I have a confession, I think about budgeting and money a lot. My husband would say too much. Being around people that run into financial problems (not necessarily because of poor budgeting) makes me be that much more focused on money. Running my own business, gets me to think about budgets and money. Running our household makes me think about budgeting. Did I mention that I think about money and budgeting? A lot.

Having a wedding didn’t help my “problem.” We just had a wedding, which in large part I planned. My husband did the obligatory meetings and listened as I complained (night after night about one thing or another), but in all honesty, he was too busy at work to think about and handle all (and I mean ALL) the things that go into planning a wedding. It would seem pretty obvious: spend money on things that matter to you, and save money on things that don’t. Great advice, but in practice you run into things that you should have, like lighting and chairs, even though I can tell you that lighting and chairs have never taken up a lot of real estate in my brain.

So yes, there are things in life that we know are a priority for us (healthy food, gym membership, taking a vacation every year…whatever it may be for you, getting your nails done weekly or seeing the playoffs live…), but there are also things we wouldn’t call our favorite, but things that we need whether we “want” them or not (car insurance). I guess this discussion is taking on a bit of a “white-people problems” tone, which I don’t mean for it to do, but my point is that while we can’t perfectly choose to spend money on only stuff that matters to us, there is still that gray area in the budget (the not fixed stuff), that encompasses a significant chunk of how the money is flowing out every month.

Let’s try to break this down:

1. Housing – does the location matter to you, or is having ample space more of a priority? Do you work from home or do you work long-hours and a commute would cut into your sleeping schedule or the time you get to spend with your family?
2. Food – if you go out to eat, is it for convenience, can you not cook at home? Is going out to eat how you get to keep in touch with friends, etc. so it’s less about the food and more about the social aspect of it. Can you change anything? Do you want to?
3. Car – how much do you use it? What does it say about you? Do you care what it says about you? What about maintenance costs? Do you live somewhere with viable alternatives?
4. Grooming (for the girls) – what do you get done? Are you getting your money’s worth? Have you considered alternatives or doing things yourself?
5. Clothing – do you wear everything you buy? Do you shop because you need something or just to entertain yourself? Has buying new things become a security blanket?
6. Entertainment – again, what are things you really enjoy doing? Do you really appreciate the movie going experience or is it something you do out of habit? Do you meet your friends at places you wouldn’t choose based on your priorities? Do you feel like you can suggest alternatives?

We can obviously go on and everyone’s list will look different, but the question is, are you spending money in a way that is aligned with what you care about and what matters to you? Is your budget getting you closer to where you would like to be in five years? Believe me when I say that I am not a materialistic person. I think of budgeting in a holistic way and with that I do think people would be happier with the money they have and their income/expenses every month, if the spending was more closely aligned with their core priorities/interests/values. It’s obviously (here it comes…) a journey, but I assure you that being conscious about your choices will allow you to make decisions you feel good about, rather than feeling deprived, or worse, feeling like you are on a budget.

What do you think? Are you as obsessed with budgeting as I am?

REASON 1 – YOU WILL PROBABLY BE GETTING MARRIED SOON AND MERGING YOUR FINANCES
You are probably going to get married. And with that comes the oh-so-fun merging of the finances. I can assure you that it is a lot better to be the person saying, “yeah, once upon a time I filed for bankruptcy. I learned a lot. I don’t have any debt now, other than my student loans, and I have managed to save for retirement and put money away for a rainy day since that time. Oh, and because it was a while ago, my credit is pretty great.” You don’t want to be the person saying, “So I have some debt. It’s totally my fault. I was stupid in college. I am working hard to pay it off. I am not putting any money away in savings and a large portion of my check will have to go towards the credit cards. Yeah, I won’t be able to contribute to the house saving budget for a long time. I could have filed for bankruptcy, but it’s against my beliefs. I want to pay it off.” I think you can guess what your spouse to be would rather hear from you. Additionally, while you may qualify for Chapter 7 (the simpler of the bankruptcies) now, you may not qualify once you are married, because of the additional household income. Why wait?

REASON 2 – YOU SHOULD BE PAYING YOUR SELF (LIKE THE RICH PEOPLE)
You are 25 or so. You should be putting money towards retirement. Listening to the news and Suze Orman, you know that Social Security may not be there for you and even if it is, it likely won’t be enough. Starting to put money away when you are in your 20s, versus when you are in your 30s makes a big difference. See this dandy calculator on Suze’s website: http://www.suzeorman.com/dt/RetirementPlan.html . Even if you are paying $150/mo. (and my guess is it’s a lot more), this is money you are not putting into savings and retirement. Even the Rich Dad, Poor Dad guy, says that you should pay yourself first. Struggling to pay off your credit cards is not paying yourself first. Oh yeah, and that guy’s company filed for bankruptcy and he is doing great financially, so bankruptcy is not just for the poor folks and by no means makes you a failure, it makes you pragmatic.

REASON 3 – YOU LIVED AND YOU LEARNED AND NOW YOU WANT TO MOVE ON
You are 25, give or take. You lived and you learned. You should not have to be at a disadvantage because of your “free-slinky” credit card. If you don’t know what I am referring to, then they probably stopped giving out free slinkies as a reward for you opening a new credit card when you are in college. Guess what, everyone likes a free slinky. I got a free slinky. I was still trying to pay for that slinky after graduating law-school. You live and you learn. If you have a bunch of debts you’ve been making no head-way on, it’s time to do something about them. There is no reason why you should have to struggle, not feel safe, not be able to afford health insurance and other basics that you should have, because you made mistakes while walking back to your dorm from class, 8 years ago! It’s time to just admit that it was stupid, but also to just be, here it goes again, pragmatic. You are an adult. You want to start making smart financial decisions, rather than still paying off the slinky. You want to save and you don’t want a large chunk of your pay check going towards those credit cards.

REASON 4 – YOU HAVE STUDENT LOANS
You don’t want to get behind on your student loans. You know that saying that there will always be “death and taxes,” well they should add “student loans” to that. In fact, sometimes older taxes can be discharged in bankruptcy, not so much the student loans. Yes, there are options, but getting behind on your student loans is not good. You should avoid it. You should certainly not be repaying your credit card debt, if it’s making affording your student loans difficult and/or impossible. Trust me on this and anyone who tells you otherwise is wrong, plain and simple.

FINALLY, this article is obviously on the lighter side and I am not proposing that you take the decision to file for bankruptcy lightly, but I am saying it may improve your life and turn out to be a very smart financial move that makes your life easier, and ultimately better and more productive. We can talk more about all the options and whether it makes sense for you at my free, no-obligation consultation.
Please contact me directly with any questions at (310)481-5098.

The Mortgage Debt Relief Act of 2007 was set to expire on December 31 2012; however, it was extended for another year, which is a pretty big deal for people who are facing a foreclosure, short-sale or a deed-in-lieu (of foreclosure). Foregoing other reasons why I think the last 2 options, respectively, are not a great for most people, let’s examine why this is still great for people who are facing the tough circumstances of losing their homes.

Let’s first talk about this Debt Cancellation or Phantom Income and how this would normally be treated. To add insult to injury when a person has debt that he/she cannot pay, sometimes what will happen is that the lender will agree to “cancel” this debt and deem it not-collectible, but then will issue a form 1099-C to the unsuspecting debtor that will make this broke debtor liable for income taxes.

(Note, that this is different from a simple debt write-off, which is an accounting term and merits a different discussion, but let’s just say that the write-off the debt for purpose of bookkeeping, but can still try to attempt to collect this debt. This is usually done with 1099-A.)

When a lender issues a 1099-C form, they are no longer allowed to continue collecting and it is usually a result of a negotiated cancellation of debt.

What in the heck do you mean I’ll be responsible for income when I just lost my house? I certainly made no money off this transaction?

You are absolutely right and it sucks, but that’s not how the IRS will see it.

In a short-sale, you have found a buyer who is willing to pay less than what you owe your lender(s) and if the lender(s) agree to this sale for less money, you will not be liable for the remaining amount of the loan. Example: your house is sold to the new buyer for $300k. You owe the lender $400k. The lender agrees to the sale and agrees not to go after you for the remainder of the balance ($100k). You later get a 1099-C form with $100k indicated as income to you. That’s what I call “Phantom Income.” While you didn’t make any money off this transaction, because $100k was “forgiven,” it is deemed income as far as IRS is concerned. However, because the law has been extended, you will now not have to pay any additional taxes.

So I don’t have to do anything with this 1099-C form issued by the bank, right?

Wrong. You still have to file a Form-982, basically explaining to the IRS why this shouldn’t add to your tax liability. You should contact a qualified CPA to help you complete the tax form properly.
Here is a link to the form: http://www.irs.gov/pub/irs-pdf/f982.pdf.
While the form is not too complicated, it is important to get it right and unless you feel super confident, I would hire someone who can help you do it.

Are there exceptions to this law?

Yes, you may still be liable for debt-forgiveness if the property was an investment property or if the mortgage forgiven exceeds $2,000,000 or $1,000,000 for married couples filing separately.

Note, while this Act only deals with debt forgiveness related to mortgages (debt secured by real property), there is similar phantom income that results when someone settles other debts (credit card, medical, etc.) for less than they owe outside of bankruptcy. However, there is no similar law that applies. One can still use Form 982, however, in that situation to avoid having to pay extra taxes for this “income” the person will have to show that he/she were insolvent at the time of this settlement.

If debts are Discharged in Bankruptcy there is no Phantom Income.

However, if debts are excused in bankruptcy, there will be no phantom income, therefore people who are using bankruptcy instead of a short-sale, deed in lieu, foreclosure or debt settlement to settle their debts, will not have to worry about being liable for this phantom income and additional taxes they weren’t expecting. Sometimes, the lenders will erroneously send Form 1099-C anyway, and in those cases, debtors that went through bankruptcy can just mark 1a on Form 982 and attach it to their returns and that’s it.

See my previous post: http://goreliklaw.com/the-magic-of-form-982-and-cancellation-of-debt-income
Note, however, that someone who chooses to do a short-sale or a deed-in-lieu when this law is no longer applicable, and then files for bankruptcy, the bankruptcy filing after the phantom income was incurred will not protect the person (absent an applicable law, or if this is income for an investment property), therefore tax implication should be considered prior to proceeding with this type of transaction instead of bankruptcy.

While, there still may be an insolvency exception to the transaction outside of bankruptcy, note that to show insolvency to the IRS you will have to count your retirement accounts towards the calculations and as such may not be able to qualify.

Final words of advice, from the above lengthy explanation, you have learned that there is a lot to consider and a competent attorney and/or CPA should be contacted prior to making decisions that could have large tax costs. Feel free to contact my office at (310) 481-5098 to discuss your case.

Should I reaffirm my car loan after I file for bankruptcy in Los Angeles, CA?

If you file for Chapter 7 Bankruptcy and you have a vehicle that you are financing, you will face a decision on whether to reaffirm the car loan.

What happens when you reaffirm your loan? Well, when you file for bankruptcy, the bankruptcy in essence “tears-up” the contract you have for the car loan. As such, if you do nothing, and later decide for whatever reason that you no longer want to honor the contract by paying as agreed, you will not have any additional PERSONAL LIABILITY. Does it mean that you can stop paying and still get to keep the car? NO! The company can repossess the vehicle, after taking the proper steps. What it does mean is that after they repossess the vehicle, if they sell it for less than what you owe (which always happens, go figure), they cannot collect the deficiency amount from you. Without the bankruptcy, if you stopped paying and they repossessed the vehicle, you would be liable for the deficiency.

By signing a Reaffirmation Agreement after you file for Chapter 7 bankruptcy you are losing your free pass to not have PERSONAL LIABILITY under the loan. So why would you sign, if it’s an option. Well, because after the changes in bankruptcy law in 2005 and subsequent case law that came out, it appears that just retaining the vehicle and continuing to pay is no longer an option. Does it mean that if you don’t sign and continue paying, that they will still repossess the car for sure. The answer is it depends. It depends on the lender. It depends on whether you are on time with your payments. It depends on whether there is equity in your vehicle. Ultimately though, I cannot say with 100% certainty that you will get to retain the vehicle by paying regularly, when you don’t sign the Reaffirmation Agreement. Some attorneys disagree and discourage their clients from signing, but I actually had a client who was a little late on her car payments, she DID sign the reaffirmation agreement, and she got her car repossessed. She called me frantically and the first thing they wanted proof of to return the vehicle was proof that she signed her Reaffirmation agreement. Could she have gotten her vehicle back without it? Maybe. Are there State laws there to protect her rights? Yes. But from a practical standpoint, here is what I look at and why more often than not I help my clients complete their Reaffirmation Agreements.

We live in California, more specifically, in LA. Call me snobby, but it is very hard to get around without a car. Most of my clients could not get to their job without a car. They couldn’t pick up their kids from school or look for new jobs. Life without a car would be very difficult for most. Having the car repossessed even for a little while would bring in a lot of stress and additional costs into their lives.

When we talk about Reaffirmation Agreements, we look at several things to determine if they make sense:

1. How much is a car worth and how much they would have left to pay under the Reaffirmation Agreement. If the car is worth SIGNIFICANTLY less and has problems than what they will have to repay under the Agreement, it obviously makes no sense to sign the Agreement.
2. Can Debtor afford the payment? Have they been late a lot, will it create a financial strain in the future? If that’s the case, there is no point in signing an agreement that will cause additional financial strain after the bankruptcy. Better to just take a chance.
3. Can it make sense to get a cheaper car before bankruptcy through financing, and return the one the debtor is currently driving. If that happens, obviously reaffirming the loan on the car to be returned will not make sense. The decision to do that would then have to be made prior to the filing of the bankruptcy, because obtaining financing for a new car that debtor intends to keep will be easier prior to bankruptcy, than during or quickly after. It is not bad faith to obtain new financing right before the bankruptcy as long as you intend to pay the loan as agreed.
4. What are the terms of the Reaffirmation? Some lenders are willing to provide better terms than the original loan, if the client Reaffirms. They also may provide additional perks, like forgiving missed payments, or working with the client in the future if they run into trouble. Something to think about as well.

Making the right decision regarding Reaffirming your car loan is another reason to hire a qualified bankruptcy attorney to help you with your bankruptcy filing. If you have any questions feel free to call me at (310)481-5098 or email at goreliklaw@gmail.com

Image by brizzle born and bred via Flickr.

How much will it cost to file for bankruptcy?

I get that question on the phone a lot. It is perfectly understandable. In fact I am planning a wedding right now and it would be really helpful to know how much it costs for flowers and music and photographer and the rest and very rarely am I able to get the price from the vendor’s website, so trust me when I say that I understand your frustration. It is frustrating and I completely understand that before you waste your time coming in to meet with a bankruptcy attorney in Los Angeles, you want to know if you can even afford it.

However, just like with wedding flowers, my guess is you are not finding prices on the attorney’s website, just like mine. Why? Well, just like the florist will need to know if I want carnations or orchids and whether it’s a small 3 table wedding or if it will be a ballroom for 300, she can’t give a quote until she knows what she is looking at. Similarly, even with a Ch. 7, it is impossible for me to give a quote until I know what your bankruptcy case will entail.

Here is what I can tell you about my bankruptcy fees. They are very reasonable for what you are getting. And I am not just saying that. They really are. From start to finish you are meeting with just me, an experienced attorney. You are NOT meeting with a secretary who handles your case and just gets an attorney to sign off. While I do need your help gathering your documents, I don’t make you fill out lengthy, incomprehensible questionnaires. We sit down and I fill out all the documents for you while interviewing you in my office. I explain the questions and we review your answers together. You are not left wondering if you are doing things properly.

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How can I offer such reasonable fees without compromising quality?

I keep my overhead low. Your fees shouldn’t be going to pay for my fancy office, therefore my office is not fancy. A lot of attorneys have a large staff and cannot afford to charge less. I think it is not optimal for the client and because I prefer to be able to control everything about your case (yes, a little OCD, but kind of a good thing in a lawyer), I don’t have those constraints. Because I don’t have a big office bill and a bunch of salaries to pay every month, I can focus on my clients and provide quality legal services without outrageous legal fees.

Just to give you an insight into how I determine your bankruptcy fee, here are some questions I would ask to determine what the fee will be. Typically, my Chapter 7 legal fee is anywhere from $950 to $2,500. Most people’s chapter 7 legal fees turn out to be around $1,300 plus the filing fee of $306.

So how do I know what the legal fee for bankruptcy will be?

1. I look at your income, and it’s important because if you are over the median additional work will need to be done.
2. I look at the amount of debt, and it’s important because additional work will need to be done if you have a lot of creditors and additional questions may be presented by the Trustee.
3. I look at your assets to review if additional exemption planning may be necessary and that usually costs extra.
4. I look at whether you have a house and a car and what the situation is with those assets as well.

Having answered those questions, I am usually able to give my bankruptcy attorney fee to you pretty quickly and you will not be surprised by additional costs.

Chapter 13 Bankruptcy Lawyer Fee in Los Angeles, CA

For Chapter 13 bankruptcies in Los Angeles you will find a pretty standardized fee structure, just because one is recommended by the Central District of California Bankruptcy Court. While, attorneys are allowed to charge less, because of the extensive amount of work it takes to properly handle a Chapter 13 bankruptcy, most attorneys stick to the fee schedule and here is mine.

Chapter 13 bankruptcy for a person who receives a W-2 and doesn’t own a business, my attorney fee is $4,000 (with 50% paid upfront and the rest through the plan). If the Chapter 13 debtor does not want to strip their second mortgage or they don’t have a second mortgage, my legal fee is generally $3,500 (with 50% paid upfront and the rest through the plan).

For a business owner who wants to file Chapter 13 Bankruptcy in Los Angeles, mylegal fee is $4,500 (with 50% paid upfront and the rest through the plan). There is a higher fee for business owners because there are additional documents that must be prepared.

Be careful of “Bargains” when looking for a Bankruptcy Lawyer in Los Angeles

The old “you get what you pay for” is commonly used, but I don’t agree 100% with that either. Look, I love bargains. I love discounts and I believe that if you are smart and do your research good deals are out there. Having said that, you also have to be reasonable. Bankruptcy is an important legal decision that shouldn’t be taken lightly. You will find all these bankruptcy petition preparers, unlicensed “lawyers” and the like advertising ridiculously low fees and promising the sky. I would not go to a dental assistant to get my root canal (and hopefully neither would you). Similarly, I wouldn’t go to a big fancy place where a scary looking surgeon came in and talked to me for a second, didn’t remember my name or review my file, and then charged a bundle as he hustled me out of the office and had his intern handle the surgery. I would go to someone who knows what they are doing. Who will take the time to listen and who will handle my case from start to finish. Yes, I would go to the equivalent of myself with a medical degree. All joking aside, though, I hope this will be helpful and provide you with some guidance as to what to expect as far as legal fees in bankruptcy in Los Angeles.

If you would like a specific quote for your case, please feel free to call my office at (310) 481-5098.