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The 2007 Mortgage Forgiveness Tax Relief Act expires December 31, 2012. That’s one of the tax cuts, put in place when George Bush was president, that are about to expire. This one may force more people to file bankruptcy.
The Mortgage Forgiveness Tax Relief Act helped people whose houses lost value during the crisis to use short sale and avoid bankruptcy. If it’s not extended, bankruptcy will be better. Because of the “fiscal cliff,” it looks likely the Act will expire.
What’s the fiscal cliff?
In August 2011, Congress and the President set December 31 2012 as the deadline for sensible plan to reduce the federal deficit. If no sensible plan can be worked out–drastic spending cuts and tax increases hit. Those drastic changes are now called the fiscal cliff. After 16 months, no sensible plan has yet gained support. There are three weeks left.
Since one of the goals of the fiscal cliff negotiations is to raise money, extending this tax break might be a hard sell.
How Did the Mortgage Forgiveness Tax Relief Act help people stay out of bankruptcy?
The reason is taxes. The general rule is that debt forgiveness is income. A short sale is income. And the income tax taxes income.
Look at it this way. Suppose you borrow $1000 from your boss. Then the boss says you don’t have to pay him back. That $1000 loan is changed into a $1000 bonus–and you owe taxes on that.
The same rule applies in a short sale. Bank of America lends you $400,000. Then they say you only have to pay back $300,000. Bank of America has given you a $100,000 “bonus”–you owe taxes on that $100,000. (About $30,000 in taxes, depending.) Unlike your boss, who might forgive a loan of $1000, Bank of America is sure to issue you a 1099-C after the short sale. So the IRS KNOWS $100,000 in debt was forgiven.
(This same problem comes up when people negotiate a settlement with their credit cards. People who don’t know about debt forgiveness tax are blindsided when they get a bill from the IRS.)
Here's a 1099-C, telling you and the IRS that debt has been cancelled. Cancellation of debt is "income." And the income tax is a tax on income.
The Mortgage Forgiveness Tax Relief Act said you don’t have taxes on money forgiven in a short sale–from 2007 to 2012. That means a homeowner who got approved for a $300,000 short sale on the $400,000 mortgage could walk away clean. (The Act only applied to your residence–short sale on investment property was still taxed.) Starting January, unless the law is extended, there would be about a $30,000 tax on the short sale. Ouch!
How does bankruptcy come in?
There’s no debt forgiveness tax on debts wiped out in a bankruptcy. So one way for our homeowner to avoid a tax on that $100,000 is to file bankruptcy. Then after the bankruptcy, the homeowner can still do the short sale; of just let the bank foreclose. Either way, no debt forgiveness tax.
Are there other ways to avoid tax on a short sale?
There’s one. If you are “insolvent”–meaning hopelessly in debt–then the tax is forgiven. Your accountant can help you with that. Starting 2013, if you are looking to do a short sale, and you don’t want to do a bankruptcy, you need to talk very carefully with a CPA or other tax adviser to see if you can afford to pay, or can avoid, the tax on the debt forgiveness income.
You may also want to talk to a bankruptcy lawyer.
Bankruptcy attorneys most often charge an up-front, flat fee. In fact, it may even be unlawful for a bankruptcy attorney to collect money from you after the filing of the bankruptcy since even the bankruptcy attorney can be forbidden by the bankruptcy to collect on monies owed once the case is filed. It is common for bankruptcy filers to get help with the cost from friends or family, or to to save up for the cost by stopping payments on debts that will soon be eliminated through the bankruptcy. It is also common for bankruptcy filers to use their tax refund money to pay for the bankruptcy. Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.
If you file bankruptcy in Utah, you will not lose your retirement or 401k account in bankruptcy. Retirement accounts are exempt from liquidation under Utah's exemption law, which means that the bankruptcy trustee may not take that money from you. However, you should not try to deposit a large amount of money into your retirement account before filing, since it is possible for a trustee to take that amount. Be sure to consult a bankruptcy attorney before putting in or taking out money from your retirement account prior to filing for bankruptcy.Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.
A Tenancy by the Entirety (TBE) is a form of property ownership in Missouri, and a few other states, reserved for married couples. Missouri recognizes TBE ownership in both real and personal property. Property owned as tenants by the entirety belongs to the marriage, which means that both husband and wife own the property as [...]
A mortgage foreclosure may also have federal income tax consequences. One issue is "discharge of indebtedness income." This can be understood as the IRS's attempt to tax you on money you were loaned but are not going to repay. The mortgage lender may be required to report the amount of the cancelled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. Fortunately though there are various exceptions to this rule and even a recently added exception.
One of the exceptions to discharge of indebtedness income is if the mortgage debt is discharged in bankruptcy, including under chapter 7 or under chapter 13. In order to take advantage of this exception, it may be important to file for bankruptcy before the foreclosure sale.
Another exception to discharge of indebtedness income is the insolvency exception. That means if you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. Insolvency generally means that your total debts are more than the fair market value of your total assets.
The new exception if the Mortgage Forgiveness Debt Relief Act of 2007 which generally allows people to exclude certain discharge of indebtedness from the foreclosure or mortgage restructuring on their principal residence. This new provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
An applicable form is Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
The Atlanta newspaper ran a story this weekend about a Mableton woman who found herself facing an eviction notice following a foreclosure even though her mortgage loan account had been accepted into Georgia’s HomeSafe program. The HomeSafe program is a federally funded and state run arrangement whereby unemployed or underemployed borrowers can get a 0% interest bridge loan. The bridge loan funds are then paid to the mortgage lender to stop the pending foreclosure. In the Mableton woman’s case, her lender, Citibank, should not have foreclosed because it agreed to participate in the HomeSafe program. In this case, after inquiries by the newspaper, Citibank has agreed to cancel the eviction and presumably reverse the foreclosure. However, Citibank insists that it did nothing wrong because it was acting on behalf of the loan’s actual owner, Freddie Mac. The AJC notes that the Mableton woman’s case is another example of something called dual tracking, in which a lender prepares to foreclose while at the same time engages in negotiating with the homeowner for a loan modification or forbearance. The homeowner often believes that a modification is imminent and that the foreclosure will be canceled, only to find out two or three days before the foreclosure that there is no deal. Our office regularly gets calls from frantic homeowners looking for a lawyer to prepare and file a Chapter 13 to stop the foreclosure. Sometimes we can help and sometimes we have no choice but to refer these folks to one of the high volume bankruptcy firms in town that will accept last minute emergency filings. My advice to anyone who receives a foreclosure notice is this:
- while there is no harm in negotiating with a lender who has started the foreclosure process, assume that the foreclosure will proceed and take steps to prepare for a Chapter 13 as early as possible.
- you will need a credit counseling certificate before you can file – do not wait until the last minute because counseling providers get backed up prior to foreclosure day
- residential mortgage foreclosures in Georgia are held on the first Tuesday of each month. If you are negotiating with your lender, make the Wednesday or Thursday prior to foreclosure your “drop dead” deadline for reaching a deal. In 25 years of bankruptcy practice I have never seen a negotiation approval come through and a foreclosure stopped on the Friday or Monday prior to foreclosure Tuesday
- if you do reach a deal, make sure you understand the terms and that you receive confirmation in writing from your lender (or lender’s counsel) that the foreclosure will be canceled. A verbal assurance is insufficient
- do not wait until the week before a scheduled foreclosure to start looking for a lawyer. You may find one but you are not going to have time to do your due dilgence
The post Georgia Homeowners Should Not Assume that Mortgage Lenders will Negotiate in Good Faith appeared first on theBKBlog.
Chapter 11 is most often associated with business bankruptcies; however, it is also a necessity for a few high-income individuals who have debt limits that surpass the Chapter 13 statutory requirements. You see, if you have more than approximately $360,000 (this number increases every now and then) in unsecured debts or $1.1 million in secured debts, you are not qualified to file a Chapter 13. Antiquated? Of course, but what else do you expect from Congress?
While Chapter 11 has it’s own pitfalls (significantly higher attorneys’ fees for one), it offers a much higher degree of control by the filer. When you file a Chapter 13, you are proposing a plan to repay a portion of your debts. This plan must be overseen by the Chapter 13 trustee assigned to your case. The Chapter 13 trustee is there to ensure that creditors are being treated fairly, among other things, but it simply adds another person to deal with in attempting to get a plan confirmed. If you file a Chapter 11, you still propose a plan of reorganization, but there is no Chapter 13 trustee to object to your plan.
In a Chapter 13 plan, your plan payments are determined by three tests, dependent upon the facts in each case. Your payment is typically based on your disposable income after subtracting your income from your reasonably necessary expenses on Schedule J. If you do not propose to pay creditors all your disposable income over a 5-year period, your plan will probably not be confirmed.
In a Chapter 11, there is no trustee to ensure that this occurs, and the code does not provide that your Chapter 11 plan must pay out all disposable income over a 5 year period. The only way a Chapter 11 debtor can be forced to pay the equivalent of his 5-year disposable income through the plan is if an unsecured creditor objects. Notice I said “objects” and not “reject” the plan. Unlike a Chapter 13 plan, your creditors are given the option to vote to accept or reject your plan of reorganization. All you need is one vote from an impaired class of creditors to push your plan through. This is called “cram-down”, because you are essentially cramming the plan down the throats of your creditors, but I digress. Many unsecured creditors will simply file a “rejection ballot” instead of ofrmally objecting to the plan. Most courts agree that this is not tantamount to filing a formal objection, and the only way a debtor is forced to pay all his disposable income he would have earned over 5 years to the plan is if an unsecured creditor objects to the plan.
Another advantage is that even if one is forced to pay the equivalent of 5-years disposable income through the plan, the plan does not have an applicable commitment period like a Chapter 13, meaning that your plan can be much longer than 5 years if required. For instance, if your 5-year disposable income is $60,000, you would be forced to pay $1,000 per month in a Chapter 13 plan. If Chapter 11, you could pay $500 per month for ten years, 6 annual payments of $10,000 for ten years, 5 annual payments of $15,000, or any other variation that is fair and equitable to your creditors.
The take-home message is this: a Chapter 11 bankruptcy can be an extremely powerful tool for those that can afford it. It offers the debtor significantly more control over his financial affairs (as well as the ability to keep using credit cards), and the possibility, if no unsecured creditors object, to pay significantly less over time than in a Chapter 13.
Ever had a Black Friday Hangover? A Black Friday Hangover is when you overindulged on so many seemingly great deals that you ended up overspending and now dread the ensuing financial headache. There are ways to enjoy Christmas shopping and avoid the hangover but you must be diligent and remember the magic word: ”No”.
1. Just say No to Store Credit Cards
How many times have you checked out and had a store clerk ask you if you wanted to save 10% by applying for a store credit card? Believe me, they aren’t offering the store credit card as a favor to you. Store credit cards often come with high interest rates which more than offset any savings you would get when you open the account. In addition, store credit cards are usually the least convenient way to charge simply because they limit your purchases to one particular business. My usual answer is “No, thanks. I’m trying to quit”. If the store clerk persists (some get bonuses based upon the number of new accounts they open), firmly tell them that your answer has not changed since the last time they asked you.
2. Just say No to the Incredible Black Friday Deal
Don’t always fall for the store’s advertising. A recent study revealed that 90% of this year’s “incredible deals” are the same prices they were last year. In fact, the Wall Street Journal has declared Black Friday a “myth”. Don’t be swayed by mail-in rebates (does anyone ever mail in a request for rebates?). Don’t be swayed by package deals because the “throw-in” items may be of poor quality or not necessarily what you need or want. Finally, use technology to verify if you are getting the best deal. Google Shopper, Invisible Hand and RedLaser all allow you to search for better deals on items.
3. Just say No to Overindulgence
The holidays are about more than just overindulging on rich food. Christmas can leave many families broke because of overindulgent gift giving. This year, avoid spending too much by setting a budget for each person on your gift list and do not stray from that budget even if the latest and greatest Christmas toy is not on the budget. In addition, consider leaving the television off (…you can do it!). Television ads are designed to create hype and interest about a product and sometimes the price tag is a financial disaster. Exchange TV time for wonderful holiday experiences with loved ones like baking, visiting a less fortunate member of the community or creating hand-made gifts together.
Ever had a Black Friday Hangover? A Black Friday Hangover is when you overindulged on so many seemingly great deals that you ended up overspending and now dread the ensuing financial headache. There are ways to enjoy Christmas shopping and avoid the hangover but you must be diligent and remember the magic word: ”No”.
1. Just say No to Store Credit Cards
How many times have you checked out and had a store clerk ask you if you wanted to save 10% by applying for a store credit card? Believe me, they aren’t offering the store credit card as a favor to you. Store credit cards often come with high interest rates which more than offset any savings you would get when you open the account. In addition, store credit cards are usually the least convenient way to charge simply because they limit your purchases to one particular business. My usual answer is “No, thanks. I’m trying to quit”. If the store clerk persists (some get bonuses based upon the number of new accounts they open), firmly tell them that your answer has not changed since the last time they asked you.
2. Just say No to the Incredible Black Friday Deal
Don’t always fall for the store’s advertising. A recent study revealed that 90% of this year’s “incredible deals” are the same prices they were last year. In fact, the Wall Street Journal has declared Black Friday a “myth”. Don’t be swayed by mail-in rebates (does anyone ever mail in a request for rebates?). Don’t be swayed by package deals because the “throw-in” items may be of poor quality or not necessarily what you need or want. Finally, use technology to verify if you are getting the best deal. Google Shopper, Invisible Hand and RedLaser all allow you to search for better deals on items.
3. Just say No to Overindulgence
The holidays are about more than just overindulging on rich food. Christmas can leave many families broke because of overindulgent gift giving. This year, avoid spending too much by setting a budget for each person on your gift list and do not stray from that budget even if the latest and greatest Christmas toy is not on the budget. In addition, consider leaving the television off (…you can do it!). Television ads are designed to create hype and interest about a product and sometimes the price tag is a financial disaster. Exchange TV time for wonderful holiday experiences with loved ones like baking, visiting a less fortunate member of the community or creating hand-made gifts together.
A topic of much concern is liability in a residential mortgage foreclosure in Florida.
In the origination of a typical residential mortgage transaction, there are two instruments - the promissory note and the mortgage. The promissory note documents the actual terms of borrowing and the mortgage provides for a lien on the real property to secure the debt of the promissory note.
In a typical residential mortgage foreclosure action in this part of Florida, the foreclosure case initially usually only seeks a judgment setting a foreclosure sale of the involved real estate. This judgment of foreclosure seeks the setting of a foreclosure auction sale by the Clerk of the Court. A typical judgment of foreclosure is not a "money" judgment upon which the mortgage company can seek "execution" or collection of the sum due other than via the proceeds of the foreclosure auction. It should be noted though, that some residential mortgage foreclosure cases contain an additional count for a judgment on the promissory note which would be a "money" judgment and allow the mortgage company to seek "execution" or collection from any non-exempt assets
After the foreclosure sale, the mortgage company may be able to seek a "deficiency" judgment or otherwise sue for the balance due on the promissory note that was not paid from proceeds of the foreclosure sale. In recent times in South Florida, most mortgage companies have not pursued deficiency judgments for a variety of reasons. This policy though could change.
In a situation of a first and second mortgage on a property in today's market, often the second mortgagee will not pursue a foreclosure but will sue on the promissory note to obtain a "money" judgment upon which it may seek collection.
Where a husband and a wife own a property, it needs to be clarified if both parties actually signed the promissory note. Often one of the spouses only signed the mortgage and not the promissory note and such spouse would not generally face liability for a deficiency or on the promissory note. The spouse would have signed the mortgage but not the promissory note if he or she was a title holder or even if not on title, due to the Florida homestead provisions.Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
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