On the surface, my initial consult had a tax problem: years of unpaid income taxes.  The salary was on the upper end of what I usually see.

It was only after we talked at length that the story came out:  the client had a mentally ill child and had drained retirement savings to pay for hospitalization for the child.

The client’s health insurance had a low limit on coverage for mental health;  the only way to pay for treatment was to dip into retirement savings, generating a tax obligation.

The bankruptcy schedules will show tax debt.  The underlying story will show that our health care system can be fatal to your economic health.

The amount of equity a California homeowner can protect from judgment creditors and bankruptcy trustees goes up on January 1, 2010.  A married couple will be able to exempt $100,000; a single person, $75,000; and the elderly or disabled, $175,000.

These increases are a welcome nod to the reality of California home prices: the current exemptions are almost insignificant against the cost of a house in California.

The balance of the California exemptions will change on April 1 in the tri annual adjustment for changes in the cost of living.

Remember, too, that debtors get the benefit of the unwritten exemptions.

Banks and credit unions collected nearly $24 billion last year in overdraft fees, the majority of them overdraft fees on debit cards, according to the Center for Responsible Lending.

Once thought to be a convenient and sale alternative to credit cards, debit cards have been transformed to a bank profit center.  Card holders are unwittingly enrolled in “overdraft protection” plans such that the bank honors a debit card transaction that exceeds the available funds, and slaps on fees for the “service”.

I assure clients planning bankruptcy that debit cards provide much the s ame functionality as credit cards.  Instead, it appears that they are subject to the same issuer gouging as the credit cards the client is surrendering.

The Federal Reserve is proposing new rules that require that bank customers opt in to overdraft protection, but places no limit on the amount of the fees or the frequency with which they are assessed.   Legislation introduced in Congress would further address these abuses.  Let’s hope Congress acts.

A recent case out of Kansas, In re Dana Werts, held that each debtor in a Chapter 13 was entitled to debts within the debt ceilings for Chapter 13 eligibility. Judge  Karlin recognized that a joint case is simply two separate cases administered together.

Previously,  courts have treated a joint case as though it were a single person and required that the debts of the couple be combined to look at Section 109 eligibility.

This is a marvelous decision for Californians where hard times and underwater real estate increasingly find married couples with collective debts in excess of the limits.  I have found myself deconsolidating cases filed jointly when it was determined that the total debt rendered the couple ineligible, if you assume that the 109 limits apply to the sum of the debts.

It then raises the question of exemptions:  if a joint case is really two cases, are not the debtors entitled to two sets of exemptions?

My thanks to my friend Doug Jacobs for pointing me to this case.

The automatic stay is the hallmark of bankruptcy, so when the judge lifts the stay to permit a lender to foreclose, we tend to think the curtain has come down on our client as homeowner.  Well, maybe not, or at least, not yet.

In some cases, the road to foreclosure seems to be a wandering path rather than an expressway.  Case in point:  relief from stay was granted in my client’s case on April 15th.  The notice of default, the first step in the statutory foreclosure process, was not recorded until six months later.

Those six months are months the clients lived payment free in the house.  They continue to try to wend their way through the lender’s loan modification process.  Even if they aren’t successful in getting a modification, it will be at least another 4 months before the lender can hold a foreclosure sale.

This is a recent example that reinforces a story I’ve told before, about the client who moved his family out of their large comfortable home as soon as he saw they could not keep it.  They rented a house, and worked on preparing for a bankruptcy filing.  More than a year later, when we were ready to file, the lender had still not taken the first step in foreclosure.  Twelve months the client paid rent, when he could have stayed where he was, at no cost.

If the headline drew you in, like the Geico gecko, you can complain you’ve been duped:  in bankruptcy, you disclose everything. Period.

My colleague David Leibowitz, himself a bankruptcy trustee writes, about things frequently omitted from bankruptcy schedules., and the possible consequences.

In my experience, the problem is not so much an intention to conceal that leads to omissions of assets, it’s failure to take disclosure seriously.  Clients don’t want to read the questionnaire that prompts them for various kinds of assets they might have.  They don’t commit to thinking about how this question might apply to their situation.  Or they assume because an asset has little market value, it’s excluded from the schedules.  You would not believe the number of clients whose completed questionnaires tell me they have no clothes. Yet I’ve never met with a naked client.

The hardest kind of things for laypeople to “see” as assets are those that are just legal rights, or even, possible legal rights:  the worker’s compensation claim, the claim against the landlord, the participation in a class action.  All of those are assets that need to be listed.

Often a trustee will elect not to administer even non exempt assets, because the effort to pursue them is too great compared to the possible return.  But even if the trustee were to administer the claim for the benefit of creditors, the loss to the debtor is usually far less than the value of the discharge of debts that results in bankruptcy.

The good folks at the Collaborative Law gathering yesterday had the same questions that their clients have:  when is the right time to file bankruptcy?  what happens when you file?  what does it  do to (for?) your life?

Collaborative Law, as I understand it, involves couples in a cooperative effort with a shared set of legal, financial, and mental health professionals to navigate a divorce.  My task was to add the bankruptcy arrow to their quiver.

It was energizing to meet a vibrant, engaged group of professionals all trying to make divorce and the accompanying issues more rational, less expensive, more comprehensive.

I sat in a courtroom last week and watched dozens of  Chapter 13 cases get dismissed, often because the debtor had not taken seriously the requirement that all their tax returns be filed within 45 days of the commencement of the case.

Perhaps I shouldn’t be surprised that  folks who didn’t take filing tax returns seriously in the first place continue to blow it off when bankruptcy is filed.  But filing returns is mandatory and dismissal automatic under the provisions of bankruptcy reform.

What debtors need to understand is that bankruptcy is a benefit and to get the benefit, you need to play by the rules on the timeline created by the Bankruptcy Code.

Usually I’m bewailing the lack of attention with which bankruptcy clients handled the incorporation of an ongoing business.  In variably, the vendor accounts are still in the name of the proprietor, the stock may not have been issued, and it’s unclear whether there was an explicit transfer of the assets to the corporation.

But last week, such inattention promised to pave the way for the stockholder to walk away from a failed corporation, taking the phone number, which was undoubtedly the most valuable assets in the business.

For, you see, they never transferred the phone account of the proprietorship to the corporation. My individual client still owned the phone number and should be able to use that number in a new business started from the ashes of the present corporation!

If the phone number had been transferred, then we would have been faced with tricky questions of how to sell it to the individual before the corporate bankruptcy and how to value the number such that the transfer wasn’t a fraudulent transfer.

Spared that headache by the ineptitude of the incorporating professional. Yipee!

It’s happened again:  there’s an email in Monday morning’s inbox from a client whom I first met weeks ago, who tells me they want to file before Wednesday’s mediation in state court!  I have no creditor information, representation agreement, money, or credit counseling certificate.   Just as inconvenient, I’m not sure I have staff who can drop everything (related to clients who planned ahead and played by our rules) to make this happen.

Clearly I’m not communicating to clients what is involved in getting even a skeleton petition on file.  Lots of clients seem to think that I may be able to file the petition without any involvement on their part beyond providing info and money.  Wrong.

The bankruptcy paperwork is filed with both the client’s signature and my signature.  We are both attesting to the accuracy of the information and the debtor’s eligibility for  bankruptcy relief.

The full filing is even more information intense:  budgets looking forward and backward; recent financial history; intentions with respect to secured debts.  All of it is doable, just not with a snap of the fingers.

Got to go:  got a skeleton to assemble before Wednesday.