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Resolve Mortgage Accounting Disagreements

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Chapter 13 gives you valuable power to force your mortgage lender to be up front about how much you owe, and to efficiently dispute the amount. 

 

Catching Up on Your Mortgage over Time

A Chapter 13 case gives you the power to catch up on your home mortgage(s) over an extended period.  This “adjustment of debts” type of bankruptcy can give you up to 5 years to catch up.

This power is found in the U.S. Bankruptcy Code language allowing you to cure “any default within a reasonable time.” Section 1322(b)(5). That amount of time is interpreted to mean, in most circumstances, the length of your Chapter 13 payment plan. Most payment plans are between 3 and 5 years long. If you need more than 3 years, usually you can extend your plan longer, up to 5 years.

The Mortgage Accounting Challenge

If you fall behind on your mortgage it can be ridiculously difficult to get accurate information from your lender about the amount you owe. If you don’t have accurate information, you can’t fulfill your desire and responsibility to cure the arrearage.

This problem is aggravated over the course of the case when the mortgage payment amount changes over time. This could be from normal changes in the interest rate, property tax and insurance, or the addition of fees.

You can’t cure the arrearage or maintain monthly payments if you aren’t timely told the amounts you owe. You can’t efficiently dispute the stated amounts if the lender does not respond in good faith.

This accounting confusion had been a serious problem for millions of homeowners trying to save their homes. In 2011 a new procedure was created within Chapter 13 to efficiently resolve mortgage accounting disputes. It’s contained in Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It gives you the power to force your lender to work with you to determine how much you owe.

How the Procedure Works

The procedure focuses on changes to the ongoing mortgage payment amount.  You can’t catch up on the arrearage if that arrearage increases because you’re not paying the right monthly payment. 

Your lender “shall file and serve on” you, your bankruptcy lawyer, and your Chapter 13 trustee “any change in the payment amount.” This includes “any change that results from an interest rate or escrow account adjustment.” This notice must be given “no later than 21 days before a payment in the new amount is due.” Rule 3002.1(b) of the Federal Rules of Bankruptcy Procedure.

You or your lawyer can object to the change in the lender’s notice. You must do so before that new payment is due. If you don’t object on time, the lender’s payment change goes into effect.

If you do object, the bankruptcy judge determines whether the lender’s proposed new amount is appropriate or not.

This procedure forces the lender to be up front about changes in how much you owe. It allows you to dispute those changes, and to get a quick court determination about who is right.

 

Chapter 13 Really Helps Delay Your Home Sale

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Chapter 13 gives you much more power over your mortgage and other home-related debts so that you can sell your home when it’s best for you. 

 

Our last blog post was about using Chapter 7 “straight bankruptcy” to buy time to sell your home.  The advantages of Chapter 7 are that it’s usually quite quick and costs less that Chapter 13. It also importantly focuses on your present income and on the present value of your home. If you expect either your income or your property’s value to increase substantially, Chapter 7 could be your better option.

Chapter 7 Disadvantages—Buys Limited Amount of Time

However, Chapter 7’s quickness can often turn into a disadvantage. If you’re behind on your mortgage, or another home-related debt, the protection Chapter 7 provides against them doesn’t last long. The “automatic stay” protection lasts—at most—only 3-4 months, because that’s how quickly most cases finish. If within that time you don’t work out payment arrangements with them, they can start or resume collections and/or foreclosure.  

So Chapter 7 often doesn’t give you much additional time to sell your home.

Chapter 7 Disadvantages—Buys Limited Leverage with Ongoing Creditors

Also, if your mortgage holder or other home-related creditor refuses to negotiate, you have almost no leverage under Chapter 7. Not only does automatic stay protection expire within just a few months, the creditor can often speed up that timetable. Chapter 7 doesn’t give you any other strong tools directly against your mortgage holder or home lienholder. Mostly what it does is discharge (write off) other debts so that you can focus on your home creditor(s). If that doesn’t buy enough time to sell your home, than Chapter 7 is probably not your best solution.

Chapter 13 Advantages—Buys Much More Time and Leverage

A Chapter 13 “adjustment of debts” case buys you time and flexibility if you want to keep your home and are behind on your mortgage and/or other home-related debts. Basically it does so by protecting you and your property while you catch up in 3 to 5 years.

These are all also true if you want to sell your home but need more time to do so. Chapter 13 can often prevent you from being rushed into selling when the market is not the best for selling. For example, instead of being forced to sell during the holiday season you could sell during the prime spring season. Or hold off on selling when doing so now would cause personal or family hardships. ln many situations you could delay selling your home for many months, or even years.

The Power of Chapter 13

The way this works is that you and your bankruptcy lawyer put together a monthly payment plan covering the next 3-to-5-years.  This plan goes through a 2-3-month bankruptcy court approval process. The plan would show how you’d make progress towards catching up on your mortgage and other especially important debts. Usually you’d pay general unsecured debts only as much as you can afford to pay them after paying other more important debts. Often these unsecured debts don’t receive much, sometimes nothing.

Your payment plan would likely refer to your intent to sell your home, if that was to happen during the 3-to-5-year period. You’d have to pay your monthly mortgage in the meantime. And usually you’d have that same length of time to catch up on a first or second mortgage. Same thing if you were behind on property taxes or anything else that was a lien on your home’s title. This can often enable you to delay selling your home for years.

What if you couldn’t afford to catch up within even the 3-to-5-year length of a Chapter 13 payment plan? Under some circumstances you wouldn’t have to pay that much. If there is enough equity in the home, you could pay less towards catching up on the mortgage (property taxes, etc.) and just pay the remaining amount out of the proceeds of the intended home sale.

Conclusion

Chapter 13 could enable you to delay selling your home until the time is right for you. If your home has a healthy equity cushion, you could catch up on some or all of the missed mortgage payments (or property tax arrearage or some other home-secured debt) until you sell the home. In the meantime as long as you fulfill the terms of the court-approved payment plan, you wouldn’t have to worry about a pending foreclosure or other collection pressures. Instead you could focus on making the regular monthly mortgage payments and Chapter 13 plan payments. And then sell your home at a time that serves you best. 

 

Bankruptcy Helps Delay Your Home Sale

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When you need a rather quick solution, Chapter 7 can deal with your creditors and buy you time to sell your home, in the right circumstances. 


Our last several blog posts have been about using bankruptcy to either prevent various kinds of liens hitting your home or deal with those liens if they happen. For example, in the last few weeks we’ve addressed, in reverse order:

  • Protecting your  home from homeowners’ association dues and assessment liens
  • Addressing child  and spousal support liens
  • Preventing income tax liens through Chapter 7 and Chapter 13
  • Dealing with already-recorded income tax liens
  • Preventing judgment liens, and removing them if they’ve already attached to your home

So clearly bankruptcy gives you a multitude of tools to help you preserve your home and its equity.

It can do even more. In the midst of dealing with all your debts, bankruptcy can buy you time to sell your home. Let’s show you how, starting with Chapter 7 today, and Chapter 13 next week.

Chapter 7 Advantage—It’s Quick

Chapter 7 “straight bankruptcy” is quick.

Its quickness helps a number of ways. Chapter 7s are less complicated to prepare and almost always cost you less. So, practically speaking, you can usually go from your initial meeting with your bankruptcy lawyer to filing bankruptcy, faster.

This can be crucial in at least two sets of circumstances.

First, you’re up against some kind of debt-collection or possession-losing event that bankruptcy needs to stop. This can be related to your home, such as the start or the beginning of a mortgage foreclosure. Or it can be unrelated, such as a collection lawsuit against you, a paycheck garnishment, or vehicle repossession. You need to quickly file bankruptcy to stop a creditor from hurting you.

Second, you need to prevent some kind of lien from hitting your home. Preventing an income tax lien or judgment lien, for example, can, under some circumstances, mean the difference between not paying the underlying debt at all and paying it in part or in full.

Chapter 7 Advantage—It Focuses on the Present

The other big Chapter 7 advantage is that it focuses on your situation at the moment of filing. This is important as it applies to your assets and income.

Regarding your assets, Chapter 7 fixates—for most purposes—on your assets and their value at the moment of filing. It generally does not care about future assets (again, with rare exceptions).

This can be crucial when dealing a home that’s increasing in value. You may be getting close to having the maximum allowed equity for your applicable homestead exemption. Assume, for example, that your home is worth $250,000, you owe $230,000, and your state has a $25,000 homestead exemption. So you’d currently have $20,000 in equity ($250,000 minus $230,000). That equity amount can go up quickly if your property’s value is increasing, plus you’re paying down your mortgage (and maybe other liens against the home). Next year you may have too much equity to file a Chapter 7 case. Filing now lets you protect your equity now, and then it can grow freely after you’ve gotten your fresh start.

Regarding your income, Chapter 7 fixates—again for most purposes—on your income at the time of your filing. Future income, including increases in income, is generally outside of the reach of your creditors and the Chapter 7 trustee.

Buying Time to Sell Your Home

With all this in mind, how does Chapter 7 buy you time in selling your home?

Consider two scenarios. One, you’re current on your mortgage, and second, you’re far behind.

Buying Time When Current on Your Mortgage

First, assume you are current or close to current on your home’s mortgage. The amount of your equity is less than your homestead exemption amount. You are being battered by creditors, and if you don’t act quickly bad stuff will happen. So you’re tempted to sell your home to reduce your cost of living or to get at its equity. But you either don’t want to sell, or for personal or family reasons you’d rather wait to do so.

A Chapter 7 filing would prevent or stop virtually all lawsuits and garnishments. It could prevent judgment liens and income tax liens and support liens against your home. Judgment liens that are already on your home likely could be removed. Previously recorded income and support liens could be better resolved with your greater cash flow. You’d likely be better able to afford your mortgage and other home-related costs. All that would happen either immediately or within about 4 months after your bankruptcy lawyer filed your Chapter 7 case.

Buying Time When Behind on Your Mortgage

Second, assume instead that you are not current on your mortgage but rather you’re far behind and facing foreclosure. You definitely want to sell your home but you’ve run out of time. You’re about to lose your home to foreclosure.

Chapter 7 buys you some time. Instead of losing your home—and any equity you may have in it—to foreclosure, you stop the foreclosure. You gain a few precious months to either close a pending sale or to make a sale.

Or if you are not that close to foreclosure, filing bankruptcy may improve your monthly cash flow enough so that you and your lawyer can negotiate a “forbearance agreement” with your mortgage lender. This is a payment plan for catching up on the mortgage arrearage (and maybe any late property taxes). Then, anytime either during that payment plan or afterwards, you could sell your home.

You may even be able to work that into the forbearance agreement. You could agree to relatively smaller monthly catch-up payments, and then pay off of the remaining arrearage and the entire mortgage balance from proceeds of the house sale.

 

Protection from Your Homeowners’ Association

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Bankruptcy gives you protection from your homeowners’ association. Chapter 7 may be enough, but Chapter 13 buys much more time.

 

Filing bankruptcy gives you limited, but potentially very useful protection from your homeowners’ association liens and debts. A Chapter 13 “adjustment of debts” filing could especially help.

Your Homeowners’ Association Is a Particularly Dangerous Creditor

Once you fall behind on homeowners’ dues and or assessments, your association gains tremendous power over you and your home.

Unpaid obligations to your homeowner’s association (HOA) immediately create a lien against your home for the amount of the debt. As soon as the debt increases—every month, usually—the lien increases. This is true whether or not you are in bankruptcy. Assuming you want to keep the home, you will have to pay the debt one way or the other.

Also, about 20 states’ laws give HOA liens “super-priority” status over other liens that are attached to the property. This would include priority over even your first mortgage, which could create huge problems for you. As just one example, if your HOA forecloses on its lien that would eliminate the first mortgage lien. At least potentially, none of the value of the home would go towards paying down the mortgage debt. You could owe the full balance of that mortgage debt in spite of no longer owing the property!

Also, you cannot discharge (legally write off) the debt for any HOA dues and assessments that come due after you file bankruptcy. This is true “for as long as [your or your bankruptcy trustee] has a legal, equitable, or possessory ownership interest” in the home. Subsection 523(a)(16) of the U.S. Bankruptcy Code. This means that if you surrender the home and walk away from it but neither the HOA nor your mortgage holder foreclose your interest in the property for a while, you continue to be on the hook for the monthly accruing due, plus any new assessments, and likely other HOA costs like foreclosure and attorney fees.

As we said, your HOAs can be a dangerous creditor. You need all the protection you can get.

What Chapter 7 Can Do For You

Assume you want to keep your home and are not terribly far behind on the HOA dues and/or assessments. Filing a Chapter 7 “straight bankruptcy” case may give you the limited help you need.

In most Chapter 7 cases all or most of your unsecured debts (those without any liens) get permanently discharged. This should significantly help your cash flow. Most of those debts you don’t have to pay as of the day you file your Chapter 7 case. Talk with your bankruptcy lawyer about whether you would have the cash flow to catch up on and maintain your HOA payments once you file bankruptcy. Your lawyer may want to contact the HOA to work out a payment plan in advance.

Remember, once you decide to keep the home you need to be confident that you can afford to do so. That’s because, as explained above, your Chapter 7 case will not discharge any HOA obligations that come due after filing. The last thing you want is new HOA debts accruing on a home you aren’t keeping after all. Decide to keep the home only if you know you can get current and keep current with the HOA.

The Much Greater Protection under Chapter 13

Filing a Chapter 13 “adjustment of debts” gives you much more protection against HOA debts and liens. It’s often the better tool if you’re substantially behind with the HOA and need lots more time to catch up. It may well be the only way to keep your home if you’re behind on both the mortgage(s) and HOA debts.

Chapter 13 involves you and your bankruptcy lawyer putting together a formal 3-to-5-year payment plan. That plan would show how you’d catch up with the HOA within that 3-to-5-year time span.

Same thing with any mortgage arrearage and other special debts. Most ordinary unsecured debts you’d only pay if and to the extent you had money to spare after these more important debts.

From the moment you file your Chapter 13 case and then throughout the payment time span, the HOA would usually not be able to take action against you or your home. It can’t foreclose its lien, or cause other mischief, as long as you’re paying the plan as agreed. Then at the end of your payment plan you’d be current with the HOA.

You’d also be current on or have paid off other important debts (like your mortgage, certain income taxes, and such). To the extent you haven’t fully paid other, ordinary and unsecured debts their remaining balances would get discharged. You should be debt free (except for long-term debt like your home mortgage). And you would have taken care of the dangerous HOA while protecting and keeping your home. Mission accomplished.

 

Avoid a Support Lien through Bankruptcy

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Chapter 7 is very limited in helping avoid a support lien. Chapter 13 is much more powerful, as long as you precisely meet some conditions.

 

Child and Spousal Support Liens

If you fall behind on child or spousal support payments, your ex-spouse can put a lien on your home.  (Most likely a lien can be imposed on your other property, but we’re focusing here on your real estate). The procedures vary state to state, but generally the lien is filed wherever property is recorded. Most often that’s at the local county recorder’s office.

The lien gives legal notice about the support claim against you.  The lien goes onto the title to your house. It gives your ex-spouse power to make you pay when you sell or refinance the house. Sometimes the lien can force the sale of the house in order to pay the support debt. So you want to avoid a support lien whenever possible. Or at least stop its enforcement after it’s been recorded.

Does Bankruptcy Stop the Filing of a Support Lien?

“[A]ny “act to create any lien” is generally stopped by a bankruptcy filing. See Section 362(a)(4) and (5) of the U.S. Bankruptcy Code about the “automatic stay.” The filing of a support lien is an “act to create… [a] lien.” So it appears that bankruptcy might stop a support lien.

However, there’s an exception under that automatic stay statute for the collection of support. Section 362(b)2)(B) of the Bankruptcy Code. If you file a Chapter 7 “straight bankruptcy” case your ex-spouse can continue collecting unpaid and ongoing support against you. This includes filing a support lien on your house, and enforcing that lien as described above. So a Chapter 7 case filing will not stop the filing of a support lien against you and your house. And it won’t stop the enforcement of that lien.

But there’s an exception to this exception. Under the right conditions filing a Chapter 13 “adjustment of debts” case will stop a support lien. Unlike Chapter 7, Chapter 13 can stop a support lien from being filed and recorded. Chapter 13 can also stop a previously recorded lien from being enforced.

That’s because although Chapter 13 does not stop the collection of ongoing support, it does stop collection of past-due support. By its nature a support lien pertains to past-due support. So filing Chapter 13 can stop the filing and recording of a support lien.

The Conditions under Chapter 13

Above we said that Chapter 13 protects you and your home from a support lien under the right conditions. These conditions are arguably sensible. But you must meet them precisely or you’d very likely lose the special benefits of Chapter 13. Your ex-spouse could begin collecting for past-due support, including filing and enforcing a support lien.

The conditions you must meet include:

  • Staying current on your ongoing support payments
  • Arranging to catch up on your past-due support within your 3-to-5-year Chapter 13 payment plan
  • Staying current on your monthly Chapter 13 play payments (through which you’re catching up on your past-due support)

These conditions are arguably sensible because the idea is that you deserve a break on past-due support collection, as long as you are sticking with your legally approved commitment to pay off that past-due support debt. If you don’t keep your commitment, you lose the protection from collection.

Conclusion

If you’re behind on support payments, filing a Chapter 7 case will not stop your ex-spouse (or support enforcement agency) from recording a support lien against your house. Nor will Chapter 7 stop the enforcement of that support lien. But, if you’re not already behind, filing a Chapter 7 case may discharge (write-off) enough other debts so you can stay current on your support obligations.

Chapter 13 will stop the recording of a support lien for past-due support. It will also stop the enforcement of a previously recorded support lien against your house. But you must pay off the entire past due support obligation during your Chapter 13 payment plan. And you must do so precisely as agreed in that plan. Lastly, you must also keep current on any ongoing support obligation. If you do all these, you and your home will be protected from any support lien. Then at the end of your case you will be current on all support. Therefore your ex-spouse/support enforcement agency will no longer have any ability to impose a support lien.

 

What Is the Difference Between a Will and Living Trust in California?

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, BlogYou have several planning tools to consider as you work with your attorney to draft your estate plan. Two of your primary options are a will and living trust. Some choose to use one or the other, while others utilize both. Understanding the difference between a will and living trust in California helps you decide which option best suits you.

What Is a Living Trust in California?

A living trust is an entity you create before you pass away. The trust maintains ownership of the property you transfer into it. You can remain the trustee and maintain control over your assets until you pass, at which point the named replacement trustee takes responsibility for your assets.

With a trust, you can also name a trustee to manage the trust if you become incapacitated. A living trust also provides for the administration of your assets without the need for a supervised conservatorship in the event of your mental incompetency (e.g. stroke or dementia).

Since the trust owns the property, your assets typically do not have to go through probate when you pass away. This process saves your beneficiaries a substantial amount of time and money. It also alleviates stress during a difficult time.

How a Will Differs From a Living Trust

A will is the most well-known estate planning tool. This document can leave instructions regarding your burial and funeral wishes. It can also explain how you want your property to be distributed, and who you want to care for your minor children.

Assets included in a will must go through probate. During probate, the court validates the will and ensures that final debts are paid before allowing beneficiaries to take ownership of assets.

Will vs. Living Trust in California

Each of these options has benefits. Working with our Palm Springs living trust attorney can help you decide whether you want to create a living trust, a will or both. Key differences between a will and living trust in California include:

  • A will allows you to name a guardian for your minor children, while a trust does not.
  • A trust avoids probate, but assets included in a will must go through probate.
  • A will only becomes active after you die, so it does not allow for asset management if you become incapacitated.
  • A trust allows you to space out the delivery of assets to beneficiaries, but a will does not have this capability.

When you choose a living trust lawyer, make sure you choose a firm with a dedicated estate planning attorney. Our Palm Springs living trust attorney can look at your vision for your family and find a way to help you achieve it.

Contact Our Palm Springs Estate Planning Attorney Today

You need a living trust lawyer who can handle your family’s unique needs and goals. Our client testimonials demonstrate our ability to help each client achieve peace of mind with a thorough estate plan.

When you are ready to start planning for your family’s future, contact attorney Robert Firth at the Law Offices of Robert L. Firth. Call us today at (760) 202-5939 or contact us online and we will be in touch with you soon.

Avoid Income Tax Liens with Chapter 13

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Chapter 13 can prevent income tax liens on dischargeable taxes. But the discharge takes years, and you may have to pay part of that tax.  

 

Two weeks ago we showed how the filing of a bankruptcy case stops the recording of an income tax lien.  A bankruptcy filing imposes the “automatic stay.” That law makes it illegal for the IRS or state tax agency to record a tax lien. (See Section 362(a)(4) and (5) of the U.S. Bankruptcy Code forbidding the creating or enforcing of a lien.) That’s true whether your lawyer files a “straight bankruptcy” Chapter 7 case or an “adjustment of debts” Chapter 13 one.

Then last week we showed how this works specifically in a Chapter 7 case. IF the tax meets all of the conditions for discharge (legal write-off), then your Chapter 7 filing would prevent a tax lien, discharge the tax debt, and forever avoid a tax lien on that tax.

But how about in a Chapter 13 case? We know it would also stop an income tax lien recording, but then what would happen? Which would be better, Chapter 7 or 13?

Dischargeable Tax Debts under Chapter 13 

Assume again that the tax debt at issue meets the conditions for discharge. That tax would get discharged at the end of a Chapter 13 case, like in a Chapter 7 case. But there are two big differences.

Discharge of the Tax Debt Takes Much, Much Longer

First, that discharge of the tax debt would not happened within about 4 months as it would in most Chapter 7 cases. Instead it would happen usually 3 to 5 years later, the length of most Chapter 13 cases.  The automatic stay protection usually lasts throughout that time. So the IRS/state could take no tax collection actions in the meantime, including the recording of a tax lien.

But such a long period of time may allow problems to arise preventing the completion of your case. If you don’t successfully complete a Chapter 13 case the discharge doesn’t go into effect. So there is more risk that an otherwise dischargeable tax debt ends up not discharged. If the tax doesn’t get discharged, the IRS/state could record a tax lien as soon as you were no longer in your Chapter 13 case.

You May Have to Pay on that Tax

Second, under Chapter 13 you could pay part of the dischargeable income tax debt during your case. You generally pay some of your debts through a monthly payment plan. This may include some of your dischargeable tax debt. In a Chapter 7 case, in contrast, usually you pay nothing on a dischargeable tax debt.

Whether you would pay anything on such a tax under Chapter 13, and how much, depends on many factors. These factors focus on the nature and amount of your other debts, and on your income and living expenses. Often, you actually don’t pay anything more in a Chapter 13 case if you have a dischargeable tax debt than if you don’t owe that tax. That’s because you often pay a set amount towards all your debts based on what you can afford. Whatever you may pay towards a dischargeable tax would otherwise have just gone towards your other debts. However, in general under Chapter 13 there’s some risk that you’d pay something on a tax debt instead of nothing.  

The Bottom Line

It is worth emphasizing that if you successfully complete your Chapter 13 case, a dischargeable tax will get discharged. So you would no longer owe anything on it. So the IRS/state would not be able to record a tax lien on it, just like under Chapter 7.

How about a Tax that Can’t Be Discharged?

What if the income tax at issue does not meet the conditions for discharge? A Chapter 7 or 13 filing would stop the recording of a tax lien, at least temporarily. But what happens then? Is Chapter 7 or 13 better in this situation for permanently stopping a tax lien? We’ll cover this next week.

 

Avoid Income Tax Liens with Chapter 7

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Chapter 7 can prevent future income tax lien recordings against your home, if the tax is truly dischargeable and you have a no-asset case. 


Last week’s blog post was about filing bankruptcy to prevent the IRS/state from recording income tax liens on your home. The “automatic stay”—bankruptcy’s broad freeze of creditor collection actions—stops tax lien recordings immediately when you file your case. To repeat what we said last week:

Federal law is crystal clear that filing bankruptcy stops and prevents “any act to create, perfect, or enforce any lien” against your property. Section 362(a)(4 and 5) of the U.S. Bankruptcy Code. The IRS and the state tax agencies do not dispute this. They cannot record a tax lien against your home or anything you own once you file bankruptcy.

But how this works is quite different under Chapter 7 “straight bankruptcy” and under Chapter 13 “adjustment of debts.” Today we talk about filing Chapter 7 to stop tax liens, next week about Chapter 13.

The Chapter 7 Advantages

The primary benefit of Chapter 7 is speed. Assume you have a tax debt that meets the qualifications for discharge (legal write-off). (See our earlier blog post titled Bankruptcy Writes Off (Some) Income Taxes.)  Most Chapter 7 cases take 3-4 months from filing to completion. Most Chapter 13 cases take 3-5 years. If you have a tax debt that you are able to discharge, doing so quickly makes lots of sense. Chapter 7 is your likely answer.

Another big benefit: Chapter 7 is much more likely to discharge the tax debt without you having to pay any of it. Most Chapter 7 cases are “no asset” ones. This means that all of your assets are “exempt”—protected from liquidation by the Chapter 7 trustee. This usually means that your “general unsecured” debts would get discharged and be paid nothing. A dischargeable income tax debt is a general unsecured debt. So Chapter 7 would usually discharge the tax debt in full, without paying anything on it. (This assumes that you filed the Chapter 7 case before the IRS/state recorded a tax lien. That recording would turn the tax debt into a secured one, which you very much want to avoid.)

Under Chapter 13, in contrast, there is a significant risk that you would have to pay something on a dischargeable tax debt.  We’ll explain how this works in the next blog post. Avoiding that risk, and discharging the tax in just a few months: these both make Chapter 7 a very tempting option.

The Chapter 7 Disadvantage

The potential downside of Chapter 7 is that the automatic stay protection only lasts a short time. You are protected from the IRS’/state’s power to record a tax lien only during the length of the Chapter 7 case. Section 362(c)(2)(A) of the Bankruptcy Code says that the automatic stay ends when the case is closed. Again, that case closure usually happens only 3 or 4 months after your bankruptcy lawyer files your case.

However, IF the tax debt at issue definitely meets all the qualifying factors for discharge, this is NOT a problem. Once bankruptcy discharges any debt, the creditor may no longer take any collection action on it. Section 524(a)(2) of the Bankruptcy Code make any “act… to collect” a discharged debt illegal. This applies to the IRS and state tax agencies just like any other creditor. So, as long as the tax debt at issue will truly be discharged in your Chapter 7 case, you don’t need to worry about any future tax lien on that discharged debt. Clearly, it’s crucial that you have a competent and conscientious bankruptcy lawyer to determine whether your tax is truly dischargeable. If so, then you can rely on Chapter 7 to prevent the recording of a tax lien, discharge that tax debt, and give you freedom forever from a tax lien on that tax.

 

Six Estate Planning Mistakes to Avoid at All Costs

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Our Inland Empire Estate Planning Lawyer Discusses Costly Mistakes

, BlogThere are many mistakes you could make with your estate plan. We have all seen stories of celebrities who passed away with problematic estates. When Prince died in 2016, he did not leave an estate or will behind. Prince is not the only celebrity to make mistakes with estate planning. As a result, his children did not receive his $200 million estate. Deceased actor Heath Ledger failed to add his then 2-year-old daughter as a beneficiary on his estate plan. 

Easy to avoid, but difficult to fix after you have passed away or become incapacitated by senility or stroke. With the help of a skilled estate planning lawyer, you can avoid some of the following mistakes.

Mistake #1: Dying Without an Estate Plan

This is the biggest estate planning mistake you could make. When you die without a will or trust in place, state law determines how your assets pass to your heirs through a process called probate. Any wishes you had for your estate may not be carried out. Since there is no will in place, the probate court will choose an administrator to oversee the process and your property will be split up and distributed according to a predetermined formula. 

Probate can be time-consuming and stressful, even for relatively small estates. Depending on the circumstances, the probate process can take many months or even years with legal fees, administrator fees, filing fees, appraisal fees, bond premiums, publication fees, etc.  The costs go on and on. 

You should speak with an estate planning attorney to avoid this common mistake. Setting up a living trust, will and powers of attorney can save your family a lot of time and money.

Mistake #2: Failing to Name Beneficiaries or Update Your Estate Plan

Much like in the case of Heath Ledger, you could fail to name certain beneficiaries. These are individuals who receive your assets upon your death or incapacitation. Some people may create a will naming their beneficiaries, but those beneficiaries could pass away themselves. In addition, you could have new potential beneficiaries. You also need to consider whether it is necessary to include new information about certain assets. 

I once had a client who neglected to the change the beneficiary on a life insurance policy to take off his first wife when they were divorced.  Thirty years later, when he passed away, his first wife received the life insurance benefits. The irony was that she was in a nursing home on state aid, and the state got all the money.

You should update your estate plan as needed. Keep in mind, California law governs how estates work. Even simple mistakes could cause major headaches for your loved ones. Fortunately, an estate planning attorney can help you with this process.

Mistake #3: Keeping Digital Assets Out of Your Estate Plan

Many people make this mistake, even individuals who are tech savvy. For instance, when banking heir Matthew Mellon left millions of dollars in cryptocurrency accounts, the money could not be recovered. Unfortunately, no one could access the accounts after he died of a drug overdose. If you have assets in Ripple, Bitcoin and other cryptocurrencies you need to make sure they can be accessed and distributed upon your death or incapacity.

However, there are other types of digital assets to consider. Intellectual property, social media accounts and gaming accounts (like Steam) could be lost forever if you do not plan ahead. An estate planning attorney can help you inventory your digital assets so you can include them in your estate plan. 

Mistake #4: Failing to Set Up Powers of Attorney

You should set up powers of attorney, even if you are in good health. Life can throw some nasty curveballs. If you became incapacitated and unable to make decisions, then powers of attorney could save you and your family a lot of trouble. However, there is more than one power of attorney, each with its own limitations and rules. You should speak with an elder law attorney to determine which power of attorney is most appropriate for your situation. 

Mistake #5: Failing to Properly Fund Your Living Trust

Revocable, or “living trusts”, are a great way to keep your assets from being probated. However, it is important to understand that you must properly fund the trust after its creation. Certain types of assets require paperwork to transfer ownership of the assets to the revocable trust. If you fail to transfer ownership to the trust, then any assets not owned by the trust could go through probate. An estate law attorney can help you with this process. 

Mistake #6: Not Speaking With an Estate Law Attorney

Unfortunately, there are many other mistakes you could make while setting up your estate plan. Our firm has only scratched the surface on this topic. By consulting with an estate planning lawyer, you can avoid some of the most common mistakes, including the ones not mentioned in this blog. Mistakes can be very costly and time-consuming for all parties involved.

About the Law Offices of Robert L. Firth

At the Law Offices of Robert L. Firth, we understand the importance of ensuring that your loved ones are taken care of after you are gone or incapacitated. Inland Empire estate planning lawyer Robert L. Firth can help you establish a lasting and effective estate plan. 

Our firm serves clients in Palm Springs, Palm Desert, Cathedral City, Rancho Mirage, Indio, Indian Wells, Banning, Beaumont, Redlands, Riverside San Bernardino and the surrounding areas. Contact us today at (760) 202-5939 for a consultation. Please bring your driver’s license and Social Security card for your first appointment. 

Prevent Future Income Tax Liens

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Bankruptcy can prevent future income tax lien recordings against your home. The result: paying nothing on the tax vs. paying it in full. 


Income Tax Liens Are Dangerous

Our last two blog posts were about judgment liens. First was about how filing bankruptcy can sometimes remove, or “avoid,” a judgment lien from your home. Second was about preventing a judgment lien from hitting your home’s title in the first place.

Income tax liens have some similarities to judgment liens and some differences. An important difference is that there is no mechanism for removing a tax lien once it hits your home’s title. This is especially bad and impactful if the income tax debt at issue was one that bankruptcy could otherwise have written off (“discharged”) for you. The recording of the tax lien turns a debt that you could have written off and paid nothing on into a debt you usually have to pay in full.

So, as with judgment liens, it’s much better to prevent the recording of a tax lien by filing bankruptcy beforehand. It’s even more important because you can’t get them off your home’s title, under just about any circumstances. You usually have to pay the tax in full, instead of potentially paying nothing.

How Bankruptcy Stops a Tax Lien Recording

How could filing bankruptcy be so powerful that it stops the IRS/state from recording a tax lien on your home?

It’s the law. Federal law is crystal clear that filing bankruptcy stops and prevents “any act to create, perfect, or enforce any lien” against your property. Section 362(a)(4 and 5) of the U.S. Bankruptcy Code. The IRS and the state tax agencies do not dispute this. They cannot record a tax lien against your home or anything you own once you file bankruptcy.

How Long Does This Protection Last?

Under the right circumstances this prevention of a tax lien lasts forever. It’s permanent.

We referred above to income taxes that can be discharged—permanently written off—through bankruptcy. Some can, some can’t. Mostly it depends on how long it’s been since the relevant tax return was due, and was actually submitted. See our earlier blog titled “Bankruptcy Writes Off (Some) Income Taxes.”)

Assume for today that the tax that you’re worried a tax lien will be recorded on qualifies for discharge.

In that case your bankruptcy should in fact discharge that tax debt. So it will be legally gone after your bankruptcy case is finished. With the tax debt gone there is nothing upon which to record a tax lien.

The Huge Difference

Assume, for example, that you owe $10,000 for a couple years of income taxes to the IRS and your state. These taxes qualify for discharge (mostly by being old enough). Your home has a bit of equity but no more than is generally protected by the homestead exemption. Assume the IRS and state have not recorded any tax liens. If you file a consumer bankruptcy (Chapter 7 or Chapter 13) you would very likely no longer owe any of that $10,000 at the completion of your case.

However, now assume the IRS/state record tax liens on that $10,000 in income tax debt before you file bankruptcy. Those liens attach to the equity in your house. Filing bankruptcy does not affect those tax liens. There is no mechanism for removing the tax liens (as there is for qualifying judgment liens). The liens continue to encumber your title and eat into your equity. If you have less than $10,000 in equity the liens encumber your future equity. The IRS/state will almost for sure require you to pay off the lien in order to release it. They’ll get their $10,000 out of you. And they’ll do so simply because they recorded the tax liens before you filed your bankruptcy case.

Chapter 7 vs. Chapter 13

Which of these is better for you if owe income taxes and are trying to stop the recording of a tax lien? We’ll address this in our next blog post (to be posted early next week). If you need to talk with a bankruptcy lawyer before then about this or anything else, please call us.

 

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About

Attorney Robert Firth works with clients throughout the Coachella Valley and all courts throughout Riverside & San Bernardino Counties. We regularly work with clients in Palm Springs, Palm Desert, Indio, La Quinta, Rancho Mirage, Indian Wells, Desert Hot Springs, Yucca Valley, El Centro and Imperial County.

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68910 Adelina Rd.
Cathedral City, CA