Read what you sign (and the words on documents actually have meaning).

There’s a popular maxim in law: “ignorance of the law is no excuse”.  What does it mean?  Put simply, you can’t kill a man, then walk into court and claim you didn’t know that homicide was illegal.  But this legal doctrine extends to all laws, not just homicides.
I’ve often joked that if this statement is true, why do people need lawyers?  If everyone is expected to know and understand the laws, why do lawyers need to exist to interpret laws and give counsel to our clients?
Nevertheless, ignorance of the law is no excuse.  And so today, I wanted to address some common misconceptions in bankruptcy law.  By no means do I expect that someone without training in law to know and understand bankruptcy law as well as I do.  This is why I try to educate my clients on how to conform their behavior before filing for bankruptcy – so they don’t make any bad decisions.  Sure, some of my clients ignore my advice and end up screwing themselves over in the process.  But what about the clients who make a mistake before they even meet with an attorney?
So with that in mind, here are some things for you to keep in mind…
Rule #1.  Read the stuff you sign.
I know very few people actually stop and take the time to read a lengthy contract, mortgage, or service agreement.  But if the other party to the agreement does something that you don’t like, but it is permitted in the contract, you’re not going to gain the sympathy of a judge when you say “I didn’t know my mortgage had a variable rate, even though it says so in the paperwork I didn’t read.”
Rule #2.  The words on documents have meaning!
“That’s not my car – that’s my daughter’s car.”
The title to your daughter’s car is in your name because your 17 year old daughter isn’t old enough to own property.  It doesn’t matter if the car is used by her exclusively.  Your name is on the title.  It’s YOUR car.
“The credit card is not in my name, it is in my dad’s name.  I use the card, so it’s my debt, and I pay it.”
No, it’s your dad’s debt.  That your dad was willing to let you rack up charges on the card doesn’t make it any less his responsibility.  Your discharge won’t wipe out his debt, even if you were the sole user of the credit card.  Now, if you cosigned on it, the discharge will eliminate your liability.  But dad is still on the hook for the card.  Oh, and any payments that you make on the card are for his benefit, and constitute a preference.
“This credit card is a business debt because I use the card exclusively for business purposes.”
LLC’s and corporations are separate legal entities that can owe separate debts that the owner of the LLC or corporation is not individually liable for (notwithstanding any personal guarantees, which are essentially cosigned debts between the business and the business’ owner).  However, having a business does not automatically convert certain debts into business debts, just because you use a credit card for business purposes.  Did the LLC or corporation sign the credit agreement?  Or did you sign it?
The first two examples demonstrate that there are a lot of informal agreements that exist between families and friends that have little or no legal bearing.  Let’s do the opposite.  What about a credit card that is only in your name?  Is your spouse liable?
Rule #3.  Sometimes, the words on documents have no meaning!
Just because I want to confuse you…  If you live in a community property state (like Wisconsin), are married, and rack up debt after you are married, then your spouse is most likely liable for those debts.  There are exceptions to the rule, of course.  But generally, it doesn’t matter that the credit card is only in your name.  If it is a post-marital debt, both you and your spouse bear liability on the debt.
Rule #4.  Unless you’re renting or living with mom and dad, you own the real estate.
“I don’t own my home.  The bank does.”
Okay, you own your home.  The bank has a lien against your home – known as a mortgage.  This is not the same as ownership.  Check the deed.  It’s your name on the deed, not the mortgage company’s.  You own it.  The mortgage company can seize the property if you don’t pay the mortgage.  But until that happens, you own it.
Rule #5.  Bankruptcy is good against the world.
“I’m not filing bankruptcy on that.”
Yeah, that’s not how this works.  Except in asset cases, debts are not dischargeable or non-dischargeable because you did or didn’t list them on your schedules.  You can choose to reaffirm a mortgage or car loan.  But you still have to list those debts as a matter of due process.  Same is true of non-dischargeable student loans, child support, and taxes.  The laws and what you do after a bankruptcy case is filed will determine what goes away and what doesn’t.  Don’t get cute with your lawyer and conceal debts that you “don’t want to include.”  That’s now how this works, and you’ll end up screwing yourself over when you do this.
I could go into a lot more detail about this rule, but suffice to say, I’ve written about it extensively in the past.
Rule #6.  Just because you hide your assets from your family or the IRS doesn’t mean you should hide them from your lawyer.
“Do you own any firearms or jewelry?”
“Not that anybody knows about.”
“Well, now I do.  What do you have?”
“Let’s pretend that I didn’t tell you.”
“Let’s pretend you did.”
“These are well hidden.  Nobody would ever find out!”
“Care to test that theory under the penalty of perjury?”
Don’t get cute with your lawyer.  Especially when it is unlikely that such disclosures would even have a negative impact on your case.  Do you really want to get sentenced to federal prison for committing perjury over something that wasn’t going to get you in trouble in the first place?
Rule #7.  A good lawyer will grill you and make you uncomfortable.  It’s better that your advocate do it, rather than the trustee or a judge.
“I haven’t had any income in the past six months.”
“Really?  Well, you indicated that you are current on your mortgage payment.  You have kids that you’re feeding.  How are you paying all of these bills without any income?”
Sound insulting?  Maybe.  But it’s better that I know [about the $50,000 you have squirreled away under your mattress, or the under-the-table cash job you have been working and concealing from the IRS, or that you’re charging $5k a month to your credit cards] now, rather than waiting for the judge to ask you this question in court, when it’s too late for me to do anything to help you.  Attorneys don’t catch every inconsistency, but a good lawyer will catch most of them.  Rather than be insulted that your attorney is grilling you, be grateful that he uncovered the issue before someone else did.
Rule #8.  Your emotions are seldom relevant.
Sure, there is a fair share of unfair and unjust laws on the books.  Bankruptcy laws are no different.  For as much as I can bash legislators for being corrupt and stupid, the fact of the matter is that they strive to write laws that are fair and balanced, and laws that take into consideration the interests of all parties, laws that protect the rights of all parties, and laws that produce just results.
Accordingly, many laws (particularly bankruptcy) is written in very sterile and formulaic terms.  A lot of the emotional appeals people make – about how they tried really hard to pay their bills, or that the debt isn’t their fault, or that an acquaintance duped them into losing all sorts of money.  Most of that won’t matter.
Which is not to say I discourage my clients from telling me these stories.  But you need to understand that the bankruptcy laws are written in a very formulaic and sterile manner.  In exchange for a discharge, the court demands information about the money you earn, the money you spend, the stuff you own, the debt you owe, and information on recent transactions.  It’s a very bureaucratic process.

Property Taxes

In the majority of home foreclosures where the homeowner decides to surrender the property, they are not responsible for the property taxes owed on it.  Whoever purchases the property ends up paying the taxes.  Often, it’s the foreclosing mortgage lender, and they either absorb the cost or pass it along in the purchase price when it gets resold.  Thus, creating the general maxim: property taxes follow the property.
But this isn’t always the case.  Here’s a cautionary tale, from when two parties on a land contract agreed that the tenant/buyer would be responsible for paying property taxes, rather than the landlord/seller.
As legal title of the house remained with the seller until the land contract reached maturity, the landlord remained liable to the county, notwithstanding the land contract agreement.  The seller then paid the property taxes, and then filed a claim in the buyer’s Chapter 13 bankruptcy case (in which, the buyer decided to abandon the land contract and moved somewhere else).
11 U.S.C. § 523(a)(14A) makes non-dischargeable any debt that was incurred to pay particular kinds of taxes, referencing § 523(a)(1).  Most commonly, this discourages people from using credit cards (which are non-dischargeable) to pay off tax debt (which is non-dischargeable) and sticking the credit card company with the bill.
Next, § 523(a)(1) references § 507(a)(8).At § 507(a)(8)(B) we have: a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition. 
So, where does this leave us?  In the particular case described above, the portion of property taxes that the landlord/seller paid on behalf of the tenant/buyer, the portion of which was due within 365 days of the date the bankruptcy case was filed – that becomes non-dischargeable.
Why doesn’t this happen all the time?  Because in Wisconsin, the mortgage company almost always folds the property taxes into the mortgage, and waives their right to collect a deficiency.

Creditor Superpowers

Not all creditors are created equal.
Some debts are “secured” which means the lender can exercise security rights in collateral you own if you default under the terms of the note.  For example, if you stop making payments on a secured loan, a mortgage lender can foreclose your home, and an auto lender can repossess your car.
Other debts are non-dischargeable in bankruptcy.  A full list of these can be found at 11 U.S.C. § 523(a), but it includes items such as taxes, student loans, debts incurred by misrepresentation and fraud, domestic support, and certain governmental debts, among other things.
Secured debts and non-dischargeable debts are the two most common distinctive classes of debts that people going through bankruptcy are made aware of.  But there are a number of superpowers that certain creditors have over other creditors, and we’re going to go over some of the most pertinent ones here.
Utility Companies – are given special status under 11 U.S.C. § 366, and may discontinue utility services if the debtor does not provide adequate assurance of payment, such as a deposit.  In my experience, requests for deposits have been relatively rare, but they do occur from time to time.
Internal Revenue Service and State Taxing Authorities – in addition to the non-dischargeable and priority status that many tax debts enjoy, taxing authorities are also allowed to file claims in a debtor’s Chapter 13 case for tax debts that arise after the bankruptcy case is filed under 11 U.S.C. § 1305.  For example, John Doe files a Chapter 13 Bankruptcy in 2011 with a 5 year term.  In 2013, John Doe finds that he owes taxes to the IRS for the 2012 tax year.  The IRS can file a claim in John’s existing bankruptcy case and force the debt to be paid in the plan.  On the one hand, this is a good thing, because the tax won’t incur interest while it’s paid in the plan.  On the other hand, it may be difficult for John to fund his plan when it is saddled with the new debt, particularly if John is nearing the end of this plan (no plan can go longer than 60 months, so the later in the plan that this happens, the less time you have to spread the payments out).
Student Loan Creditors – filing bankruptcy can trigger higher default interest rates, which is particularly a problem for Chapter 13 debtors who are not paying off their student loans in full during the Chapter 13 Plan.  Since student loans are currently non-dischargeable (there has been a lot of buzz in Washington lately about possibly amending the bankruptcy code to allow certain types of student loans to be discharged under certain conditions), those post-petition rates continue to be incurred throughout the life of the bankruptcy plan.  Bruning v. United States, 376 U.S. 358 (U.S. 1964).

What you need to know about wage garnishments.

Filing for bankruptcy is an excellent way to stop wage garnishments.  The automatic stay immediately stops all collection actions, and the discharge wipes out the judgment debt.
However, as any quality bankruptcy attorney will tell you, filing for bankruptcy requires some time and work.  If you want you case done properly and without errors, you should expect that the process will take a couple of weeks, minimum.  In other cases, people need to deliberately wait to file their case for any number of reasons.
But you’re facing a wage garnishment NOW.  What can you do to avoid wage garnishment until your bankruptcy case is ready to be filed?
Let’s start out with some basic facts that you should know about wage garnishment.  Note: everything in this post is specific to Wisconsin law.  If you have been sued in another state, consult with an attorney who practices in that state.
  • The maximum amount that can be garnished is 20% if your “disposable earnings” (your gross wages, minus amounts taken out for federal tax, state tax, and social security taxes, but does not include other deductions such as insurance or union dues).  If you have child support deducted from your paycheck, then the combined amount of child support deductions and the wage garnishment can be no greater than 25% of your disposable earnings.
  • Garnishments typically last for 13 weeks.  They can end sooner if the underlying debt is fully paid.  They can be extended for a longer period either by stipulation, or by a new application that takes effect after the first 13 week period is up.  Also, public employees can be garnished until the debt is paid off.
  • You can only be garnished by one general creditor at a time (does not include tax levies, federal student loan levies, and child support).
  • You cannot be fired solely because of a wage garnishment (though most employment in the United States is “at-will” employment, which means an employer can fire you for any reason or no reason at all, so long as it is not solely for a discriminatory reason).  There is also an exception to this rule if you have a collective bargaining agreement that permits termination under such circumstances.
  • You may dispute a wage garnishment.  To do so, click here for the form.  Send a copy to the Clerk of Courts, the creditor and/or the creditor’s attorney, and your employer.  Your employer must not garnish you if you file one of these responses, unless and until the court overrules your application and directs the employer to proceed with the garnishment.  Your employer must wait at least 5 days after your pay date before sending garnished funds to the creditor, to allow time for you to file a dispute.
  • Most creditors cannot touch certain types of income (such as social security).  However, if you owe debt to the government, social security and other types of income can become fair game.

You may be exempt from wage garnishment.  If you are, make sure that you file a response with the court and copy your employer.  Your employer is not required to investigate on his own to determine whether or not you are garnishment-proof.  All exceptions (except proof of bankruptcy filing or discharge) require a judicial determination.
You may be garnishment-proof if:
  • You have filed bankruptcy and the automatic stay is still pending.  (In pending Chapter 13s, only until property of the estate revests back to you.)
  • You have received a bankruptcy discharge, and the debt was incurred before your bankruptcy case was filed.
  • Your household income is below the federal poverty guidelines.
  • If your household income is above the federal poverty guidelines, but the garnishment would bring you below the guidelines, you can only be garnished to the extent that it brings you down to the poverty guidelines.
  • Currently, or in the past six months, you have received – or determined to be eligible for – public assistance (food stamps, W2, SSI, etc.).