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The evidence is coming in, and it makes absolutely perfect sense: The federal and state governments are ramping up tax examinations and collections to bring in more money.
Just this morning in our tax and bankruptcy law firm: Five new cases, not including the other tax cases on my desk. I sensed this was coming. It's a no-brainer for a policy-maker: Why raise taxes and antagonize the citizenry, when you can just enforce more aggressively what's already on the books?
The difference between what is collected on time and what is legally owed to the government is known as the "tax gap." IRS has examined the problem and published its a study.
IRS estimates that, for the 2001 year studied, the federal government was losing about 15 to 16.6 percent of the dollars owed to it. (Since most states mimic the federal tax scheme, the state loss in Maryland, Virginia and the District of Columbia would be comparable.)
As a dollar figure, it amounts to between $312 billion and $352 billion. Collecting that is not chump change and would have a significant impact on public financing. Hence the collection initiative.
According to the study, there are three components making up the "tax gap":
1) Failure to file tax returns.
2) Underreporting of actual income on tax returns.
3) Underpayment of the tax stated on the tax return.
Underreporting occurs when the taxpayer files a return but omits reporting some income and/or overstates or takes deductions or credits to which they are not entitled, whether purposely or out of ignorance.
Underpayment occurs when the tax return is filed reporting the correct tax amount, but the taxpayer does not, or cannot, make full payment when due.
Many of the tax problems we see in this office can be traced to incompetent or downright criminal tax preparers. However, when the taxpayer is caught by the IRS or state tax agents the tax preparer will be of interest to them, but the tax preparer's conduct generally is not a defense for the taxpayer to the tax liability.
My advice: Avoid a tax preparer without demonstrated licensing, education, and experience. Some questions to ask:
- What are your credentials? Generally, you can trust tax preparation by a CPA, tax attorney, or a preparer with a large, national company that has been in business for a long time.
- Of what tax organizations are you a member? Membership in an organization indicates they are serious about what they do, want to keep up with developments in the field, and are not afraid to be in the company of peers.
- What education do you have? Look for a bachelors degree in accounting, finance, or business administration.
- Do you have a license? Attorneys need to be licensed in the state in which they practice or offer services, and CPAs have to pass a rigorous exam. Unfortunately, generally you do not have to be licensed to offer tax preparation services. (Although the IRS is considering licensing.) At a minimum, ask to see a business license, which is required in most jurisdictions. This will indicate the preparer is not afraid to make himself or herself known to the local government and meet some basic qualifications.
What the most current tax scams we are seeing perpetrated by fly-by-night tax preparers:
- Taking TWO head of household deductions by having the couple do two tax returns claiming they live in separate residences. Often they use a relative's address.
- Qualifying for the earned income credit or taking more exemptions by claiming children who do NOT reside with the taxpayer.
It's up to you to be informed. Be careful and seek out competent counsel.
Sometimes it is worthwhile to put up a fight when you're being sued on a credit card or mortgage loan deficiency. The truth is, many times, the lender does not have the evidence available to prove the case, or does not have the means to get the proof admitted into evidence -- a crucial step to win a judgment for the debt against the borrower.
J.P. Morgan Chase & Co. tacitly admitted this recently when it voluntarily dismissed more than a thousand of its credit card lawsuits across the country. The company won't admit WHY it took this step which was reported in last week's Wall Street Journal.
It has been coming to light in the courts, however, that, just like the "robo-signers" that surfaced with the foreclosure mess, credit card lawsuit affidavits of the debt allegedly owed have been signed by employees who are not personally-familiar with the company records and have not verified the debt.
Rather than risk public disclosure and embarrassment, speculation is that the company decided to withdraw the cases until the documentation could be fixed.
For the poor soul facing a lawsuit, it is important to know that the collection "model" used by the credit card companies is based largely on the fact that very few debtors respond to the suit. In fact, about 94% of suits end up in "default judgments" because there is no response by the defendant.
To defend, you may have to have some knowledge of the law. This attorney frequently sees unrepresented debtors showing up in court and responding in this typical fashion to the judge's query as to whether they owe the debt: "I cannot afford to pay." By responding this way, the debtor has implicitly admitted the debt is owed, hence, the judge will issue judgment, and not being able to pay is not a valid legal defense to establishing the liability.
The debtor will have to, in good faith, contest the liability and ask for trial. Some understanding of the rules of evidence and "discovery" are helpful to know what proof the lender will have bring forward, how the debtor can ask for it, and what the lender's attorney will need to establish to get it admitted into the record.
It's not foolproof, but sometimes worthwhile, particularly when the debtor cannot simply declare bankruptcy, maybe because he has property which cannot be protected and which he would lose, or other personal reasons.
This law office specializing in financial matters in DC, VA and MD has successfully defended creditor lawsuits and settled others. One current case involves a suit for $185,000 for a second mortgage that was left over from a foreclosure on the client's home. Today, we got a letter from the lender who has brought his settlement offer down to $30,000 -- not a bad discount.
It doesn't hurt to investigate all the options. Don't be in the 94% who just let the lender get a judgment against them without a fight.
I have written several blogs which address the blight of the homeowner in trouble because of the recent economic downturn. I’m talking about people who borrowed an affordable sum after making a down payment to purchase their dream home. Until the recent economic downturn these homeowners made their monthly payments ( in many cases for years). Then layoffs started. In a great number of cases it was impossible to replace lost jobs at their salary range.. Many were forced to accept jobs paying less. By the time life starting getting back to normal, their mortgage payments were way behind. To make matters worse their new salaries don’t stretch enough to make a full mortgage payment.
The federal government had multiple opportunities to act in a way that would have thrown a life line to these good folks and each time either failed to act or threw the life line beyond reach. What were these opportunities?
Congress could have amended the Chapter 13 Bankruptcy Code in such a way as to give a Bankruptcy Judge the bases upon which to fix most of these loans. What was proposed was simply giving ‘Middle America’ the same rights as General Motors has, not expanding the Bankruptcy Code. Congress took away many rights from homeowners a number of years ago and all that was proposed was restoring those; rights and,
Congress then set billions of dollars aside to give folks in this position a way to modify their home loans to make their mortgage payments affordable and at the same time caused very little,( if any pain) to the financial institutions. There can be little question that this vast amount of money thrown at the problem has done little, , to help the consumer. In short a failure. . What is more distressing are the results of a homeowners when unsuccessful in obtaining a loan modification. The abuses in this area has increased the number of foreclosures, in many cases because each those homeowner thought they were about to get their home loans modified. The misconduct on the part of the financial institution usually starts with a temporary fix of lowering the payments and/or interest rate while a modification is being processed. Somehow the modifications are seldom approved and the foreclosure, clock keeps ticking while the loan modification is processing. For some it’s a matter of days from being denied a loan modification and their foreclosure.
Now there may be a glimmer of hope. The Attorney Generals from a number of states have weighed in on the problem of trying to come up with a fix for HAMP (the law that was to fix home owners having a problem). These States Attorney Generals are pushing to amend/change the rules as to what lenders can and cannot do while a modification is being considered especially where there is a temporary fix in place. Briefly it would prevent the abuses that are currently going on.. A word of caution efforts to help the homeowner continues to build a strong opposition in Congress.
It's a little known, but extremely valuable, technique employed by experienced bankruptcy lawyers: Using the "automatic stay" feature of bankruptcy to get a repossessed car back into the hands of its owner.
Our DC-based bankruptcy law firm used it the other day to get a car back for a young man in Northern Virginia who needed his car to get around and commute to his job.
When a car is repossessed, physically it comes under the control of the lender. However, legal title does not pass, and remains with the owner, until a legally-valid auction has been conducted and title then conveyed to the winning bidder, which oftentimes is the lender.
Until that auction takes place, which also must be conducted according to procedures stated in the contract and/or state law (and which usually includes notice of the auction date, time, and location to the owner), legally the car still belongs to the individual.
If a bankruptcy is filed by the owner, the "automatic stay" (a court order requiring debtors to stop enforcement action) comes into existence halting the auction. Our firm's practice is to immediately fax confirmation of the bankruptcy filing to the lender, and then make arrangements for the owner to pick up the car.
To keep the car, the owner must become current on the loan by paying all arrears, late fees and costs of repossession, and also make the regular payment going forward. The owner has to bring the loan current and re-start payments shortly after filing in Chapter 7, or the lender will ask the court for permission to "lift the stay" and proceed once again with the repo. Otherwise, if the owner has the money, or can raise it quickly, he can exercise redemption rights in Chapter 7 and fully pay off the car at its current value in a lump sum payment.
Chapter 13 bankruptcy offers additional options, such as paying the arrears and costs, through a plan of 36 to 60 months. And an even more powerful right exists in Chapter 13 to re-set high interest rates to a little more than prime, and/or pay only what the car is worth through the plan (if the owner has owned the car for more than two and half years, or the vehicle is used in his business) in what's known as a "cram down."
Automobile lenders are getting more aggressive and creative. Recently one of our clients had her car repossessed on a Sunday from a supermarket parking lot when she went out briefly for groceries. Obviously the lender staked out her home waiting for an opportunity.
It can happen, but remember that it's not the end of the story. There are still ways to fix it.
Prior to the enactment and implementation of the federal bankruptcy laws designed to help people keep their homes there were always a few people in trouble and waited too long before seeking bankruptcy legal advice on Chapter 13. These few were faced with the bitter truth that their failure to act promptly resulted in their home being lost to a lender at foreclosure. Fortunately, in the past, this situation only rarely occurred.
Things have changed for the worse. The situation has become complicated in a number of ways: one of the most frequent of which is a couple attempting to modify their mortgage at the same time the foreclosure process is going on. On the one hand they are receiving notices leading to foreclosure at the same time they are being told their request for modification is being processed and will surely be approved. It’s really sad when you are getting mixed signals to not be concerned with the foreclosure process because the modification will fix the problem. In a significant number of cases, within a few short days of the foreclosure sale, they are told their loan modification has not been approved and by the way the loan modification personnel can do nothing to help postpone or intervene saving your home!
This type of news is shocking and sets most people in shock as they try to come to grips with what wasn’t a “fix” but an absolute nightmare facing foreclosure within a few days. By the time most people come to grips with the foregoing situation and scramble to obtain bankruptcy legal advice to save their home from foreclosure, it’s too late!! How this type of situation is allowed to happen almost seems criminal. The sad truth is our government set aside billions of dollars to fix home loans that were in trouble, adopted rules and regulations on how these situations should be handled yet provided no one in charge to make sure the banks and mortgage companies play fair.
In the previous Blog I discussed Reaffirmation, which is one of the ways for a debtor in Chapter 7 bankruptcy to keep property secured by a lien such as an automobile. There are alternatives to reaffirmation. There are two ways to eliminate a debt secured by property, one of which is to give the property back to the creditor and the other allows you to keep the property by redeeming it as allowed by the bankruptcy laws.
The kinds of property that can be redeemed is limited to consumer goods which are used primarily for household purposes, such as furniture, a refrigerator, washing machine, dryer, personal computers, televisions and automobiles. The advantage only works to the debtor's advantage if the creditor is underwater (upside down) with its debt. When the collateral is worth less than the debt you only have to pay the creditor what the property is worth rather than the entire debt. An example would be if you owe a computer company $2,000 on a PC that is only worth $500, you would only have to pay the company $500. The only disadvantage is that you have to pay the creditor in cash. Having to pay cash is often a challenge for many individuals just emerging from bankruptcy. In the right situation redeeming consumer goods can work a lot better than a reaffirmation agreement.
To redeem property requires a court order. Your lawyer files the appropriate documents with the Bankruptcy Court, a hearing is set at which time the court places a value on the property. You pay the creditor cash for the value of the property determined by the court and the creditor releases its lien. You now own the consumer good free and clear of debt.
A reaffirmation agreement is a contract that is used in a Chapter 7 Bankruptcy case that must be approved by the Bankruptcy Judge, in most cases without a court hearing. In general, the purpose of this agreement is to agree to repay what is owed to a creditor, in almost all cases the debt is secured by something that the debtor bought and wishes to keep. A good example would be an automobile. If the Debtor wishes to keep the car and still owes money on the car, he/she must agree to continue to pay for the car.
A reaffirmation agreement is sent to the Debtor's lawyer by the Creditor, who then obtains the client's signature and then must certify that the reaffirmation agreement is in the debtor's best interest and does not present an undue hardship, as set forth in the bankruptcy code. The document is then filed with the Court and approved by the Judge without a hearing. However, as with all things in life, there are exceptions that would trigger a hearing before the Bankruptcy Judge, at which time the client, through his/her attorney would have to justify the reaffirmation agreement.
One example, is that the debtor's budget filed as part of the paperwork that started the bankruptcy case does not demonstrate that the debtor would have the money to pay for the car the debtor wants to retain. In this case, the debtor would have to find a way show the Judge that the payments could be made without creating undue hardship.
Another example, would be the debtor wishes to reaffirm an unsecured debt and the debtor's lawyer is unable to certify the reaffirming the debt is in the debtor's best interest. In this case the Judge is going to want to know what makes this particular unsecured claim different from the other unsecured claims, that he should allow the debt to be reaffirmed. Justifying this type of reaffirmation usually requires demonstrating to the Judge that there is something unique about either the debt or the relationship between the debtor and the creditor. An example of a reaffirmation agreement that I presented to the court was a situation in which the debtor had a career in the military and served his country honorable for a long time and had retired in El Paso to be close to a large military base as well as a military hospital. He had always shopped on post and had always had a military credit card allowing him to make credit purchases on post. His argument was simple -- He had always shopped on post and always had a military credit card and that the use of this credit card was not a contributing factor to his bankruptcy. In short, he wanted to continue to do what he had been doing for over thirty years. When I finished arguing the debtor's position the judge did not hesitate in making a ruling. He stated: "I come from a military family and I understand the special relationship that exists between this person and this particular creditor. I further understand that not to allow this debt to be reaffirmed would be a life changing event for this retired person. The Reaffirmation Agreement was approved by the Court.
The "Means Test" became law as part of the Bankruptcy Consumer Protection Act Of 2005. The test is mandated by the bankruptcy code including a long, vague and confusing explanation of exactly how to set up the test, which was left to the Office of the United States Trustee. The backbone of the test is derived from the Internal Revenue Code. The test has gone through more than a few changes as people in charge attempted to make the test fit the statute and has been subject to a number of court rulings both by the Bankruptcy Courts and the Courts of Appeal. Two (2) changes that have recently taken place are:
The Court of Appeals for the Fifth Circuit, the Appellate Court that Texas is subject to has recently ruled on whether or not a debtor is entitled to an "Ownership Expense" deduction when the vehicle is paid for. The Court ruled that a debtor is entitled to an ownership expense deduction regardless of whether or not there is a debt against the vehicle.
Is a debtor entitled to an additional deduction with a vehicle that has high mileage? Obviously a car that has low mileage costs less to operate than a vehicle with high mileage. The Office of the United States Trustee has determined that a debtor is entitled to an extra deduction for vehicles that have over 200,000 miles on them. Exactly how much of a deduction is unclear at this point and is apparently determined on a case by case basis.
The result of the foregoing is that the bar has been lowered to some extent as to whether or not a debtor can be eligible to file a Chapter 7 bankruptcy rather than a Chapter 13 bankruptcy.
Required by law, the first request that a trustee for a Chapter 7 or a Chapter 13 bankruptcy makes of a debtor is to see his driver's license and social security card in order to establish the identity of the debtor. The trustee is fulfilling his obligation to identify the debtor by seeing an original driver's license, because it has a picture of the debtor and then matches the social security number against the name on the card and then compares the same against the bankruptcy paperwork. There are, of course, other forms of identification that will work just as well such as a military identification card. What will not work is a copy of any of the items mentioned, they must be originals.
If a debtor does not have these items with him/her, at least in El Paso TX, is that, in a Chapter 13 bankruptcy case, the meeting is continued to a later date, which means you have to take another day off of work and in the case of the Chapter 7 bankruptcy you must bring the originals by the Trustee's office within several days after your 341 Meeting, not as bad as having the meeting continued, but still inconvenient. This may seem petty, still copies vs. originals will delay your bankruptcy moving forward.
Oh my God, today I spoke with a woman who was considering bankruptcy as a way to get out from under her credit card debt. She like most people would rather pay off her debts than file for bankruptcy especially when you can wrap your arms around your debt total. I applaud your ethics and values. Sometimes, based on how much you owe in credit card debt it could take years and years and years to pay off especially due to mounting interest rates. Some of these debt relief storefronts are no better in helping you than the exorbitant interest rates charged by the credit card companies. Getting back to this woman I spoke to today, her debts today were approximately $6,000. The company she was (at least I hope it's in the past now) considering working with was going to charge her on top of her monthly payment towards her credit card debt - a service charge of $300 per month during the lifetime of the payment schedule. She was told that it would take approximately 24 months. What is wrong with this picture? A $6,000 debt without additional interest charges would cost this woman more than $13,000. People do the math!! I know how it feels to have bills you can't pay and to have creditors breathing down your neck. I know how badly that can make you feel and so you think anyone that will work with you is a blessing. NOT................ Read, read, read the fine print........... You're not buying a car ............. you're paying off debts. DO THE MATH.
If you choose to handle your credit card debt through a debt relief agency seek out a non- profit agency. Or consider filing bankruptcy, Chapter 7 where you erase entirely your credit card debt as well as all unsecured debts if you qualify.
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