Author Archives: Ryan C. Wood

About Ryan C. Wood

Ryan C. Wood is a California attorney practicing primarily in the areas of Bankruptcy Law, Business Law and generally seeking justice for under represented clients in the Bay Area.

Cars, Credit and Bad Car Loans

By Ryan C. Wood

A concern young people should have is establishing credit. How do you obtain credit? How do you build up your credit? Credit is a vicious cycle. In order to have good credit you need to have start getting a credit history in the first place. But a lot of lenders and creditors will not lend to you if you do not have any credit. In fact, no credit history is worse than having bad credit. How do you get around that?

Young people and other people trying to get their credit off the ground can use one of the most helpful ways of kick starting their credit score: the co-signer. If you do not have any credit and you want to buy a car you will either have to pay a high interest rate or the car lender may even deny you credit. But if you have a co-signer that has decent to great credit your interest rate may be significantly reduced depending on your co-signer’s credit score and history. The co-signer more or less is vouching for you. The co-signer is essentially saying that if you cannot pay for the loan the creditor may go after them to get the loan repaid. You need to be able to find someone that believes in you and trusts that you will be able to pay the debt back or their credit could be negatively impacted. So long as you continue to make those car payments on time your credit will slowly build. You will not have great credit overnight. Credit takes a long time to build and takes a lot of patience and good financial decisions to reach its height. Co-signers beware, you are taking a risk and need to understand that you could be on the hook for the co-signed loan.

What happens if you took a wrong turn and made some bad financial decisions? Say for example you go crazy with your credit cards and you do not have the money to pay it back? Or you were unable to get a co-signer on your car and had to pay over 20% interest for a car that is not worth the amount you paid? The good news is that it is not the end of the world. People make mistakes all the time. You can always start over. One of the biggest tools that can help you get that fresh start is bankruptcy. You should not be thinking of bankruptcy in the same vein of thinking about getting started on improving your credit. Bankruptcy should only be used if you made some mistakes that you cannot get out from under.

If you are considering bankruptcy due to your financial circumstances there are some advantages. If you were unable to get a co-signer for that car and ended up paying a high interest rate bankruptcy can help you. If your car is not worth how much you owe on the car (for example: you owe $15,000 for a car that has a blue book value of $5,000) you can redeem the car for the fair market value in a Chapter 7 bankruptcy. What does redeem mean? Redeem means you pay the lump sum amount of what the car is worth. So instead of paying back $15,000 for the car you only have to pay back $5,000. The caveat is that you have to pay the $5,000 in one lump sum payment. If you are unable to do that, there are companies out there that can help you redeem the car by providing you with a redemption loan. That is similar to a refinancing deal after your bankruptcy case is filed. You need to do the right calculations though to make sure the redemption loan is worth it and that you will be saving money in the long run.

Another idea if you cannot redeem the car and you do not want a redemption loan is to “cram down” the car in a Chapter 13 bankruptcy case. In a Chapter 13 cram down you also pay what the car is worth instead of what you owe on the car. You spread out the payments over 3 to 5 years depending on your financial circumstances and you can also reduce the interest rate to about the prime rate at the time you filed your bankruptcy rate + 1-3%. For example if the prime rate is 3.25% at the time you filed your bankruptcy case you may be able to pay only 4.25%-6.25% for the car for the term of the Chapter 13 plan. You can only do this if it is a purchase money security loan and you paid into the loan for more than 910 days (comes out to about two and a half years).

There are a lot of factors to determine if the bankruptcy option is right for you so it is always advisable to seek the services of an experienced bankruptcy attorney prior to making a final decision.

Are Substituted Tax Returns Considered a “Filed” Tax Return So That Unpaid Income Tax Can Be Discharged in Bankruptcy?

By Ryan C. Wood

In order for your tax debt to be dischargeable in bankruptcy you need to meet all these criteria: 1) the taxes need to be due more than three years ago, 2) filed at least two years prior to filing bankruptcy, 3) the taxes need to be assessed more than 240 days (8 months) ago, and 4) no filing of fraudulent returns or willful attempts to evade or defeat a tax. If you meet those 4 requirements, your unpaid income taxes can be dischargeable in your bankruptcy case. Today we are going to focus on Internal Revenue Service policies and whether a substituted tax return filed by a taxing authority on behalf of a taxpayer is considered a “filed” tax return to satisfy number two listed above.

What is a substituted tax return? A substitute for return (“SFR”) is a tax return the Internal Revenue Service (“IRS”) files on your behalf if you fail to do so. The IRS gathers all the information submitted to them (W-2s, 1099s, etc.) and the taxing authority prepares your return on your behalf. Keep in mind that the SFR is most likely not going to include all the deductions, exemptions, and credits that you may be entitled to so the tax assessment may be higher than what you actually owe. The IRS will send you a Notice of Deficiency and provide you with a proposed assessment and give you 90 days to file a return or a petition in Tax Court. If you do not respond the IRS will proceed with the assessment and for all intents and purposes the SFR will be considered a valid return for tax assessment and interest and penalties will accrue. Now just because the IRS filed an SFR for you does not mean that you cannot file your own tax return. In fact it is encouraged that you still file your own return because as indicated previously, the IRS does not take into account all the deductions, credits, and exemptions that you may be entitled to. By filing your own return you can reduce your tax liability if not eliminate it altogether. You may even be due a refund. If you do not file your return within 3 years of the date the return is due you risk losing your refund and your right to claim tax credits. Make sure your bankruptcy attorney or you obtain an account transcript from the IRS to verify your tax history and verify that a SFR was filed on your behalf.

Now that you know what a SFR is the next step is to determine if the SFR acts as a filed tax return if the IRS prepares the SFR. The short answer is a resounding NO! Please see IRS Chief Counsel Notice CC-2010-016 and Internal Revenue Code §6020(b). The SFR does not count as a filed return and therefore if you owe taxes pursuant to the SFR it is not dischargeable in bankruptcy. If you prepare and file your own tax return after a SFR was prepared by the IRS, taxes are assessed and file it with the IRS and meet all the criteria of a dischargeable tax debt, then only the portion of the tax that was not previously assessed would be dischargeable. If you end up owing no taxes or a decrease in taxes owed, those taxes would not be dischargeable.

After the IRS prepares a SFR and assesses taxes owed from the SFR you can still prepare and file your own tax return. Once you file your own tax return and if your unpaid income tax meets all the criteria for the taxes to be dischargeable, only the portion that was not previously assessed from the SFR would be dischargeable. If it turns out that you do not owe as much as the IRS claims, whatever amount remaining owed to the IRS from the taxes assessed by the SFR is not dischargeable.

For example:

Let’s look at an example to help you picture this rule. Let’s say you want to file for Chapter 7 bankruptcy in November 2014 and you ask your bankruptcy lawyer if your taxes are dischargeable. You owe taxes for the 2008 tax year but you never filed a tax return for this year and the IRS filed an SFR on your behalf and assessed the taxes in 2010 and the SFR indicated you owed $15,000 for the 2008 tax year. Even though you meet all the other criteria to have your taxes discharged, the $15,000 is not dischargeable because you did not technically file a return since SFRs do not count as a valid return. Now let’s say you immediately go to a CPA to file the 2008 tax return and you were assessed an additional $5,000. That $5,000 would be dischargeable in bankruptcy once it meets the other discharge rules. If the CPA helps you file the tax return and you end up lowering your tax liability from the $15,000 the IRS assessed from the SFR to only $3,000, your tax liability will only be $3,000. This is good news since you only owe $3,000 rather than $15,000, but the bad news is that the entire $3,000 is not dischargeable no matter how long you wait to file for bankruptcy.

The harsh effect of the SFR should encourage you to file your taxes on time in the event you know you are going to owe income taxes. Not filing a return and the Internal Revenue Service filing a substituted return could make any otherwise dischargeable income tax not dischargeable. So no, substituted tax returns are not considered a “filed” tax return so that unpaid income taxes can be discharged when filing bankruptcy.

What is a Hardship Discharge in a Chapter 13 Bankruptcy Case?

By Ryan C. Wood

If you are currently having problems making your Chapter 13 plan payments each month due to circumstances that you cannot control there may be some help for you. If you currently have a bankruptcy attorney you should seek his or her advice immediately before your case is dismissed for nonpayment. Most Chapter 13 trustees have a quick trigger finger when plan payments become delinquent. If you do not have a bankruptcy attorney you need to consult with one immediately to see what your options are. There are generally three main options if you are unable to make your Chapter 13 plan payments. The first one is to modify your Chapter 13 plan to a lower payment you can afford either temporarily or permanently depending upon the circumstances. Some Chapter 13 trustees will enter into a stipulation to repay the missed payments without filing a motion to modify and obtain court approval. Another option is to convert your case to a Chapter 7. The third option is to obtain a hardship discharge. All three of these options are dependent on court approval and would depend on your particular circumstances. Today we are going to discuss the hardship discharge.

Pursuant to 11 U.S.C. §1328(b), a hardship discharge is available for people that cannot modify their Chapter 13 plans in a practical manner and had circumstances come up that they could not be held accountable for that made them unable to continue their Chapter 13 plan payments. Additionally, they need to have paid into the plan not less than what they would have paid to their Chapter 7 creditors if their bankruptcy estate was liquidated. It is also important to note that the hardship discharge is only available to people whose Chapter 13 plan was confirmed or approved by the bankruptcy court. If your plan was not confirmed you are not eligible for the hardship discharge. See Toste v. Smedberg (In re Toste), BAP 9th Cir., 2014).

So what exactly does the hardship discharge cover? Does it discharge all your debts or only some of them? To truly understand the hardship discharge we need to know about what is dischargeable or not in a regular Chapter 7 bankruptcy and what is dischargeable in Chapter 13 bankruptcy cases. In a Chapter 7 bankruptcy your general unsecured debt is dischargeable unless it fits into a category under 11 U.S.C. §523(a). These are debts such as those incurred through false pretenses or fraud, priority tax debt, student loans, domestic support obligations, death or personal injury caused by operation of motor vehicle while driving under the influence, restitution, unscheduled debts, and much more. For a complete list you should review the exceptions to discharge under §523(a). Be sure to provide your bankruptcy attorney detailed information about how your debts and how they were incurred if there are any not so good circumstances.

Chapter 13 bankruptcy discharges are broader than Chapter 7 bankruptcy discharges. There are certain debts that are non-dischargeable under §523(a) that are dischargeable in a Chapter 13 case. Pursuant to 11 U.S.C. §1328(a), you are entitled to a full discharge of your debt except for the following debts: debts that provided for a cure for any defaults on any secured or unsecured debts (for example: if you were behind on your mortgage or car payments and the Chapter 13 plan provided for the cure amount), debts for priority taxes, student loans, money obtained by false pretenses or fraud, unscheduled debt, fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny, domestic support obligations, death or personal injury caused by person filing for bankruptcy who was driving under the influence. Additionally, debts for restitution included in the sentencing of a conviction of a crime or restitution awarded in a civil action against the person filing for bankruptcy as a result of willful or malicious injury that caused personal injury or death to someone is also non-dischargeable in a Chapter 13. Thus, if you successfully complete the Chapter 13 plan, the non-dischargeable debt in §523(a) other than the debts enumerated in the above paragraph will be dischargeable. Some issues pursuant to Section 523(a) may require an adversary proceeding to be filed to prove the grounds for a debt to be not discharged.

So what happens if you initially filed a Chapter 13 case but circumstances occurred where it was no longer feasible for you to continue making payments in your Chapter 13 plan? You can obtain the hardship discharge, but the discharge is narrower than the normal Chapter 13 bankruptcy case discharge if you complete the plan and receive a §1328(a) discharge given all of the regular §523(a) exceptions to discharge provisions apply. See Toste v. Smedberg (In re Toste), BAP 9th Cir., 2014). You can look at it as you are receiving a Chapter 7 discharge rather than a Chapter 13 discharge.

Damages for Violation of Automatic Stay in the Ninth Circuit

By Ryan C. Wood

The general rule is that once you file for bankruptcy protection you should be free from creditor harassment and collection activity. This is because once you file for bankruptcy protection there is an automatic stay in place. This automatic stay stops any and all collection activity including creditor calls, letters, wage garnishments, repossession, foreclosure, levies, and/or continuation or start of any lawsuit in an attempt to collect a debt. The automatic stay is one of the most powerful tools in the bankruptcy arsenal. But what happens if a creditor ignores the automatic stay and continues to try to collect a debt from you anyway? What rights do you have?

This is what happened in the case In The Matter of Rupanjali Snowden (No. 13-35291, 9th Circuit Court of Appeals, September 2014). In this case, Ms. Snowden took out a payday loan from Check Into Cash of Washington (“CIC”) in the amount of $575. She was unable to make the payment and advised CIC that she was thinking of filing for bankruptcy and provided her bankruptcy attorney’s contact information to them. Despite having this information, CIC would constantly contact Ms. Snowden at work (she is employed as a nurse at a hospital). Every time she heard her name over the intercom she thought she was being called regarding an emergency with her daughter and became very stressed. Ms. Snowden filed for bankruptcy protection shortly after. CIC was listed as an unsecured creditor in the bankruptcy petition and therefore received notice of the bankruptcy case. A little over a month after her bankruptcy filing, CIC cashed her post-dated check causing Ms. Snowden’s bank account to become overdrawn and charged additional bank fees as well. Ms. Snowden became panicked and was crying and feeling miserable. Her bankruptcy lawyer filed a motion for sanctions against CIC for violation of the automatic stay, seeking return of the funds, overdraft fees, damages for emotional distress, punitive damages, and attorneys’ fees and costs. CIC disputed the fact that they violated the automatic stay. Ms. Snowden offered to settle the case for $25,000 which CIC rejected. CIC proposed to pay her $1,445, which Ms. Snowden rejected. The bankruptcy court found that CIC willfully violated the automatic stay and awarded Ms. Snowden $12,000 for emotional distress, $12,000 in punitive damages, $575 for the loan amount, $370 in bank fees, and $2,538.55 in attorney fees, totaling $27,483.55. CIC appealed the case to the district court. The district court remanded back to bankruptcy court to determine emotional distress damages and reevaluate punitive damages based on change in emotional distress damages. The bankruptcy court did not change its judgment after reconsideration. CIC appealed the case again and Ms. Snowden cross-appealed.

The ninth circuit upheld Ms. Snowden’s emotional distress award and punitive damages. The court also rejected CIC’s argument that the attorney fees stopped accruing once CIC offered to settle the case with Ms. Snowden for $1,445. The court indicated that CIC never admitted to the violation of the automatic stay and therefore the violation of the automatic stay was not cured. The court determined the proper date the violation of the automatic stay ended on December 10, 2009, when the bankruptcy court determined that the automatic stay was violated. Of course, Ms. Snowden would not receive all of the attorney fees up to that date. She would only receive the fees that are related to curing the stay violation itself. Since some of the attorney fees were related to recovering damages, those would be disallowed.

This case provides a guideline of what damages can be obtained when there is a violation of the automatic stay under these circumstances. As with each case, however, the rulings are heavily dependent on the specific circumstances of each case. You have to provide facts to prove you are eligible for actual damages, emotion distress, punitive damages, attorney fees and other damages. Willful violations of the automatic stay are a very serious matter and should not be taken lightly. Without the automatic stay being followed the entire bankruptcy process would break down.

What Happens if I Do Not Disclose All Assets in my Bankruptcy Petition?

By Ryan C. Wood

When you file for bankruptcy you are obligated to disclose all of your assets and all of your debts in your bankruptcy petition truthfully and under penalty of perjury. Failure to disclose may have many negative consequences such as the trustee in a Chapter 7 bankruptcy case liquidating your undisclosed asset and providing it to your creditors or the denial of a bankruptcy discharge. A debtor can also be sentenced to prison and fined. Just ask ex-Philly baseball player Lenny Dyskstra. Mr. Dykstra was sentenced to six months in federal prison and ordered to pay $200,000 in restitution in 2012. This article focuses on less substantial bankruptcy fraud.

You must disclose all of your assets when filing for bankruptcy.

You must disclose all of your assets when filing for bankruptcy.

Take the case of In re: Gronlund (No. 13-1566, B.A.P. 9th Circuit, August 2014). In this case, Mr & Mrs. Gronlund filed for Chapter 7 bankruptcy protection. They were overly detailed in listing their personal property, down to where their pots and pans were listed in their house. They did not list their interest in real estate in Mexico. The Ch. 7 trustee noticed income on their tax returns that was not disclosed in their bankruptcy petition. During their 341 meeting of creditors, Mr. Gronlund admitted to receiving $2,500 in interest only payments each month from the note derived from the Mexican property (“Mexican Note”). Mr. Gronlund testified that he did not think to list the Mexican Note because he already sold the property to a Mr. Rezai. Mr. Gronlund was not consistent on where Mr. Rezai lived. The trustee continued the meeting of creditors to give the Gronlunds an opportunity to amend his schedules. The Gronlunds never did so and the trustee filed an adversary complaint to deny the Gronlunds their bankruptcy discharge under 11 U.S.C. §727(a)(2)(A) and (a)(4)(A) indicating the Gronlunds concealed their interest in the Mexican property and making false oaths. The Gronlunds filed their amended schedules after the adversary complaint was filed. The schedules indicated that even though the Gronlunds have an interest in the Mexican Note, the Note had more encumbrances than it was worth (the Gronlunds indicated the Note was worth about $450,000 and the encumbrances were around $470,000). There were no proof of claims filed for the encumbrances and Mr. Gronlund tried to introduce documents that he believed would prove the existence of the encumbrances, but the bankruptcy court did not find the documents credible. A Special Mexican Real Estate Counsel testified for the trustee indicating that there were no encumbrances recorded against the Mexican property and that the property was actually worth about $530,000. Mr. Rezai consistently paid the Gronlunds $2,500 every month for the past four years. For the Gronlund’s defense, Mr. Gronlund indicated he was very stressed during that time due to family illnesses, supporting injured family members, had to testify as a witness in a trial that was prosecuting his friend for murder, and business losses. He hired an affordable bankruptcy attorney and asked his bookkeeper and employee to assist in his bankruptcy case rather than take care of it himself. He indicated his bankruptcy attorney received all the information and already told the attorney to fix the first two drafts. He did not review the third draft because he thought his bankruptcy attorney had everything fixed and all his schedules were accurate.

Pursuant to 11 U.S.C. §727(a)(2), a debtor will not receive a discharge if he has concealed property within one year before filing of the petition or property of the estate after filing the petition with the intent to hinder, delay, or defraud a creditor or an officer of the estate. The bankruptcy court indicated the Gronlunds concealed the Mexican Note because they failed to list the asset in the initial schedules, didn’t list the $2,500 payments, being evasive at the meeting of creditors and later claimed that the Mexican Note was over-encumbered. The bankruptcy court based their findings of the Gronlund’s intent to hinder, delay or defraud based on their conduct and circumstances surrounding the filing of the petition and how they acted afterwards. Given the Gronlunds were very sophisticated in business it was very suspicious the only thing left out of the schedules was their only asset with significant value.

Pursuant to 11 U.S.C. §727(a)(4)(A), a debtor will not receive a discharge if they “knowingly and fraudulently, in or in connection with the case made a false oath or account.” The bankruptcy court indicated that the Gronlunds failed to list the $2,500 payments received and failed to list the Mexican Note in their schedules and meeting of creditors. Since the note was a valuable asset worth between $450,000 – $530,000, the fact was very material in the case. Failure to list this as an asset was detrimental to the estate. The court believed the Gronlunds knowingly made those statements since they revised two previous drafts of the petition and just didn’t review the third one, especially when the $2,500 was a significant amount of their monthly income. The bankruptcy court also believed that the Gronlunds had the fraudulent intent to deceive their creditors and therefore denied the Gronlunds discharge. The Gronlunds appealed the bankruptcy court’s ruling but the 9th Circuit Bankruptcy Appellate Panel agreed with the bankruptcy court’s rulings.

The moral of the story is to always disclose everything to your bankruptcy lawyer and in your bankruptcy petition. You may think that an asset is not worth anything or that something is not important enough to disclose to your bankruptcy attorney. Something may seem insignificant to you but may have huge consequences in your bankruptcy case.