third option.

            Spouses Sometimes Count

            A final note: a good thing about, in particular, the $175,000 California homestead exemption is that it extends to the spouse of the person filing Chapter 7. So if the debtor is, say, 63 years old, but their husband is 67 but really doesn’t want to file bankruptcy, the 63 year old who does file Chapter 7 bankruptcy gets the $175,000 homestead exemption in California anyway.

            Be careful in Chapter 7 bankruptcy.  It’s not always the best type of bankruptcies.

            Learn the differences between Chapter 7 bankruptcy vs 11 vs 13.

             

             

            You really should talk to a qualified Los Angeles bankruptcy lawyer, as you get what you pay for, and it’s not worth risking your home. If you don’t do this right, you’re literally gambling with your house.

            credit card lawsuit options and shield

            4 Options if a Credit Card Lawsuit Hits

            4 Options if a Credit Card Lawsuit Hits

            When a credit card lawsuit strikes, it’s terrifying. However, you have options. None are perfect, but let’s look at some pros and cons and how each of these might work for you, and whether you need a credit card lawsuit attorney.

            How we got here

            How likely is it for a credit card company to sue you?

            First, it helps to stop and look at how things got to this point. It surprises many of my clients when they initially contact me. They ask, “can a credit card or collector sue for missing payments?” The answer is, “yes.” If you miss a payment or two, we all know that a credit card company or their collectors can bug you. Collection harassment is extremely common, and of course a collection harassment lawyer is valuable to protect you.

            Do credit cards usually sue? It depends. However, what many people don’t realize is that a credit card or their collection company can advance from collection harassment to credit card lawsuit. They don’t do this right away, and not every one of your credit cards will take their customers to court in all cases. But as a right and business practice, yes, if you wait long enough, the odds are that one of your credit cards will give you a collections law suit.

            Credit card lawsuit statute of limitations in Calif

            The lawsuit won’t be too soon

            How long will credit cards wait to sue you if you’ve stopped paying? Or put differently, how many months before the credit card sues you? Can they wait too long where they blow the statute of limitations where I have a real defense? The answer, like most things in law is: “It depends.”

            Firstly, credit card companies don’t typically file lawsuits for one missed payment. Or even two or three. It’s possible their collection harassment might produce results. Plus, it costs creditors less money to robocall you incessantly than lawyering up.  Consequently, they wait a while if they’re going to file a complaint or summons with the local court for a collections lawsuit.

            The lawsuit usually won’t be at the last minute

            On the other hand, they’re not going to wait until the last minute to sue you either. They know how much time they have remaining on the statute of limitations, and as a rule, don’t wait until the final moment. They want to avoid miscalculating, and now you having the possibility of a defense.

            The statute of limitations can be a successful defense to a cause of action. Each type of lawsuit has a different amount of time. Failure to maintain your payments is breaking your cardmember agreement. That is a contract between you and the credit card company.

            In California, the statute of limitations for a breach of written contract claim is four years. That is, the credit card lawsuit statute of limitations in California is four years. Each state has a different law, so if you’re outside California, check with a local bankruptcy attorney near you like me.

            Your options if a credit card company sues you

            Now we understand how this happened. We can’t change the past. However, you can control how you respond. You can make an informed decision about how to best move forward.

            Let’s start with a disclaimer. None of these options is advice for you, it’s just information, and none of them will be ideal. Each has a downside, and it doesn’t take a trained eye to find the negative in any given situation. The challenge is to identify the positive, and then weigh the good and the bad against your current priorities, future goals, and resources. This is one benefit of setting up a chat with an impartial professional who can analyze things objectively. But before you contact me, read on.

            1. You can ignore the credit card lawsuit

            Yes, that’s right: you can respond by not responding, and do nothing. Doing nothing is an option. No one is saying that ignoring a legal summons or complaint is a good option. In fact, it’s horrible to ignore legal deadlines and impair your legal rights. However, when brainstorming, everything goes on the table.

            If you ignore the collections lawsuit, it will eventually and almost certainly turn into a judgment. A credit card judgment is a terrible, awful, very bad thing. With that, they can collect on the judgment and take your assets.

            Pros:  It’s free and costs nothing… yet; avoids bankruptcy; stress of wondering when they get the judgment and your life will change for the worse.

            Cons: Judgment can garnish wages (usually 25% of your net pay in California), empty and levy bank accounts, and put a lien on your home, Also, the judgment grows at 10% annually with post-judgment interest until the balance is paid.

            Ignoring a credit card lawsuit is generally a bad option.

            2. You can defend the credit card lawsuit in court

            Second, you can find a credit card lawsuit attorney and defend the collection lawsuit and respond to it. This involves preparing a legal response which explains valid grounds why you didn’t breach the contract. Note: it’s generally not a valid defense to explain that you don’t have the ability to repay. To win on this, you’ll need to prove that no, you did not break the contract.

            Unless the credit card company sued the wrong person or you’re actually current with your minimum payments or they blew the credit card statute of limitations in your state, chances are there is no valid legal defense.  That means that even if you go through the steps of replying to the lawsuit, that there will likely still be a judgment against you.

            Pros: delay the inevitable; avoid bankruptcy… temporarily; chance you could win if you really didn’t break the contract or they waited too long to sue you

            Cons: your lost time, money, and emotional strain of fighting ruthless collection lawyers in court for months or years

            A small warning of caution of defending a collection lawsuit

            How to defend a credit card lawsuit: There are numerous websites selling the notion “how to beat a credit card lawsuit” and how to win and defend a credit card law suit with these 5 common defenses and this one weird trick (and you won’t believe number 4!). Many of these are suggesting stalling tactics or technicalities to clog up the court system with defenses and discovery requests (which will take you a lot of time and energy with which to comply).

            I say the following as someone who provides relief to desperate souls for twenty years. I write also as an attorney who successfully won a case against a large credit card company where a judge ordered them to pay tens of thousands of dollars. Beware of those selling false hope. Yes, you may be able to seek documents, or debt authentication by requesting evidence of chain of custody or lots of other things in discovery. And this may successfully slow down the inevitable end (and result) of the lawsuit. But it may also be frowned on by the judge as bogus or bad-faith defenses or discovery.

            If they can afford a Jedi Knight, they will spend to collect their debt

            However, do you believe that the same credit card companies who pay major movie and TV stars to advertise for them will turn around and hire Barney Fife as lawyers who are so sloppy that it makes the debts noncollectable? Even if one person were to successfully defend a credit card lawsuit in court due to negligent oversight, it’s reasonable to expect the massive conglomerate would immediately shut down that loophole so no one else ever did again.1

            Again, I dedicate my life to help people who are overwhelmed by credit card debt. As a consumer debt attorney, I provide hope and relief to those who most need it. But that compassion must be tempered with truth and reality when appropriate.

            The most likely result of fighting to win and defend a credit card lawsuit will be long, drawn-out discovery. This lawsuit discovery will require hours of your time. It will be a major emotional drain, cause bitter resentment, and a hard-fought battle when the multi-billion-dollar credit card company wins and its lawyers obtain a judgment in court for the debt.

            The “win” of slowing things down will come at the cost of your inner-peace, angry obsession with the evil credit card company, and its bitter disappointment corroding a small piece of our soul.

            However, in some cases, there can be strategic benefit to defending the credit card lawsuit. This, like most decisions in law, should only be done with clear-eyed realistic expectations.

            3. You or a credit card lawsuit attorney can settle with the credit card company

            Third, you have the option of settling the lawsuit. All they want is money. If you’re extremely fortunate, the credit card attorneys will agree to a series of payments. However, don’t expect a significant discount to settle the debt for pennies on the dollar. That ship sailed long before lawyers go involved, and they expect to get reimbursed for costs and fees.

            Further, if they’ve spent the money to take you to court, they usually feel the ‘win’ or judgment is assured. There is little reason to give you a discount or accept $25 a month. As a rule of thumb, credit card companies will negotiate a settlement on a lawsuit with a lump sum payment.

            Pros: You can negotiate a discount and save money on your balance; avoid bankruptcy; have the whole process over; get peace of mind.

            Cons: Typically requires lump sum payment which you don’t have; stress of negotiating with attorneys; time involved of back-and-forth offers and counter-offers.

            “How much can I settle a credit card debt for?” The answer is (as always), “it depends.” Yes, with credit card debt settlement you can really settle a debt for less. However, the opportunity for the biggest negotiated discounts are gone now that the collection has incurred legal costs. At the collection lawsuit stage, you’re not going to settle for 10% of the debt you owe, though it would be a major win if you can negotiate the credit card debt for 50%. You should have at least that amount in cash ready to pay immediately in case you settle your debt for less, as they’ll want a lumpsum payment.

            While you don’t need a debt settlement attorney to negotiate a debt resolution, it helps to have a professional who is outside the situation involved. First, it saves you a lot of emotional wear and tear. Second, this is what we do. Third, if a bankruptcy attorney like me makes an offer to settle a credit card debt, there’s an implicit threat that if they don’t accept, you file can bankruptcy and they get nothing. That kind of leverage can help a credit card lawsuit attorney negotiate a good result.

            4. Filing bankruptcy ends a credit card lawsuit

            Finally, bankruptcy should be the last resort, and usually is. You can file bankruptcy, and that will end the collection lawsuit.  The benefit of the automatic stay — typically known as the Code‘s “bankruptcy protection” — means that creditors cannot start or continue any collection activity once they know you’ve filed bankruptcy. It’s an extremely powerful shield with the force of the federal government; creditors can be sanctioned thousands of dollars for willfully ignoring it.

            Now, you should not just run into the safety of bankruptcy without first surveying the landscape. As each case is different, this is really where the major advantage of talking to a skilled bankruptcy attorney comes in. We can advise about any specific risks or benefits to your particular situation. So the following list of pros and cons will be very generalized until we learn your unique facts.

            Pros: peace of mind; stops the credit card lawsuit; protects assets, paycheck, home, and bank accounts from collections; possibility of debt consolidation repayment, which could also be a con.

            Cons: on your credit report for a number of years (but you can rebuild credit after bankruptcy); some cases involve liquidation of assets; payment to a bankruptcy lawyer, (which is almost always cheaper than paying all your debt).

            Closing words

            When faced with a credit card lawsuit, you have options. What you should do when you are sued for credit card debt depends on your unique circumstance, your priorities and goals, and your resources.

            I’ve successfully settled collection lawsuits, which can be done if my client has the ability to offer a lump sum settlement. Payments on a debt settlement are possible, but less likely.

            Doing nothing is the simplest: it literally requires no action on your part. But, it can lead to disastrous results.

            If you’re in Los Angeles County, Orange County, Ventura or Santa Barbara Counties, reach out to me. I’ll provide a free Zoom consultation to those residents for 30 minutes to go over your options, provide the best advice I can, and explain if bankruptcy may help.  I vow you’ll get experienced honest advice about what I believe is your best step forward.

            Contact me now


              Footnote

              1It remain the opinion of this consumer debt attorney that large credit companies refuse to spend the money to put in processes to protect codebtors in Chapter 13 bankruptcy. Not enough debtor counsel prosecute violations of the codebtor stay, so credit card companies refuse to take measures to protect themselves and their shareholders. This is quite different from the very common process of ensuring they can prove you owe your debt, as it’s their bread-and-butter to come after you for their high-interest money and how they can afford superstars like Samuel L. Jackson and Jennifer Garner.