Used to be, bankruptcy law was organized to encourage debtors to file Chapter 13 and repay some part of their debts.  Some part of that encouragement came in the form of the Super Discharge:  the ability to discharge debts incurred by bad acts; unfiled tax debt from long past tax years; and unfiled claims in the bankruptcy case.  Most of that departed with BAPCPA.

I’ve adapted.  Chapter 13 became more like the alternative dumping ground if the means test closed off Chapter 7.  Often, the differing allowable deductions on B-22C meant the debtor foreclosed from 7 made minimal payments in 13.

But what galls me these days is the impact of the 9th Circuit BAP decisions of Smith and Martinez which disallow deductions for debt contractually due in the upcoming 60 months on liens to be stripped in the Chapter 13 and for property to be surrendered.  The result is that Chapter 7 becomes more attractive because there, the prevailing case law hews close to the statutory language that allows means test deduction for debts due over the life of a Chapter 13 plan.  What a blow to the sponsors of BAPCPA who were intent on forcing more debtors into Chapter 13 repayment plans.  (This has to be the only time I’ve mourned the thwarting of the intentions of the  BAPCPA proponents.  Remember the line from the Grinch Who Stole Christmas that the Grinch’s heart was just so many sizes too small?)

Very soon after BAPCPA was effective, I argued the Pak case to the BAP concerning whether the statutory look back period in B-22 was conclusive when the debtor’s future income was not only different but larger.  I argued that the law was to be applied the way it was written:  that Congress, in its infinite wisdom (and I tried not to giggle) thought it could write a formula to find the “can pay” debtors and that it intended to cut off judicial discretion to assess the allowance of expenses or the income to be available to fund the plan.  I lost and came away after oral argument with the sense that the judges on the panel wanted the old days back, when their judgment and good sense were the last word.  That was a perfectly fine world, but not the world after enactment of BAPCPA.  (Kagenveama from the 9th Circuit some month later vindicated the argument I made unsuccessfully to the BAP.)

With Smith and Martinez, I again sense that the BAP is chafing at the idiocy found in  BAPCPA.  I chafe too, but I don’t want to see a legal atmosphere where the words of the statute can be ignored if the judges see a way to “get” a debtor or to return to a world where their judgment is valued.  I treasure predictability, and if  BAPCPA gets applied as written(mean though it is), then I’ll figure out how to get my clients the best deal available under the law.  If however we have courts finding interpretations that carry them back to preBAPCPA days, then I feel like the Light Brigade: ” canon to the right of them, canon to the left of them…”  hoping I can ride boldly and well,  into the mouth of hell,…

In the mean time, I’m filing more Chapter 7′s.

Next class in my irregular series on bankruptcy practice skills for rookie bankruptcy lawyers was announced today:  Creditor Claims & Contested Matters.

Two hours on proof of claim basics;  reviewing and objecting to claims; and handling a contested matter in bankruptcy court.

June 17    5-7 at the Computer History Museum in Mountain View.  The usual larger room is being demolished, so seating is even more limited than for the last class.

You can sign up at Law-full.com

Two trends in the housing crisis are intersecting in my practice:  we’re seeing more loan modifications, all the while we see more and more homeowners with whopping negative equity. The question I’m asking each client eager for a modification is “what do you expect for this property five years from now?”

Most loan modifications are simply tacking the arrears to the loan principal and lowering the interest rate for some time.  With a property already worth more than is owed, the arrearage gets capitalized, and the loan principal increases.

When the homeowner owes more than the property is worth, the only way that property can be sold or transfered is by short sale (if the lender agrees) or by foreclosure.  The homeowner is now chained to the property and any disposition of that property in the near future will involve either a protracted negotiation with the lender or a foreclosure and a further hit to the borrower’s credit report.

There are several moving parts in this problem:  how great is the deficit?  for how long will the property be appropriate for the client?  how does the mortgage payment in the modified loan compare to the cost of renting?  Each different combination of factors produces slightly different  analysis.

But the underlying issue remains:  the real property is not really an investment any longer, even with a modified loan.  It is a place to live presumably at a price you can afford today.  When it is no longer affordable or appropriate, you will have a property that is essentially unsaleable in the  conventional manner.

For many clients with loan modifications, we are just kicking the underlying problem down a road a ways.

What is obvious to me is that the

While the federal tax law carved out an exception to the tax on cancellation of debt income when it involved the taxpayer’s home, the state of California did not move to conform its tax law to federal law.  Those who lost their homes to foreclosure faced state taxes on the phantom income.

California conformed its law to the federal treatment of forgiveness of debt income this week.  At least California has moved away from kicking taxpayers when they are now.

Now if someone would enact an effective, balanced approach to mortgage modification that considers principal reduction.  Otherwise, I continue to advise clients to walk away from houses they will never be able to sell for enough to pay the mortgage.

The dollar amounts of California bankruptcy exemptions increased, April 1, 2010.  The updated exemption amounts are ridiculously hard to find online.  How California, home to Silicon Valley, could keep new law so obscure on the internet is hard to understand.

The list of state law exemptions available outside of bankruptcy is found here.

Remember that in bankruptcy, a debtor can elect either the state law exemptions, including the homestead exemption, or the California bankruptcy exemptions found in CCP 703.140.

It’s tax time and questions about foregiveness of debt income seem to abound.

Things to remember:  lenders and debt collectors feel themselves bound to send out a 1099 whenever they handle a transaction that may implicate cancellation of debt.  Receipt of a 1099 is not the final word on the topic, only notice that the transaction in question has been reported to the IRS.

The standard rule is that debt that is cancelled is treated as though you had received that much cash, and that pseudo-cash is treated as income.  The exceptions to recognizing that transaction as income include 1) insolvency at the time, and 2) discharge of the debt in bankruptcy.

You have to file an IRS form to rebut the 1099.  It’s form 982 and right at the top are the boxes to check to invoke the exceptions.

Remember, too, that there is special legislation dealing with cancellation of debt upon loss of a primary residence, excluding phantom income from qualifying transactions.

Here’s the IRS on the subject:  http://www.irs.gov/taxtopics/tc431.html

Clients who want the benefits of bankruptcy without any change or cost to the way they want to live life have been the theme of my practice lately.  This seems to come out when we do a Schedule J budget in a Chapter 13, and they want $300/month in recreation, $1400 in food, and $300 in clothing, figures that stand out in a bad way to a trustee.

A basic premise of Chapter 13 is that you must have money in excess of your on going living expenses to qualify.  Usually, these days, clients are in Chapter 13 because there’s something they must pay: mortgage arrears, priority taxes, or a car or two.  Yet these same debtors don’t see that a reasonable price to pay for time (to pay),  peace (from collectors), and discharge (of all the other debt) is a scaled down style of living.

While I try to explain that change is required, I hear the Victor Herbert song “I Want What I Want When I Want It” playing in my head.  I want to shake them and ask, “don’t you recognize what a marvelous opportunity to redeem your financial life this is?”

I haven’t started a list of the characteristics of clients with this attitude, but I’m going to.  To see it this often suggests either there’s  a client type that sees the world this way, or I’m missing something in my educational spiel.

My post on what to do when you can’t make your Chapter 13 payments on Bankruptcy Law Network, written for consumers,  sparked a couple of responses from my lawyer colleagues there.  Chip Parker observed he needed a refresher on how-to, since hardship discharges hadn’t been see much in the last decade in Florida.

Turns out my other bud, Kent Anderson, had written on the showing necessary for a hardship discharge for Lexis.

The exchange and cross pollination that is available to us as lawyers and consumers via the internet never ceases to energize me.

Be an educated client, but don’t tell me how to do the means test!  For someone who has spent as much time as I have trying to get good bankruptcy information out in the public domain, I found I had a very churlish reaction to a new client who wanted to tell me how his bonus would affect the means test.  What is there about law that makes everyone who is literate think he can read the law, and practice law?

The error this client was making was common:  he assumed that current monthly income was the magic number for an above median income debtor.  He missed the entire part of the “test” that looks at deductions from CMI to reach Monthly Disposable Income.  Who could tell whether the bonus made a difference on the bottom line without calculating the allowances and deductions?

Makes me ask myself, what is it that I want in a client?  How much knowledge should they have?  Do I really want to teach each client how the means test works, or doesn’t work, in order to file their case?  Do I truly prefer the passive, non thinking client?  This business of “medians” is more complex than it appears on its face.

My friend David Leibowitz explores the fears his clients have of bankruptcy on Bankruptcy Law Network.  I encounter clients with the same emotions, fear that life as they know it will end if they file bankruptcy.  Well, at some level, the miserable life of living in debt; sleepless nights;  having no financial  reserves will end.  But their fears are of something more horrible yet, bankruptcy.

Why aren’t they afraid of being penniless in their old age? This seems to me to be a real fear.  Almost every client who’s struggling to repay credit cards, now at 29% interest, is skimping on saving for retirement.  Courtesy of the Great Recession, they have no equity in their homes.  If they have a job, there’s no pension attached.  They have little or nothing set aside to augment Social Security.  Yet fear of bankruptcy keeps them paying on debt they can never repay.

My last post talked about the institutional purveyors of this fear.  I’m on this soapbox and don’t want to step down til I make some headway on this issue.

As one of the Peanuts characters said, “Arghhhhhhh!”