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Means Test In Small Detail

The vast majority of people that come into the office for a bankruptcy consultation are struggling with making their basic necessity payments.  The typical person usually has not paid a credit card for months or even years, and their income is about equal to their basic necessities.  However, some people come in with different financial situations. 

In 2005, Congress implemented additional rules that limit individuals and couples that make higher income (as determined under the Bankruptcy Code) from qualifying for the benefits of Chapter 7.  The reason for this is that the thought is that if you have an ability to pay off a portion of your debts, you should do that, and that is what your creditors deserve (according to Congress). 

The Chapter 7 Means Test determines the "disposable income" for debtors.  This test is quite complex, and the trustees reviewing cases under Chapter 7 review each case to make sure that debtors, in fact, qualify for the relief they are requesting. 

The starting point for the Means Test is the debtor's gross income.  This is the total amount of income before taxes, and any deductions, even if that income is not subject to taxes (for example 401(k) deductions).  If a married person is filing by himself/herself, the non-filing spouse's income must also be included (although certain deductions are available). 

The next step is to see whether that income is above the median income for the debtor's state.  For example, in California, the median income for a single person is currently $47,683.  For two (2) people, that income goes to $61,539.  If your income falls above the median income based on your household size, you have to go through further tests.  The keys on these tests is to determine whether a debtor has an ability to pay back a portion of debt.

If the income is higher that the median, a potential Chapter 7 debtor must go through a deduction process to show the court, the trustee, and the debtor's creditors that the debtor does not have any sufficient disposable income.  Some of these deductions include national deductions for (a) living expenses (food, clothing, household supplies, personal care, and miscellaneous), and (b) health care expenses (outside of health care insurance).  Other deducutions include income taxes (not real property taxes), term life insurance, child care (baby-sitting, day care, nursery and preschool), and regular charitable contributions.

To determine whether you qualify for Chapter 7 bankruptcy, contact the Henshaw Law Office today at (408) 533-1075.

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Debt Modification and Forgiveness

Bankruptcy is seen as a method for individuals and business to eliminate and restructure existing debt.  So, with that, most people that come into our office look for ways to do this.  However, some debt simply cannot be eliminated easily.  Some is not considered “dischargeable” in bankruptcy.  Other debt is considered secured.  That secured debt can be eliminated.  However, to do so, the person considering bankruptcy, in many cases, would have to give up their property (usually homes and cars) if he or she wants to eliminate any further payments.

The current economic downturn has created a desire for many people to eliminate debt and restructure it through governmental means, and not simply through a bankruptcy process.  A recent article details the ideas and proposals that many have been creating and promoting.  The article states as follows:

As of June 30, roughly 1.6 million homeowners in the U.S. were either delinquent on mortgages or in some stage of the foreclosure process, according to CoreLogic. And the real estate data and analytics company reports that 10.9 million, or 22.5 percent, of U.S. homeowners are underwater on their mortgage -- meaning the value of their homes has fallen so much it is now below the value of their original loan. CoreLogic said the figure, which peaked at 11.3 million in the fourth quarter of 2009, has declined slightly not because home prices are appreciating but because a growing number of mortgages are entering foreclosure.

The nation's banks, meanwhile, still have more than $700 billion in home equity loans and other so-called second lien debt outstanding on those U.S. homes, according to SNL Financial.

Debts owed by American consumers account for almost half of the nearly $9 trillion in worldwide bonds backed by pools of mortgages, car loans, credit card debt and student loans, which were sold to hedge funds, insurers and pension funds and endowments.

And that doesn't include the $4.1 trillion in mortgage debt sold by government-sponsored finance firms Fannie Mae and Freddie Mac.

Many have suggested that the government write off the debt.  Other proposals include allowing for bankruptcy to modify home loans for individuals’ primary residences in the same way that the Bankruptcy Code allows for such modification on vehicles and other property.  Currently, an individual does not have the ability to modify a loan on a primary residence.  However, if a property has a second (or third) loan that is completely unsecured (value of the house is less than the value of the first loan), the unsecured loan can be eliminated. 

Contact the San Jose Bankruptcy Attorney at Henshaw Law Office today at (408) 533-1075 to see whether bankruptcy would be a good option for your debt.

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Hiding Assets

Every once in a while I get people in my office that think they are able to outsmart the IRS, the Franchise Tax Board, the Bankruptcy Courts and their trustees, and general creditors.  The problem is that some of these entities, especially those funded with government money, have seemingly unlimited resources and ability to go after those that seek to hide assets and income.

A recent Yahoo! article described one man's 20-year fight to hide such assets.  The man is a former retail technology company owner that had approximately $100 million available to pay off creditors.  An interesting quote from the article is that:

"'I hope he will do the right thing and pay his debts,' said [an attorney for the law firm seeking to collect]. 'But most people do not let go of $100 million easily.'"

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The taxing agencies want to get their money.  If you have it available to you, they will try to find it.  If the taxes owed are income taxes, there are ways around such agencies' reach.  In many cases, we can file a Chapter 7 bankruptcy to eliminate taxes older than three (3) years.  We simply look at the date the taxes were due and count back three years.  There are other rules that may also apply in your case.

One key to watch out for is if the IRS files a tax lien on you.  Such liens are not easily dischargeable.  They attach to all property you own.  To discharge the debt, you will have to treat such a tax as a secured debt in your bankruptcy schedules.

The key here is to speak with the San Jose Bankruptcy Lawyer at the Henshaw Law Office today at (408) 533-1075.

California Residents and Debt

An article describes how much debt, on average, individuals face in the United States.  Not surprising to many, California leads the way with a whopping $336,169 average debt load.  This figure does not include debts owed on educational loans (which are generally not dischargeable in bankruptcy).  The one plus for Californians is that we are paying either paying off our debt, or eliminating it in some other manner.  The article fails to state the manner of eliminating debt.

Many people come into my offices or call me on the phone wanting to discuss bankruptcy for a number of different reasons.  Some people have emergencies such as a bank levy, a foreclosure, or a wage garnishment.  Other people want to use my service because life has simply become unmanageable.  The phone calls become incessant and the stressful nights simply have to end.

Bankruptcy can help with many of these problems. For example, if you have one of the emergency situations, the filing of bankruptcy petition will prevent a creditor from removing money from your account, even if they obtain authority to do so.  Similarly, we can stop a foreclosure up to the last minute before the sale (but not after the sale).  Lastly, we can stop a wage garnishment so that you can keep your hard earned money.

Call the San Jose Bankruptcy Attorney at the Henshaw Law Office at (408) 533-1075.

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Homeowner Dues When Home is Foreclosed

A recent article describes a big problem homeowners with homeowners association dues following bankruptcy.  The big problem is found when such homeowners surrender their homes, but still remain owners of the property because the bank will not take the property back.  A partial excerpt of the text is found below:

A federal bankruptcy judge in Nashville has ordered the sale of a flood victim's home after the lender refused to foreclose, in what legal observers say is a first-of-its-kind ruling.


Sheryl Pigg lost nearly everything in the 2010 flood, according to The Tennessean. She ultimately found a new home, declared bankruptcy and discharged her debts.


But a 2005 change to federal bankruptcy code made Pigg liable for continuing homeowners association fees at her abandoned home, because she was still the legal owner. Pigg sued mortgage holder Bank of America to get the lender to foreclose, accept a deed in lieu of foreclosure or allow a sale of the Nashville condominium.


In his ruling, Judge George Paine II ordered Pigg's bankruptcy reopened so that a trustee can sell the home, with the proceeds going first to the homeowner's association and then the bank. He reasoned that Bank of America has consented to the sale of the flood-damaged condominium through its inaction.


"With the real estate collapse, lenders, who otherwise have the right to do so, are choosing not to foreclose on their collateral leaving homeowners in limbo," Paine wrote. "Congress' broadening of (the bankruptcy code) to protect HOAs deprives the debtor of a fresh start, and thwarts the goals of the entire Bankruptcy Code."


In court filings, Bank of America argued that it was not obligated to foreclose on an abandoned property.


"Bank of America is reviewing Judge Paine's decision," the bank said in an emailed statement to The Tennessean. "At this time, we have not decided whether to appeal."

For questions on homeowners association dues in bankruptcy, call the San Jose Bankruptcy Attorney  Henshaw Law Office at (408) 533-1075.

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Improving Economy?

Bankruptcy courts may be one of the better economic indicators of both the local and national economy.  A recent article dated July 4, 2011, of an interview with a bankruptcy judge in Florida gives some insight on why this is so.  Judge Glenn of the Middle District of Florida said, "Filings slowed dramatically after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, but have since risen annually."

Judge Glenn also described one reason why individuals file for bankruptcy protection.  He said:

When you talk to the lawyers at the Bar meetings, you hear how the foreclosures in the state courts have slowed a little because of all the foreclosure problems. There is speculation that when the foreclosures pick back up in the state courts, that the bankruptcy filings will pick up.

That’s because 30 percent of our filings in Jacksonville are the kind of filings to save homes, Chapter 7 is liquidation, Chapter 13 is to save a home, Chapter 11 is business reorganization. About 25 to 30 percent of our filings, districtwide and in Jacksonville, are Chapter 13s, so when foreclosures pick up, this will probably pick up.

Judge Glenn also predicted that bankruptcies should flatten out, but could increase as the population in his District increases.  He also said that, "From all I can tell, [the economy] is getting better. I base that on the fact that the job markets, although they’re increasing slowly, are increasing.  From what I see, for the last 12 months, our filings are only up 1 percent as opposed to how much they increased before that. For the first five months of this year, they are down. I think the economy is getting better. Slowly."

Let's compare the Middle District with the Northern District of California.  From March 2010 to March 2011, 38,405 cases were filed in the Northern District.  This compares to 35,401 during the previous year.  This is over an 8% increase from 2010 to 2011.  Similarly, in the San Jose Division, the total number of bankruptcies filed increase over 5% (13,117 in 2011 compared to 12,476 to 2010).


The hope is that we will all recover in the near future.  


For more questions on consumer or small business bankruptcy protection, call the Henshaw Law Office at (408) 533-1075.  


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Bankruptcy in Baseball

Today's baseball news seems to be surrounding the Los Angeles Dodgers and their owner's filing of Chapter 11 bankruptcy.  The goal of the Dodgers is not to fold and end as a franchise, but to buy time from what they consider to be a hostile overreaching from Major League Baseball.  The Dodgers are valued at approximately $800 million, with assets estimated at $1 billion, and debts at approximately $500 million.  For those that follow baseball, and are interested in the plight of the Dodgers, their largest creditor as far as baseball personnel is Manny Ramirez.  Mr. Ramirez no longer plays for the Dodgers, but is still owed $21 million.  Aren't the Giants fans glad that he did not choose the Bay Area....???

It sounds like it will be an interesting summer in Dodgerland.  I still am hurt from the Kirk Gibson home run in 1988, so I am not too sad about their case.

As related to consumers, we run across many individuals that simply need time to figure out some issues with their debts.  This may be based on a foreclosure, bank levy, car repossession, or a lawsuit.  Bankruptcy's automatic stay can help those in such a need.

For more information on the automatic stay, or other bankruptcy related questions, please call the Henshaw Law Office today at (408) 533-1075.

Decline in Bankruptcies

According to the Wall Street Journal, bankruptcies are on the decline.  They state:

"The number of consumer bankruptcies filed declined by nearly 14.8% to 114,803 in May from a month earlier, the American Bankruptcy Institute and the National Bankruptcy Research Center said Thursday. Compared to the same month a year ago, filings fell almost 15.7%."

The Northern District of California has reported that bankruptcy filings here in the San Jose area continue to rise, at least as of March 2011. 

The Wall Street Journal's report proclaims that "the worst is behind us."  Let's hope they are correct in their proclomation.

For bankruptcy questions, contact the Henshaw Law Office at (408) 533-1075.

Chapter 13 Valuation of Vehicles

If you are considering Chapter 13 bankruptcy to strip down a vehicle loan, one issue that debtors have to consider is the value that the courts will allow.  In Chapter 13 cases, the value of collateral is defined as “the replacement value of such property … without deduction for costs of sale or marketing."  In the case of vehicles, this is the retail value of the vehicle.  To determine this amount, debtors and their attorney can utilize a couple options, including Kelley Blue Book and the National Appraisal Guides.

The difference between values can be quite substantial.  For example, the retail value of a 2005 Toyota Camry with 50,000 miles is approximately $14,500, while the same vehicle has a private party value of $12,600 (as of 6/2/2011).  Over a course of a three (3) year plan, this amount is equal to approximately $60 a month.  The price a person could really obtain for the vehicle may be significantly less.  However, the Bankruptcy Code regulates that a debtor does not get to simply estimate the value.  These values are regulated. 

Should you have any questions on Chapter 13 vehicle values or other bankruptcy questions, contact the Henshaw Law Office today at (408) 533-1075. 

Student Loans – Can they be Eliminated Through Bankruptcy?

Not to be too simplistic, bankruptcy is to help those people that have spent more than they earn.  With the rapidly changing economic scenario in this country, student loans have become more prevalent.  The question then becomes if, when, and how these loans can be discharged.

For most people, the answer to the first question is that these loans generally cannot be discharged.  Student loans are not dischargeable under the Bankruptcy Code if (i) made, (ii) insured, or (iii) guaranteed by a governmental unit or (iv) made under any program funded in whole or part by a governmental unit or a nonprofit institution.  The rationale behind this provision of the Bankruptcy Code is that lawmakers determined that individuals should not be allowed to take advantage of the benefits of the costs of education without paying for them.  In that same theory, some bankruptcy courts have allowed discharges of student loans where the debtor in bankruptcy is the cosigner, not the student loan borrower.

The one way out of student loans is when continuing the debt would constitute an “undue hardship” on the borrower.  The court is the one that determines what an undue hardship means and whether the situation qualifies under the Code and case law. 

The procedure to attempt to obtain a discharge of student loan debts, after an individual files a bankruptcy petition, begins with the filing of an “adversary action.”  This means that the borrower files a lawsuit, with a corresponding complaint, against the lender. 

To show undue hardship courts have accepted a number of tests.  One such is a mechanical test wherein the bankruptcy court evaluates a number of factors, including the number of the debtor’s dependents, and their ages and needs, health of the debtor and his or her dependents, access to transportation, level of education attained by the debtor, day-to-day living expenses, marketability of the debtor's job skills, current income, and other sources of wealth.

Another test courts have looked at is whether the borrower has made good faith attempts to pay of the educational loan as well as obtain and retain employment.  One last test bankruptcy courts use is to look at the “totality of the circumstances” to determine what is most equitable under the given situation.

As stated above, in the great majority of cases, student loans will not be discharged.  However, because each case is different, and the courts do allow for discharge in limited circumstances, call the Henshaw Law Office today to see whether your case may be one of those where an undue hardship may be found.

Moving Office

Due to the growth of the Henshaw Law Office, we are relocated to a new office on April 15, 2011.  Our new address will be 1101 South Winchester Boulevard, Suite F-166, San Jose, California 95128.  The new location will be more convenient for a majority of our clients.  We look forward to the benefits of the new office and our increased space.  We hope to see you in the office soon.

Business Sales Tax Dischargeability

One issue recently came up on the dischargeability of taxes in bankruptcy.  If you have studied bankruptcy much, you likely know that income taxes owed can be discharged so long as the tax return was filed at least three (3) years prior to the debtor filing a bankruptcy petition.  However, for many small businesses, an issue of sales taxes can come up in their bankruptcy filings.

A 1986 Ninth Circuit Court of Appeals case (In re Shank) reviewed whether sales taxes can be discharged.  In that case, Shank ran a business in the State of Washington.  For each of his sales, Shank was to collect sales tax and remit the funds to the State as sales tax.  Shank, in turn, failed to remit the funds and ultimately filed bankruptcy five (5) years after the business ceased operations.  He sought to discharge the debts in the bankruptcy.

The court reviewed the rule that certain tax debts can be discharged after three (3) years.  However, a law was enacted under the Bankruptcy Code in 1966 wherein certain tax liabilities would not be dischargeable, no matter how much time had passed.  One such tax was “trust-fund tax.”  The case went on to review the history of the legislation enactment through both the United State House of Representatives and the United State Senate. 

The court’s ruling presented two separate forms of sales tax liability: “[1] those owed personally by a retailer and [2] those incurred by a retailer’s customers which are collected by the retailer under the authority of the state, held in trust, and then remitted by the retailer to the state.”  To understand the difference between the two taxes, a Seventh Circuit Court of Appeals case determined that a 5% occupation tax on the gross receipts was not considered a “trust fund tax.”  However, Shank’s obligation to remit the sales tax he collected for his sales, did fall under the trust category, and could not be discharged.  Another court reasoned that if the tax is paid by the purchasers of goods or services, it is likely that the tax is part of a trust that will not be discharged.

If you own(ed) a small business an are considering bankruptcy to relieve yourself of debts, contact the Henshaw Law Office to determine whether your tax liabilities can be discharged.

Chapter 13 vs. Chapter 11 vs. Chapter 11 “Small Business”

In general, most people filing, or interested in filing, bankruptcy as a small business owner would likely choose between Chapter 13 and Chapter 11.  Chapter 7 bankruptcy is usually not a welcome option for the sole proprietor.  The main reason is that Chapter 7 bankruptcy would likely require that the business be shut down.  With that said, most business owners would prefer the relative simplicity and ease of a Chapter 13 case rather than the complexity of Chapter 11.  Additionally, the higher cost of Chapter 11 usually creates an additional incentive to utilize the benefits of Chapter 13.  However, for some business owners, particularly those looking to adjust secured debts, Chapter 11 may be the best option, even with the added cost.  Lastly, the creation of the “small business” Chapter 11 can help those business owners with limited liabilities with a streamlined process.

Eligibility for each Chapter

Chapter 13

To be eligible to file for bankruptcy under Chapter 13, the individual must have “regular income.”  This requirement means that the debtor maintains sufficient income to make payments under the Chapter 13 plan.  In addition, the Bankruptcy Code limits a Chapter 13 debtor to unsecured debts of $360,475 and secured debts of $1,081,400.  Should the individual’s debts fall outside this level, the debtor must file for Chapter 11.  This debt level limitation is equally applicable in cases of joint (married) debtors. 

Chapter 11

In general, any “person” who may be a debtor under Chapter 7 may also be a debtor under Chapter 11.  Although most people think of the various, large corporate cases, Chapter 11 can also be used for small businesses, sole proprietorships, and individuals.  A husband and wife may also be eligible to file a joint Chapter 11 petition.

Small Business Chapter 11

Recognizing that many small business owners do not qualify for Chapter 13, but want to be able to reorganize such small business debts, the Bankruptcy Code now allows for streamlined procedures in Chapter 11 for certain business entities.   A small business, for Chapter 11 purposes, is a person or business engaged in commercial or business activities whose total debts do not exceed $2,343,300.  This designation of a “small business” must be stated in the initial bankruptcy petition. 

Benefits of Each Chapter

Chapter 13

Overall, Chapter 13 gives the individual debtors, including small business owners, the same opportunity to reorganize their debts that large business have under Chapter 11.  However, this reorganization is completed through a less complex and expensive procedure.   As with Chapters 7 and 11, all debtors that file for Chapter 13 bankruptcy are afforded the benefit of the automatic stay.  This stay prevents any collection, foreclosure, lawsuit, or garnishment activity against the Chapter 13 debtor.   While the Chapter 13 debtor must file a reorganization plan, it is only the debtor that may propose and create the debt repayment plan.

Also, in Chapter 13, like Chapter 11, the individual debtor maintains possession and control of any business interests.  As such, the debtor has the exclusive right to sell, lease or otherwise use business assets, as long as such actions are in the normal course of business operations. 

Unlike Chapter 11, in Chapter 13 a creditors’ committee is not appointed.  Also, the plan does not require that any creditor consent to the reorganization plan in Chapter 13.

Many individuals are attracted to Chapter 13, if not forced out of a Chapter 7 because of a failed means test, because of the ability to alter secured debt.  For example, a car loan can be altered if the borrower is behind on the car payments to allow for (1) repayment of past payments owed and (2) restructuring the loan to conform to market value even when the loan balance far exceeds the true value of the car.  Similarly, on home loans, Chapter 13 allows the debtor to make up past due payments over the term of the plan (3-5 years).  However, in Chapter 13, like Chapter 11, a debtor cannot adjust the terms of a loan secured by the debtor’s principal residence.  As to non-primary-residence property, the Chapter 13 plan can restructure the debt so long as full payment is made within the plan period (3-5 years).

As to claims, unlike Chapter 11, a Chapter 13 debtor does not have to obtain approval from its creditors to approve a plan.  The debtor simply has to provide a plan that the court approves.

Chapter 11

In Chapter 11, a sole proprietor is able to continue business operations, and run the business as previously done.  The debtor is able to obtain financing, sell assets, lease property, and do all that the business normally would do, but for the bankruptcy.  While Chapter 11 can be quite expensive due to the extensive reporting, filings, and other procedural matters involved, one real benefit unavailable to Chapters 7 and 13 debtors is that secured debt can be adjusted extensively.  For example, a rental property that that has a principal balance far below the current market value (quite common in this economy) can be adjusted to conform to that market value.  The payment terms do not have to fall within a 3-5 year plan window.  Again, while Chapter 11 can be expensive, this simple ability to adjust non-primary-residence secured debt may be worth the additional expense.

Small Business Chapter 11

The benefits of the “small business” Chapter 11 is strictly procedural.  Congress has simplified the procedure to allow for companies that are not Blockbuster or GM to partake in all the benefits of Chapter 11.  The advantages include a simplified plan form for most courts, not requiring a committee of creditors in most cases, a shortened monthly operating report, and an extended exclusivity period to file a plan (180 days vs. 120 days).

Conclusion

In most bankruptcy cases where an individual business owner is considering whether to file a Chapter 13 or Chapter 11, the decision is clear.  Chapter 13 will be most beneficial due to the increased costs and procedures of Chapter 11.  However, in cases of a qualified “small business” with real property outside of a principal residence, the small business Chapter 11 may be a benefit that can save the business owner substantial money over the course of the bankruptcy and in the future.

If you have any further questions in small business bankruptcy, contact the Henshaw Law Office today at (408) 599-1305.

Bankruptcy Options for the Sole Proprietor

When a person decides to start a business, the potential owner has to make a lot of decisions such as where to locate the business, how to market, and deciding on a business strategy.  The legal aspects of starting a business, especially if it is the owner’s first time out, can seem less important than making money and managing the company. 

The first legal principle to recognize with sole proprietorships is that the business is not separate from its owner.  If you are in such a situation, you are probably all too aware of this fact.  This means that the business owner is individually and personally liable for any debts the business incurs.

This personal liability of a sole proprietorship has serious implications should the company enter bankruptcy protection.  First, a business established as a sole proprietorship cannot file for bankruptcy without the business owner (one good reason to set up a business as LLC or corporation).  Second, the individual owner’s assets may become available to both the company’s and the individual’s creditors.

The question that many people have with their own personal business is whether the bankruptcy trustee or court will close the business completely.  The answer to this question will depend on a number of factors.  However, the main factor is which Chapter of bankruptcy the business owner chooses to file under in the bankruptcy court.

Chapter 7 is also known as liquidation.  The Chapter 7 trustee will sell all “non-exempt” assets to pay off creditors.  A business that is not able to exempt much of its assets will be required to close based on the inability to function as required as compared to its business needs.  There is also a growing trend with sole proprietorships of trustees simply closing the business to prevent the business from incurring further liabilities. 

If the owner of the company has significant assets and wants to continue operating the business, Chapter 13 may be the better alternative.  In Chapter 13 the owner’s debts are reorganized and a payment plan is created to pay part or all of the debts over a three or five year period.   The owner can keep all of the business property through this repayment process. 

Ultimately, if you are considering bankruptcy for sole practitioner debts, consider all of your alternatives, including setting up a separate business identity.  If bankruptcy is needed, contact the Henshaw Law Office today at (408) 599-1305.

Super Bowl Trouble

As it is Super Bowl week, I thought it would be appropriate to add a little football spice to the blog.  The other day I was reading an article that detailed some of the financial struggles of NFL players.  According to a separate Sports Illustrated article, approximately 78% of NFL players are seriously struggling financially after two years of retirement (whether voluntarily or not).  That same article compares the life and lifestyle of professional athletes to lottery winners.  For the most part athletes have short careers that provide them with a significant sum of money in a short period of time.  Most athletes have gone from high school to scholarship-funded college athletics to the pros.  Most do not have any budgeting or accounting background.  I think we can all look back and think what we would do if at age 20 someone suddenly gave us all the money, notoriety, and possessions we could want.  The problem is that, for the most part, all three generally last only a few years.

I am not saying that we should take pity on those that are able to squander upwards of $100 million.  But, again, lessons can be learned from their tales.  I heard once from a man in Brazil, “it is not what you make, it is what you spend.”  For many, this recent recession has caused a hard look at what are really necessities.

Many athletes ultimately have used bankruptcy to curb their losses.  Some of these include Deuce McAllister (failed car business), Lawrence Taylor (drug habit), Jose Canseco (houses/cars), and Michael Vick (investments…).  When an individual has a lot of money, the investments, the assets, and the falls just seem to be bigger.  However, for the average American, the stakes can be a matter of being able to make a $1,000 rent payment or being able to keep a car that is threatened with repossession. 

I keep thinking to myself, how are these guys squandering this money away so quickly.  Don’t they have someone helping them to know that their money will run out?  Doesn’t anyone let them know that their careers in athletics is a finite and somewhat defined period?  Doesn’t anyone advise them that buying 13 Ferraris is not part of a strong investment portfolio?  The answer is not that they don’t have the advice.  It is that they are surrounded by other people and ideas that make them believe in a world without spending limits and where money will easily fall from the sky (broadcasting, music production, car washes). 

After high school, while attending De Anza College I worked part time for a company where each executive had a very nice car.  Part of my job was to take the cars to get washed, fill them up with gas, and take them to the repair shop if needed.  After driving a brand new $100,000 Mercedes it was difficult to climb into my 1983 Nissan 200SX with screeching brakes.  I wanted to live the executive life so I bought a car I simply could not afford.  It took me four solid years to make up for that mistake.  To this day, I still drive the car I traded for after the mistake car (my wife always seems to get the nicer cars). 

The main lesson I take away from the financial plight of the professional athlete is that the old saying is still true.  Keep costs below pay.  Save for a rainy day because the weather can change quickly.  Lastly, although it is sometimes difficult, try to keep up with the Joneses.  Just because someone has the new 60 inch 3D HDTV doesn’t mean it is the best use of money.  Financial freedom starts with responsible decisions. 

Also, find a good, responsible person that you can discuss your financial situation and goals with on a regular basis.  A financial advisor or accountant can help make sure you are on the right path.  In case you do find yourself in a sinking path, bankruptcy may be the way to keep you afloat.  Don’t look at it as your last option.  Take the time to consider all options before they are chosen for you. 

If you are having financial struggles currently, contact the Henshaw Law Office today to see what options you may have.

2011 Tax Return Refund

I recently filed my 2010 tax return, and thought that a lot of people that are considering filing for bankruptcy may have questions about a potential refund on their own 2010 taxes.  For many, this refund is a huge part of the beginning of the year.  For some, it can be the difference between being able to survive the year (even after bankruptcy) and having to make even more drastic changes. 

Let’s look at one scenario.  It is late January and an individual is considering bankruptcy.  In the past three years the individual’s tax refunds has averaged approximately $4,000 (for both state and federal).  The individual’s income level and family situation has remained consistent throughout the past three years (and the tax year in question).  The individual estimates that a tax refund will equal the $4,000 level of the past three years.  What happens if the individual files for Chapter 7 bankruptcy before filing a 2010 tax refund?  Will that refund be confiscated by the trustee and distributed to creditors?  Does the individual have to claim anything on the bankruptcy petition?

The first question we have to look at is whether a tax refund can be considered “property of the estate.”  Only property of the estate is subject to turnover (delivery) to a bankruptcy trustee, and distribution to creditors.

Property of the estate is defined in the Bankruptcy Code as “all legal and equitable interests of the debtor in property as of the commencement of the case.”   The courts have held that this definition is broad and consists of virtually all of a debtor’s property.  The courts have also determined that a refund should be prorated to the percentage of the taxable year.  For example, if a debtor filed a bankruptcy petition on October 1, then only nine months (3/4) of a refund would qualify as “property of the estate.” 

The second question is what can be done to protect the refund should an individual file for bankruptcy.  Once the debtor’s interests or assets become property of the estate, the debtor may claim certain exemptions protecting that property.  One specific exemption that may apply in California is the “wild card” should a bankruptcy debtor choose the California (bankruptcy only) exemption statute.  In this case, a debtor can exempt any property in the amount of $1,100 plus any portion or a residence or burial plot (around $20,000). 

Thus, while in our situation (person filing for taxes in January 2011), the entire tax return for 2010 becomes property of the estate and subject to turnover to the trustee, it is possible, and potentially likely, that the property will remain with the individual through the use of statutory bankruptcy exemptions.  Bankruptcy planning comes into play again and the use of exemptions determines what someone can keep and what they cannot.

There is one more piece of tax information that should be briefly touched on.  Should an individual owe taxes from a previous period, it is possible that an individual may not be able to exempt a refund owed.  This would be a topic of another discussion…

OK, one more thing.  Always file a return, even if you owe money.  It starts the statute of limitations, and in many cases, your bankruptcy case will be dismissed if you have failed to file for the previous year.

For more questions, contact the Henshaw Law Office.