A blog about debt, credit and bankruptcy

May 14, 2021 By Jen Lee

Financial Wellness: The Forgotten Wellness Topic

I recently wrote an article for the Contra Costa Lawyer on attorneys and financial wellness. Much of the article applies to non-attorneys as well and are thoughts that we come across every day in our law practice.

Most people do not want to talk about their finances. No one wants to admit their finances are not their strong point or that they may need help figuring out. After all, no one else has these problems, right?

Wrong.

This idea that no one else has the same problems is why we have an elephant (Bernadebt!) as our team mascot. The elephant in the room is that way more people are struggling with financial stress than we realize. The other thing we see a lot is this worry about what others will think. Trust us, no one else is paying attention to your financial problems because they are so worried about their own and what YOU will think of theirs!

This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.

February 2, 2021 By Jen Lee

Annual 1099-C Don’t Freak Out Reminder!

Annual 1099-C Don’t Freak Out Reminder!

Every year, we get panicked emails, phone calls, carrier pigeon messages from clients who filed for bankruptcy and then received a 1099-C in February when tax forms start coming out. Don’t panic. Here are the thoughts that are running through your head:

What’s a 1099-C?

A 1099-C is issued when a creditor cancels or forgives debt. For example, if you settle an account by paying $1,000 and the creditor cancels $5,000, then you will receive a 1099-C to pay income on the canceled debt of $5,000.

Wait, what?? I have to pay income taxes on debt that is canceled?

No, a 1099-C does not automatically mean that you owe taxes. It means that you need to determine if you are required to pay income taxes or if there is an exception that you qualify for to exclude the amount from your income. Don’t panic yet.

Ok, so what are these magical exceptions? And why are you telling me not to panic?

First, if you filed for bankruptcy, you do not owe income taxes on debt that is canceled in bankruptcy. That is one of the benefits of bankruptcy over other debt resolution options and one that should be explained to you by anyone talking about your debt options.

Second, even if you did not file for bankruptcy, there is still the possibility that you can show that you are insolvent to exclude some or all of the canceled debt.

There are a few other exceptions, but these are the two that mostly apply to settled accounts and bankruptcy.

Ok, I’m calm now. How do I let the IRS know that I fall into one of these exceptions?

There is a magical IRS form out called Form 982. On this form, you can let the IRS know which exception applies to your situation. There is some math involved, depending on the exception, so we recommend you speak with your tax preparer about how to fill out the form.

Bottom-line: Don’t panic. Getting a 1099-C is just a notification from a creditor that debt has been canceled. If you don’t deal with it, then it becomes a problem. However, dealing with it can save you a lot of headaches in the future.

January 6, 2021 By Jen Lee

A Lesson in Internet Headlines

Yesterday (January 5, 2021), news websites reported the following two headlines:

PANDEMIC SPURS MOST BANKRUPTCY FILINGS SINCE 2009
The sky is falling, the sky is falling!

BANKRUPTCY FILINGS HIT 35-YEAR LOW THANKS TO GOVERNMENT PANDEMIC AID

Wait, what? I thought the sky was falling.

How can both of these headlines be true? Because the reporters cherry-picked statistics to make the most sensational headlines. As far as business bankruptcies go, it’s true that bankruptcy filings were way up in 2020. However, consumer bankruptcy cases were way down in 2020. So, it was the best of times, it was the worst of times.

To explain, businesses struggled with shutdowns and lack of funding to pay leases, payrolls, and expenses with no revenue. Many businesses have held off filing for bankruptcy to see what a recovery may look like before jumping into bankruptcy, but many were not able to hold off, which resulted in high business filings compared to recent years.

However, consumers and individuals are currently struggling with how to predict the future. It did not make sense in 2020 for most people to file bankruptcy without knowing what debt and income looks like going forward. Also, the pandemic unemployment helped many people stay current on bills. Finally, the eviction and foreclosure moratoriums, along with court closures, have made it less urgent to file immediately to stop those proceedings.

So, take your headlines with a big grain of salt these days. It also helps to remember that you are not alone in facing difficulties. Get advice for your specific situation and use the tools that are available to you.

October 29, 2020 By Leo Spanos

When Should I Consult an Attorney about my Debts?

Living on credit is a day-to-day reality for millions of Americans.

Consumer debt in the United States totals $14.1 trillion — that’s $14,100,000, 000,000 – with the average person owing over $90,000 (according to Experian’s 2019 Consumer Debt Study). This includes credit cards, consumer loans, secured loans on personal property (electronics, furniture, jewelry, etc.), car loans, mortgages, and student loans. Given that many people are living paycheck-to-paycheck and the job insecurity caused by the global pandemic, it may be reasonable to consult an attorney about financial stress and debt management options. This may be the case even if you have a six figure income and have never missed a payment; it is better to consult an attorney early (and know your options) than to wait until your back is against the wall.

But when is that point? Factors to consider, regardless of income, are –

Are you making minimum monthly payments?
Are most of your debts credits cards with high interest rates?
How much do you owe in relation to your monthly income?
Are you behind on your mortgage or rent?
Do you have debts in collection?
Do you have money left over to save for retirement?
Are you on installment plans for medical bills or tax debt?

You might improve your situation through stricter budgeting, debt consolidation, or negotiating settlements with your creditors. This is not always feasible depending on the size of the debts, the interest rates, and income. If you are making the minimum monthly payments on high interest credit cards with large balances and are not saving for retirement, bankruptcy might be your best option. For non-business debts, there are two types of bankruptcy, Chapter 7 liquidation and Chapter 13 reorganization. The main difference is whether you are trying to protect assets (e.g., house, car, etc.) from creditor repossession/foreclosure or you just want to get rid of your debts and get a “fresh start.” Your credit score is likely to increase after a bankruptcy because you are less of a risk to potential lenders. You can also qualify for a mortgage within 12 months of a bankruptcy. An experienced attorney can evaluate your situation and tailor a strategy to meet your needs.

September 22, 2020 By Leo Spanos

New Homestead Exemption Will Have Significant Impact On Bankruptcy Practice In California

With the stroke of a pen, California’s homestead exemption — the amount of equity in one’s primary residence that can be protected from creditors — increased from $75,000, $100,000, or $175,000 (depending on the circumstances) to the greater of $300,000 or “the countywide median sale price of a single family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption,” up to $600,000. Put simply, the exemption increases from up to $175,000 to $600,000, depending on the county. This represents a sea change and will help thousands of homeowners in need of bankruptcy relief avoid having their homes sold by a trustee and used to pay creditors. Governor Gavin Newsom signed Assembly Bill 1885 into law on September 15, 2020.

Countywide statistics on sales can be found on www.zillow.com. Counties with median sale prices over $600,000 include Los Angeles County, San Diego County, San Francisco County, Orange County, Contra Costa County, and Alameda County.

In a Chapter 7 liquidation, a trustee will be appointed and sell any assets with equity exceeding statewide exemptions. Most peoples’ main asset is their house. Prior to the law, if you had debts totaling $100,000 but equity of $500,000 the trustee would sell your house and pay your creditors. This would leave you $400,000 (minus bankruptcy fees and costs) to find new housing. Given California’s real estate market, this would be a tough task. (Why would you file for bankruptcy in this situation? Maybe your wages were being garnished or you were being sued or facing foreclosure.) If you want to keep your home, a better option would be a Chapter 13 reorganization. You would be required, however, to commit to a 3-5 year plan under the supervision of a Chapter 13 trustee and the Bankruptcy Court. About half of Chapter 13 plans are not successfully completed.

Using the above example, the new law allows you to discharge, i.e., cancel, the $100,000 in debt and still keep your house in a Chapter 7 bankruptcy. Since your equity was below $600,000, it can’t be touched by a trustee. If you do not qualify for a Chapter 7 or a Chapter 13 better suits your needs (e.g., behind on your mortgage and facing foreclosure or recent tax debts), you could still likely discharge the majority of your debts – subject to other limitations — under a plan of reorganization because your equity would be protected from creditors.

Given that many Californians are in financial distress despite having significant equity, the new law – which takes effect January 1, 2021– offers much needed relief. If you have questions regarding this or other legal matters, you should consult an experienced attorney who can evaluate your particular situation and provide individualized guidance.

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