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Beware of Tax Implications from a Short Sale or Loan Modification

This Article recently appeared in the New York Times. 

Come tax time, JPMorgan Chase will be able to write off the $1.5 billion in debt relief it must give homeowners to satisfy the terms of a recent settlement.

But the homeowners who receive the help will have to treat it as taxable income, resulting in whopping tax bills for many families who have just lost their homes or only narrowly managed to keep them.

They are not alone. A tax exemption for mortgage debt forgiveness, put in place when the economy began to falter in 2007, was allowed to expire on Dec. 31, leaving hundreds of thousands of struggling homeowners in financial limbo even as the Obama administration has tried to encourage such debt write-downs.

Congress routinely allows tax breaks to expire and then reinstates them, usually retroactively, as it did last year. But the stakes are high for families dealing with large declines in their home values, and reinstatement of the tax breaks is more uncertain because of a movement in Congress to broadly overhaul the tax code, which, despite its long-shot prospects in an election year, could end up eclipsing smaller tax issues.

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Mr. Heil owes $250,000 on his mortgage, and has found a buyer willing to take the house for $150,000, but his tax bill would be $28,000. David Maxwell for The New York Times

“Frankly, I’m worried because this should have gotten done before the end of the year and we’ve got families that have to make decisions now,” said Senator Debbie Stabenow, Democrat of Michigan, who is the sponsor of a bill that would extend the mortgage tax break.

The tax exemption was intended to help homeowners who are underwater — that is, who owe more on their mortgages than their homes are worth. According to the real estate data service CoreLogic, there are still more than 6.4 million households underwater.

Typically, if someone lends you money and later says you do not have to pay it back, the I.R.S. counts the amount forgiven as income, except in cases of bankruptcy or insolvency.

Short sales, in which a bank agrees to let homeowners sell their homes for less than they owe (a common way of avoiding outright foreclosure), are a form of canceled debt, as are loan modifications that reduce the amount owed.

 

Loss of the exemption is a financial body blow to homeowners already struggling to make ends meet. “I’m in a hole here — I’m trying to work my way out,’” said Eric Heil, 50, a hospital imaging technician who said a divorce and reduced income were forcing him to sell the house he has owned for 18 years in Parma, Ohio. “And the government’s going to say you have to pay taxes on it?”

Mr. Heil owes $250,000 on his mortgage, and has found a buyer willing to take the house for $150,000. The bank has agreed. But if Congress does not extend the exemption, he will be forced to count the $100,000 difference as income. That would mean a $28,000 tax bill, and Mr. Heil has no idea how he would afford it.

The number of people using the mortgage debt relief exemption has increased every year, reaching almost 100,000 in 2011, the most recent year for which the I.R.S. has figures. That number could be far greater in 2013, when there were more than a quarter-million short sales, according to Daren Blomquist of RealtyTrac, who estimates that those families received an average debt reduction of roughly $37,000. If the exemption had not been in place, that would have translated to an extra $9,250 tax bill for those in the 25 percent bracket.

Many homeowners are so deeply underwater that they require much more help. Under a separate mortgage settlement involving the five largest lenders, more than 90,000 homeowners received debt relief averaging $109,000 each.

Please Don’t Cash in Your Retirement Accounts to Pay Credit Card Bills

A huge mistake that many of my clients make is that the cash in their 401k plans or IRA accounts in order to pay off debt. Most of these clients have already made this mistake prior to meeting with me.  Their intentions are good, trying to pay down their debt, but they are usually motivated by panic and the fear put in them by ruthless debt collectors and they make the decision without knowing all of their options.  Therefore, they usually make the wrong decision to liquidate retirement accounts and they end up regretting it later.

The truth is that retirement accounts that are ERISA qualified, which bascially means that you will incur a tax penalty if you liquidate the account prior to retirement age, are not reachable by creditors.  The prevailing public policy is that people need these retirment funds available to them for living expneses once they retire, thus creditors are not legally permitted to levy and liquidate these accounts.  These accounts are fully exempt from the reach of creditors whether you are in a bankruptcy or not.

If you are experiencing financial difficulties and are struggling to pay your bills, it is important that you consult with an experienced bankruptcy attorney, who can help you navigate these difficult financial issues and advise you as to the ramifications of such decisions.  Normally, my advise would be to never liquidate your retirement accounts, what you are basically doing if you do liquidate these accounts is taking a fully exempt asset and converting them to a non-exempt asset.  These means the funds are now reachable by creditors.

So please, before you take the drastic step of liquidating your retirement account, contact Capone & Keefe (888-540-4795) and let our professionals help you make the best decsions for yours and your family’s financial future.

The Pitfalls of Balance Transfers

I’m sure many of you are receiving all kinds of offers from credit card companies offering low interest rates, 0% to 2.99% on balance transfers or new purchases.  These seem the perfect opportunity to pay off those higher interest rate cards that you presently have. However, these seductive rates do come at a cost if you don’t know what to look out for.

So have at look at these five tips to avoid getting taken advantage of, when taking advantage of balance transfer offers:

#1 Inspect the Interest Rates
When playing the balance game, the best bets are obviously the lowest interest rates available.  These days if you have a pretty good credit score, you can normally find a 0% interest teaser rate that can greatly reduce the amount of interest you’re currently paying. But be wary: these offers eventually expire, and, if they’re not paid off, can often default to a higher rate than you’re currently paying. So, the rule of thumb is, if you can pay off the balance before the end of the promotional period, it’s a good time to transfer.

#2 About That Promotional Period.
In the end, the longer the promotional period, the better. Choose a year or more to pay off your promotional rate and leave those 6 month cards to the more gullible guys.

#3 Find Out About Those Fees
Some credit card companies make their money on 0% balance transfer offers by charging a certain percentage of the transfer amount to front the exchange. Keep in mind that transferring a $10,000 balance transfer with a 5% transfer fee mean you lose $500 in the process. It’s important to also factor in an annual fees, which can make the balance add up in the end

#4 Get Used to Reading the Fine Print
The easiest way for credit card companies to slam you with extra fees following your balance transfer is if you miss a single payment—a fact often hidden in the card offer’s very fine print. Make sure you know what to expect by taking a little time to inspect the tiny type on your latest offer.

#5 Take Heart With a Good Transfer
Imagine a world with no balance transfer fees, ones that would increase your current credit line along with the transfer, or were 0% for the entire life of the transfer balance. It may seem very 2001 the very notion of these types of offers, but if you find these types of pre-recession rates, snatch them up and pay down those costly credit cards while you still can.

Keep in mind, the balance transfer “game” is only easy for those who are good at juggling their accounts and paying off debt quickly with cash they already have. For example, you can pay off one credit card loan by borrowing from another card that carries a low, introductory rate and save some money, if, (and that’s a big “if” in this economy), you can pay off the transfer before the interest rate jumps back up to where it will inevitably jump after the promotion ends. If you’re considering bankruptcy, you’re not likely in the position to play this game, plain and simple.

And, if you are bankruptcy bound and have transferred balances, address this fact with an attorney. Because balance transfers are essentially a loan that you’ve borrowed to address another loan, if you file for bankruptcy within 90 days of the balance transfer, the transferred debt could be presumed to be fraudulent and therefore exempt from being wiped away in bankruptcy. These transfers are also payments on existing debts, and as such, the trustee could also attempt to recover that amount for creditors, making your case more complicated.

So, if you have been effected by the economy, are facing insurmountable credit card debt and are wondering how to get back on track, knowing a qualified bankruptcy attorney can also help you to conquer your creditors and face your financial fears, yielding the right kinds of support, information and insights—at a low cost. The bankruptcy attorneys at Capone & Keefe offer free consultations to discuss these and any other bankruptcy issues you may have, just call toll free 1-888-540-4795 to set up you consultation today.

Do I Qualify For Bankruptcy?

Many clients have delayed coming in for a consultation because they fear they won’t qualify for a bankruptcy.  Most of the time, they have this fear because of misinformation they have received from friends or family or even from creditors.  The bottom line is that everyone qualifies for some type of  bankruptcy protection. 

Since the bankruptcy laws changed in October 2005, something called the means test has been instituted.  Many people incorrectly think that this test was instituted to prevent people from being able to file a bankruptcy.  That is not the case.

The means test is used primarily to determine if a prospective debtor is eligible for a Chapter 7 or if they would have to file a Chapter 13.  Basically, the means test takes a historic look at your income based on the preceding 6 months to determine  a monthly average, which monthly average is then multiplied by 12 to get what the Bankruptcy Code terms your “current income”.  This figure is then used to determine if you are above or below the median income in your State for a household of your size.  If you are below the State median income, then you would qualify for a Chapter 7 bankruptcy. 

 If the means test reveals that you are above the State median income, then we have to proceed with the second prong of the test, which is to take the monthly income average and then deduct from that average the allowable expenses, as set forth in the Bankruptcy Code.  At the end of the calculation, if there is a postive number, indicating disposable income, then chances are you would have to file a Chapter 13 case and make a monthly payment to the Trustee in an amount approximately equal to  the disposable income indicated by the means test.  This does not mean that you have to pay back all of your debt!  It means that you have to pay back what you can afford, based on the means test, on a monthly basis for 60 months.  You would then receive a discharge from any unpaid balances owed on your dischargeable debts upon completion of your chapter 13 plan.

Another common misconception that many people have is that if you own a home you don’t qualify for bankruptcy, which is of course not true .  Or they fear that if they do file a bankruptcy they will automatically have to give up or sell their homes.  Also, not even close to the truth.

The fact of the matter is that a majority of people that file for bankruptcy protection are homeowners.  In fact, many of those people are filing a bankruptcy specifically to save their homes.  An experienced bankruptcy attorney would never put their client in a position to lose your home, if it was the client’s intention to keep their home. A chapter 13 bankruptcy is what’s called a reorganization.  A chapter 13 debtor is what’s termed in the Bankruptcy Code as a Debtor in Possession.  These means that as a chapter 13 debtor you retain possession of all of your assets.  You don’t have to sell anything nor can anyone  force you to sell anything. 

The attorneys at Capone & Keefe can help you by explaining all of your options, so call us at 1-888-540-4795 and start to put your mind at ease and your finances back on the right path.

Negative Impact of the Bankruptcy Reform Act-Congress Needs to Fix It’s Mistake

 The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA ) became operative on October 17, 2005. A little more than six months later, the Case-Shiller index of real estate values reached their peak and began a free-fall that hasn’t stopped yet. (http://www.ritholtz.com/blog/wp-content/uploads/2011/04/2011-Case-SHiller-updated.png ) Shortly, real estate will be worth what it was in 1998 and the U.S. will have lost a decade of growth. Many have filed for bankruptcy to get out from under depressed values.

Although neither the media or our government wants to use the word “depression” publicly when referring to the economy, consider the following:

*Foreclosures have increased 14% during the last quarter and the number of pending foreclosures and mortgages in default is staggering.
*Home ownership is falling and is reaching historic lows among segments of the population. Parts of Florida are reaching 20% vacancy and other states are not far behind.

*Last month, the Census reported that the rate of home ownership fell in the past decade by the largest amount since the Great Depression. Meanwhile, millions of Americans have turned to the rental market at a time when little new product is being built, allowing landlords to raise rents. The national rate came in at $1,004 in the third quarter, up from $981 a year earlier, according to Reis Inc.

* It’s estimated that it will take more than 15 years for Freddie Mac to unload it’s REO (Real Estate Owned)  inventory.  These are the properties that Freddie Mac has taken back through foreclosure. http://www.housingwire.com/2011/11/03/freddie-could-take-more-than-a-decade-to-unload-reo-inventory.
*Unemployment is pegged at a stubborn 9%, but that number doesn’t include those who no longer qualify for benefits or college or high school grads who have never been able to find a job. More than 400,000 people lose their job every week. Nor does it account for those that are underemployed, meaning that they are making significantly less at their current job than they were at previous jobs, but took the job nonetheless to have some type of income coming in.

*Municpalities and state governments are running huge deficits as they struggle to maintain social services in the face of declining tax collections. Look at Harrisburg, PA or Jefferson County, Alabama that have filed for bankruptcy.
*Tent cities of the displaced are showing up everywhere. Check the desert outside San Diego, CA or any of the “Occupy Wall Street” or its progeny around the country.
*Meanwhile, the number of people around the country filing for bankruptcy have declined some 15 to 20 percent since the beginning of the year. Why? Because bankruptcy is designed as a safety net to catch you before you hit the ground. You file for bankruptcy to save assets and future income. But when you have neither, why bother to file bankruptcy?

You can almost point to the reforms in bankruptcy that started this ball rolling. It removed the safety valve for overburdened consumers and any incentives for starting a small business that might grow into the next Apple computer.  Instead of Congress focusing their efforts on making changes that may in fact, help their constituents, like rolling back some of the changes enacted to the Bankruptcy Code by BAPCPA or by amending the current Code and allowing Bankruptcy Courts to modify mortgages, they provide us with ineffectual loan modification programs like HAMP and HARP.

Many pundits are now predicting that these protests that are popping up around the country will soon turn violent.  People are frustrated and hopeless, which is not a good combination.  Perhaps some real changes to the Bankruptcy Code that favor the consumer and not the banks would be a start to relieving some of the pressure that many American citizens find themselves under. Let’s hope that Congress wakes up and starts putting more effort into providing the help that the American people need and less effort into their re-election campaigns, otherwise, I’m afraid it’s just going to get uglier.

 

Apathy the Prime Reason People Are Not Dealing With Their Financial Problems

Even though more Americans are piling on debt, fewer are seeking help in trying to get their finances back on track. Poverty in this country has increased, unemployment rates continue to hover around 9% according to the U.S Department of Labor, but when you add in the underemployed and the discouraged the figure is closer to 17%. Meanwhile according to a new study by CardHub.com consumers have accumulated $18.4 billion more in credit card debt in the second quarter of 2011 than they did in the first quarter. That is up 66% from the same quarter in 2010.

Yet, despite the increased spending and the decrease in income or for that matter employment, fewer people are seeking bankruptcy relief. Bankruptcy filings are down 15% nationally in 2011 from the same time period in 2010. clearly, people need financial help more than ever but aren’t seeking it, so what gives?

My feeling and the feeling of many other bankruptcy attorneys that I have spoken with is that many people just don’t care anymore. That they have surrendered to their situation. That things have gotten so bleak many people don’t even want to deal with the issue or acknowledge the problem. Many are just concerned with putting food on the table and keeping the lights and heat on, not with dealing with putting a stop to creditor harassment and collection activity.

The government has also contributed to the general apathy. For starters, the HAMP and HARP loan modification programs have in general been major failures with far fewer loans actually being modified by mortgage companies than was expected. However, one unintended consequence of the program is that it has been successful in  extending the time it takes mortgage companies to complete a foreclosure. Mortgage companies are required to put foreclosures on hold once a customer has been accepted into one of the modification programs. Thus, due to the general run around that mortgage servicers put customers through when trying to modify a loan, many people are in the HAMP process for 6 months or even a year before a determination is made. This means that the foreclosure is delayed for that period of time, which lets these homeowners stay in the homes that much longer without making a monthly payment.

This coupled with the moratorium placed on foreclosure proceedings in many states due to the bad record keeping of many mortgage companies has provided a situation where many homeowners have not made a mortgage payment in more than a year or two without a foreclosure complaint being filed.  This has created a situation where homeowners have become apathetic with regard to an impending foreclosure because frankly they haven’t been served with a complaint.  Thus, many homeowners, who otherwise would have acted to try to save their home are not doing anything for the simple reason that they haven’t had the pressure of a pending foreclosure to force them into action.

Also, many people have a “bailout mentality”, in the sense that they have lost their jobs and are counting on their unemployment benefits to continue to be extended so as to keep paying their bills.  Again once those benefits end, if suitable employment hasn’t been found, the bills will remain with no means to pay them.

So what to do?  The answer is to not wait for something really bad to happen, like a foreclosure complaint being filed or a bank account being levied.  Be proactive and take action now, consult a bankruptcy attorney,  get the creditors off your back now and start working towards the discharge of your debt.  This way, when things do turn around for you, you are in a position to move forward in a positive manner, rather then being dragged down by the overwhelming debt and the stress that debt brings with it.  A bankruptcy discharge will give you that fresh start that you need.  It will allow you to sleep at night and to move forward by making decisions that benefit your financial future.

Factors Considered by Mortgage Companies When Deciding Whether to Modify Your Mortgage Under HAMP

I have discussed in a previous post the eligibility requirements for a loan modification under the HAMP program, now I would like to give you some idea how the mortgage company will determine if you will be offered a modification.  We will use the same example that we used in the previous post, you have monthly gross income of $10,000.00 and your mortgage payment is $3,500 per month.  Let’s assume that your current interest rate is 5.5% and you have 27 years left on your present mortgage, which has a balance of $400,000.  The stated goal of HAMP is to modify your mortgage payment down to 31% of your monthly gross income, which would be $3,100 per month.

The mortgage company will begin its analysis by lower your interest rate incrementally to as low as 2.5% and then re-amortize your mortgage balance over the 27 years left on your mortgage to try to get the payment down to the $3,100 per month figure.  If the mortgage company gets down to the 2.5% rate at 27 years and that doesn’t equate to a $3,100 per month payment, the next step would be to extend the term of your present mortgage.  So they will take the mortgage balance at 2.5% interest and re-amortize it over a 30 year term and then a 35 year term and then finally a 40 year term to try to get your payment down to $3,100 per month.

If the mortgage company gets to a 40 year term at the 2.5% interest and that still doesn’t get your payment down the $3,100 figure, then only at that point will they consider deferring principal on the mortgage.  For example if your mortgage balance is $400,000,they may defer $25,000 of principal and then apply the amortization to $375,000 of principal at the 2.5% for a 40 year term to try to get you to the $3,100 per month payment.  The $25,000 deferred principal will remain a lien on the property, however no interest will accrue on it.  The monies would only be payable upon your sale or refinance of the property down the road.

Let’s now assume that the mortgage company analysis results in them being able to get your mortgage payment down to $3,100 by amortizing the $400,000 mortgage balance over 30 years at 2.5% interest.  The last step in the mortgage companies analysis now becomes the Net Present Value test. This means that the mortgage company will determine if it is better for them to re-amortize your mortgage as stated above and receive their money at 2.5% interest over the next 30 years or is it better for them to continue its foreclosure, incur all the costs and expenses associated with that, and receive the funds from the sale of your residence within the next 2 years or so (or however long they estimate the sale process will take). 

The value of your home will have a lot to do with how the Net Present Value test comes out. If you have a lot of equity in your home or even a little equity so that a mortgage company will be made whole through a Sheriff’s Sale, then chances are the Net Present Value test will not work out in your favor and your modification will probably be denied.  However, if you have no equity and your house is under water, there is a good chance the Net Present Value test will work out in your favor.

I have obviously over simplified the analysis, however my intent was to give you an idea what the mortgage companies are thinking about when analyzing whether or not to modify your loan.

The Foreclosure Moratorium in New Jersey Has Given Homeowners a False Sense of Security

Late in 2010, the New Jersey Supreme Court had issued a moratorium on foreclosure filings in New Jersey by six of the largest banks, including GMAC, Bank of America, JP Morgan Chase, Wells Fargo, City Bank and West One. The ban on filings was due to these banks using robo-signing of documents causing illegal foreclosure filings as the filings violated the Fair Foreclosure Act. Thus, the number of foreclosures filed in New Jersey fell from 58,000 in 2010 to just 6,000 through July of 2011.

In September of 2011, the New Jersey Superior Court had lifted the last of the six injunctions on foreclosure filings when it gave the go ahead to Ally financial and its GMAC Mortgage unit to resume foreclosure actions in New Jersey. Accordingly, homeowners in New Jersey should now prepared for a flood of foreclsoures to be filed starting at the end of this year and continuing through next year.  One prominent foreclosure firm has told me that they have 30,000 foreclosures ready to be filed now that the moratorium has been lifted.

Unfortunately, this moratorium has given many New Jersey homeowners the false sense that they will be able to remain in their homes indefinitely without paying their mortgage or otherwise making arrangements to cure their mortgage arrears.  For those that really have no intention of trying to save their home the moratorium has been a blessing in that it has in fact bought them more time to stay in the home and hopefully save the money they would otherwise be paying to the mortgage company. 

However, for those homeowners that truly wish to save their home the moratorium has perhaps made it more difficult.  Due to the fact that homeowners have not been under the pressure of a foreclosure proceeding, many have put off  the filing of a Chapter 13 petition to save their home.  The downside of putting off the filing of a Chapter 13 is that the longer you wait to file the greater the mortgage arrears become.  A chapter 13 allows you 60 months to complete your plan, thus, 60 months to pay back your arrears.  So obviously the longer you wait to file and the larger your arrears become the larger the monthly Trustee payment that will be required to cure those arrears.  Accordingly, the issue of feasibility comes into play.  Meaning can your budget sustain the additional payment necessary to cure your mortgage arrears.

The fact is that it is much easier to fix your issues and complete a chapter 13 plan and thus, save your home if you tackle your problems sooner rather than later.  So contact your bankruptcy attorney now, don’t wait until you receive the foreclosure complaint or worse the foreclosure judgment.  It will put your mind at ease knowing that you are addressing your financial issues.  Rest assured the foreclosure complaint is coming now that the moratorium has been lifted, so be proactive and address the issue don’t be reactive and sit and wait for something really bad to happen.

 

Bankruptcy May Be Your Smartest Investment and Quickest Way Back to Financial Health

Fear of the unknown, pride, uncertainty, misinformation, stubbornness, distraction, and cash flow are just some of the reasons that keep people from getting their financial life  in order with a bankruptcy filing.  The problem is that without it you may never be able to gain control of your pocketbook.

Making the choice to do nothing is the easy choice.  Your current situation is at least familiar, you’ve learned how to ignore your problems.  It’s harder to deal with your issues head on.

 But what if by meeting your financial issues head on means getting out from under your bill problems and jump starting your financial life?  Clearly, in that case it becomes far more attractive to leap than to stand still.

So if you’re having difficualty paying your monthly bills and are on the fence about what to do, here are  ten reasons for filing bankruptcy now that may help you make your decision.

  1. The stress you feel over being unable to pay your bills, having to constantly field collection calls and letters and the worry you feel about possible wage garnishment or bank account levies can destroy your health.
  2. The fact that the value of your real estate has decreased so substantially over the past few years may allow you strip off secondary liens, like equity lines, second mortgages and judgments.  If the value of your home increases in the future as the real estate market rebounds this option may not be available to you, thus filing a bankruptcy now rather than later could be much more beneficial to your long term financial health.
  3. You cannot be taxed on debt that is discharged in a bankruptcy, which is not the case with debts that you settle outside of a bankruptcy directly with your creditors. 
  4. You will be able to keep more of your assets when your federal exemptions are applied to investments you may have with depressed values. 
  5. The Federal tax exclusion for cancellation of debt on foreclosures of your principal residence expires in 2012, is limited in scope, and doesn’t deal with state taxes incurred for the debt cancellation.
  6. You cannot start to re-establish credit until you either pay off all of your debts, bring them all current and keep them current or discharge your debts in a bankruptcy.
  7. Relationships suffer in times of financial distress, the stress caused by unpaid bills, collection calls, law suits, wage garnishments, etc. takes its toll on a marriage.  So save your marriage by discharging your debts.
  8. If you wait to file until your income improves, you run the risk that the means test may require you to file a chapter 13 plan of reorganization , which requires a repayment of some of your debt; rather than being able to discharge all of your debt in a Chapter 7 now.
  9. You are not getting any younger.  Many clients are ill prepared for retirement.  Every dollar you are currently spending on making minimum payments to credit card companies is another dollar you could be saving for retirement.  Worse many clients raid their 401k or IRA accounts to pay debts with.  That is the worst thing you could do, even if a creditor receives a judgment against you they cannot attempt to collect from an ERISA qualified retirement account, which is fully exempt from creditor execution.
  10. Filing of a bankruptcy is not the black mark that most creditors want you to believe.  Bankruptcy filings have been up over the last number of years.  Chances are you know more than a few people that have filed a bankruptcy, even though it hasn’t been brought up in conversation.  Donald Trump and many other big businessmen file bankruptcies as a business tool so they can reorganize their business finances, why shouldn’t you use the same techniques to reorganize your personal finances.

For most people that are having financial problems these problems are brought on by an unexpected loss of income, which has caused them not to be able to pay their bills as they come due. Chances are that once you regain employment that alone is not going to solve your issues, as the debt has now become insurmountable since your creditors have now increased your interest rates and added late fees and overlimit charges making it impossible to catch up. 

For the reasons stated above the time to act is now.   By doing so, you put yourself in a position to move forward financially in a positive way by being debt free.  You can now use your money for things you want to and need to, like retirement and savings rather then living pay check to pay check.

The reasons most people don’t file bankruptcy is due to myth and misunderstanding.  Don’t be one of those people.  Consult a reputable bankruptcy attorney and find out how it can help you.

Do You qualify for a Loan Modification Under HAMP

Everyone it seems is attempting to get a loan modification these days. Anyone that has attempted to modify their mortgage knows that the process can be extremely frustrating. One way to make it somewhat less frustrating is to make sure that you qualify under the HAMP guidelines before you bother applying or retaining an attorney to apply for you.
First of all, you need to be delinquent on your mortgage payments in order to even be considered, the standard is 90 days delinquent. Second, you must live in the premises that you are attempting to modify the mortgage on.  Third, the mortgage you have on a single family residence cannot be in excess of $729,750.00.
If you qualify under those guidelines, you can now move to the next step. Your first mortgage payment, plus your property taxes, homeowners insurance and homeowners association fees must be more than 31% of your monthly gross household income. For example if your gross monthly household income is $10,000.00 and your mortgage payment, inclusive of taxes and insurance, is $3,500.00, you would qualify for consideration of a loan modification under the HAMP program, because you are paying 35% of your gross income towards your housing payment.

With all of those factors being present, you are now a candidate for a HAMP loan modification.  The next key step would be for you to make sure that your mortgage Servicer particiaptes in the HAMP program.  You can check at www.makinghomeaffordable.gov/contactservicer.html to see if your Servicer participates.  If your Servicer is a participant then your next step would be to put the HAMP package together and submit it to your Servicer’s Loss Mitigation Department.  I will be posting a later blog about the factors the mortgage servicers consider in determining if they will offer you a loan modification.  For now, good luck.

What is the First Meeting of Creditors?

Another frequent question I get from clients is–if I file a bankruptcy do I have to appear in Court?  Well the answer is sort of.  You may have to go to the Courthouse, but you will not be appearing in front of a Judge in a court room.  You will have to appear at what is called your 341a Hearing, which is conducted by your Trustee.  The hearing, at least here in New Jersey where I practice,  is conducted in a hearing room or at the Trustee’s office.  So that is about as close as you will come to having to appear in Court.

Nevertheless, even the mention of that hearing sends many of my clients into a panic.  The truth is there is no need to panic, the hearing is actually quite painless.  The key is to have a competent, experienced bankruptcy attorney handling your case.  If you have such an attorney, the hearing will be very painless indeed.  In fact, most of my client’s leave these hearings and say, “that was it, that’s what I was worried about.”

An experienced bankruptcy practitioner will send the Trustee all of the paperwork that is routinely requested by the Trustee weeks prior to your hearing and will follow up with the Trustee’s office as to whether there is anything else needed or any other questions that need to be addressed.  As long as the Trustee has the documents that he needs prior to your hearing and has had time to review them, it will make the hearing go much more smoothly.  The fact is the Trustee’s role is to administer your case and his primary purpose at the 341a hearing is to verify the truthfulness of your petition.  If the necessary documentation is provided to allow him to do that prior to the hearing it saves a lot of time at the hearing.  It also makes the Trustee’s job easier, which is always a good idea and helps the hearing go smoothly.

Prior to the hearing, an experienced attorney will go over every question that a Trustee will ask you so that you are prepared.  These questions will mostly revolve around your assets, liabilities, income and expenses.  An experienced attorney will also be able to point out anything in your petition that may perk the interest of a Trustee and prepare you for those potential questions.  Being prepared obviously makes the hearing go smoothly.

Clients also ask if any creditors are going to show up at their hearing.  The answer is most likely no one will appear.  My experience is maybe in 1 out of 500 cases does a creditor appear to ask questions.  Even if they do, the creditor is only permitted to ask general questions about your assets, liabilities, income and expenses.  If the creditor wishes to get more specific and detailed they would have to take a Rule 2004 examination, which is a deposition, which they will not do as it is time consuming and costly for the creditor.  So only in extreme cases where a creditor is claiming that you defrauded them in some way and there is a large amount of money owed to that creditor would they even consider taking your deposition. It is a very rare occurrence in a personal bankruptcy case.

What Kind of Paperwork Your Bankrutpcy Attorney Needs to Start the Process

One of the biggest hurdles we have in getting our clients cases filed is that our clients take a long time to gather their paperwork needed to complete their bankruptcy petition. Since the  Reform Act of 2005 was enacted a bankruptcy practitioner’s need to gather and keep in his file a large amount of paperwork has increased. Part of the reason is the potential of a random audit on your case by the United States Trustee’s Office. If your file is chosen for an audit, all of the paperwork used to complete the petition will have to be provided to the Trustee’s office to verify the accuracy and truthfulness of the petition. Thus, it is vitally important for the information be received by your attorney prior to the preparation and filing of your petition as this paperwork will need to be kept in the file.t

So what is the required paperwork? For starters, we now need to collect 6 months worth of pay information from our clients so that we can complete the Means Test. The six months needed is always the 6 months prior to filing. So for example, if your petition is to be filed in July, you would need to supply pay stubs for the months of January through June. You would also need to supply documentation for any other income you may have had during that period. This would include profit and loss statements if you are self employed, Social Security income, pensions, rent, part-time jobs, contributions from family members, unemployment or worker’s compensation, etc.

You will also need to supply your last four years of tax returns, as your attorney is required to keep those in his file. You will need to supply statements for all of your creditors, which include addresses and account numbers for these creditors, as these must be listed on your petition so that proper notice may be sent to these creditors. This includes statements for mortgage companies, car loan statements, credit card statements, personal loans, medical bills, etc. You must list all of your creditors on your petition. You cannot pick and choose who you would like to list and who you would like to leave off. You must provide a complete picture of your assets and your debts.

Speaking of assets you will need to provide copies of all Deeds, car titles, bank account statements, retirement account statements, investment account statements, etc.

In order to help prepare your budget, you will need to provide copies of your utility bills, water and sewer bills, insurance bills (life, car, etc), condo association bills, basically copies of bills for anything that you will continue to pay after the filing of your bankruptcy case.

Finally, if you own real estate, you will most likely have to have a Comparative Market Analysis(CMA) prepared by a realtor so as to value your home or real estate investments.  At least in my office, if you can provide all of that information to us, we can have your petition completed in a day if necessary.  The delays happen when clients drag their feet on getting everything together.  This only creates a problem when there is an emergent basis that the petition needs to be filed.  Like to stop a Sheriff’s Sale , wage garnishment or bank levy.

So if you really want the process to go smoothly, put all of that paperwork together prior to meeting with your bankruptcy attorney.

Short Sales, Possible Tax Consequences and Bankruptcy

Given the state of the real estate market and the large mortgage debt that many people find themselves in, many of my clients find themselves upside down on their residences.  One of the questions I get asked most often by my clients is whether or not they should move forward with a short sale on their homes.  While a short sale is one way to get out from under the large mortgage debt you are facing there are some factors to consider before moving forward, the biggest of which being possible tax consequences.

When there is a short sale, you are selling your home for less than the amount that you owe on your mortgage or mortgages.  If your mortgage company agrees to release its mortgage lien on your residence for less then they are owed, the difference in the amount that is owed to the mortgage company and the amount the mortgage company nets from the sale is generally forgiven by the mortgage company, meaning that you don’t have to pay it.  The problem is that this forgiven debt is regarded as income to you, it is referred to as debt discharge income (DDI).  The mortgage company will send you a Form 1099-C (Cancellation of Debt) and will report the income to the IRS.

Happily enough, there are some taxpayer-friendly exceptions to the general rule that DDI is taxable, and they can save your bacon. Here they are in a nutshell:

* Up to $2 million of DDI from mortgage debt that was originally taken out to acquire, build, or improve the borrower’s principal residence is tax-free (you must reduce the basis of the residence by the tax-free amount). This super-favorable rule is not available for DDI from debt that was not used to acquire, build, or improve the principal residence such as DDI from a home equity loan used for other purposes. Rats! But don t give up hope. One of the other exceptions summarized below may work for you.

* If the borrower is in bankruptcy proceedings when the DDI occurs, the DDI is tax-free.

* If the borrower is insolvent (debts in excess of assets), the DDI is tax-free as long as the borrower is still insolvent after the DDI occurs. If the DDI causes the borrower to become solvent, part of the DDI will be taxable (to the extent it causes solvency). The rest will be tax-free.

* To the extent DDI consists of unpaid mortgage interest that was added to the loan principal and then forgiven, the forgiven interest that could have been deducted (had it been paid) is tax-free.

* If the DDI is from seller-financed mortgage debt owed to the previous owner of the property, it s tax-free. However, the basis of the property must be reduced by the tax-free DDI amount.

That is obviously a lot to digest and you should consult an accountant when trying to determine if you will in fact incur tax consequences from your short sale.  However, the key for most of my clients is if the mortgage on your residence is the original mortgage used to purchase the home, then there is probably no tax consequences. If you refinanced your mortgage only for a lower interest rate and did not take any money out when you refinanced, then there are probably no tax s.  If you refinanced and used any money that you took out for the improvement of your residence, then there is probably no tax consequence, but be prepared to prove what the money was used for.

Thus, it is very important that you consult with an attorney that is well versed in bankruptcy law before deciding if a short sale is the right option for you.  You should also note as I have previously discussed in a prior post, that a short sale is no better on your credit than is a foreclosure or a bankruptcy filing. Hence, if you are in the position to be considering a short sale, you should consider all of your options before proceeding.

Bankruptcy Filing and The Automatic Stay

One of the most stressful situations that my client’s are facing or have faced prior to the filing of their bankruptcy case, is the constant harrassing phone calls and correspondence that they are receiving from their creditors. Many of my clients have ceased answering their phones or have turned them off altogether. Other clients tell me that they can’t bear to open their mail and either just throw out their mail as it comes or keep it unopened in boxes or bags.

Most people put up with this constant harassment for months, let their stress levels reach huge levels and have months of sleepless nights before they consider filing a bankruptcy. Most people let these creditors intimidate them into thinking they have no options and no hope.

However, the truth is that you don’t have to live like this and you do have options. Bankruptcy is a way to put a stop to the harassment. When you file your bankruptcy petition, you receive the instant benefit of the Automatic Stay. Upon filing, notice is sent to all of your creditors, upon receipt of this notice your creditors are no longer permitted to contact you in any manner. This means that your creditors cannot call you, they cannot send you letters or statments, they cannot file a law suit against you or continue with a law suit that is already in place, nor can they continue to attempt to collect on a judgment they may have received against you and they can no longer report negatively on your credit. If any of your creditors do continue to attempt to collect money from you outside of the bankruptcy, in violation of the automatic stay, they would be subject to sanctions imposed by the Bankruptcy Court.

In essence, all of the madness stops the minute you file your bankruptcy petition. The silence will be deafening. The number one comment I hear from clients after our initial meeting is that they will finally be able to sleep again. The reason being is that a large part of their stress will be relieved. The stress which is related to the constant harrassment they have been receiving from creditors. Once that stress has been relieved and the quiet has been restored it allows my clients to focus on getting back on track financially.

Choose Your Bankruptcy Attorney Wisely

If you are contemplating the filing of a bankruptcy, then your have obviously experienced some trying financial times. The overwhelming percentage of people that file bankruptcy file because they have experienced some type of event that has tipped that delicate scale between your income and your expenses. There has usually been a loss of income from a lost job, decrease in salary or hours, an injury that is keeping you out of work or a divorce or separation; or there has been a large increase in your expenses from a medical condition or some type of catastrophic event. Whatever the reason may be, it is enough to cause you to not be able to meet your monthly bills on time.

Most people and most of my clients have struggled to try to keep up by borrowing money from retirement accounts or from relatives before even considering the filing of a bankruptcy.  However, you are now tired of the constant phone calls, the sleepless nights, the fact that your creditors won’t do anything to try to help you, and really just the constant battle to try to keep up. In other words, you have tired everything and you have certainly not come to the decision to file a bankruptcy easily. So WHY would you just choose the cheapest or first bankruptcy attorney you come across!

The decision you make is going to help shape your financial future. It could be the difference between fixing your finances and truly achieving your fresh start and your financial problems continuing. You need to choose your attorney wisely, this is one of the most important decisions that you will make for you and your family!

It is clear that the economy in this country has been in decline for the past few years. The bad economy has not spared any industry, including the legal profession.  Thus, what has happened is that many attorneys whose normal practice consisted of real estate or land use law, having seen their businesses decline, have now turned to bankruptcy law.  These attorneys are advertising bankruptcy’s for extremely low fees.  This may seem great that you can save several hundred dollars by hiring one of these novice bankruptcy attorneys, however be careful becasue with the low fee also comes a complete lack of experience and knowledge.  I can’t tell you how many phone calls myself and my similarly experienced colleagues take from people, that have hired one of these attorneys, asking us to take over their cases because they are not happy with their attorney or he has screwed up their case. In many cases, the case can’t be salvaged, the damage has been done and all this person is left with is a potential malpractice claim against that attorney. This is your financial future we are talking about, you are looking to ease your stress not add to it, so why would you entrust your future to someone whose only dabbling in bankruptcy law to try to make a few bucks until the real estate market turns back around?

Similarly, I’ve had people call me and ask me questions about their ongoing case becasue their attorney won’t return their calls.  Unfortunatley, I have to decline to answer their questions because they are represented by counsel, but again why would you want to entrust your future on an attorney who wont’ talk to you once your case is filed and he is paid.  You need to seek out an attorney that you are comfortable with, that you know will work on your case and that will provide you the guidance and expertise you need to get the most out of your bankruptcy filing, so that you are in a better place after you file your case then you were in before.  You need to have someone on your side  that can answer you questions and that doesn’t mind answering your questions. 

 So before you go to your consult, do some research, write down your questions and ask those questions to the attorney at the meeting.  Then ask yourself after the meeting, was this attorney able to answer my questions satisfactorilly, did he have a good grasp of the information, did he explain the process to me in terms that I could understand, did he give me information about bankruptcy that I was unaware of, do I feel confident that this person can do the job for me, do I feel comfortable with him, is he able to explain my options clearly with regard to a Chapter 7 and a Chapter 13, can he explain my non-bankruptcy options? If your answer is no to any of these questions, you may want to look elsewhere for an attorney.

As for the retainer, realize that the lowest priced attorney is likely not your best option. Most likely the lowest priced attorney has little or no experience in the bankruptcy law area and you are getting a break on fees becasue you are one of his guinea pigs.  Is that what you want to be when you financial future rests on this decision?  As an analogy, would you let a brand new doctor just out of school  perform surgery on you just because he is significantly cheaper than the experienced surgeon.  Of course you wouldn’t, you would make the decsion that is best for your short term and long term health.  You need to consider the same factors when choosing your bankruptcy attorney as that decision will shape your future financial health.

How a Chapter 13 Can Help You Reduce Your Burdensome Car Payment

Are you currently paying a burdensome car payment; a payment that is much too high for the vehicle that you are driving. Is the high monthly payment effecting your ability to pay other bills and to properly budget your income.  If the payoff on your vehicle is higher than the value of the vehicle, and you have been paying on the car loan for at least 910 days (2 1/2 years),  a Chapter 13 bankruptcy can provide a solution for you.

If those factors are present, you can file a Chapter 13 and provide in your Chapter 13 plan to cramdown the vehicle.  For example, if your car is worth $5,000, but you owe $10,000, and you are paying $400 per month and interest of 10% on the note, and you have been paying on the loan for 30 months; we can propose in your chapter 13 plan to only pay the creditor the value of the car, $5,000.00 over the life of your Chapter 13 plan at a reduced interest rate.  Based on the Supreme Court Decision in In re Till we can lower the interest rate to whatever the prime interest rate is, plus one percentage point.  So presently that would be 4.25%, which is clearly much lower than the 10% being paid currently under this example.

Thus, the result is that you get to retain the vehicle and only pay what it is worth versus what you actually owe on the vehcle.  The difference that is not being paid would be treated as an unsecured debt and ultimately discharged once your Chapter 13 plan is completed. You have effectively lowered your montly payment on the vehicle by a minimum of $250 per month and now created some more disposable income each month for yourself.

The Truth About Debt Consolidation

We’ve all heard those radio or television advertisements that claim that they can consolidate your credit card debt and settle it so that you only have to pay as little as 5% of what you actually owe. Sounds great doesn’t it.  If I’ve learned anything over the years it’s that if anything sounds too good to be true, it usually is.  That old adage certainly applies here.

For starters, there are numerous details these debt consolidation companies neglect to inform their prospective clients about prior to having them sign their contract. I have hundreds of clients that have come to us after trying the debt consolidation route and to a person they tell me that the details of the consolidation program were never completely explained to them.  My clients also indicate that if they had known the details prior to signing the contract they never would have moved forward.

 Generally, when you start the process with a debt consolidation company, they will take a look at your total credit card debt and then will give you a monthly payment plan, which is a fraction of what you are now paying and they claim will be sufficient to settle all of your debt.  Let’s for example say the consolidation company gives you a plan that calls for $1000 per month, which you will pay to them and they will settle your $70,000 of credit card debt. You sign your contract and start diligently sending your payments in every month to the consolidation company instead of sending your payments to the various credit card companies.  You’re relieved that this company is now dealing with all of your creditors so you can relax, right…wrong!

What’s included in the consolidation company’s contract language that normally isn’t explained to you, is that the first 6 payments that you make them all go to pay the consolidation company’s fee.  Then, normally from the subsequent 6 payments, half of what you pay goes to the consolidation company’s fee.  Thus, under the example, if you paid your $1,000 every month for a year, $9,000 of that money would be going to pay the consolidation company’s fee.  The balance of the money that you have paid in goes into a trust account.  The contract you signed further indicates that the consolidation company will not begin negotiating with your creditors until a certain sum is contained in your trust account.

However, long before you even get to a years worth of payments to the consolidation company, your creditors are harassing you, putting you into collections, filing lawsuits and perhaps ultimately acquiring judgments against you.  Additionally, all of your creditors have begun reporting negatively on your credit once you stop making regular monthly payments to them, thus your credit is now destroyed. Yet none of these ramifications of a debt consolidation program have ever been explained to you.

The likely end result is that you have now paid thousands of dollars to a consolidation company and received virtually no benefit.  Most of my clients that have come to us after having tried the consolidation route, finally come in after their creditors have received judgments against them and the clients are now having their wages garnished or bank accounts levied. These clients indicate that the consolidation company initially tell them  to direct all creditor calls to them and they will take care of the creditors.  Not long after you start the consolidation process and begin paying the consolidation company, you realize there is really nothing the consolidation company will do about the creditor calls, nor is there anything they can do.

The reality of the situation is that your creditors have no obligation to deal with your consolidation company nor does the consolidation company have any type legal hammer to use against your creditors.  In other words, they can’t make your creditors deal with them, they can only hope they do.

It’s also probably likely that the debt consolidation company has advised you early on that you should go the consolidation route because a bankruptcy will ruin your credit.  Well, I’ve already illustrated how that worked out for you.  So what should you do when you can’t pay your bills any longer?  In almost every case, the filing of a bankruptcy is a better choice.

The United States Bankruptcy Code gives you the legal hammer that you need to deal with your creditors-on your terms.  If you consult with a knowledgeable baknruptcy attorney (make sure it’s someone that specializes in bankruptcy not someone dabbling in it), that person can lay out your options.  These options could be that you are able to discharge all of that unsecured debt in a Chapter 7 case or that you can re-pay what you can afford monthly in a Chapter 13 case over a 3 or 5 year period.  You would then be discharged of any reamining balances owed your unsecured creditors once you have completed your chapter 13 plan.  As long as you are complying with the guidelines set forth in the Bankruptcy Code when proposing your chapter 13 plan, your creditors have no choice but to accept the plan.

Don’t let your creditors or a debt consolidation company scare you away from exploring the bankruptcy option.  It is only for self-serving reasons that they are trying to do so; they certainly don’t have your best interests at heart. Don’t you owe it to yourself and your family to explore all of your options?

The Real Estate Market and How a Chapter 13 May Help

Five or six years ago the real estate market was booming. It seemed that values would just continue to escalate as there was no end in sight to the real estate boom. Many people refinanced during this period or took out second mortgages on their residences, as mortgage companies had many programs that made such financing readily available to most people. Many people were put into mortgages, like adjustable rate mortgages, no interest mortgages or negative amortization mortgages that they never should have been in, but for the fact that the mortgage broker told them it was a way to keep their mortgage payment down in the short term and that they would be able to refinance again, down the road, before the interest rate adjusted and the payment became unmanageable.
That all sounded great, but we now know how that all turned out. The real estate market crashed, thus there was no longer any equity in most people’s homes. This led to the mortgage industry crisis (which is a story for another day) and ultimately to the situation many people find themselves in today. That is that you are sitting in your residence that is now worth much less than what you owe on it, your mortgage payment is now much higher than you can afford and there is no chance to refinance. What options do you have?
Well if part of your problem is that you have both a first and second mortgage a possible solution could be to file a Chapter 13 bankruptcy case. In a Chapter 13, the Bankruptcy Code allows us to “Strip off” secondary liens on real estate. This is permitted when there is no equity for the secondary lien to attach. For example, if your property is worth $200,000.00 and you have a first mortgage with a payoff balance in the amount of $250,000.00, then any secondary liens that you may have on that property can be stripped off in a Chapter 13 case. This means that you will not have to make that second mortgage payment while you are in the Chapter 13 case. Then once you have completed your case the second mortgage company will be required to discharge the mortgage lien of record. You will also be discharged from any personal obligation on the mortgage debt. Thus, at the end of your Chapter 13 case, you will be left with only the first mortgage on your home.
In a time where most people are looking at the equity postion in their homes and wondering when if ever they will have equity again, getting rid of a second mortgage in a Chapter 13 case is one way to speed up that process. Let’s face it, for most people their home is more than just an asset, it is a place where memories have been made, where families have grown up. Most people are looking for ways to save their homes not walk away from them, stripping off a second mortgage in a Chapter 13 is one way to help you do just that.

Bankruptcy and Your Credit

As a bankrutpcy attorney, one of the most frequently asked questions that I receive is how will the bankrutpcy filing effect my credit. Most people come in with the pre-conceived (and incorrect) notion that they will have terrible credit for 7 years after the filing of a bankruptcy.
That is not correct. The 7 year term is the time period that a chapter 13 bankruptcy will appear on your credit report, which is also the amount of time that anything that is reported stays on your credit report. A chapter 7 bankruptcy can show up on your credit report for 10 years. This does not mean that you will have bad credit for 7 or 10 years, it just means that the bankruptcy filing will show up on your credit report for that length of time. The farther away you get from the bankruptcy filing, the less impact it will have on your scores.
What has to be realized is that in most cases if you are presently contemplating the filing of a bankruptcy then you credit scores are probably not looking that good. You are probably delinquent on some of your debts, like credit card payments, car loans or mortgage payments. As long as you remain delinquent on these accounts, the creditor will be reporting that delinquency monthly to the credit agencies. Your credit scores will not be able to recover unless you take action to stop the negative reporting.
If you have the ability to catch up on these delinquencies that would be one way to stop the negative reporting and rebuild your credit. However, that scenario is not likely for most people. As stange as it may seem, the filing of a bankruptcy is another way to stop the negative reporting. While a bankruptcy is obviously a negative item on your credit report, if your scores are already low the actual effect will be minimal. However, upon the filing of a bankruptcy you get the benefit of the automatic stay.
The automatic stay goes into effect upon filing and notice to your creditors of the filing. The automatic stay prevents your creditors from pursuing any further collection activity against you. This means the creditor can no longer send you statements, can no longer call and harass you, cannot institute or continue any legal action against you and also can no longer report negatively on your credit.
Thus, what happens post filing of a bankruptcy is that your credit has a chance to improve as there will be no further negative reporting from the creditors. The rest is up to you. If you maintain your post-petition mortgage payments or car payments with regular on-time payments, your credit scores will rise as the only items that will be reported are positive. You will also have the opportunity to obtain new credit cards within a few months after the filing of your bankruptcy petition. If you were to take out one credit card and charge on it and then make those payments every month on a timely basis that will also help you re-establish your credit scores.
While I am not an expert on credit, I can tell you through my experience with clients that if you continue to pay your remaining monthly bills in a timely manner post-filing, you could easily have scores back over 700 within 2 years of filing.
You are also eligible for an FHA mortgage once two years has passed since the filing of your bankruptcy. If you have maintained perfect credit since the filing of your case you will be looked at under the same criteria as anyone else that is applying for an FHA mortgage.
So in essence, despite what your creditors want you to believe a bankruptcy is not the end of your credit life, but it is sometimes the fastest way back to good credit scores.