Law Office of Simmons & Purdy

A Message about Bankruptcy 

© By William J. Purdy

Law Office of Simmons & Purdy



Every day I see clients in our office that should consider filing bankruptcy. Some of them should have filed years ago, but they don’t. The reasons they give, and the parade of horrors they’ve built up in their minds about bankruptcy, are the reason for this message. I’m a tax attorney who also has a very good handle on mortgage law. I’m not a bankruptcy attorney, never have been. But I understand a great deal about what bankruptcy can and cannot do.  Whether you decide to file for bankruptcy or not, you need to know the truth. You need to know what a myth is, and what the facts are.

Myth #1: Bankruptcy Destroys Credit for Ten Years

Nope.

It will indeed be on your credit report for up to 10 years. Some say it is there forever because bankruptcies are public records that are not expunged over time. If you know how to look them up, that’s true.

But if you mean your credit rating, the three digit number thing you obsess over? The thing you never even used to look at? Plan on it returning to the 725-750 range after about two years if you’re busy paying your bills every month on time after bankruptcy.

Think about it. It’s pretty tough for your credit score to go any lower after you file. (Post-bankruptcy, FICO says credit scores range from the 500(s) to nearly the 600(s). At that point, every bill you pay on time makes your score go up. Your credit rating plotted over time looks far more like a fetal heartbeat than a gut wrenching roller coaster ride. Your credit rating does NOT drop to zero when you file bankruptcy. 

No…It just ain’t so. It never was true. Still hundreds of thousands of people pay hundreds of millions to “credit specialists” to boost their credit. This is in fact something they can easily do themselves. Pay your bills on time, every time. Buy items on credit and pay them off. (Yes, you can get credit after bankruptcy. You'll probably start getting cards sent to you in the mail after you get your discharge.)

Myth #2: After Bankruptcy I’ll have Nothing

I love this. The truth is bankruptcy is an incredibly powerful debt management and debt restructuring tool. Just ask WAMU, Lehman Brothers, WorldCom, General Motors, Enron and PG&E to name just a very, very few.

There are several types of bankruptcy filings. Each is different. Each can be utilized as a highly specialized tool to achieve very unique and important results.

Corporations often use bankruptcy very strategically. The sharpest corporations know exactly to the day when they will file, and to the day when they will emerge from bankruptcy. They emerge with the appetite of a hibernating Grizzly bear who slept late. Done correctly these companies emerge from bankruptcy financially far stronger than they ever were.

The mistake most consumers make is that they rush into bankruptcy in great haste after pulling a phone number out of the yellow pages. This is a huge mistake.  Haste often results in the consumers’ downfall in this area.

Consumers need to consult with, and plan their filings the same way GM and PG& E did. A well timed and well considered bankruptcy can produce astonishing results for individuals. You should never rush off and file at the last minute. Decisions made in great haste under great pressure are frequently wrong. My sister used to say that, and she was right!

Step one is to avoid “F&F” bankruptcy attorneys. (File and forget attorneys.) Consumers need to seek out skilled bankruptcy specialists who are well versed in what each type of bankruptcy can do for the individual consumer and when to file.

Please don’t dig up the cheapest bankruptcy attorney you can find when there is hundreds of thousands or millions of dollars in debt involved. Picking the low price leader is a uniformly bad idea.  The cost to fix bad bankruptcy work is far higher than getting it right the first time. Besides, some screw-ups absolutely cannot be fixed.

Myth #3: I’ll Lose My Home if I File Bankruptcy

Nope. Not necessarily.

Someone likely to lose their home in bankruptcy is probably equally likely lose it without filing. It just may take longer for the house to ripen into full blown economic gangrene that rots and falls off your balance sheet.

Currently tens of millions of homes are so far underwater that in a Chapter 7 filing, the debtor can opt to retain the house, as long as they continue to make the mortgage payment. But they can often get rid of mountains of other debts, and most importantly they are no longer personally liable to repay the mortgage debts. (The house is still liable for the mortgage debt but they personally are not.) This fact ends up being HUGE especially for tax purposes.

In Chapter 13 debtors may be able strip off no-equity junior mortgages and encumbrances on the house and permanently discharge them for pennieson the dollar. (I’ll talk more about this below.)

In a Chapter 11 debtors may be able to cram down their rental property mortgages to the current fair market value of the property, AND KEEP their no equity home in the bargain.

The United States Government and the lending industry actually caused the massive underwater mortgage problem, destroying the lives, savings and homes of millions of Americans.  The government’s policies and the unchecked lawlessness of the lending industry, actually made these problems get much worse. I believe homeowners should make lemonade from these lemons whenever possible.

Myth #4: I Owe Income Taxes So Bankruptcy Is Useless

I hate it when I hear this. Bankruptcy is one of the only ways to permanently get rid of income taxes. We’re living in an era when the IRS, in the Bay Area, will not settle your tax debt unless you are unemployed, on kidney dialysis, and on a heart-lung machine. You can often pay your taxes off over time. What they don’t tell you is that each payment is applied FIRST to penalties and interest and last to taxes. You get to pay more for much, much longer. Nice huh?

Income taxes are dischargeable in bankruptcy if they meet certain tests. There is a Three Year Rule, a Two Year Rule, and a 240 Day Rule. These three special time periods have to run out. There are complex rules for figuring out if they have run, and certain things the taxpayer may have done can keep these time periods from running out.

“F&F” attorneys don’t have a clue about any of this. That’s why you need a specialist who knows what they CAN do in bankruptcy, how to do it and most importantly when. By the way, the same rules apply to the California Franchise Tax Board as well. In my opinion the entire Offer-in Compromise section of the California Franchise Tax Board is a sham. They collect the information and force every applicant onto a payment plan.

Myth #5: I Owe California Sales Taxes

So Bankruptcy Is Useless    

See the misconception immediately above. Not true.

With certain exceptions, the identical general set of discharge-ability rules applies to liability for California sales taxes. The State Board has admitted this in writing while commenting on a proposed piece of legislation. (Oops…)

See Staff Legislative Analysis 2008 for a proposed bill that would stop the accrual of interest on unpaid sales and use taxes for a small business during the pendency of a Chapter 7 Bankruptcy proceeding. Proposed Section 6593.7 for of the Revenue and Taxation Code.)

Myth #6: With My Income, I Will be forced to File a

Chapter 13 and Pay All the Debt in Full

Please see a solid bankruptcy specialist before concluding this is true. It is true that there is now a Means Test for deciding whether or not Chapter 7 is available.

But it takes a damn good bankruptcy specialist to model what will happen. Depending on what you want to achieve, a Chapter 13 might actually be preferable.

Many Chapter 13 plans pay little or nothing to unsecured creditors.  It may be termed a repayment plan, but that doesn’t mean creditors necessarily get anything.

Myth #7: I Owe Too Much to File Any Bankruptcy

Nope. That’s like being too good looking.

It is not how much you owe. Just ask General Motors.

It is how much money and or property you have that is not subject to any debts. Where you have lots of money or other property which can be liquidated to pay your debts, filing bankruptcy may not be useful because you end up paying all the debts in bankruptcy. Or most of them.

It’s not the amount of debt, except in Chapter 13. There is NO debt limit in Chapter 7 and none in a Chapter 11 proceeding.

Wise up. Exorcise these bankruptcy boogeymen from your minds. Good legal advice from an experienced bankruptcy lawyer may set you free.     

A Message About Lien or Equity Stripping

It’s astonishing that many of you reading this are still in your homes. Many of you have barely held on to your  home against the relentless onslaught of deliberately deceptive neg-am mortgages, mail fraud, wire fraud, conspiracy, forgery, and perjury committed by the financial industry. All of which has gone completely unpunished.

The lending industry has been committing serious felonies that the federal courts, the United States Attorneys and of course the FBI, can’t do enough to ignore. Meanwhile these crimes continue to be uncovered daily by civil attorneys fighting desperately, house by house, to save the homes of individual homeowners. Don’t waste your time with your congressperson or senator. They don’t care. They never did. As long as you return them to office, they will do what they have done so far for you. Nothing.

The Miracle You Can Perform

There may be a hidden miracle under your feet. There are fewer of them now. It’s the miracle of the disappearing value of the real estate you call “home”. It may be time for you to make lemonade from your biggest lemon.

That “underwater” lemon that is your house could be your own personal financial savior. That is, if salvation consists of keeping your home.

If you want to give the holder of your second and third mortgage that taste of cold steel many of them so richly deserve, now may be the time.

Enter Chapter 13 Bankruptcy

With lenders engaged in a cruel, corrupt and one-sided game of loan-modification-water-torture, there is a way for many homeowners to level the playing field. It’s known as a Chapter 13 Bankruptcy strip-off AKA lien or equity stripping. For many homeowners it’s now time to quote chapter and verse from the Federal Bankruptcy Code.

The time to do it is now. Before a Congress, completely co-opted by the financial industry, does the bidding of its paymasters and removes this tool from the pathetically tiny toolbox of homeowner rights.

Stripping Off Your Second Mortgage in Bankruptcy

In the 9^th Circuit of the federal court system, which sadly includes California, federal district and appellate court judges generally despise distressed homeowners. They’ve made no secret of their hatred of homeowners. The body of decisions emanating from this group reads like and ode to the sanctity of any and all things that will satisfy the lending industry’s every whim. This doctrine is called corporate deification. All federal district court judges in the 9^th Circuit ardently believe in the doctrine. It means simply that these judges absolutely believe financial institutions cannot be corrupt or act in an organized illegal fashion. These judges firmly believe banks ARE the country. You and I are an expendable resource.

Standing defiantly separate from that not so august cabal, are the U.S. Bankruptcy Court’s decisions and the judges of the US Bankruptcy courts. In particular Zimmer, 313 F.3d 1220 and Lam, 211 B.R. 36 (9th Cir.BAP (Cal.). Together these cases establish a potentially massive source of relief for beleaguered homeowners in Chapter 13 by utilizing a simple formula:

If the value of your home is less than the amount of your first mortgage, and you have a second, third or more mortgages on your home, those junior mortgages can be reclassified as an unsecured debt and treated essentially like credit card charges.

The junior mortgages can be discharged and “stripped off” in a Chapter 13 Bankruptcy proceeding for pennies on the dollar over the period of the repayment plan. ALL OF THEM!

There is no way out of this for the junior lenders and no immediate adverse debt relief tax for the debtor due to the bankruptcy exception provided in Internal Revenue Code Section 108. For once, the lenders have to do something they’ve been making California homeowners do for the last 8 years:

They gotta stand there and take it.

It breaks my heart to see the incalculable damage inflicted wilfully and freely on the middle class of which I am a member. The mortgage fraud debacle has affected every single person I know. The sad part is that many of my friends don’t realize what has caused their businesses to decline, or the loss of their jobs. They think it was some random bolt of lightning. The practices of the lending industry destroyed the entire economy of the United States and ultimately rocked the world financial system.

I know what each of you reading this has gone through. I’ve heard thousands of stories from clients and victims. Thousands! There are solutions for almost all of the abuses occurring today. You don’t have to become my client to utilize them.

Just please don’t become another victim.