As a bankruptcy attorney, I try to be an active member of several informational social networking communities, such as Thumbtack and Lawguru. I believe that legal information should be free, so I have no problem with answering questions or providing general legal advice to anyone. I encourage anyone involved in a legal matter to educate themselves on their case.

However, it is important to not rely on general advice to represent yourself. For every rule that can be learned from general advice, there are many exceptions that may apply to your situation. In determining whether an exception applies to your case, it is critical to have a thorough consultation with an experienced attorney.

According to today’s headlines, Lindsay Lohan owes back taxes to the IRS in the amount of $234,000 for the tax years of 2009 and 2010. The IRS has recently went after her bank accounts to obtain some of this money. The IRS does not usually do this unless the debtor has been unable to come up with a satisfactory payment arrangement. The IRS will frequently give debtors a great deal of time to pay it off so long as regular payments are made.

Presumably, Ms. Lohan does not appreciate the inability to use a checking account in her name, so what can she do? The surest way for Ms. Lohan to once again be able to use bank accounts without fear of garnishment is to file a chapter 13 bankruptcy. She would be able to “force” the IRS to accept a payment arrangement to pay off the nondischargeable taxes, and some of those taxes may actually go away without having to pay them (more on that in a prior blog entry). There are a few potential roadblocks to her ability to file a chapter 13. She may have unsecured debts greater than $360,475.00, her assets may inflate the amount necessary to be paid in to an unreasonable degree or she may not have income steady enough to make the necessary payment. Another practical concern is that the time for filing bankruptcy is always when the debtor has financially “leveled out”, or is improving. It is not ideal to file bankruptcy when there are significant problems on the horizon, such as impending attorney fees and reduced income.

Ultimately, as a practical matter, she may be able to pay it all off outside of bankruptcy if she gets a few high-paying endorsement or appearance fees (since she reportedly received $100,000 for simply promoting a product recently, there is some evidence for the notion that she could pay this debt off without bankruptcy). Coming up with a conclusive answer as to Ms. Lohan’s situation would require more information about her income and assets to resolve the issues above.

I know what you’re thinking: “But Matt! How can you pose a question in your title that you don’t answer??!” But the answer is really the same for Ms. Lohan as it is for anyone else: she should have a consultation with an experienced bankruptcy attorney. I do them for free!

posted 12/4/2012

Bankruptcy is not for everyone. Some people are fortunate enough to be in a position to negotiate a settlement arrangement with their creditors.  A person can negotiate directly with the creditors or hire a third party to do it for them. But it is important to realize that debt settlement is a high-risk strategy with an uncertain outcome.  Whether you are in Nebraska or another state, the basics of debt settlement are as follows:

1.  Your payments must be late.  Most large creditors (ie: credit card companies) won’t even discuss settling the debt for less than what you owe unless you have gone at least 90 days without paying anything.  This is a big part of why debt settlement can be so risky. Once you have fallen that far behind, the companies may start charging an absurdly high interest rate, making the debt even more insurmountable than before.

2.  Lump sum settlements will get you the best deal.  If you are in a position of having a large amount in your savings, or are certain to receive a great deal of money in the near future, then you should be able to get a very favorable lump sum settlement. Creditors love to receive money upfront, even if it means they are agreeing to forgoe more money in the future. Creditors will usually give you 30-90 days after an agreement has been reached to provide them with the agreed-upon funds. Depending on the debt and the creditor, it is not unreasonable to assume that you can settle the debt by paying around 60% of what you owe.  I have personally handled matters in which the creditor agreed to 40%, but this is not typical.  Debt buyers are always willing to settle for less than what the original creditor was willing to settle for, but it is important to remember…

3.  There are no guarantees. Even if the debt is “small” and the collector is a debt buyer, this does not mean that you are guaranteed to reach a settlement with the collector. Debt settlement is always a gamble. As an attorney, I am very risk averse when it comes to my clients, so I typically advise against debt settlement.  In most situations, it is simply better to file for bankruptcy protection and get a fresh start.

4.  Expect to pay taxes on your “profit.”  Under federal law, if you settle the debt and the creditor agrees to forgive a portion of the debt, then the creditor must alert the taxing authorities to this forgiveness. Assuming the amount forgiven is high enough, then you will receive a 1099 the next year.  You will be expected to pay taxes on the amount of debt as if you made it as income.   Alternatively, bankruptcy will have no tax consequences.

As you can probably tell, I lean towards bankruptcy as a means to handle insurmountable debt. In most situations, it is a guaranteed way to rid yourself of debt without the spectre of future problems down the road, such as an increased tax burden.

Posted 12/17/2011

If you ask a bankruptcy attorney whether taxes are dischargeable in bankruptcy, they will usually tell you “No*”.  It’s  a good idea to say “no” because the truth is far too messy and littered with unforeseeable problems that could easily derail an attempt to discharge back taxes through bankruptcy and lead to heartache for the clients and the attorney. That said, I will now try to explain the asterisk at the end of the word “no”, but keep in mind that this is for general knowledge purposes only and only applies in Nebraska.  For every factual assertion made below, you should assume there are at least two unmentioned exceptions. Since this is a blog and not a 100 page dissertation, I cannot discuss every single exception or nuance. If you want to know how to deal with your precise situation, then this is no substitute for speaking with an attorney.

If the unsecured tax debt is over 3 years old, and was assessed (ie: “filed by the debtor”)more than two years ago, then it is dischargeable through a Chapter 7 or Chapter 13.  Note that this does not include any tax debt that is secured by a lien on your home or property.  Every tax other than this category is not dischargeable in a chapter 7.

In a chapter 13, “priority” debt must be paid in full over the course of the 3-5 year plan.  Fortunately the penalty fees in a chapter 13 stop. “Priority” tax debt is as follows: if the tax debt is over 3 years old but was assessed within the last 240 days.  If the tax debt is less than 3 years old and filed prior to the chapter 13 filing.  If the tax debt is assessable, but has never been assessed even after the filing of the bankruptcy (and it will likely destroy your chapter 13 once you do get it filed. NOTE:  always get the taxes filed before the bankruptcy!-preferably at least two years prior)

Secured tax debt, such as tax debt secured by a federal lien on your home and personal property, must be paid in full through the chapter 13 plan.

Nonpriority unsecured nondischargeable tax debt did not exist before the BACPA changes in 2005.  If your tax years are over 3 years old, and a return was filed within the last 2 years (but not within the 240 days before you file your bankruptcy petition), then it fits into this unique category.  It has the effect of becoming tax debt that cannot receive payments ahead of your other unsecured creditors in a chapter 13 plan, but will also still exist once your chapter 13 plan is over and you have received your “superdischarge”. And it will also have been accruing late fees and penalties during your chapter 13.  A very nasty type of tax debt that is best avoided and can be avoided with some careful planning.  If this may apply to you, talk to an attorney sooner rather than later.

Please note that the IRS has three years from the time of assessment to assess further taxes.  Also, if fraud has been involved, then we’re dealing with an entirely different set of rules.

Posted 12/7/2011

A frequent question that people have is what will become of their personal property when they file for bankruptcy, in particular, they want to know what will happen to their vehicle.  Every situation is different and will need to be analyzed individually by an attorney, but I can provide a general answer to this question to increase an understanding of how the topic is treated.

First off, it depends on which type of bankruptcy you are filing.  In a Chapter 13, you don’t lose any personal property that you want to keep, provided that you can pay for any non-exempt equity in the vehicle through the life of the Chapter 13 plan.  If that sounds confusing, it’s because Chapter 13s can be very confusing, and you should definitely speak directly to an experienced bankruptcy attorney before coming to any conclusions about your property in a Chapter 13.  Relatively speaking a Chapter 7 bankruptcy is much simpler.

In a Chapter 7, you can keep all of your property so long as it is protected by an exemption.  Although there are many helpful exemptions under Nebraska law, there is no exemption for an automobile.  However, there is a “tool of the trade” exemption in the amount of $2,400 for each individual.  If you use a vehicle to get to or from work, or to search for work, case law dictates that you may use this exemption to protect that amount of equity in your vehicle.  You don’t need to have an hour long commute from Lincoln to Omaha, any reasonable distance will do to take advantage of this exemption.

“Equity” in this case doesn’t exactly mean how much the vehicle is worth, it means how much of the worth of the vehicle that you actually own.  Sometimes people think if they pay off their car and file bankruptcy, then the vehicle will be protected. The opposite is true.  It is far more helpful to still owe money on the vehicle when you file for bankruptcy, because the amount owed reduces your equity.  Additionally, sometimes people think that if they file for bankruptcy on a vehicle that they are still making payments on, then they can keep the vehicle and stop making payments.  This is not the case.

To keep the vehicle, you will need to be current on your loan at the time of filing the bankruptcy and you will need to stay current afterwards. If you miss any payments after filing, then the creditor can seize and resell your vehicle, but the bankruptcy prevents them from suing you for the deficiency.  This assumes that you have not signed a reaffirmation agreement, which I will discuss in a later blog posting.

To illustrate, let’s assume that your vehicle has a resale value of $10,000. You owe your lender $8,000.  If you use this vehicle to get to work, then the “tools of the trade” exemption will protect the vehicle because your equity is under $2,400.  But let’s assume that you don’t use the car to get to and from work.  Let’s assume you only use the vehicle to drive to Husker games. You cannot use the exemption to protect the vehicle, and the Trustee can take an interest in it.  However, this does not necessarily mean that you will lose the vehicle.  You may be able to work out a deal with the Trustee that will permit you to pay the Trustee $2,000 (your equity in the vehicle) over X number of months. But really, if your using the car just for Husker games, it’s a better idea to let it go and start fresh!

Posted 12/2/2011

Since the changes to the bankruptcy laws in 2005, all debtors seeking bankruptcy relief are required to complete two “classes”: a pre-filing class and a post-filing class.  However, these are not long sessions as the names may suggest.  Both classes can be completed online at a minimal cost and in a short period of time.

The pre-filing class usually centers on budget issues and informs debtors of possible alternatives to bankruptcy.  I recommend the class through www.cricketdebt.com, which usually takes about 45 minutes to complete.  At the end, the debtors contact Cricket through a phone call  to review the budget that they have filled out online during the course.

After the debtors have filed their bankruptcy petition, they will need to complete a post-filing course, also known as a debtor education course.  This is more of a “lecture” type class that is done online and can take about two hours.  Most people can have difficulty finding the time to set aside two straight hours for a lecture, which is why it can be completed in half-hour increments.  I recommend the Dave Ramsey lecture through www.accesshope.net.

While these classes may not teach you anything that you haven’t already learned while you sought alternatives to bankruptcy,  they are mandatory for bankruptcy relief in every state, including Nebraska.

Posted 11/23/11

Nebraska allows creditors to garnish wages and bank accounts.  This means, if a creditor knows where you bank or where you work, they can seize your money.   Nearly every creditor must first obtain a judgment against you before they can use garnishment as a remedy.  They do this by serving you with a summons and complaint.  If you do not file a response, or if you file a response and lose your case, then they can receive a judgment.

Nebraska state law does provide protections for debtors from garnishment through the use of exemptions, but these exemptions can only be utilized if the debtor acts quickly following a garnishment.  In terms of exemptions, the most notable is the wage exemption. In a wage garnishment situation, a creditor may only seize 25% of the debtor’s disposable income, unless the debtor is the head of a household, in which case the creditor may only take 15%.  If the debtor makes less than 30 times the federal minimum wage, then no money may be taken.  If the debtor is an independent contractor  then the entire payment can be seized.  This is because the payment is not considered “wages”, therefore the wage exemption does not apply.

The surest way to end a garnishment is to file a chapter 7 or chapter 13 bankruptcy.

Posted 11/16/2011

This is a common question from most potential clients. Frequently, debtors have been trying to find non-bankruptcy solutions to their debt problems for months or years until they reach a point where non-bankruptcy solutions are no longer feasible. This becomes clear to the debtor when the debtor is facing a garnishment, foreclosure, or the loss of property through a writ of execution. At this point, the bankruptcy will need to be filed soon so the debtor has a chance to save their property.

How fast an attorney can file depends on how quickly you can get certain documents together. So long as my clients have the appropriate documentation and an excellent idea of their assets, it is not uncommon for me to get them filed within hours of the initial consultation (although giving me more time is appreciated!). The documents I generally need are: any lawsuit/garnishment paperwork, one bill from every creditor that you owe money to (we can pull your credit report to assist you if necessary), the last two years of tax returns, the last seven months of paystubs, and a basic idea of your assets. Certain situations require more documentation, so it’s important to talk to a bankruptcy attorney long before it becomes an emergency situation so the attorney can appropriately address your situation.

I offer free initial consultations to all my clients, so there’s nothing to lose by learning about your rights long before you find yourself in an emergency situation. Nebraska law does permit you to protect certain property even in garnishment and writ of execution situations. I can advise you of these solutions as well as anything you need to do to prepare for a potential bankruptcy.

Posted 11/7/2011

Sometimes when a person is struggling with debt and considering bankruptcy, their well-intentioned actions can have devastating consequences for their bankruptcy. These consequences can lead to an unnecessary loss of property, a dismissal without discharge of their debts, or even criminal liability. The following are some of the most common and most serious mistakes that a person can make before filing for bankruptcy.

5. PAYING OFF SECURED COLLATERAL
It may seem counter-intuitive, but it is better to still owe money on secured collateral before bankruptcy than owning it outright (particularly in a chapter 7). Frequently people believe that, before filing for bankruptcy protection, if they can pay off a certain secured item, then that item will be “safe”. The opposite is true. If an item is fully paid for, then the equity in that item becomes property in the estate. If that equity exceeds the statutory exemptions, then there is a good chance that it may be seized by the bankruptcy trustee. Owing money on that property keeps your equity low.

4. RECENT USE OF CREDIT CARDS
If you are considering bankruptcy, then it is critical to STOP using credit cards. Using credit cards shortly before filing can prevent that debt from going away on the basis of fraud AND may have criminal consequences.

3. FAILING TO LIST DEBTS
ALL creditors are to be listed on filings with the court. It is not necessary to know the exact amount allegedly owed, but it is crucial to have an address so that the creditor may receive notice of the bankruptcy. The most common consequence of this failure is that the debt will not be discharged.

2. “INSIDER” PAYMENTS
Large payments to a friend or family member before filing bankruptcy can have disastrous consequences. The trustee wants all creditors to be treated on a level playing field, and these types of payments undermine that goal. Therefore, the trustee has the power to avoid these payments by going after the recipient for the amount that they received. While this may not directly affect the debtor, it can lead to issues such as recoupment or, in a chapter 13, the debtor being forced to pay this amount through the life of the plan.

1. KEEPING THINGS FROM YOUR ATTORNEY
Tell EVERYTHING to your attorney. If you think it probably doesn’t matter, tell the attorney anyway. It is better to have said too much than to have left out a crucial detail. So long as you follow this one rule, all the mistakes listed above can still be fixed so long as your attorney is aware of the problem before filing.

posted 7/21/11

If you are underwater on the first mortgage on your home, the other mortgages can be “stripped” in a Chapter 13 bankruptcy. In other words, if you owe more than the home is worth at the time of the bankruptcy filing, then we can use the Chapter 13 process to turn the other mortgages into “unsecured” debt, which is something that you will not have to pay back to keep your home.

posted 5/11/2011