Because of this potential blind spot, it is imperative to consider how asset planning moves will affect you in a potential bankruptcy case. This is because transfers of business and personal property are heavily scrutinized by the bankruptcy court, and many moves that look like a good idea to your CPA can actually cause you to lose the benefit of the bankruptcy exemptions, and worse.

Exempt property exists in every state as a means of protecting people with a base amount of property necessary for survival. It is essentially a list of assets and values prescribed under state or federal law which cannot be taken from you by a creditor, whether through a lawsuit or in bankruptcy.

Exempt property in Colorado, where I practice, includes $60,000 of home equity, $5,000 of vehicle equity, and $20,000 of stock in trade. Remember, the equity is the value of the property less the amount owed to secured debt on the property (i.e., mortgage, auto loan, etc.). While the list of Colorado exemptions includes more than these three exemptions, I bring mention these three because they are often overlooked for asset planning purposes.

Home ownership through a Trust

A common asset planning technique is to purchase your home through a trust in order to be able pass it on to your relatives outside of probate when you die. In general, probate is an expensive and time consuming process which people seek to avoid through asset planning.

Unfortunately, most don’t understand the downside of this move when it is made. That downside is that the equity in your home no longer falls under the homestead exemption because it is owned through a trust. While assets in a trust may be secure from your creditors in bankruptcy if the trust is a valid spendthrift trust, such trusts are restrictive and most do not utilize valid spendthrift trusts for purposes of holding real estate. Therefore, this move often prevents you from claiming the $60,000 homestead exemption (which is $90,000 if you are over 60) and exposes your home equity to your creditors.

Cha-ching – you’ve just help fund a banker’s bonus.

Fortunately, ownership of the home through a trust can often be undone prior to filing bankruptcy. However, if you get sued and there is a judgment against you, such a move prior to filing bankruptcy could be viewed as a fraudulent conveyance.

Placing personal assets in your small business

This is an old favorite of CPAs for tax planning purposes. It entails pledging a personal asset such as vehicle to your small business so that you can depreciate the asset against your business income. While the depreciation can often enable you to realize significant tax benefit, it has downside you need to understand.

In the case of pledging a vehicle to your business, this move prevents you from claiming the $5,000 motor vehicle exemption for your vehicle if your business is a legal entity such as an LLC, corporation or partnership. For other assets pledged to a legal entity, this move denies you the $20,000 stock in trade exemption (which may also apply to your vehicle). The trade-off for your tax deduction is often losing the ability to protect the asset against your creditors.

While it may also be possible to undo these moves prior to bankruptcy by distributing the assets back to you, this can be risky and costly. The distribution often carries fresh tax liability which cannot be discharged in bankruptcy.

Furthermore, if such a distribution is made after a creditor gets a judgment against you, it may be viewed as a fraudulent transfer. There is also risk of such a transfer being found to be fraudulent if the business is insolvent when you make the distribution, or if the asset distributed is secured by a corporate debt (ex., line of credit secured by the assets of the business).

Asset planning is an important exercise and one which should look at all of the facets of your financial situation. Unfortunately, many asset planners do not appreciate risk of defaulting on debt when giving advice about asset planning. As the economic events over the last few years have shown, this is a major oversight. When considering moving assets from personal ownership to ownership through a legal entity such as a corporation or trust, you should know that such moves may well expose an otherwise protected asset to your creditors. I suggest seeking the advice of a bankruptcy attorney before making any transfers of property while in debt. While you may not need to file bankruptcy, many firms such as Wink & Wink will perform bankruptcy-smart asset planning at a reasonable cost.

Despite the “recovery” that government officials and anyone involved in the real estate market like to talk about, unemployment and underemployment are persistently high and the housing market is in full on crash mode. This is not to mention wage decreases, which many employers are handing out like candy. This is leading many people to liquidate or borrow against some or all of their retirement account.
If you are feeling this pinch and considering taking money out of your 401K, IRA or whatever form of ERISA qualified (tax deferred) retirement account you may have, my advice is to stop and consider alternatives prior to touching this money. I don’t mean to say that you should never take money from your retirement account, but you should strive to avoid doing it and view it only as a last resort.

RETIREMENT ACCOUNTS ARE EXEMPT IN MOST STATES

In Colorado where I practice as a consumer bankruptcy attorney, any amount you have in a retirement account is exempt. This means your creditors cannot get it if they sue you. It also means you can keep this asset if you decide to file bankruptcy. By taking money out of your retirement account, not only are you taking from your own future, you are essentially opening the door for your creditors to get something they otherwise have no right to get.

If I had a nickel for every time a client tells me they liquidated a retirement account before coming to see me, well – I probably wouldn’t be rich or anything because a nickel isn’t worth what it used to be with inflation and all – but I’d have a piggybank full of nickels!!

That heavy pig wouldn’t make me nearly as happy as I would be if people stopped liquidating retirement accounts to pay debt.

Of course, the exemption laws vary from state to state, and some states limit the exemption to a certain amount in a retirement account. However, these limits are generally quite high. For example, the federal exemptions (which apply in some states and situations) limit IRAs and Roth IRAs to $1,095,000, and have no limits on other tax exempt retirement accounts such as 401K accounts.

WHAT TO DO BEFORE TAPPING YOUR RETIREMENT ACCOUNT

If you are struggling to keep up for whatever reason and considering getting money from your retirement account, I strongly suggest you consider the following options as alternatives to tapping your retirement account.

Stop paying unsecured debt

Credit card bills and medical bills simply rank lowest on the totem poll of who to pay when you are struggling. If you can free up enough money to cover your necessities by simply not making these monthly payments, you absolutely should NOT touch your retirement account! Period. End of Story.

You may have to file bankruptcy to get rid of those debts, but that is a much, much better option than mortgaging your untouchable, and well deserved, future.

Stop paying secured debts and letting these assets go

For many, stopping your monthly credit card payments is not enough to position you to cover the necessities of life. If this is you, you have some tougher decisions to make.

HOMES

I suggest you start by looking at your home. In particular, you should look at how much the house is worth (I suggest you look at the low end of the estimate provided by Zillow) versus how much you owe on it. One of my previous blog articles covers this topic.

Many homes are worth less than the amount owed on them, or underwater. And with the real estate market in a free fall (a recent Bloomberg article reports that home sales fell 27% in July 2010, YIKES!), existing underwater homes are sinking into the abyss while many more are falling below the surface. This means it’s a bad time to own a home.

If the federal government can’t prop up the real estate market with all of its stimulus, what good is your 401K??

If your home is underwater, I suggest you consider letting it go before you go pulling money from your retirement account. This may be the best investment decision of your life, especially when you factor in how long you can stay in the home rent-free while the foreclosure process runs its course. In Colorado, homeowners can often stay in the home for 9 to 12 months or more once they stop making payment.

Again, this decision may ultimately require you to file bankruptcy because your home lender may be able to sue you for the difference between what your home is sold in foreclosure versus what you owe (topic of another previous blog post). But if the alternative is throwing your future into real estate losses, this as a small price to pay to help insure your future.

CARS

Another asset to consider when working to make ends meet is your vehicle. If I had a nickel for every client coming to me with a high car payment (which I consider be over $450 per month) while considering bankruptcy, my piggybank would be bursting at the seams (even if I wouldn’t be rich!).

Of course, finding a more affordable vehicle may be difficult. If you have bad credit, you may not be able to get into another vehicle. And auto repossession can happen quite quickly when you stop making payments.

But, if you’re going to tap into a retirement account to make a high car payment, a better use of the retirement account funds may be a different car. While a vehicle worth $3,000 or $4,000 may not be as cool as your current ride, it is probably a smarter use of your retirement account funds than throwing them into a bottomless pit – which is what a high car payment is when you can’t afford all of your obligations.

WHEN IT MAKES SENSE TO LIQUIDATE A RETIREMENT ACCOUNT

If these alternatives are not available to you, you are in a situation where you can justify an early withdrawal or a loan against your 401K. Everyone’s gotta eat!

But lots and lots of people are making early withdrawals from their retirement accounts who have better financial options. This is because early withdrawals from your retirement account take from your future while also unlocking your money for your creditors. Because of this, early withdrawals from your retirement account or loans against it should be viewed as a last resort only to be visited after stop paying on unsecured debt, let your home go if it is underwater (and live there rent-free until they foreclose on it), and find something cheaper to drive. Such moves will likely require you to file bankruptcy, but will position you to protect your retirement account while also reducing your current expenses. Now that’s what I call a fresh start!

Active service members can take steps to reduce loan obligations, prevent court judgments, and avoid eviction and foreclosure.

A powerful federal law helps active service persons handle their legal affairs and reduce financial obligations while on active duty. Below we discuss the following benefits provided by this law:

* reduced interest rates on existing debts
* special treatment for tenants regarding lease cancellations and evictions, and
* protection from court actions and repossessions.

For employment issues facing servicemembers, see Taking Military Leave.

The Servicemembers’ Civil Relief Act

The Servicemembers’ Civil Relief Act, or SCRA (50 U.S.C. App. § 501 and following), applies to all active duty members of the armed forces, including the activated National Guard, the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA), and the commissioned corps of the Public Health Service.

The SCRA aims to allow military members to serve without suffering financial or legal repercussions at home. In particular, Congress recognized that military pay for many activated reservists would likely be lower than their normal income, making it hard to pay debts.

Reduced Interest Rates on Existing Debts

Under the SCRA, many active duty personnel are entitled to a 6% interest rate cap on debts or financial obligations of any kind (except federally guaranteed student loans).

Conditions to Get the Interest Rate Reduction. To get the reduced rate, you must meet these conditions:

* You took out the loan before you began active duty. For example, a reservist who buys a car in June and goes on active duty the following October is entitled to the reduction. A sailor who secures a car loan while on active duty and then is transferred out of the country does not qualify for the reduction.
* Your military service materially affects your ability to pay the loan at the pre-service interest rate. This usually boils down to showing that you make significantly less money now than before you went on active duty.

How to Get the Rate Reduction. Write a letter to the lender asking that the interest rate on the loan be changed as of the date your active duty began. Include copies of your orders and paychecks, and evidence that you are now making less money than you did prior to active duty.

What Must the Lender Do? The lender must reduce the interest rate on the loan to 6% or less if you’ve provided the correct information. The lender can contest the reduction in court – which it might do if it believes your income reduction doesn’t materially affect your ability to pay the interest on the loan. Until the court rules, however, the interest rate must remain reduced. Once you resume inactive status, the loan will revert to its original rate.

Special Treatment for Tenants

Many active duty members may also be able to terminate lease obligations and avoid eviction.

Cancellation of Residential or Commercial Leases

Tenants who enter active military service after signing a lease or rental agreement have a right to get out of their rental obligations. This is true for both residential and commercial (business) leases. You must mail written notice of your intent to terminate your tenancy, along with a copy of your orders, to the landlord or manager.

* Month-to-month rental agreements. Once the notice is mailed or delivered to the landlord or manager, the tenancy will terminate 30 days after the day that rent is next due. For example, if rent is due on the first of June and you mail a notice on May 28, the tenancy will terminate on July 1. This rule takes precedence over any longer notice periods that might be specified in your rental agreement or by state law. If state law or your agreement provides for shorter notice periods, the shorter notice periods will control.
* Leases. Once the notice is mailed or delivered, the tenancy will terminate 30 days after the day that rent is next due. For example, suppose a tenant signs a one-year lease in April, and rent is due on the first of the month. The tenant enlists or is called up on October 10. If the tenant mails a termination notice on October 10, the lease terminates on December 1, which is 30 days after the first time that rent is due following the mailing of the notice (November 1). This tenant will have no continuing obligation for rent past December 1.

Delaying Eviction for Nonpayment of Rent

The SCRA requires courts to postpone (stay), for up to three months, some residential evictions for nonpayment of rent.

Which tenants are affected? The SCRA applies if your spouse, children, or other dependents occupy the rental unit during a period of military service. (A dependent is someone you’ve supported in the past 180 days, by paying more than half of that person’s living expenses.)

Rental amount. The Act’s protections apply when the rent is $2,400 per month or less. That figure — chosen by Congress in 2003 – is adjusted to account for inflation or cost of living increases.

The effect on an eviction lawsuit. The Act does not prevent a landlord from serving a termination notice for the nonpayment of rent. But a landlord who has filed suit must tell the court that the tenant is an active service person (so be sure to notify your landlord when you are activated). The judge will decide whether the service person’s status in the military materially affects his or her ability to pay the rent. If the judge determines that it does, the judge may stay the eviction for up to three months. If the judge decides otherwise, the lawsuit will continue and may result in an eviction.

Requisitioned Pay

The Secretary of Defense or the Secretary of Transportation may order that part of your pay be allotted to pay the rent.

For more information on tenant issues, see Nolo’s Renter’s Rights Resource Center.

Protection From Court Actions and Repossessions

The SCRA also protects active duty service members from some court judgments and repossessions.

Delay of All Civil Court Actions

The SCRA allows active service persons to ask for a postponement (stay) of many kinds of civil actions in which the service person is a defendant. In addition, when calculating the statute of limitations (the time during which a person must bring a lawsuit, or lose the right to do so), the period of time that the person has been in the military is not counted.

These provisions of the Act have been used most frequently in foreclosure and domestic relations cases.

Foreclosure. No lender, including credit unions, banks, and individuals, may foreclose on, seize, or sell the homes of military personnel during active duty or up to three months after. To be eligible for this protection, you must have taken out the mortgage before you began active duty.

However, a mortgage lender can request permission from the court to foreclose if it thinks that a borrower’s active status has not materially affected his or her ability to pay the loan or appear in court. For example, a newly activated reservist whose income level has not dropped, who has been posted to a nearby city, and who can obtain leave to attend court will probably not qualify for a postponement of a foreclosure.

Divorce proceedings. Active military personnel may ask for a postponement (stay) of divorce proceedings if they can show that their active status makes it impossible to attend the proceedings.

Default Judgments

A default judgment occurs when you are sued and fail to appear in court, and the judge then rules against you in your absence.

Plaintiff must notify the judge that you are on active duty. Under the SCRA, a plaintiff — who brings a lawsuit — who seeks a default judgment against an absent active duty service member must notify the court that the service person is on active duty. If neither the service member nor his or her attorney appears in court, the court may appoint an attorney to represent the service member in his or her absence.

You may be able to reopen the case later. If the court enters a judgment against you during your military service, under certain circumstances you may be able to reopen the case later.

Repossessions

The SCRA prohibits repossessions performed without a court order (such as those done by merchants or “repo” specialists) of goods purchased by installment contract, such as consumer items or cars, as long as the purchase was made before active duty began.

If you are on active duty, the merchant must get a court order before it can repossess an item. Once in court, an active duty service member may apply for a stay of repossession proceedings. The judge will grant the stay if the service person’s ability to pay the debt has been materially affected by entering active service, in the judge’s view.

SCRA: Web Resources

The various branches of the United States military have helpful websites explaining the meaning and application of the Servicemembers’ Civil Relief Act. The following two sites explain the Act’s protections in detail:

* www.jag.navy.mil/documents/SSCRA.htm
* www.military.com

Once you get to military.com, type “SCRA” into the search box. The resulting links give information on the Act as well as financial, educational, and other support services for family of active duty service members.

For a comprehensive discussion of legal issues facing tenants, read Every Tenant’s Legal Guide by Janet Portman and Marcia Stewart (Nolo).

© 2010 Nolo

WHAT CONSTITUTES FRAUD?

Bankruptcy law defines a fraudulent transfer as one which was done within the two years before filing bankruptcy AND was done with intent to hinder, delay or defraud any creditor. Bankruptcy law also yields to State law for fraud. In Colorado, where I practice bankruptcy law, this means they can look back four years on transfers of money or property.

THE TEN BADGES OF FRAUD

Of course, like many legal descriptions, this one begs another question – What does intent to hinder, delay or defraud mean? Well, since people almost never admit to defrauding their creditors, the courts generally look to 10 badges of fraud to determine intent.

While interpretation of these badges can vary, there is precedent which says that more than one may have to exist to establish fraudulent intent. They are:

1.    ‘Special equity’ – if you sell the property out from under a creditor’s interest, such as a security interest, this can be fraud.

2.    Special relationship – if you and the buyer or recipient of your gift are family, friends, or close business associates, you’ve taken a step toward committing fraud.

3.    Maintaining possession – if you had the great idea to sell property to your roommate who will still let you use it, you’ll likely find out this wasn’t such a great idea.

4.    Pattern of ‘sharp’ dealing – if you’ve engaged in a series of moves to keep property away from creditors, your sharp dealing may be deemed not-so-sharp. In this case, more is less.

5.    Transfer made you insolvent – if the transfer or gift leaves you unable to pay your debts, fraud can be found to exist.

6.    Transfer after judgment – if you decide to start getting rid of assets after a creditor sues you and gets a judgment against you, your procrastination can be ruled fraudulent.

7.   Less than fair value – if you decide to give the buyer a sweet deal on your property by selling it for less than it’s worth, well duh!

8.    Concealing transfer – this is the worst thing you can do. Worried about your debt, now you get to worry about criminal charges. Please, please, please – tell the truth.

9.    Use of credit – did you use credit to purchase exempt property? If so, you may have committed fraud.

10.    Total value of assets transferred – bigger is not better when the question is whether you committed fraud.

WHAT IT MEANS?

If a court finds you’ve committed fraud, you’re at the mercy of a judge. In bankruptcy court, the potential consequences of a finding of fraud can be as light as a ruling that a particular debt is not dischargeable to a ruling that none of your debts are dischargeable or that your case is dismissed. In extreme cases, you can even face criminal charges.

WHAT TO DO IF YOU’RE CONSIDERING A POTENTIALLY FRAUDULENT TRANSACTION?

If you’re unable to pay your bills and you have property you’re worried about losing – run, do not walk, to a bankruptcy attorney. I believe the most valuable function of a bankruptcy attorney is to help people keep their property. If the property turns out to be exempt, you can keep the property you’re worried about losing.

Believe it or not, I have encountered a client who fraudulently transferred property (by giving it to his mother) he would have kept through bankruptcy. Don’t let that be you!!

If the property is not exempt and you can’t keep it, you may be able to keep the value by legally selling the property before bankruptcy and putting the proceeds into other, exempt property. As you might imagine, this is risky business and should be done under the advice of counsel.

WHAT TO DO IF YOU’VE ALREADY COMMITTED A POTENTIALLY FRAUDULENT TRANSACTION?

If you’ve already violated one or more of the badges of fraud, my advice is the same. Go chat with an attorney immediately! The determination of fraud is very detailed, and there are often things which can be done to help mitigate any of the damage you’ve done by acting without the advice of a lawyer.

Lots and lots of people throughout history have struggled to pay debts, and lots of them tried tricks to keep their property away from creditors. Whatever ideas you’ve got have been tried before. Courts have seen it and ruled on it. This is an area of expertise amongst bankruptcy lawyers. Whether you have property you are worried about losing or you have already disposed of some property in way which may be deemed fraudulent, the best thing you can do is seek the advice of someone with this expertise. You will likely find you have a surprising amount of options for what you can do.

What is wage garnishment?

A wage garnishment, or wage assignment, is a court ordered process through which your wages or earnings are withheld for payment of a debt to one of your creditors. Basically, it is a way for a creditor to hijack a significant portion of your wages directly from your employer. Even though your sweat earns this money, you don’t see it when garnished, other than as a cruel and crippling deduction on your paystub.

How does a creditor get a wage garnishment?

In order to get the right to yank your wages and cripple you financially, a creditor has to sue you and get a judgment against you. When you receive a summons notifying you that you’ve been sued, the creditor will probably be able to secure a judgment against you within 30 to 60 days if you do nothing. You may be able to extend this time by answering the complaint, and requesting more time. It never hurts to make the creditor prove their case by asking for a copy of the note or a summary of payments and interest charges.

However, these tactics only buy some time (perhaps another 60 days or so). In general, most debtors do not have a good defense to the lawsuit. If you owe the money and the creditor hasn’t waited too long (for many creditors, they can wait 6 years to sue you), then there’s not much you can do to stop a judgment against you for the amount of the debt plus interest plus their attorney’s fees in recovering the debt.

By the way, you should not simply ignore a summons. A recent article in the Star Tribune describes how some judges are issuing warrants for your arrest if you do not show up in court to answer for your debt or fail to make a court ordered payment. While these cases seem extreme, I wouldn’t want to see you spend a night in jail over a debt.

Once a creditor gets a judgment against you, they can get a writ of garnishment from the court. While the judgment gives the creditor a right to seize certain ‘non-exempt’ assets such as cash in a bank account, creditors pursue wage garnishment for many debtors. This is because many people have few, if any, non-exempt assets (which means they would keep all of their property in bankruptcy) and wages represent a stable source of income to draw upon.

Once a writ of wage garnishment is issued by the court, it is then served upon your employer, instructing them to withhold a portion of your paycheck and give it to your creditor. The employer is legally obligated to obey the garnishment order.

From the time of the judgment, creditors often can get the writ of garnishment issued and served to your employer within approximately 60 to 90 days. Therefore, from summons to garnishment generally takes 3 to 4 months if you do nothing (again, be wary of the risk of a warrant mentioned above), and can be extended a couple of months if you make the creditor prove their case.

How much can a creditor take through wage garnishment?

The answer depends on the state you live in and the type of creditor suing you. In Colorado, where I practice as a bankruptcy lawyer, most creditors can generally take 25% of your gross wages until your debt is paid (it is possible for them to take more if you make more than 30 times minimum wage).

The wage garnishment limit in Colorado is also the federal wage garnishment standard, and is law in most states. However, some states such as Texas and North Carolina, severely limit the amount of wages a creditor can garnishment. Not surprisingly, a recent study has found that bankruptcy filings in those states are lower.

In Colorado as in most states, only one creditor can garnish you at a time. If you are being sued by multiple creditors at the same time, they will have to get in line to drink from the wage faucet that comes from your hard work. But, they will get their turn at your wages if they have a judgment against you.

IRS wage garnishment

The IRS often takes more than the 25% wage garnishment limit because there are special federal laws which govern the amount of your wages the IRS can garnish. This amount is determined by a formula calculating the tax owed, the number of dependents you claim and other issues (view tables showing varying IRS garnishment amounts).  Generally, this formula lets the IRS take 30% to 70% of your income. YIKES!

These risk of losing this level of income means your really have to do something about your tax debt. Bankruptcy can help. Certain taxes can be discharged in bankruptcy, while other taxes can be paid over 60 months in a Chapter 13.

Student loan wage garnishment

Many student loan lenders, including the Department of Education and student loan guaranty agencies, have the authority to collect federally financed student loans that are in default through a wage garnishment of 15%. These creditors, which essentially represent the government’s money, are unique because they can get the garnishment without a court order. So, if you’re behind by federally financed student loans, you should know that they can easily get to 15% of your wages.

While Bankruptcy does not get rid of student loans for most people, it can help you wipe out other debts so that you can afford to repay your student loans.

Bankruptcy Ends Wage Garnishments

In summary, if you’re behind on debt payments and you have a job, a lawsuit and wage garnishment is coming your way sooner or later. Your creditors have plenty of time to sue you. There’s an entire industry filled with lawyers who specialize in suing debtors and getting garnishments. They’re good at what they do, and won’t let you slip through the cracks.

While this may seem bleak, you have a big stick of your own – bankruptcy. Bankruptcy can wipe out debts before the creditors have time to sue you. If you’re being sued, bankruptcy can stop the lawsuit. If you’re being garnished, bankruptcy can stop the garnishment. However, the costs of bankruptcy can be a much bigger hurdle at that point.

So, if this is your situation, time is not on your side. I suggest you meet with a bankruptcy attorney immediately. This will give you as much time as possible to collect the funds required to pay your attorney and gather the information required. By acting quickly and decisively to get out of debt, your total cost will likely be limited to attorney’s fees.

It seems so harmless – borrowing from your bank. After all, once you trust an institution enough to hold your money, it’s hard to imagine why you wouldn’t take advantage of at least one of the various credit options they have to offer.

But I’m here to tell you, there’s something about loans from your bank which makes them worse than loans from other banks. It’s called cross collateralization. Try saying it ten times fast.

What does it mean? Well, it means banks can generally take money out of your bank account without your permission to satisfy a loan obligation you owe them. This is known as the bank’s right of setoff.

It may not seem like the kind of tenet to pass on to your children, especially since the vast majority of people who take out a loan never really consider the possibility of default. But think about – say you get laid off, or divorced, or sick, or your car just died, or any number of real life situations happens to you and you become unable to meet your loan payment to your bank. You may think your bank (or even better, your trusted credit union) will work with you. After all, you’ve probably been a customer for years and they seemed so nice when they gave you the loan.

But this is when banks earn their reputation as greedy mother-(insert expletive here)! By the way, your trusted credit union is no different. Just when you need forbearance, they take advantage of their trusted position as your bank to screw you when you most need some help. They take your money directly from your bank account. To make matters worse, the usually accelerate your loan, which means they can take the entire loan balance from your account. For many borrowers, this means they leave you with nothing. And they seem to have knack from taking the money right when you need it most.

Check out this real life story about a couple in Atlanta who took the full brunt of Wells Fargo’s right of setoff. She defaulted on a student loan because she couldn’t find a job and, WHAMMO, they accelerated her loan balance and took all of the money from her bank account – $4,059. Wells Fargo then hit them with $385 in overdraft fees because their outstanding expenditures at the time their account was raided suddenly could not be fulfilled.

Now you can’t make rent, or fix the car, or make your co-pay, or eat, or sleep at night. A bit dramatic? Not if it’s you!

At this point, you might feel the fury of a thousand loyal banking customers. You may decide to do some research. “Can they really do that?” you might say. You might decide to call the Better Business Bureau, or write a letter to your congressman, or talk to an attorney!!!

Let me stop your quixotic mission right there. You cannot win such a fight. First, it is all spelled out in the very fine print of your loan documentation. Second, don’t forget the golden rule – “He who has the gold, makes the rules” – and for purposes of cross-collateralization and the right of setoff, the banks make the rules.

My friend, you don’t stand a chance of redeeming this great wrong perpetrated by your bank. But you can avoid making this same mistake twice. Like the man who learned about yellow snow the hard way, you need just commit a simple principle to memory. DON’T BANK WHERE YOU BORROW.

For if you simply borrow only from banks where you don’t keep your money, you will never have a bank suddenly take money from your account without your permission. This is because cross-collateralization does not exist across different banks. For example, let’s say you miss a credit card loan payment with one of those large banks which nearly brought down our economy (you know the ones), but keep your money at the small local bank. Because you have no money with the large bank, they have no cross-collateralization. They must go through legal proper channels to get anything from you.

Suddenly, the large bank has more motivation to work with you. After all, they’d rather get paid than hire a lawyer. Of course, their willingness to work with you is limited, usually to two or three months. If you can’t start paying during this time, they will hire a lawyer and pursue a judgment against you.

However, absent the right of setoff, the legal process of getting to your bank account now requires getting a judgment and then a writ of garnishment. This is an additional 2-3 months from when the start the process. In case you’re counting, you’ve just bought at least 4 to 6 months by not banking where you borrow (2-3 months of attempts to collect followed by 2 to 3 months of legal proceedings). Furthermore, since you will receive notice of the lawsuit when it begins, you can simply liquidate your bank account and start living on cash at that point.

Of course, if you are in this situation, they will likely seek to garnish your wages (if your state allows wage garnishment as they do in Colorado, where I practice). We cover this little gem in a separate blog post, the bottom of line of which is that you should definitely consult a bankruptcy lawyer to find out your rights. Heck, it doesn’t hurt to consult a bankruptcy attorney as soon as you find yourself missing loan payments.

So there it is – DON’T BANK WHERE YOU BORROW! Say it to yourself over and over, like a mantra. Tell it to your friends. For as God as your witness, you will never be cross-collateralized again!!

Getting rid of personal income tax debt in bankruptcy

Income tax debt can be discharged (or wiped out) in bankruptcy if 5 conditions exist:

1.    The taxes were due at least three years ago: keep in mind the due date is the focus of this requirement. It is normally April 15, but can be a different date if you filed an extension. As of the date of this article (April 5, 2010), income taxes from taxable years 2005 and earlier meet this requirement. In 10 days (after April 15, 2010), income taxes from 2006 will also be included.

2.    The taxes were from a return filed at least two years ago: the focus here is the actual filing date, not the due date. This is one good reason to file your tax return if you haven’t done so already.

3.    The taxes were assessed at least 240 days: this requirement is confusing even to lawyers. Basically, most tax assessments occur when you file a return. However, if you have had an audit or IRS proposed assessment which has become final, that is your assessment date.

4.    The tax return was not fraudulent: This should be no surprise because it is like other fraudulent debt in bankruptcy – you can’t get rid of it!

5.    You are not guilty of tax evasion: similar to fraud, you cannot be guilty of any intentional act of evading the tax laws in order to get rid of them in bankruptcy.

For most people, the first two are the real hurdles. However, all of the requirements must be met in order to get rid of the debt. So, if you think your tax debt satisfies these requirements, you should consult a bankruptcy lawyer to make sure.

I know – encouraging you to see an attorney is a mandatory component of my blog, and is in my best interests as an attorney. But it’s in your best interests too!!

Other taxes

The requirements laid out in numbers 2 (if the taxes require a return), 4, and 5 apply to all taxes. Certain taxes, such as property taxes, excise taxes and customs duties, can be wiped out if they meet these conditions and are old enough (different time requirements for different taxes). If you owe these types of taxes, you should consult a bankruptcy attorney to discuss what timeframes apply to your specific tax liability.

There I go again!

Small business owners – payroll taxes and sales taxes

Any taxes which are to be withheld (such as payroll tax) or collected (such as sales tax) cannot be wiped out in bankruptcy. While these taxes are generally incurred at the corporate level, owners and corporate officers can be personally liable for these taxes.

LET ME RESTATE THAT IMPORTANT POINT – If you are a small business owner, you are very likely going to be personally liable for sales taxes and payroll taxes, and bankruptcy cannot remove your liability for these taxes! These facts mean you should prioritize paying them ahead of all other creditors.

Bankruptcy can help you deal with back taxes even if they cannot be wiped out

If you have taxes which cannot be wiped out in bankruptcy, you should explore all options. While these options include negotiating with the IRS (e.g., offer in compromise, payment plan, uncollectible status, etc.), they also include bankruptcy.

First, bankruptcy can get rid of other debt, enabling you to pay your back taxes.

Second, in Chapter 13 bankruptcy, you can stop interest and penalties on back taxes and pay them down over a three to five year payment plan. While this means paying the taxes, it may be your best option for dealing with them. This is especially true if you have other debts which can be wiped out in bankruptcy because Chapter 13 will let you pay down back taxes prior to paying anything toward debts which can be wiped out in bankruptcy (i.e., credit cards, medical bills, etc.). This often will reduce the amount these other creditors will get , which may be nothing after you pay your taxes.

If you owe the IRS, you should definitely take the time to understand your rights in bankruptcy. You may be able to get rid of the tax debt completely. If not, Chapter 13 bankruptcy can still stop penalties and interest on your back taxes while giving you three to five years to pay, and reducing the amount you have to pay your other creditors.

All in all, this is worth a call to a bankruptcy attorney!

(Press Release – Denver, CO) – Abraham Lincoln and Thomas Jefferson are noted for many things, but bankruptcy usually isn’t one of them. Yet both President Lincoln and President Jefferson were declared bankrupt in their lifetimes. According to historians, Thomas Jefferson is thought to have faced personal bankruptcy several times during his adult life. As more American’s are forced to file bankruptcy today because of our recession, President’s day can remind us that even America’s finest Presidents had financial problems.

Abraham Lincoln and bankruptcy

Abraham Lincoln is often considered the wisest American President. Lincoln guided the United States through a devastating Civil War by relying upon his incredible intelligence, leadership skills, and charisma. However, many years before Lincoln became one of history’s finest Presidents, Lincoln was a failed shop keeper. Lincoln opened a shop in 1832, became bankrupt in 1833, and spent the next 17 years paying off debts from his failed venture.

Thomas Jefferson’s Presidential accomplishments are incredible as well. After authoring the Declaration of Independence, Jefferson became the 3rd U.S. President and consummated the Louisiana Purchase, doubling the size of the United States. What many American’s don’t know, however, is that Jefferson spent most of his adult life in debt.

Historian Herbert Sloan writes “debt occupied an extremely important place in Jefferson’s life,” in his book Principal and Interest: Thomas Jefferson and the Problem of Debt. Sloan found that Jefferson’s personal debt load “was central to his experience from his thirties to his eighties, and this half-century of concern and worry about debt inevitably left its mark on Jefferson.”

During the time of both Jefferson and Lincoln, bankruptcy protection laws in the United States were significantly more onerous than today. While U.S. consumers living in 2010 can file personal bankruptcy to escape crippling debt, Jefferson and Lincoln had no such option. Instead, Lincoln toiled for nearly two decades to pay back creditors, while Jefferson died with more than $100,000 in debt – an incredible sum in the year 1826.

Local Colorado bankruptcy attorney Gailyn Wink says that “Many of the people I work with are amazed to learn that Presidents Lincoln and Jefferson dealt with personal bankruptcy.” Wink adds that “Lincoln and Jefferson weren’t alone. Former U.S. Presidents Ulysses Grant and William McKinley were bankrupt at one point.”

According to Gailyn Wink, bankruptcy has an negative reputation that it really doesn’t deserve. “If Abe Lincoln can deal with bankruptcy and go one to become of our nation’s greatest Presidents, today’s consumers should understand that sometimes bankruptcy is the best way out of a bad situation.” Gailyn’s business partner and husband Michael Wink, who is also a bankruptcy attorney, adds that “Around here, we have an expression. Bankruptcy isn’t a four letter word – debt is.”

If you are a Colorado consumer facing crippling debt, learn more about bankruptcy by contacting Wink & Wink, P.C.

Learn more about Wink & Wink, PC.

Owners of Sole Proprietorships can wipe out business debt while keeping business assets in bankruptcy

Sole proprietorships are not business entities but are essentially part of the business owner. While these businesses do not give their owners limited liability (i.e., if someone sues the business, they are suing the owner personally), they generally give their operators the most options in bankruptcy. This is because the business debts are generally wiped out along with personal debts when the operator files for personal bankruptcy. Additionally, under the Colorado Law (where I practice), the owner can claim up to $20,000 worth of business assets as exempt and keep them through the bankruptcy.

Owners of Business Entities are often NOT able to wipe out business debt and the assets of entity can be lost in bankruptcy

Most business entities, such as LLCs and corporations, offer their owners limited liability (i.e., those wanting to sue the business usually cannot sue the owner personally). However, lenders typically require the owners to sign personally as a condition of extending credit to the entity. For these debts, liability is not limited to the business, but extends to the owner. This situation is very common.

In general, the business owner can wipe out personal liability for the guaranteed business debt by filing personal bankruptcy. However, that debt remains on the business because business entities cannot get debts wiped out in Chapters 7 and 13. Business entities can pursue debt relief in Chapter 11, but that is generally too costly a process for the typical small business.

Additionally, assets of the business entity are NOT exempt under Colorado law. This means that the business owner may lose the assets of the business entity in bankruptcy, or pay to keep them. For these purposes, the value of corporate assets is their sale value minus corporate debt.

I know – it seems crazy that you can keep $20,000 worth of assets as a sole proprietor but not through a business entity. It has its reasoning in the fact the entity provides limited liability to the business owner. OK – you don’t have to like the reasoning, just know the distinction is real.

So, what should the owner of a business entity do if they are in need of debt relief?

Chapter 13 can wipe out personal debt while enabling the business owner to keep the business entity

If the business owner is struggling primarily with personal debt, Chapter 13 can enable the owner to wipe out personal debt while giving him or her time to pay the value of any assets held by the business entity. This is because Chapter 13 will put the business owner in a three to five year payment.

Chapter 7 can also wipe out personal debt, but assets of the business entity may be tougher to keep

Chapter 7 can enable the business owner to wipe out debt without a payment plan. However, the value of assets held by the business entity can be more problematic in Chapter 7 because the business owner will have to forfeit those business assets or pay for them without the benefit of a three to five year payment plan.

Business owners may have to close down business entities with significant debt or assets

If the business has significant debt, personal bankruptcy is likely not enough save the business because personal bankruptcy will not remove the debt from the business entity. Similarly, if the assets of the business entity are too much for the debtor to pay in Chapter 7 or Chapter 13 bankruptcy, the business owner will have to give up the entity either before or during bankruptcy. Business owners should consult an attorney prior to shutting down a business entity in anticipation of filing personal bankruptcy. You may be able to go into business as a sole proprietor.

For business owners in financial distress, personal bankruptcy presents an opportunity to remove debt and gain a fresh start. However, personal bankruptcy cannot remove debt from a business entity and you may not be able to keep assets of the entity in bankruptcy. While these facts may be harsh, facing them may be the only way to get out of a bad financial situation.

Legal Considerations – EQUITY and LEINS

From a legal perspective, you can only keep your car in bankruptcy to the extent your equity in it is exempt under State law. In Colorado, you are allowed $5,000 in vehicle equity, or $10,000 if you are 60 years old or older. The formula to determine equity is: current value of the vehicle LESS the amount you owe on it. If your equity in the vehicle is greater than the exemption limit in your state, you may still want to file. An attorney can probably help you plan to keep the value of the equity in your vehicle while also getting the benefits bankruptcy.

Additionally, if you owe on your car, bankruptcy generally does not remove the lien on your vehicle associated with this debt. This means that you will have to make car payments in order to keep the vehicle through bankruptcy.

However, if your car is currently worth less than you owe on it, bankruptcy may reduce the value of the lien on your car to its fair market value. This can effectively reduce what you owe on the vehicle to its fair market value.

Practical Considerations – AFFORDABILITY

From a practical perspective, you should seriously consider whether you can afford your current car when entering bankruptcy. This is because bankruptcy often represents an opportunity to walk away from a bad car deal with little or no liability. I know this is tough to think about, but you should NOT let your love of a fancy ride keep you from making smart financial decisions.

Of course, you still need a car. So, if you can’t afford your current car deal, you should pursue and consider the following options when preparing to file bankruptcy. These options are:

1)    HOOPTY: Buy a used vehicle with whatever money you can scrape together. Truthfully, this is probably your best financial option, but many don’t want to drive such an inexpensive car. Where I’m from, we used to call these HOOPTIES!!

2)    USED VEHICLE WITH A LOAN: If you have a job, you can probably get a loan even though you are filing bankruptcy. The loan may come after you file or after your discharge, in which case you will need to make payments on your old vehicle or utilize public transportation until you have the new loan. Regardless, you can expect to pay 18% to 21% interest. This is why a less expensive car with no loan is a better deal. Still, if you have a monthly payment you can afford with a high interest rate, you’re better off than you were before.

3)    NEGOTIATE YOUR CURRENT DEAL: Tell your current car lender you plan to file bankruptcy and ask them to reduce your monthly payment to something you can afford. In general, the car companies don’t like these deals, but it’s worth a try.

4)    RIGHTS IN BANKRUPTCY: As I mentioned above, if you owe more on your current car than it is worth, you may be able to effectively get the balance you owe on the vehicle down to its current market value. This may make the vehicle affordable to you.

a.    CHAPTER 7 REDEMPTION: In Chapter 7 bankruptcy, you can do this through your right of ‘redemption’, which enables you to buy the car from the lender for what it’s worth today rather than what you owe. Of course, you need a lump sum to do this, but there are lenders who will loan this money. Unfortunately, these lenders smell blood in the water and usually charge 21% to 24% interest. Because of this, this deal only makes sense if the car is worth substantially less than you owe.

b.    CHAPTER 13 CRAM DOWN: In Chapter 13 bankruptcy, you can reduce the amount of the lien on your car to the amount of its current value without having to take out a new loan IF you have owned the vehicle for at least 2.5 years. This is known as a ‘cram down’ and it can be VERY POWERFUL.

A good bankruptcy lawyer should be able to put you in touch with lenders and help you evaluate these options. First and foremost, the best deal is one that you can afford.

So, you generally keep a car in bankruptcy, but you can’t have too much equity in it and shouldn’t pay too much for it. If you think bankruptcy may make sense for you, I suggest you find out about it with a flexible mindset toward your car. For many, bankruptcy will wipe out tens of thousands of dollars worth of debt. Don’t let your love of that depreciating mode of transportation keep you from making smart financial decisions. Instead, know that bankruptcy will let you have a car of some sort and go for the fresh start!!