Tag Archives: Bankruptcy

What Are The Best Credit Cards To Rebuild Credit After Filing Bankruptcy?

By Ryan C. Wood

The best credit cards to rebuild credit after filing bankruptcy are secured creditors with no annual fee.  Do they exist?  Yes, secured credit cards with no annual fees do in fact exist.  Like all parts of capitalism there are business, banks and lenders that are targeting this segment of society and offer services.  Many of my chapter 7 clients report receiving vehicle loan offers in the mail even before they receive a discharge in their chapter 7 bankruptcy case.  Lenders are targeting them given the lenders know they have not debts post-discharge.   

Best Credit Cards to Rebuild Credit After Filing Bankruptcy

The following is a list compiled from many different websites and the information may no longer be accurate due to interest rate changes and other factors.  Some of the interest rates are very high.  If you pay off the balance each month it does not matter at all though.  You may want to start with the highest interest rate no annual fee cards since they are more likely to give you a card.  If no success, then try the low interest rate low annual fee cards.  If not then try the high interest rate with high annual fee cards. 

Surge MasterCard:                                      Annual Fee $75 – $100            APR- 26% – 30%

Total Visa Unsecured Card –                                       No additional information listed

Petal “1” Visa Credit Card: No annual fee                  APR – 20% – 30%

Platinum Elite Credit MasterCard Secured Card: Annual Fee $29          APR – 19.99%

  • First Progress

Capital One Secured Credit Card:                              No annual fee                                 APR – 26.99%

Discover It Secured                                                       No annual fee                                APR – 22.99%

  • 1% – 2% Cash back on certain purchases

Milestone Gold Mastercard:                                       Annual Fee $35 – $100                   APR – 24.90%

Avant Credit Card:                                                        Annual Fee $39                               APR – 25.99%

Next Gen Platinum Master Credit Card                  Annual Fee $48 – $75                    APR – 35.99 %

  • First Digital

Official Nascar Credit Card                                          Annual Fee: $0 – $100   APR – 17.99% – 23.99%

  • Credit One Bank; 1% cash back on certain purchases

Platinum Prestige Mastercard Secured Card        Annual Fee: $49                                APR – 9.99%

Merrick Bank Secured Visa Card                                 Annual Fee: $36                             APR – 17.45%

Platinum Elite Mastercard Secured Credit Card   Annual Fee: $29                            APR – 19.99%

Credit One Bank Plantinum Visa                                  Annual Fee: $0 – $99    APR – 17.99% – 23.99%

  • For Rebuilding Credit

Reflex Mastercard                                                           Annual Fee: $75-$99    APR- 25.90% – 29.99%

First Access Visa Credit Card                                        Annual Fee: Unknown            APR – Unknown

Fingerhut Advantage Credit Account                      Annual Fee: $0.00                       APR – 29.99%

  • By WebBank

Indigo Platinum Mastercard                                        Annual Fee: $0.00 – $99             APR – 24.99%

The Open Sky Secured Visa Credit Card                 Annual Fee: $35                          APR – 17.39%

Platinum Select Mastercard Secured Card            Annual Fee: $39.00                    APR – 13.99%

How To Rebuild Credit After Bankruptcy

Never ever pay anyone or any company to help you rebuild your credit. Not even a bankruptcy attorney like me.  There is no magic wand that can be waived to fix a credit score.  If you have inaccurate information on your credit report is should be removed so it does not drag down your credit score.  You can do this yourself and for little effort.  Do not call the phone number on that sign you see posted on a telephone pole promising to fix your credit in 30 – 60 days.  It is a scam.  At the same time you are always permitted to pay someone to wash your car even when the car is not dirty. 

  • Pay Your Bills Each Month On Time Each and Every Month

Yeah, easier said than done right?  It is still the single most important step you can take to rebuild credit once things did not go quite right.  Pay your cell phone bill on time.  Pay your rent on time.  Pay your utility bills on time.  If you do obtain a credit card or somehow are allowed to keep a credit card be sure to pay the monthly balance off in total each month.  Do allow a balance to remain that accrues interest.  It all matters at this point and every little bit will help rebuild your credit.

  • If You Have Credit Do Not Use It All

This is referring to the total amount you could borrow or use on your various credit accounts.  For example if you have two creditors both with credit limits of $10,000 you have a total of $20,000 in available credit.  If you use up all of your available credit you will probably need the services of a bankruptcy lawyer sooner than later. The amount of credit you use versus the amount you have is a metric used for your credit score.  The lower the percentage the better for your credit score.,  For example if you have $20,000 in available credit and you are have a balanced owed totaling $18,000 you are using 90% of your available credit.  Not good.  If you are only using $2,000 of the available $20,000 you are only using 10%.  That is what you want.  So a trick you can play to help this percentage is to apply for more credit cards thereby increasing your available credit  while the amount you are using stays the same.  This will lower the percentage of your available credit you are using.  In the example above the person with $18,000 in debt could apply and obtain two more credit cards each with $10,000 credit limits.  The would not have $40,000 in available credit while only using $18,000 lowering the percentage to 45% of credit used.  This is much better than 90% they had previously.  See  number three below though too.   

  • Opening A Bunch of New Accounts All At Once

Inquiries for obtaining credit can damage a credit score.  Each time you open a new account an inquiry is made to the credit bureaus and these temporarily will lower your credit score.  So if you open five new credit accounts within a six month period you will have many inquiries and your credit score will suffer.  This is a game of chess.  It is not just jumping over your opponent like in checkers.  So open accounts over a period of a long time to increase your available credit rather than all at once.  Just because you have $200,000 in available credit does not mean you have to use it.  That is the difficult part when things do not go as planned and credit are used for basic living expenses such as food and utilities.  But this is about rebuilding credit and having a great credit score so increasing your available credit slowly over time is a good thing. 

  • As Mentioned Above Apply For a Secured Credit Card

Secured credit cards are a great way to rebuild credit.  You will have to provide an initial deposit so secure the repayment of the credit card but that is fine.  As you use the secured credit card and there are no issues they will increase your credit limit and eventually the deposit can be refunded to you.  It is important to note this is not a pre-paid card but a secured credit card. 

CARES Act: Bankruptcy Cases and Coronavirus COVID-19

By Ryan C. Wood

The CARES Act does provide some relief or changes for bankruptcy filers and potential bankruptcy filers due to the Coronavirus COVID-19. I will modify this article when official changes to the Bankruptcy Code are published by the authorities that regulate these changes. That said I know the information below will be helpful to provide you with some insight and peace of mind.  Section 1329 of the Bankruptcy Code already provides the terms of your confirmed and approved chapter 13 plan can be changed based upon a change in circumstances.  Depending upon your circumstances that exist already, your confirmed chapter 13 plan, how your potential modification will actually help will vary widely.  Just know there are procedures that exist to help you if you are unfortunately financially negatively affected by the Coronavirus COVID-19.  Now keep reading for information that should apply to you.

You may also watch my YouTube Video about Bankruptcy and Changes From CARES Act Due To The Coronavirus COVID-19

First If You Can Continue Your Chapter 13 Plan Payments Do So

If you are in an active chapter 13 bankruptcy case you are supposed to continue to make your chapter 13 plan payments even with the shelter in place orders and the coronavirus and COVID-19.   If your chapter 13 plan is not confirmed or approved yet you still need to continue to pay the monthly chapter 13 plan payment even though it is not yet confirmed or approved.  If you cannot continue to pay the monthly chapter 13 plan payment read about the options that are available to help.  If and when your chapter 13 plan is amended or modified will be when you can pay the new chapter 13 plan payments each month based upon those changes.  This may not be possible given your current financial situation and of course you must pay for food and other necessary expenses to just live. 

If You Do Not Pay the Chapter 13 Plan Payment

If you just cannot pay the monthly chapter 13 plan payment you are in default as to the confirmed chapter 13 and the case is subject to dismissal. Normally the chapter 13 trustee will file a motion to dismiss the case for nonpayment. Once the motion to dismiss the case is filed you will have time and options to save the case such as modifying the terms of the confirmed plan. Hopefully chapter 13 trustee’s will be more lenient with missed plan payments given the current circumstances and significant financial turmoil outside of everyone’s control. We shall see. 

If Your Chapter 13 Plan is not Yet Confirmed or Approved

You will need to amend your chapter 13 plan based upon your change in financial circumstances due to the Coronavirus COVID-19.  The CARES Act does not provide for an extension of the term of how many years a plan can exist for cases that do not yet have a confirmed approved chapter 13 plan. The plan filed in the chapter 13 case may no longer be feasible given the your change in financial circumstances. You will need to amend the plan or explore other options.     

Chapter 13 Plan Modification Pursuant to Section 1329 of the Bankruptcy Code

If your chapter 13 plan is confirmed or approved Section 1329 of the Bankruptcy Code allows for the modification or change of the terms of your confirmed chapter 13 plan.  The CARES Act provides changes to modification under Section 1329 of the Bankruptcy Code.  It is early so what is provided here may change or be different depending upon the procedures put in place in your jurisdiction.  Normally a chapter 13 plan can only be a maxiumum 60 months or five years.  The CARES provides a confirmed chapter 13 plan may not provide for payments over a period that expires more than 7 years after the time that the first payment under the original confirmed plan was due.  I read this as confirmed chapter 13 plans can now be extended past the 60 month or 5 year limitation that previously existed.  The means that your plan payments can be spread out over an additional 2 years therefore resulting in a reduction of the monthly plan payment that existed before.  This will be applicable to cases filed before, on, or after the date of enactment of the CARES Act.  This is good news and we shall see have this goes in the real world. See the end of this article for the actual language of the CARES Act.

A motion must be filed and a hearing held before the Court and in most jurisdictions a new plan will be proposed based upon your changed circumstances.  An amended Schedule I and J regarding your income and expenses will most likely have to be filed too.  Plan modification is normally an additional cost to pay your bankruptcy attorney for the additional time and money they must expend on your behalf.  You will need to review the rules in your local jurisdiction regarding this and costs will vary.  What relief or changes are available to you will depend upon why you filed the chapter 13 case to begin with.  Was the case filed to pay back missed mortgage payments?  Did you have to file a chapter 13 based upon your income and expenses and not the value of your assets?  Did you file a chapter 13 case to protect assets that could not be exempted or protected in a chapter 7 liquidation case?  Your obligations to creditors based upon the Bankruptcy Code will continue to be the same while your ability to meet those obligations has changed due to the Coronavirus COVID-19.  You must contact your bankruptcy attorney for more information about how your specific change in circumstances will modify your confirmed chapter 13 plan or chapter 13 bankruptcy case.   

Chapter 13 Hardship Discharge

The Bankruptcy Code also provides for an early entry of an order of discharge in your existing chapter 13 case. Depending upon your circumstances you may be eligible to seek this relief. Section of 1328(b) the Bankruptcy Code provides you may request a hardship discharge if: (1) the debtor’s failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor; (2) creditors have received at least as much as they would have received in a chapter 7 liquidation case; and (3) modification of the plan is not possible. Again a motion must be filed with the Court and a hearing held. Other information by declaration will need to be provided evidencing the hardship, how it was outside your control and that modification of the existing chapter 13 plan is not possible. For many chapter 13 cases this will not be possible given the reason the chapter 13 case was filed to begin with such as paying back missed mortgage payments or not dischargeable taxes. Just know this is another potential procedure that currently exists to help you given these challenging times. I will be filing motions for request for entry of a hardship discharge for a few clients as it stands given they have been irreparably financially harmed directly due to the Coronavirus COVID-19 response.

Income Received From Coronavirus COVID-19

The CARES Act also excludes any income derived from Coronavirus COVID relief from your monthly income or income calculation.  Relief will vary widely depending upon your income and circumstances but the idea is these one-time increases or payments should not be included in your income calculation to negatively affect or artificially increase your income given the relief will most likely not continue for the entire life of your bankruptcy case. 

Small Business Reform Act of 2019 Debtor Changes and CARES Act

The debt limitation to be a debtor under the Small Business Reform Act of 2019 have been increased from the original limit of $ The small business chapter 11 debtor new laws just took effect and the CARES Act provides a significant change.  These are new laws for specifically a person engaged in commercial or business activities that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of petition or the date of the order for relief (date case is filed) in an amount not more than $7,500,000 (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor (bankruptcy filer).

Section 1113 Bankruptcy

(b) Bankruptcy Relief

(b)(1)(C) Confirmation of Plan

A plan confirmed prior to the date of enactment of this subsection, the plan may be modified upon the request of the debtor if – (A) the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic; and (B) the modification is approved after notice and a hearing (2) a plan modified under paragraph (1) may not provide for payments over a period that expires more than 7 years after the first payment under the original confirmed plan was due.

How is Material Defined or What Is Material?

Section 101 of the Bankruptcy Code does not defined the term material. We will have to look to cases for some guidance. “A fact is material if it bears a relationship to the debtor’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor’s property.” Retz, 606 F.3d at 1198 (quoting Khalil, 379 B.R. at 173). Roberts v. Erhard (In re Roberts),331 B.R. 876, 882 (9th Cir. BAP 2005) (citing In re Wills, 243 B.R. at 62) Somewhat helpful.

More helpful. “A fact is ‘material’ only if it might affect the outcome of the case, and a dispute is ‘genuine’ only if a reasonable trier of fact could resolve the issue in the non-movant’s favor.” Fresno Motors, LLC, 771 F.3d at 1125 (citing Cty. of Tuolumne v. Sonora Cmty. Hosp., 236 F.3d 1148, 1154 (9th Cir. 2001) and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986))

#TrickleUPBailOut


By Ryan C. Wood

As I sit here pondering my future and the shutdown of San Mateo County, California because of 80 total known coronavirus infections I have some thoughts about how the inevitable bailout should look like. I am sure there are more criteria then what is listed below that are a good idea. The point is no more handouts to multi-billion corporations with the false expectation that the money somehow trickles down to lowest person on the ladder. Do not tease us with a mere $1,000 one-time payment and then give corporations $770 billion or more. Give us the people ALL of the money and let us spend it in support of the economy.

Keep the $1,000 payment proposed for people given that will only pay for my clients’ phone bill, cable bill and maybe there will be some left over for a car payment.  Instead give actual people, you know, the humans living in the United States the money being proposed to be given to corporations.  We all have freedom of choice in a free market right?  Us working people are supposed to choose how to spend our money creating winners and losers in the free market, right?  Trickle down is a joke. CEO takes millions along with upper management then whatever is left goes to page wages that are not even good? 

Do you want to drink water from melted snow thousands of feet high in the Sierra Nevada Mountains or drink water that is left over from trickling down thousands of miles picking up every single harmful thing possible?    

Clearly we need a #TrickleUPBailOut based upon the following criteria: 

  1. #TrickleUpBailout – MONEY TO THE PEOPLE

What I am saying is that hard working tax paying Americans should get the bailout money period.  Then those hard working tax paying Americans can choose what to do with that money.  Keep the proposed $1,000 given I know the amount proposed to be given to corporations spread out over those humans that need it will be far more money. How those in need who receive the billions spend the money in our free market will determine the winners and losers. Not the government choosing which corporations to prop up on the tax payer dime regarding the free market.   There will be winners and loser.  Let our free market and freedom of choice be how we move forward after the coronavirus catastrophe.  That is how it is supposed to work.  Not the other way around.  Please do not give billions of tax payer dollars to a handful of corporations under the guise of too big to fail yet again.  The government is not supposed to create winners and losers.  We have a free market right?  Tax paying hard working voters are supposed to make these decisions right?  Give the bailout money to real people that have hearts, breathe and live, vote, pay taxes and need help given the coronavirus catastrophe.  Do you not trust us to exercise our rights and freedom of choice?   

2. #TrickleUPBailOut – ALL PEOPLE GET THE BAILOUT FUNDS IF THEY QUALIFY

All people that meet the following criteria get the bailout funds regardless of legal status, race, religion, gender, sexual orientation, ever convicted of a crime or any other way to treat a human different from another human.  Let us start a new normal from the ashes of the coronavirus catastrophe that truly is equal to humans that qualify just because they are simply a human that live and works in the United States.  Disease and natural disasters that hurt humans do not care about any of these things.  Disease and natural disasters do not discriminate; only humans do.   

The application for #TrickleUPBailOut funds will not include a single question about legal status, race, religion, gender, sexual orientation, ever been convicted of a crime type questions period.

You live here in the United States.  You lived it you get it.         

3. #TrickleUPBailOut – NO BAILOUT FOR TRUST FUND BABIES

Sorry, but it must be said.  Good for you, not hating, but trust fund babies should not get a dime of tax payer money as a result of the coronavirus catastrophe.  Your good already given someone else in your life was able and nice enough to take care of you and provide for your every financial need.  If you are a trust fund baby that has to work to get by in life then that is different of course.      

4. #TrickleUpBailOut – NO BAILOUT MONEY FOR CERTAIN HIGH INCOME EARNERS

I am not going to say a number but we can all agree that someone who has a gross income of $300,000 a year or more does not need any bailout money, period.  I will let other people elected to make such decisions and set a number.  The point is if you make that much money you do not need a bailout.  Bailout money should be reserved for those in need of it most.  There are exceptions of course.  If you lose your job and all income then ……..

5. #TrickleUPBailOut – IF YOU LOSE YOUR JOBE YOU QUALIFY

If you lose your job during the coronavirus catastrophe you automatically qualify, period.  No questions asked.  Lose job = #TrickleUPBailOut money. 

I am sure there are plenty of other criteria that make sense to make sure all bailout tax payer dollars actually go to benefit tax payers that actually need it; period.  These five things are probably just a good start.  The point is why trust some CEO getting paid $30 million a year to decide what to do with tax payer bailout money?  As a bankruptcy attorney I am already fielding calls and the coronavirus has already caused bankruptcy filings.   I am sure there will be more to come, but giving bailout money directly to humans in need may reduce the number of future bankruptcy cases.  Even if bailout funds do not prevent bankruptcy filings who cares?  Taxing paying hard working people are the ones that deserve every penny of any bailout money from the government.      

If I File Bankruptcy Will It Affect My Spouses Credit Score?

By Ryan C. Wood

As with many questions there is a short answer and a long answer.  The simplistic short answer is no.  If you file bankruptcy it will not affect your spouse’s credit score.  When you get married your credit profile is not linked to your spouses.  So, no, if you filed bankruptcy in the past it should not negatively affect your new spouse’s credit score.  Some believe that when you get married the credit profiles are linked and the credit score is averaged between the two spouses.  No, that is not correct.  As a bankruptcy attorney I get asked this sort of question over and over again.

The Long Answer Is Yes Your Spouses Credit Matters

The long answer is yes your spouse’s good or bad credit will affect your ability to obtain credit or loans in the future; generally.  Generally when a married couple applies for a loan for a home a joint application must be filed and this is when both credit profiles are looked at.  This is not an absolute though.  You are not required to apply for a home loan or vehicle loan as a married couple though.  I have no doubt a mortgage lender or broker would be happy to just use the spouse with the highest credit score to qualify for a home mortgage and charge an interest rate 1 – 3% over the market rate at that time.  If you do apply as a married couple most lenders will in fact average or take the lowest middle credit score for spouses applying for a home mortgage or other large credit purchase.

All Community Assets and Community Income Must Be Listed

If you are married you do not have to file bankruptcy jointly with a spouse.  Here in California as a community property state all community assets and all community income must be listed in the petition for bankruptcy protection filed for the filing spouse though.  The community is also getting a discharge of the community debts as well; See Section 524(a)(3) of the Bankruptcy Code.  This is getting very technical and we have other articles about this issue……  Just know that you can file for bankruptcy protection yourself to keep a bankruptcy filing off of your spouse’s credit report.  But also know that the long answer above still applies when seeking credit jointly; both credit reports are looked  reviewed.

The Bottom Line Is Take Steps To Rebuild Your Credit

One of the misconceptions us bankruptcy attorneys hear all the time is how bankruptcy will hurt or lower a credit score.  While having a bankruptcy on a credit report is certainly not positive there are all kinds of entries on a credit report that are not positive.  Also for the vast majority of people I meet with the damage to their credit score already took place given all of the missed payments piling up to that point long before seeking bankruptcy protection.  When I am sitting down speaking with someone their credit score is already pounded down by what took place already.  Most people would be better off credit score wise if they sought bankruptcy protection when they knew payments would be missed or when payments are missed.  At the same time I cannot fault anyone for trying to figure it out in the real world.  The reality is the filing of bankruptcy actually will improve most people’s credit score by stopping any additional negative history being reported and their debt to income ratio instantly changing to their benefit.  There will be no more debt listed on the credit report.  After that it is up to each individual to take the necessary steps to increase their credit score. 

Do Not Pay Any Companies For Credit Improvement Services

I cannot stand driving around and seeing signs stapled to telephone poles advertising how some company can fix your credit for a fee.  I also hear radio commercials about removing items from credit reports for a fee.  The Fair Credit Reporting Act governs the reporting of credit history and negative history can be on our credit reports for seven years.  If information reported to the credit bureaus is not accurate it should be removed and you do not have to pay anyone to do this.   

The Federal Trade Commission Website Is A Great Resource

The Federal Trade Commission provides a sample letter to dispute inaccurate credit entries and a step by step guide on how to dispute inaccurate credit report entries.  It is simple and easy to do.  We are all also entitled to a free credit report each year from annualcreditreport.com or call 1-877-322-8228.  You can get a report from each of the three major credit bureaus or just any single bureau.  The FTC website also has warnings regarding credit scams and other problems you can learn a lot from.  The Consumer Financial Protection Bureau also has this information and additional warnings about credit scams.  The CFPB was created after the mortgage meltdown to specifically help protect consumers from predator lending and other financial problems.

Not Having Accurate Credit History Is Costly

If your credit score is not a high as it should be because of negative history that is not accurate the amount you pay in interest on vehicle loans or home loans will be thousands and thousands of dollars more.  Over the life of a home mortgage of $500,000 at 3.5% interest will result in $308,280 in paid interest.  At an APR of 4.5% the interest totals $412,034; a difference of $103,758.  Realistically here in the Bay Area there are no homes for $500,000 anymore.  So let us have more fun with numbers.  A $900,000 mortgage [this is assuming you put down 20% at the time of purchase and you are purchasing an actual house at around $1.1 million or more] at an APR of 3.5% will have interest totaling $554,905.  At an APR of 4.5% the interest totals $741,660; a difference of $186,755.           

Benefit Overpayments Are Dischargeable In Bankruptcy

By Ryan C. Wood

Time and time again I hear various government overpayments are not dischargeable when filing for bankruptcy protection. This is wrong. Government overpayments and overpayments are general unsecured debts that are eligible to be discharged when filing bankruptcy. I dedicated an entire section of a bankruptcy attorney website to hopefully dispel this myth over seven years ago. Overpayments from various government entities such as the California EDD (Employment Development Department), welfare overpayments, food stamp overpayments, social security overpayments and even retirement benefit overpayments are eligible to be discharged when filing for bankruptcy protection given they are general unsecured debts.

Do Not Forget About Recoupment Though

What is even more unknown is what equitable recoupment is. This article discusses the difference between a setoff and equitable recoupment. Equitable recoupment is not a violation of the automatic stay or order of discharge resulting from filing for bankruptcy and that is what is at issue in the case described and listed below.

Ninth Circuit Bankruptcy Appellate Panel No. CC-17-1375-LSF

The Ninth Circuit Bankruptcy Appellate Panel recently had an appeal that dealt with these issues as it pertained to a former city council member who also served on the planning commission for a city for around 17 years, a long time. Upon retirement she applied to supplement her retirement income by obtaining retirement income from the State of California via CalPers (she was apparently a State of California employee) and the also applied in her city for their Retirement Enhancement Plan benefits given her “:public service” as a member of the city council and planning commission. The 9th Circuit BAP memorandum of decision specifically added a footnote to the memorandum of decision to highlight that this person was on the city council at the time this Retirement Enhancement Plan was approved and that she voted in favor of the Retirement Enhancement Plan.

The Retirement Enhancement Plan is supposed to provide a small supplement to the California Public Employees’ Retirement System (CalPers) benefits for only certain eligible city employees. Public Agency Retirement System (PARS) is a private corporation that manages this Retirement Enhancement Plan. When there is an overpayment of some sort of benefit the question is always why was the person overpaid? In this case there seemingly are mistakes by all parties involved. The Retirement Enhancement Plan enrollee and bankruptcy filer in this case provided PARS with her income correctly as $14,938.04 annually or a year, which should have resulted in a monthly plan benefit of only $99.87 from the Retirement Enhancement Plan. Then PARS sent her an enrollment packet that mistakenly had the income listed as $14,938.04 per month, not annually, and resulted in a monthly benefit payment of $1,198.84 or a 1,100% increase……. The enrollee just signed the enrollment documents and returned them to PARS with the mistake. The overpayment of $1,098.97 continued for about 19 months before PARS realized the mistake and requested the $21,972.20 in overpayments be immediately returned.

Four months later in December 2014 the enrollee and overpayment receiver filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. Again, the PARS overpayment is a general unsecured debt that is eligible be discharged when filing for protection under the Bankruptcy Code. In Chapter 13 it becomes a little more complicated given a bankruptcy filer may have an obligation to pay all or part of their unsecured debt back and have the unpaid portion discharged upon completion of the Chapter 13 Plan. Almost three years after filing the Chapter 13 bankruptcy case the bankruptcy filer and overpayment receiver filed a motion for sanctions against PARS for violating the automatic stay in the chapter 13 case for withholding benefits to recoup the overpayment she received before the chapter 13 bankruptcy case was filed.

As I have told potential clients and clients for years that the underlying overpayment is eligible to be discharged, but the entity that the overpayment is owed the money has the right to recoup from any future benefits you made receive. This is what PARS is doing in this case. PARS reduced the bankruptcy filers/overpayment receivers’ current benefit to recoup the overpayment or funds the bankruptcy filer should not have received. The bankruptcy filer and her bankruptcy attorneys filed a motion for sanctions saying PARS is violating the automatic stay in the bankruptcy case by continuing to collect on a debt that is part of the bankruptcy filing and eligible to be discharged. This is called equitable recoupment.

PARS filed an opposition to the motion for sanctions providing the bankruptcy filer or overpayment receiver should have known she was receiving too much each month given she had approved the Retirement Enhancement Plan when she was on the city council and she knew the Retirement Enhancement Plan was intended only to provide a minimal supplement to CalPers retirement payments. She actually received $1,198.84 each month and that is a lot higher than the intent of the Retirement Enhancement Plan. Also PARS argued that she had signed the forms that included the calculation error and should have noticed the calculation error at that point too. If the cashier is supposed to give you a dollar in change and gives you $1,000 19 times in a row instead you will notice right? The bankruptcy court held PARS had the right to equitable recoupment and the bankruptcy filer and overpayment receiver appealed the order denying her motion for sanctions to the 9th Cir. BAP. So here we are now.

Equitable Recoupment

Equitable recoupment is not a violation of the automatic stay when filing for bankruptcy protection. Equitable recoupment is also not provided for in the Bankruptcy Code, but is a common law equitable doctrine, a fairness doctrine, that provides the setting up of a demand arising from the same transaction as a plaintiff’s claim or cause of action for the purposes of abatement or reduction. See Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996). Recoupment is not subject to or limited to claims that exist before a bankruptcy case is filed and can be recovered after the bankruptcy case is filed. This is what is going on in this case by PARS. PARS setup a demand for return of the overpayment for the purpose of abatement or reduction of the bankruptcy filer’s current and future benefits under the Retirement Enhancement Plan. If the bankruptcy filer was no longer receiving benefits under the Retirement Enhancement Plan from PARS, then there is no way for the abatement or reduction to take place on current and future received benefits.

Here comes the more complicated part and a detailed analysis of if a party has the right to recoupment. There is a two part test used by the Ninth Circuit….. the events need to be part of the same transaction and must be sufficiently interconnected so that it would be unjust to insist that one party fulfills its obligation without requiring the same of the other party. The Ninth Circuit uses a logical relationship test regarding if the events are part of the same transaction. See Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 753 (9th Cir. BAP 2001). Transaction is defined liberally and in a flexible construction or broadly.
The original Bankruptcy Court found that the logical relationship test was satisfied given the debt owed to PARS and future benefits owed to the bankruptcy filer/overpayment receiver were from the same facts. The Ninth Circuit Bankruptcy Appellate Panel did not have too much to add to the analysis and agreed that the overpayment owed to PARS and the current benefits received by the bankruptcy filer/overpayment receiver are from the identical transaction and retirement plan.

The bankruptcy filer/overpayment receiver in the appeal attempts to argue that equitable recoupment is not part of the Bankruptcy Code, if Congress intended for equitable recoupment to be an exception to the automatic stay Congress would have included it in Section 362(b) of the Bankruptcy Code and California law prohibits the offset of retirement benefits. The Ninth Circuit Bankruptcy Appellate Panel explained that it is bound by Ninth Circuit precedent unless overturned by the Supreme Court and equitable recoupment is a doctrine in the Ninth Circuit. The Ninth Circuit Bankruptcy Appellate Panel further noted that the bankruptcy filer/overpayment receiver did not make these arguments in her opening brief so the panel does not have to consider them regardless. Ouch. Regarding California law prohibiting the recoupment of retirement benefits the appellate court equally slams the door and provides multiples cases in which California courts treat pension benefits the same as wages for purposes of recoupment. See Krolikowski v. San Diego City Emps.’ Ret. Sys., 24 Cal. App. 5th 537, 557 (2018) (holding that recoupment of state pension benefit overpayment was not barred by statutes of limitations; exemptions for levy and attachment of public retirement benefits; equitable estoppel; or laches).

What Happens Most of The Time Regarding Overpayments When Filing Bankruptcy

What happens with overpayments most of the time when filing bankruptcy is after receiving a discharge that is the end. Someone receives an overpayment for whatever reason and they do not need future benefits from the program or entity they received the overpayment from. There is no way for the discharged overpayment to be collected on given there are no current or future benefits paid out that can be reduced for recoupment purposes.

Do Not Mistake Setoff With Equitable Recoupment

Unlike equitable recoupment setoff is codified in Section 553 of the Bankruptcy Code. Setoff allows a creditor to deduct amounts owed to it by the bankruptcy filer from amounts the creditor owes to the person or entity filing for bankruptcy protection. A creditor must request and receive relief from the automatic stay before doing any sort of setoff. Also a distinguishing difference is setoff does not allow claims from before the bankruptcy case was filed to be setoff with claims after the bankruptcy case was filed.

What Fake News Is There About Filing Bankruptcy?

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There is way too much fake news out there about bankruptcy. Look, I know bankruptcy is not looked at in the best light for many reasons. I am not going to try and convince anyone that believes bankruptcy is wrong. Most people will never understand until something happens that is completely out of their control and now they are looking at filing for bankruptcy protection. Bankruptcy is the law and absolutely necessary in our economic system.

So, what is the single most misunderstood part of bankruptcy? What is the most common “Fake News” I hear out there about filing bankruptcy? A little information about me first so you give my opinion some weight. I have been involved in the bankruptcy industry before I graduated law school. I did not jump on this band wagon during the mortgage meltdown like many other attorneys. I intended to be a bankruptcy attorney during law school and I have not been employed in any other area of law. I worked for a creditor’s right law firm. I worked for a debtor’s rights law firm. I worked for a Chapter 13 Trustee, David Burchard, for the San Francisco and Santa Rosa Divisions of the Bankruptcy Court for the Northern District of California. I then started my own practice to even better serve those in need of debt relief. I have touched easily over 5,000 bankruptcy cases. I have talked to thousands of potential clients and those that chose to file bankruptcy. The single most misunderstood part of bankruptcy is the relationship between assets and exemptions that protect the bankruptcy filers stuff and/or assets.

The Most Disturbing Fake News Is: You Will Not Lose All Of Your Stuff When Filing Bankruptcy

THIS IS NOT TRUE AT ALL. This is probably the most troubling part of being a bankruptcy attorney. I have to explain over and over again that you will not be left penniless and barefoot in the middle of the street after filing for bankruptcy under any chapter of the Bankruptcy Code. We all need a certain minimum stuff to survive in this world. Bankruptcy is designed to give you a fresh start, but not a head start either.

While bankruptcy is governed by Federal Law and created by Congress, each state can create their own exemptions to protect peoples stuff from those they owe money to. A bankruptcy filer in certain states can choose the state law exemptions or federal exemptions to protect their stuff. In California you must use the state law exemptions pursuant to California Civil Code 703.14 or 704. The theory behind protecting a certain amount of someone’s assets is it does no human on Earth any good if another human is stripped of all of their worldly possessions when filing bankruptcy. At the same time common sense should tell you that if you own a paid in full $60,000 Tesla you cannot get rid of $30,000 in credit card debt while still keeping the paid in full $60,000 Tesla. You would be right. Under California exemptions we get either (CCP703.14) $5,350 or (CCP704) $3,050 to protect your vehicles. I am not going to go into the differences between California’s two set of exemptions, the 703 or 704’s. Just know that there are two choices and one is probably more beneficial to you than the other. It all depends upon your assets.

So what are the problem assets? As the example provides above vehicles can have high values sometimes or if multiple vehicles are owned it can be difficult to protect all of them depending upon the vehicles value of course. Home equity in the Bay Area is now a huge issue again given how much home values have increased over the last 8 years. We can only protect so much equity in a home. For more information about how much California exemptions protect in home equity look up the homestead exemptions for California. During your consultation with a bankruptcy attorney you will discuss exemptions in much detail.

Filing Bankruptcy Is Not Financially Devastating Like The Media Or Your Friends Think

The other most common “Fake News” I hear is how financially devastating filing for bankruptcy protection is. This is simply not true at all. Most of the financial devastation already took place before I ever speak to someone. All the missed payments, late payments or repossession/foreclosure has already happened or will soon happen regardless of filing for bankruptcy protection or not. Four or five months of missed or late payments can tank a credit score. The damage is done. SO FILING FOR BANKRUPTCY DOES NOT LOWER YOUR CREDIT SCORE. THE NEGATIVE EVENTS LEADING UP TO THE BANKRUPTCY CASE BEING FILED LOWERS YOUR CREDIT SCORE.

What the bankruptcy does is eliminate the debts you are struggling to pay each month so that you can make regular on-time payments for the necessities of life. Then once you make regular on-time payments on everything your credit score will increase. How can you rebuild your credit while still making late payments or missing a payment on one card and not another? It really does no good to rob Peter to pay Paul. That is a vicious cycle of debt and increased interest payments that will never end.

You can buy a house. You can buy a car. You can continue to live life like you are now. It is just without all of the debt that keeps you from getting ahead in this very short life we have. You do not have to struggle each month. That is no way to live and you do not have to. Educate yourself about bankruptcy and other tools to help you get ahead in life.

California Law and Record Title Presumption Versus Community Property Presumption and Bankruptcy

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Update as of November 14, 2018

On November 8, 2018, the Ninth Circuit Court of Appeals entered an order certifying question to the Supreme Court of California as follows:

“Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?”

This is the question the following cases and discussion of various cases are trying the answer and it is far from simple. The outcome of the decision by the Supreme Court of California will not have much of an impact on bankruptcy filings if they side on the community property presumption since that is what is taking place now. If the record title presumption is determined to overcome the community property presumption us bankruptcy attorneys will again be able to file cases for one spouse or the other that recognizes real property held as a joint tenancy and only include the value of the filing spouses separate property interest. We shall see.
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Prior to November 8, 2018

What? I thought the Ninth Circuit Court of Appeals in the Summers case already held that the taking of title as joint tenants under California law is not subject to California community property transmutation laws? Then the California Supreme Court held the seemingly opposite result in the Valli case. Yes, that Frankie Valli. The law that counts is California State law. The issue here develops when real property is acquired during marriage and title is taken by a married couple as joint tenants. The title is taken as joint tenants and therefore the property is legally under California State law the married couple’s separate property. The taking of title in this form provides their intent. We also have California’s transmutation law and certain presumptions saying something else apparently. Now we have the Brace case decided by the Ninth Circuit Bankruptcy Appellate Panel publishing a decision that discusses the interplay between the Summers and Valli cases.

Bankruptcy law is federal, which relies on applicable nonbankruptcy law, state law, to provide for many substantive and procedural rights under the bankruptcy code. If you did not know this please take a moment and do some research on this issue. Then you throw in that California is a community property state and we have a complicated interplay of law and who gets to decide who is right when applying these laws. There are also only 8 community property states with Alaska being an opt-in community property state. So I would say there are 8.5 community property states if being technical.

I believe the difficulties in interpreting this intersection of law is for good reasons and good intentions. The result has been far from good for a very long time. The issue really just comes down to trying to prevent litigation regarding what is community property versus separate property at the time of divorce in California.
Sadly when things go bad opinions change as to who owns what. When filing for bankruptcy protection what is community property of a married couple and separate property is also extremely important.

The 9th Cir. Bankruptcy Appellate Panel Says The California Supreme Court Wins

The Ninth Circuit Bankruptcy Appellate Panel could have chose to not considered the California Supreme Court case and vice a versa. See Miller v. Gammie, 335 F.3d 889 (9th Cir. 2003). The 9th Circuit Bankruptcy Appellate Panel cited a 9th Circuit decision that held when there is a irreconcilable issue between courts then any future three-judge panel of the court of appeals and district courts should consider themselves bound by the [California Supreme Court Valli Case] intervening higher authority and reject the prior opinion of this court as having been effectively overruled. This is some rare air right here. How many people can tell you exactly how intersections of law such as this are decided? Very few, but here is it and a case to read about it. Extremely interesting reading and the requirement of a three-judge panel is excellent.

Presumptions Under California Law Regarding Community Property and Taking Title During Marriage

Before moving forward there are certain presumptions under California community property law that need to be defined and understood.

CA Family Code Section 750

A husband and wife may hold property as joint tenants or tenants in common, or as community property, or as community property with a right of survivorship.

California law clearly provides a married couple can hold property as joint tenants. It issues is the title or evidence of this intent to overcome the presumption that all property acquired during marriage is community property. See CFC 760 below.

CA Family Code Section 760

Community Property: Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.

Okay, so when real property is acquired during marriage the presumption is the real property is community property. What could possibly rebut that presumption? Is it possible a recorded title signed at the time purchase providing title is as joint tenants can rebut this presumption?

CA Family Code Section 2581

Presumption Concerning Property Held In Joint Form: For the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property. This presumption is a presumption affecting the burden of proof and may be rebutted by either of the following: (a) A clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property; (b) Proof that the parties have made a written agreement that the property is separate property.

Again, a recorded title is the legal document that provides how and who owns a piece of property. Again, is title taken as joints tenants during marriage then recorded with the county recorder’s office fulfills the requirements of CFC 2581? What other interpretation of a joint tenant title could be inferred? As with all questions of statutory interpretation we begin with the plain language of the statute. See Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004); Ariz. Health Care Cost Containment Sys. v. McClellan, 508 F.3d 1243, 1249 (9th Cir. 2007). But a recorded deed is not a statute. By the plan language of a recorded title without knowing anything else what conclusion would or could the recorded title result in? This is open to human interpretation? It says the married couple is married and bought the property as joint tenants regarding the property they acquired during marriage. The entire point of CFC 2581 is to provide guidance on a recorded title. What more does a title need say? It is difficult to balance what CFC 2581 actually says with with the recent decisions in Valli and now the Brace case.

Let us now bring this back to the Bankruptcy Code and why I am writing about this. Section 2581 applies “for the purposes of division of property on dissolution of marriage or legal separation of the parties,” and when filing for bankruptcy protection? The various decisions on this issue do discuss this issue in some detail and conclude there is nothing limiting the application of Section 2581. Section 2581 does not say for all purposes. It clearly provides for the purposes of division of property on dissolution of marriage or legal separation. Generally when the word “purpose” is used it is because it is possible for other “purposes” such as filing for bankruptcy protection Section 2581 is not applicable. This is not how California law has been interpreted though. “We give the language its usual and ordinary meaning, and ‘[i]f there is no ambiguity, then we presume the lawmakers meant what they said.’” See People v. Gutierrez, 58 Cal. 4th 1354, 1369 (2014) (alterations in original) (quoting Mays v. City of Los Angeles, 43 Cal. 4th 313, 321 (2008). When a married couple does file bankruptcy in a community property state, and only one spouse files for bankruptcy, only community property and filing spouses separate property become part of the bankruptcy estate pursuant to Section 541 of the Bankruptcy Code. So for purposes of filing for bankruptcy protection what is community property and separate property must be taken into account depending upon the circumstances. I now say depending upon the circumstances given many times there is no reason to even go down the road of should only one spouse file for bankruptcy protection and the other not. Many times one spouse just does not want to file at all. Or a couple has some misguided myth about bankruptcy that prevents them from even considering filing at all under any circumstance while the other spouse is all for it. Attorneys practicing bankruptcy law get a very bad wrap from the real world. This topic is a perfect example of the difficulties.

So the Ninth Circuit Court of Appeals in Summers said the California transmutation laws are not applicable to the purchase of property during marriage as joint tenants. Even if the California transmutation laws are applicable the signed, notarized and recorded title meets the requirements of Section 852, right?

CA Family Code Section 852

Transmutation of Property: (a) A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected; (b) A transmutation of real property is not effective as to third parties without notice thereof unless recorded.

Third parties do receive notice given the title is recorded with the county. So simple.

The Ninth Circuit Court of Appeals held in Summers that California transmutation laws do not apply to the acquiring of real property during marriage under California law. CFC 2581 provides there should be an express declaration of the parties’ intent. Yes, that is the title record as joint tenants. But no, you have to go beyond what the letter of the title says and now comply with California transmutation laws as well? CFC 2581 is not good enough apparently.

California Evidence Code Section 662

Record title presumption: which provides generally that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof.”
Wait a second here. California Evidence Code Section 662 says there is a presumption about how title is taken. What clear and convincing evidence has the Court discussed that the married couple in Valli or Brace did not want the property to be held as joint tenants? The title says that. So we now apparently have to ignore CFC 2581 and Cal. Evid. Code 662.

The Summers Ninth Circuit Court of Appeals Case – Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242 (9th Cir. 2003)

In Summers, the Ninth Circuit held that under California law, the community property presumption is rebutted when a married couple acquires property from a third party as joint tenants. In Summers the husband, wife and daughter took title to a piece of real property as joint tenants and each of the three parties eventually filed for bankruptcy protection. Citing several California Courts of Appeal decisions, the Ninth Circuit held that under California law the transmutation requirements applied only to interspousal transactions. The wrinkle here that threw everything sideways was the daughter, a third party, was also on titled in addition to the married parents. To get a result that was fair there had to be a way for the three to be joint tenants. The Summers court relied on the California courts’ definition of “transmutation” as “an interspousal transaction or agreement that works a change in the character of the property.” In re Summers, 332 F.3d at 1244 (citing In re Marriage of Cross, 94 Cal. App. 4th 1143, 1147 (2001) (emphasis added)).

As a result of Brace we arguably have to ignore the actual definition of a transmutation under California law. When a house is purchased there is no “interspousal transaction or agreement that works to change the character of the property.” Someone please explain to me how a purchase of a house, an agreement between a married couple during marriage, changes the character of property a married couple is purchasing? You have to own the property first to change the character of the ownership. Right? Some human being please explain to me how I can change the character of property I do not yet own? This bankruptcy attorney finds this confusing.

The purchase of a house is also NOT an “interspousal transaction.” The transaction is between the spouses and the seller. Now we have to ignore the California transmutation definition too. The California Supreme Court case Valli v. Valli (In re Marriage of Valli), 58 Cal. 4th 1396, 1400 (2014). The California Supreme Court did not agree with the Ninth Circuit Court of Appeals interpretation of California transmutation law in Summers. In Valli, the California Supreme Court held that California’s transmutation statutes are also applicable to transactions in which spouses acquired property from a third party. 58 Cal. 4th at 1405-06. The California Supreme Court noted that prior to California’s transmutation laws the alleged transfer of property by oral or implied agreement caused expensive litigation in divorces. This led to just a passing comment being interpreted or argued to be an agreement to transmute property. That is why we now must have a writing to transmute property. Okay, so there is plenty of merit to reducing litigation in divorces and not having one spouse upon divorce or dissolution say an asset is not a community asset. I get that. The problem is that I still have read nothing to lead me to believe a title saying a house purchased during marriage with title take as joint tenants does not meet the transmutation requirements anyway even though I do not believe the transmutation requirements are applicable to begin with. Nope. That is not the case according to Valli and Brace. This is a legislation issue and what various California laws say about this issue and the interplay with the Bankruptcy Code in a community property state.

Another wrinkle is: The California community property presumption applies to property acquired during marriage unless it is: (1) traceable to a separate property source; (2) acquired by gift or bequest; or (3) earned or accumulated while the spouses are living separate and apart. Valli, 58 Cal. 4th at 1400.

Ninth Circuit Bankruptcy Appellate Panel Brace Case

The Ninth Circuit Bankruptcy Appellate Panel declined to agree with the Summers case and followed the Valli case interpretation of California law. It is important to note that the 9th Circuit BAP provided that the presumption of community property was not overcome by the facts of the Brace case. Under other circumstances they may have held otherwise with more facts to overcome the community property presumption. It begs the question what evidence or recorded document or non-recorded document is clear and convincing evidence of the married couples intent to be joint tenants when purchasing property California? The 9th Cir. BAP instructs us that a specific statutory provision does prevail over a general one relating to the same subject. Pac. Lumber Co. v. State Water Res. Control Bd., 37 Cal. 4th 921, 942 (2006). This principle of statutory construction actually supports the conclusion that the community property presumption prevails over the title presumption. See Valli, 58 Cal. 4th at 1412-13. The community property presumption is a specific statutory presumption found within California’s community property law, not the more general presumption found in Section 662 of the California Evidence Code. Another piece of rare air regarding how the intersection of law is interpreted. They are saying that the transmutation laws are specific and the record title presumption is just a general statutory provision of the general transmutation laws that can be ignored if there is more specific law. That is interesting. Does a big umbrella stop the rain from every getting to the small umbrella under the big umbrella? In some circumstances yes and some circumstances no. It is open to interpretation on a issue by issue analysis and there is nothing uncomplicated about it.

What We Can Take Away From This?

There is no such thing as joint tenancy between a married couple under California law unless there is an additional writing in which you say something like, “WE TOOK TITLE TO OUR HOUSE AS JOINT TENANTS DURING MARRIAGE, SO THE PROPERTY IS EACH SPOUSES SEPARATE PROPERTY. IF THERE IS ANY QUESTION ABOUT OUR INTENT IN THE EVENT OF DEATH, DIVORCE DISSOLUTION OR BANKRUPTCY WE ARE MAKING THE EXPRESS DECLARATION REGARDING THIS PROPERTY WE NEVER OWNED BEFORE MARRIAGE AND ARE IN FACT INTENDING TO OWN THIS REAL PROPERTY AS OUR SEPARATE PROPERTY AND JOINT TENANTS AS THE RECORDED TITLE PROVIDES.” Then take that writing and record it with the county recorder’s office or have it notarized and tucked away with hope it is never needed. But then when you go to record this document after ten years an employee at a county recording office may say that the document was not notarized properly if the notary left out one word from the certificate notarizing the additional writing you created to make your intent clear. So do you now we need two writings or a writing about the writing witnessed by two disinterested parties? In today’s world possibly a video uploaded to the “cloud” of both spouses actually saying what there intent is regarding a property purchased during marriage? The point is where does it end? So how do you hold property as joint tenants if you are married when the actual recorded title is not enough to show the intent of the parties is the question?

Why Do Bankruptcy Filers We Care?

This issue arises when one spouse files for bankruptcy and the other does not. The issue for bankruptcy attorneys is whether only half the value of our client’s real property becomes property of the bankruptcy state when the title is taken as joint tenants. Half of the house is supposed to be the separate property of each spouse or half is the non-filing spouses separate property. This is a huge issue for bankruptcy filers in California and applying exemptions to protect client’s real property and obtain a discharge of their eligible debts. Community debts may only seek satisfaction from community assets.

What If A Creditor In A Bankruptcy Case Is An Infant or Incompetent Person?

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I really do not know the utility of this article given I know this set of circumstances rarely will ever come up. I have literally had a hand in four or five thousands cases over the years and this issue has not come up so far. I also administered countless Chapter 13 cases as the staff attorney for David Burchard, the Chapter 13 Trustee for the San Francisco and Santa Rosa Divisions of the United States Bankruptcy Court for the Northern District of California. The set of circumstances that this could be an issue are very narrow. The bankruptcy filer would at some point injured or damaged a minor somehow or the person with a claim against the bankruptcy filer became incompetent over time. Also, if the person with a claim is an adult, how would the bankruptcy filer or their Bankruptcy Attorney ever know the person is incompetent? They probably would not.

Nonetheless if this issue does come here you go. It is rare for an adult, someone over the age of 18, to be indebted to or someone under the age of 18 has a “claim” against an adult. It is also rare for someone to owe an incompetent person money. If someone is incompetent they cannot enter into a contract legally. It is possible that the debt or claim arose prior to the person becoming incompetent. So there are a some reasonable hypothetical facts to help discuss this issue. In the real world you will probably look long and hard to find this was every an issue in a bankruptcy case.

The issue is how can you provide notice of a bankruptcy filing to an infant or someone who is incompetent? An infant is defined as a person who has not attained legal majority; or under-age or under 18 or 21 years of age depending upon state law. A person that is under the age of minority cannot be served legally even if they are a creditor of the person who is filing for bankruptcy protection. Also, a person that is incompetent cannot be or accept service given they are incompetent. Incompetency is generally defined as an adult who can no longer take care of their own financial and personal affairs because of mental problems or potentially a physical problem too.

The most important parts of filing for bankruptcy protection is giving all creditors notice of the bankruptcy case. Once the bankruptcy attorney files the bankruptcy petition any and all collection activity must stop and the Bankruptcy Court is the sole place to seek remedy. So if all creditors do not receive notice or do not understand the notice that is a problem. Every bankruptcy filer wants their creditors to receive notice and stop the phone calls or harassing letters. You will also want the creditor to get the order of discharge in the mail so that they know once and for all the debt is no longer legally enforceable by federal court order.

How Do You Serve An Infant Or Incompetent Person?

First look to Federal Rule of Bankruptcy Procedure 1007(m). In 2001 FRBP was amended to add section “m.” FRBP 1007(m) provides: If the bankruptcy filer knows that a person on the list of creditors or schedules is an infant or incompetent person, the bankruptcy filer also shall include the name, address, and legal relationship of any person upon whom process would be served in an adversary proceeding against the infant or incompetent person in accordance with Rule 7004(b)(2). The point is to serve someone that knows the infant or incompetent person that can accept service on their behalf. Federal Rule of Bankruptcy Procedure 7004(b)(2) provides: (b) Service by First Class Mail. Except as provided in subdivision (h), in addition to the methods of service authorized by Rule 4(e)–(j) F.R.Civ.P., service may be made within the United States by first class mail postage prepaid as follows: (2) Upon an infant or an incompetent person, by mailing a copy of the summons and complaint to the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against such a defendant in the courts of general jurisdiction of that state. The summons and complaint in that case shall be addressed to the person required to be served at that person’s dwelling house or usual place of abode or at the place where the person regularly conducts a business or profession.

Basically for an infant you need to also include the name and address of the infant’s parents or legal guardian. The same is true for an incompetent person. Someone has to be taking care of or appointed as a conservator or guardian of the incompetent person. Whoever is taking care of them is the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against a defendant in the courts of general jurisdiction of that state.

Should I File Bankruptcy Jointly With My Spouse?

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I will give you my opinion right now and say yes, if possible. If your spouse and you do not own any separate property then please file bankruptcy jointly and receive an order of discharge with both of your names and social security numbers listed. Doing this makes it black and white to your creditors. All debts are discharged as to both spouses. If only one spouse files for bankruptcy and receives a discharge you have entered the gray as to the non-filing spouse. While bankruptcy is governed by Federal Law to determine certain asset issues the Bankruptcy Court has to look to state property marital law to determine separate property and community property.

The Community Discharge

So in a community property state only the community assets are liable for community debts. If there are no separate property assets brought into the marriage by the spouses then there is nothing other than community assets at the time of filing and then post-discharge. 11 U.S.C. § 524(a)(3). “[Section] 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition.” In re Karber, 25 B.R. 9, 12 (Bankr. N.D. Tex. 1982). In summary, all actions to collect a “community claim” from section 541(a)(2) property acquired after the petition date is permanently enjoined unless timely objected to. A creditor is still free to seek collection against the non-filing spouse’s separate assets.

So What Is The Problem?

So you the issue is some of the debts are under one spouses name and social security number while some debts were incurred by the other spouse. Who files for bankruptcy then? All of the debts were incurred during their marriage too. If one spouse files for bankruptcy and receives a discharge will that discharge protect the spouse that did not file? Yes and no. This is the gray of only one spouse filing. What can a creditor do or not do to collect their debt against the non-filing spouse’s separate property? What is property of the bankruptcy estate or community assets after the spouse received a discharge? Can a judgment creditor suspend the non-filing spouses driver’s license? Is a driver’s license a community asset?

File Jointly If Possible To Avoid Confusion

As bankruptcy attorneys that have filed and been involved in thousands of b bankruptcy cases, if it is possible, we recommend spouses file jointly so that it is black and white post-discharge. Each spouse receives a discharge of all debts whether in their name and social security number or not. A creditor with a judgment can renew the judgment and then wait to collect. The entire time the judgment is also accruing interest. Also, once the judgment is renewed the total amount of the renewal will accrue interest. This accrual of interest will make the judgment increase significantly plus the cost of collection added in also. What is the judgment creditor waiting for? They are waiting for some separate property assets to be obtained by the non-filing spouse. If the non-filing spouse inherits assets from someone the inherited assets are arguably separate property of that spouse and now there are separate assets to collect from. Or the judgment creditor is waiting for the community to end via divorce or death. Once the community is terminated then the protection of the discharge of the filing spouse is also terminated.

We had a judgment creditor write us a letter once to explain their position and right to collect from the non-filing spouse. The judgment creditor argued that the community discharge pursuant to Section 524 is a “phantom discharge” since it only bars collection from community assets. Again, if there are no separate assets then how is the discharge merely a phantom discharge? If there are no separate assets then all assets are community assets and therefore protected. What procedure is there to make the determination that there are no separate assets? There really is none. If a creditor allegedly violates the order of discharge the only recourse is to seek sanctions from the bankruptcy court that signed the order of discharge. Litigating this issue will most likely cost more than what it cost to file the initial Chapter 7 bankruptcy case. No one really wants to have to deal with this after receiving a discharge and moving on. If you are married and do not file jointly this is a potential issue you will be creating by filing alone.

Prevent Possible Litigation

Again, the theme of this article is if you can file jointly then file jointly and eliminate the possibility of litigating whether a creditor is violating the order of discharge or not. It may not be possible though depending upon the circumstances. Bankruptcy attorneys have to look at all of the assets of clients and make a determination as to the best course of action. There are also circumstances in which a spouse refused to file for bankruptcy protection no matter what. The point of filing for bankruptcy is to discharge eligible debts or reorganize debts without causing additional stress or problems for the bankruptcy filer. Most bankruptcy filers do not have the means to litigate issues that sometimes arise. Like a creditor going after a non-filing spouse post-discharge. If you filed for bankruptcy protection you probably do not have thousands of dollars to litigate anything. In the event a creditor goes after a non-filing spouse and we are successful in obtaining sanctions there is no guarantee that the bankruptcy court will award attorneys’ fees and costs for seeking sanctions. It is usually a tough position to be in after the bankruptcy is long over and then a creditor decides to do some sort of collection activity against the non-filing spouse. So what then? To take this issue off the table completely and just file jointly.

Bankruptcy and Service of Motion To Avoid Judicial Lien

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The issue here is who must be served when filing a motion to avoid a judicial lien under Section 522 or 506 of the Bankruptcy Code. There could be a number of parties involved or a number of attorneys involved in obtaining and enforcing the judicial lien before a bankruptcy case is filed. So who has to be served with the motion to value or avoid the lien? Is service required on the state court attorney that obtained the judgment, the original creditor or the potential attorney now representing the creditor in the bankruptcy case?

FRBP 9014 and 7004

Once the bankruptcy case is filed the Federal Rules of Bankruptcy Procedure, Federal Rules of Procedure and local bankruptcy rules take over. All states have laws governing the enforcement and collection of lien rights and judicial lien rights. Procedures for contested matters in bankruptcy cases are governed by Federal Rule of Bankruptcy Procedure 9014, which requires service of a motion “in the manner provided for service of a summons and complaint by Rule 7004 . . . .” Rule 9014(a). So we have to look to FRBP 7004. Service of a summons and complaint varies depending upon the type of entity the creditor is. Whether the creditor is a sole proprietorship, limited liability company, corporation or is insured depository institution. If FDIC insured service shall be made by certified mail addressed to an officer of the institution unless— (1) the institution has appeared by its attorney, in which case the attorney shall be served by first-class mail; (2) the court orders otherwise after service upon the institution of notice of an application to permit service on the institution by first-class mail sent to an officer of the institution designated by the institution; or (3) the institution has waived in writing its entitlement to service by certified mail by designating an officer to receive service.

Ninth Circuit Bankruptcy Appellate Panel Case

In a recent 9th Cir. BAP case; Teresa Bryant, Appellant, vs. The Bank of New York Mellon; Select Portfolio Servicing, BAP No. CC-16-1009-DKuF, discussed the proper service of a motion to avoid a judicial lien. In this case Ms. Bryant’s bankruptcy attorney served the motion by certified mail on a bank officer of Mellon pursuant to FRBP 7004 and served each attorney that appeared on behalf of Mellon in the bankruptcy case. In the Northern District of California we have a local rule that says if a claim was filed for the lien, then the address provided on the claim has to be served in addition to the requirements of FRBP 7004 be met. Mellon tried to argue that since their state court attorney was not served the motion to value service was defective. This issue was addressed in Frates v. Wells Fargo Bank, N.A. (In re Frates), 507 B.R. 298, 301 (9th Cir. BAP 2014). The appellee bank in Frates argued their state court attorney should have been served with the motion to value or avoid. The Ninth Circuit BAP said no.

The Ninth Circuit Bankruptcy Appellate Panel previously concluded that compliance with Rule 7004(h) was all that was required. The court recognized that California law would have required service of post-judgment motions on the state court attorney, but the court did not “perceive any reason why compliance with California law should be compelled in light of the procedural due process safeguards provided by the rules themselves. This means that when enforcing the judicial lien under California law post-judgment motions must be served on the state court attorney for the judgment creditor. That is not the case after a bankruptcy case is filed.

You Do Not Have To Serve The State Court Attorney

Bankruptcy case rules make no mention of serving a motion to avoid a judicial lien on any state court attorney involved in the matter previously. In the Bryant appeal the debtor’s bankruptcy attorney served the attorney that made an appearance for Mellon and filed a motion for relief from stay filed in the bankruptcy case and still served an officer of Mellon by certified mail. The Ninth Circuit Bankruptcy Appellate Panel held nothing more was required. The lower bankruptcy court unfortunately evaluated the circumstances of not serving the state court attorney as a possible fraud on the bankruptcy court for not serving Mellon’s state court attorney with the motion to value. The 9th Circuit Bankruptcy Appellate Panel decidedly said no. There was no fraud on the bankruptcy court.

What Creditors Attorneys Should Do

If a state court attorney wants to be noticed or a creditor wants their state court attorney that obtained the judgment to be served then the state court attorney should file a request for special notice in the bankruptcy case. Then they have to be provided notice. In Chapter 7 bankruptcy cases judicial liens can be avoided in no assets cases. In a no asset case there is no call for creditors to file claims or even make an appearance in the case at all. Under these circumstances no attorney will make an appearance for a creditor in the Chapter 7 no asset bankruptcy case. The only viable service is pursuant to FRBP 9014 and 7004. In Chapter 13 bankruptcy cases claims are called to be filed on behalf of creditors. So in theory in a Chapter 13 case there could be an attorney or other party to provide notice to and meet the requirements of FRBP 7004.