R.C. Lim, Attorney and Counselor at Law

FreeCreditReport.Com Is Not FREE!

Don’t be duped. How do you think they pay for those awful commercials?

The actual free site that facilitates your requests from Equifax, Experian, and TransUnion. None will give you your FICO score, but you can gain access to each entry to review it for accuracy.

The Basis Step-Up Conundrum

Check out BusinessWeek on the “Estate Tax Gap” or the problem that the basis step-up has gone away for the year. This can really, really hurt family businesses for which the basis is actually zero.

Next year, the estate tax will tax estates valued over $1 million at tax rates between 37% to 55%.

Increased Rates of Filing

Well, it looks like the vast majority of the increased rates in the Central District are occuring not in Riverside or Orange Counties as I would have guessed. Rather the big bump — 75% — happened right here in Los Angeles County!

Supreme Court Gossip: Elizabeth Warren To Replace Justice Stevens?

The latest gossip among the chattering lawyers is that Elizabeth Warren may be in line for the Supreme Court nomination to replace Justice Stevens. Professor Warren would likely be a more popular choice and face less Republic resistance than many potential nominees. Her nomination would also provide a strong example against the rule that law professors make lousy nominees because they have said and written too much.

In fact, Professor Warren’s populist message is exactly the sort that would give the Republican leadership pause because it’s so likely to be popular with their own constituents.  Given Professor Warren’s personal background as a consumer debtor attorney, it’s extremely likely also that during her term she would forever change the operation of finance in the United States.

The LA Times Picking Over Carrion: WaMu’s Role in the “Mortgage Time Bomb” Revealed!

Since the mortgage crisis has begun, I find that I often read newspapers and get the distinct impression that still no one gets what has happened here with our mortgage mess.

Today’s Los Angeles Times leads with a story uncovering Washington Mutual’s role in the housing crisis. Here the main piece of news is that the bank continued to accept loans in which it had uncovered fraudulent activity because the bank knew it would simply package the debt and sell it off to some other party.

The issue here is that this was commonplace among all of the banks in all of the various lending markets and had been so for years! Moreover, this is not a very well kept secret. Talk to any honest real estate appraiser, and he or she will tell you about the mountains of business that didn’t come his or her way because of scruples. Talk to anyone who packaged the debt, and he or she will tell you about the bag of tricks that were then used to gain higher ratings from the credit agencies.

Washington Mutual makes a convenient scapegoat because it no longer exists as an independent bank. Washington Mutual collapsed and was seized by regulators and then in turn sold to Chase. When the LA Times runs a story about how nearly all of the still existing banks were basically in the same line of work, that’ll be news! Basically, the inference that I draw from WaMu’s collapse is that the bank was less involved in the “mortgage time bomb” than the banks that are still around since it means that they did a worse job at getting the toxic stuff off of the books.

Derrick Coleman, NBA Star, Files Chapter 7

Derrick Coleman, the former number one pick in the NBA draft, recently filed for Chapter 7 protection under the bankruptcy code. His case will be one of the few Chapter 7 asset cases, and among his assets he lists many fancy cars and other tchotchkes one would expect an NBA great to have collected over a career as an NBA great.

Coleman owed more than $4 million than his assets were worth. As a high profile case, Coleman hopefully did a more thorough job filling out his schedules than the former auto dealer Danny Hecker I wrote about a few days ago did. Having made some $89 million over his career, Coleman’s monetary troubles seem to have come from investing money in his struggling hometown of Detroit.

I suspect that Coleman could have done a little better had he visited an asset protection planning attorney. One thing that such attorney can do is advise you on how to segregate your assets and risk so that when one business fails it does not spill over to the rest of your assets or businesses. This is what parent corporations do when they create subsidiaries. The subsidiary can then fail without harming the parent. In Coleman’s case, it might have allowed him to close a business without having his creditors reach his personal assets.  In the context of corporations owning corporations, this can be quite expensive — separate and then consolidated taxes and books for auditing. In the context of smaller businesses, the series LLC offered in several states makes this considerably easier and cheaper to accomplish.

The Future Direction of Housing Prices

When Robert Shiller speaks about market bubbles and prices, you’d be wise to listen.  Shiller is a Yale Econ professor who studies market bubbles. Shiller famously published the bestseller, Irrational Exhuberance, predicting the demise of the dot.com bubble months only a few months before it collapsed.

Mind you, Shiller is sharp. One distinction he draws is knowledge of the existence of a bubble from knowledge of when exactly that bubble is going to pop. As if calling and then watching the housing bubble in slow-motion, Shiller re-issued Irrational Exhuberance with a special new chapter on housing in 2005. There he pretty much laid out the narrative about housing and interest rates that it took most folks another four years to figure out. He also invented a brand-new index so as to make his point, the Case-Shiller Index, which measures the relative expensiveness of housing prices in a manner similar to the price-earnings ratio for a stock.

In today’s New York Times, Shiller penned an article, “Don’t Bet the Farm on Housing Recovery” where he sheepishly predicts that housing prices are set to move down again.  I personally am ready to listen to what he has to say.

Some Lessons from In Re Hecker

Danny Hecker filed for Chapter 7 protection last June. His case reported some $750 million plus in debts perhaps the biggest case ever in his Minnesota jurisdiction. As a former car dealer, Hecker’s house of cards had collapsed from a high perch. Hecker’s assets were also significant, and he listed them at $18.5 million. As it turns out, he left a few important things out. Then he compounded the error by lying to the court. As the scheme unraveled, his ex-father-in-law who was implicated in the scheme apparently shot himself before he could give testimony.

The trustee in the case accused Hecker of fraud which led to an ongoing 25-count criminal indictment against Hecker. Among the assets that he left out were sizeable quanitites of cash that he handed over for the benefit of a girlfriend, motorcycles, boats, trailers, expensive watches, club memberships, a handgun, boat docks, airplane tickets, a car, and several hundred dollars of $2 bills. The ugly result here is that the settlement of his Chapter 7 suit has been dismissal of his case without discharge.  In other words, Hecker will continue to face the 25-count criminal indictment AND all of his assets will be sold–including those he thought he was hiding–AND Hecker will still be personally liable for some $725 million dollars to his creditors. Hecker’s lack of money is now very much affecting his criminal case for the worse. Hecker has already had two sets of criminal attorneys withdraw from representing him for nonpayment of fees. The man is clearly broke. And unlike a bankruptcy attorney who can petition the court to be paid from the sale of assets–assuming certain other things–his criminal attorneys can do no such thing. This leaves him with the Federal Public Defender’s office.

Hecker has fired his bankruptcy attorney who Hecker claims did a terrible job. As it turns out, the attorney Bill Skolnick is a pretty big deal there in Minnesota. I think it’s still had to tell what this means. But the case stands as cautionary tale of why it’s important to be truthful in the petition, truthful in the 341 meeting, and truthful in a 2002 exam. While the actual rate of prosecution for bankruptcy fraud is low and getting lower, the magnitude of the harm on the other side could not be worse. Essentially, you have all of your stuff sold–you keep all of your debts–and you go to jail.

Given the list of assets that were excluded, I am led to believe here that part of the mistake may have been simply that Hecker did not pay enough attention to filling out the forms completely. As a debtor, it is good to remember that when in doubt - DISCLOSE! While the trustee may not like wading through your extra entries, you will have removed the risk that you forgot something.  This process is considerably harder for the person who has a lot of things. While a stack of a hundred $2 bills might be rather hard to forget for some. For others, it’s only one of thousand other things exactly like it. The next thing for debtors to remember is that they really need to rack their brains and not expect to get everything on the first pass or to be prompted by their attorney for everything they own or control.  It is up to the debtor and the debtor alone to provide a complete list to the attorney. And much more importantly, it is the debtor’s signature(s) that go on the petition! You want to get it right.

Inherited IRAs and Bankruptcy

IRAs benefit from a federal bankruptcy exemption on an amount something north of $1.1 million. (The previous amount should have had its 3-year inflation reset on April 1, 2010.) This is a touch more complicated, and “roll-over” IRAs, or IRAs that are funded from ERISA plans can potentially qualify for unlimited amounts although there is very little guidance right now on what happens once such plans become “mixed” when a roll-over plan is mixed with regular contributions. (See Natalie Choate at Morninstar.com).

Inherited IRAs have become a fairly common tax planning strategy for estate planners. If not planning is done, an IRA can trigger a whopping tax bill. Tax is immediately due on long-term and any short-term gains. The capital gains tax would be in addition to any estate taxes on the estate. However, the IRS permits a decedent to pass an IRA without triggering a distribution and a tax and most importantly to replace the new beneficiary’s age for the purpose of calculating the minimum withdrawal calculations. This permits a “stretch-out” of the IRA distributions over a potentially very long period, depending on the age of the beneficiary, thereby permitting the assets to continue to grow tax free for an even longer time.

However, a Texas case, In re Jarboe, 2007 WL 987314 (Bkrtcy. S.D. Tex. 2007),  suggests that these inherited IRAs are not entitled to the same $1.1 million plus protection that they would have had in the hands of their original holder. Although this case is merely persuasive in other jurisdictions, like our 9th Circuit, bankruptcy practitioners are probably simply steering clear of its seemingly solid reasoning by advising clients to pay the capital gains tax and then push the former IRA assets into other categories of clearly exempt assets, like a home. If the client is already using his or her full homestead exemption, the exemption planning might be a bit more challenging.

Our Fair City - Los Angeles Heads Closer to Bankruptcy

At first it looked like Detroit would be the first large US city to need bankruptcy protection.  Detroit has what looks to be an unfixable $450 million hole in a $1.6 billion budget.

But Los Angeles may beat Detroit to the punch. Currently there is a showdown between the L.A. City Council and L.A.’s Department of Water and Power and Mayor Villaraigosa on the other side. At stake are rate hikes to implement clean energy that the City Council won’t agree to and $74 million in “surplus revenue” that the D.W.P. in turn refuses to hand over to the City. Mayor Villaraigosa has already called for the temporary shutdown of certain city services. However, his efforts do not seem to be working. Regardless of who is it at fault, the sudden loss of an expected $74 million could turn L.A. upside down and into Chapter 9 quickly.