Renting beats owning a home in California and many other markets

rent 2Even though owning a home is still cheaper than renting nationally there are many markets where it is still cheaper to rent than own.  One of those markets is all of California!  This is rentaccording to a Deutsch Bank housing survey cited in an article posted on-line in SmartMoney.  With housing price declines and record low-interest rates it should be cheaper to own real estate but in California and the northeast and elsewhere it is still in fact cheaper to be a tenant.

According to the same article homeownership is slipping.  It is down from a high of 69% in 2004 to a low of 65% and it appears to be still falling.  More and more people seem to have caught wind of this fact and they are becoming tenants.  Apparently one-third of all rentals are single family homes as the number of single family homes for rent grew by 2 million from 2006 to 2010.  There are currently a total of 13 cities where it is cheaper to rent than own now.

So don’t despair if you don’t have a piece of the American dream.  Don’t worry if you have been foreclosed on and you now must rent.  If it is cheaper to rent then maybe renting is a good idea for a while.  It is doubtful that their will be any meaningful appreciation in housing anytime soon so why buy?  When you add in the costs of maintenance, insurance, mortgage, and taxes it is very expensive owning a home.  Let the landlord worry about that stuff and be happy renting!

Now may also be a good time to clean up those debts yo have accumulated over the years too.  Paying rent is always easier without paying for all those credit cards, personal loans, auto deficiency balances, and medical bills.  Try bankruptcy to eliminate those old debts and get a fresh start.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015. Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

For rent photo courtesy of Billy Alexander.  Houses for rent photo courtesy of cdsessoms.

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What is community property and how does it affect my bankrupty?

property 3Community property is, in short, the property you and your spouse acquired while you were married.  It includes any real estate and property 5personal property that you bought while you were married.  So cars, clothes, jewelry, furniture are all considered community property if they were acquired while you were married.  Real estate acquired during the marriage is considered community property in the same way.

It gets a little more complicated when you have a piece of real estate that was yours alone prior to the marriage.  If you get married after you bought the property your new spouse can gain (over time) a community interest in your real estate.

Real estate requires the regular and continuous paying of fees for maintenance, taxes, and even the mortgage payment.  Even if you continue to pay these yourself (with no contribution from your new spouse) your spouse is getting a growing community interest as you make those maintenance payments.

The money you use to pay these ongoing property expenses are community funds even if the funds come from income you earn alone.  This is because every dollar you earn during your marriage is half owned by your spouse.  This works both ways as every dollar your spouse earns is half yours too.  Therefore if you are married and the only one working and you pay these expenses out of your income alone on property that was yours before the marriage, your spouse is still getting a gradual community interest.

So when it comes time to file bankruptcy the trustee will want to know if you are married.  If you are then community property issues arise and he will ask questions about any property you or your spouse own individually or together.  If your spouse files bankruptcy and you do not your spouse may have a community interest in your real estate.  This will be true even if your spouse did nothing to and for the property.

These issues can get complicated so you need an attorney to analyze your property and your spouse’s to see if there are any community property issues.  Property can and will be seized and sold by a trustee if there is any value owned by the person filing bankruptcy if that value is not properly exempted.

Community property does not include property that you alone inherited and that you have kept segregated and separated from your spouse’s property.  If you have not commingled that property with your spouse then that property can be considered separate and not community for bankruptcy and other purposes.

But if you inherited real estate it may have started out as separate property but it may lose its separate property nature over time.  Again as you pay on it you may be giving your spouse a community interest even in separate property that was inherited by you.

There are other issues related to community property such as whether you gifted property to a spouse by putting the title it in their name.  If you do put a spouse on title then there is a presumption of gift and depending upon how title is held that property will probably be considered half owned by the spouse.  It would then lose its separate property status.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

Private property photo courtesy of hworks.  House photo courtesy of danzoO8.

Are gambling debts a problem in bankruptcy?

gambling 3The short answer is that they can be.  In general the bankruptcy trustees who oversee your case seem have the opinion that gambling 4gambling debts are somehow frivolous, shady, or just not respectable and thus possibly not eligible for a bankruptcy discharge.  The same trustees don’t blink an eye at credit card debts as long as they are aged (more than one year old) but they do seem to have something against gambling debts.

I believe that it is a belief that somehow gambling is not the type of debt that the bankruptcy system was designed to discharge.  You are somehow acting irresponsibly in the eyes of a bankruptcy trustee if you engage in gambling and you borrow money to do so.

But wait a minute that is not the end of the story!  The judges don’t always agree with them.  Bankruptcy was designed to give debtors a fresh start and a relief from debts the cannot pay.  Those debts come in many types and gambling is just another type of debt.  They too should be dischargeable in bankruptcy.

I had a case years ago where a client had gambling debts and the trustees raised an objection to their discharge so I looked up what the judges at that time had ruled.  To my surprise they seemed far more understanding than the trustees.  The judges pointed out in a series of cases that gambling is a legal activity.  Not just in Las Vegas but in casinos around the country.  Here in San Diego we have many Native American casinos that are fully legal.  Millions go each year to these casinos and legally gamble.  There simply is no illegality about it.

If a debtor engages in an entirely legal undertaking then we can’t deny a debtor’s right to engage in it as well as borrow money to finance it like he would a car or clothes that he was buying.  So if the debtor accumulates debt related to the gambling then that really is no different from him running up his credit cards for some other item.  This is what I understood from reading a number of cases on gambling a few years ago.

There were a few caveats though.  The debtor with gambling debts could not have run up his credit cards in anticipation of filing bankruptcy.  One judge referred to this as a credit card “bust out” scheme.  If this was the case then that could be seen as credit card fraud.

Credit card fraud occurs when a person borrows (charges) on a credit card with no intention to repay.  That is why if you run up credit cards and then immediately file bankruptcy you probably will have a credit card fraud problem.

When you sign your card you signed that you will borrow money on the card but you have an intention to pay it back.  That intention can change later though and you can find yourself in a position where you cannot pay.  At that point you stop paying and possibly file bankruptcy.

The gambler then is just like the guy who charges consumer goods on his card except he gambles.  As long as he believes he will eventually win and then pay the car back then there is no fraud because fraud is subjective.  We may look form the outside and say that he will never win at gambling.  His chances are great that he will lose.  But if the gambler believes honestly (but unreasonably) that he will win then there is no subjective fraud.

So it is best to wait for some time after a debtor borrows money on a credit card to gamble.  It will then look less like the debtor had any fraudulent intent.  Any questions about gambling debts and bankruptcy should be directed to a knowledgable attorney.

Don’t forget that there is the gambling addiction problem too.  It is possible that a debtor has an addiction to gambling.  If the debtor is in treatment for this addiction and has ceased all gambling there is a possible argument there to counter any fraud charges.  A good bankruptcy attorney can help you with these arguments.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

Risk Free photo courtesy of Sean MacEntee.  Roulette wheel photo courtesy of Zdenko Zivkovic.

What is a chapter 20 bankruptcy?

twentyIt is really just one bankruptcy followed by another.  It is a chapter 7 followed by a chapter 13 which added together equals 20 so it is called a “chapter 20”.  Most people have heard of bankruptcy chapters 7, 11, and 13 but a chapter 20 is really just a combination of a 7 and a 13 and there is no official chapter 20 that you can file.

In a chapter 20 bankruptcy someone will first file a chapter 7 and get a discharge.  They then decide some time later to file a chapter 13 bankruptcy.  A chapter 20 is sometimes referred to as a “no discharge chapter 20” because the debtor is not entitled to a discharge in the chapter 13 if he filed it within 4 years of his chapter 7 according to section 1328(f) of the bankruptcy code.

One reason why people file a chapter 20 is because of the debt limits of a chapter 13.  Some want to file a chapter 7 to discharge the unsecured debt they owe to bring that debt within the limits of chapter 13.  Chapter 13s have specific debt limits and if you exceed them you could be forced into a chapter 11 which is far more complicated.  One strategy to avoid a chapter 11 is to file a chapter 7 to lessen the debt through the chapter 7 discharge and then do a chapter 13.  This would be an example of a “good faith” reason to file a chapter 20.

Another common reason why they would want to file a chapter 20 is because of the chapter 13 lien strip capability not offered in a chapter 7.  In a chapter 13 homeowners can strip (eliminate) second mortgages if they are completely unsecured.  Second mortgages are completely unsecured if you owe more on your first mortgage than the entire home is worth.  This leaves nothing (no equity in the home) to secure the second mortgage so it is in effect an unsecured debt.

But of course it is a lien that exists and will continue to exist on your house if you do nothing or even if you file a chapter 7 bankruptcy.  The lien will remain on you home virtually forever and the only way to get rid of an unsecured second mortgage it is to strip it off in a chapter 13 bankruptcy.

So some people try to get rid of their credit cards in a chapter 7 bankruptcy and then file a chapter 13 to strip the second mortgage.  If they just filed a chapter 13 without the prior chapter 7 they would have to pay some of the credit cards back in the chapter 13.  So it seems that filing a chapter 7 followed by filing an immediate 13 makes sense right?  After all you save all of those credit card payments you would have to make for 5 years in a chapter 13 right?

Wrong!  You cannot be seen to be manipulating the system just to get rid of your credit cards and then strip a mortgage.  This would be an example of a “bad faith” bankruptcy filing and this would be challenged by the bankruptcy trustees in an adversary proceeding.  If you file one chapter and then another to create a benefit for yourself that would not exist in either chapter then that could be considered bad faith.  So you must not attempt to merely get a credit card discharge and then apply for a lien strip.

This tactic would be considered bad faith because if you filed a chapter 7 you would not be allowed the lien strip.  If you filed just a chapter 13 you would have to make payments to the credit cards for the length of the chapter 13 plan.  The courts will want you to pick one or the other but no both chapter in succession merely to seek maximum benefits.

One way to avoid a possible bad faith challenge to your chapter 20 is to show that there has been a subsequent change in your situation since the filing of the chapter 7.  If for instance you intended to surrender your house at the time of filing the chapter 7 but your situation substantially changes after your chapter 7 discharge then you may have a valid new reason to keep your home.  You could get a divorce or suffer a lessening of income for instance.  Then you could possibly do a chapter 13 to strip the second mortgage and this could prevent a bad faith challenge.  Courts examine chapter 20s carefully though so you should be aware of this increased scrutiny over your case when you attempt one.

It is also possible that housing values change and your second mortgage might become unsecured sometime after your chapter 7 discharges.  If you are in a period where housing values are declining then the value of your house may drop below the value of your first mortgage sometime after your chapter 7 is complete.  Now you can strip the lien in a chapter 13 whereas before you filed the chapter 7 you could not.  This would be a valid circumstance that could defeat a bad faith claim.   There are many other possible good faith circumstances in addition to these mentioned above.

Chapter 20s used to be more common.  Doing a chapter 20 became a problem after the 2005 bankruptcy law was passed.  This law can be interpreted to not allow a chapter 13 discharge unless 4 years have passed since the filing of a chapter 7.  (A second chapter 7 cannot be filed until 8 years have passed since a first chapter 7).  This prohibition is contained in section 1328(f) of the bankruptcy code which relates to discharge.

With this code section in mind the question then becomes how can you receive a discharge from your second mortgage after the chapter 13 plan is completed if section 1328 disallows such a discharge?  This can create problems for you as you proceed with the chapter 20 bankruptcy.

Most courts have maneuvered around this by turning to other sections of the code and they have allowed you to do a chapter 20 anyway.  Remember though that the possibility is still there that you will get a challenge if you attempt to do a chapter 20.  It appears that at this time the law is not completely settled and the courts are not in complete agreement on this issue of allowing a chapter 13 within four years of filing a chapter 7.

It also appears to help if new debt exists.  If some sort of new debt has been acquired post chapter 7 judges apparently like that.  It seems as if there needs to be something to make payments on in the chapter 13 and not just a lien to strip.

Bt I still believe that the safest thing to do though is to not run afoul of section 1328(f) at all.  Just wait the required 4 years after your chapter 7 to file a chapter 13 and strip your lien.  You then won’t be in violation of 1328 and there should be no argument to stop you from filing.  Nobody wants to buy a court challenge or court case when filing bankruptcy.

The additional advantage of waiting the full four years to comply with section 1328 is that it is a longer period in which to argue changed circumstances.  It is harder for anyone to argue bad faith if you waited a full four years after your chapter 7 to file a chapter 13.  This is because people don’t generally plan that long in advance and circumstances do naturally do change considerably in four years.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

Twenty photo courtesy of takomabibelot.

Are we headed for deflationary depression instead of hyperinflation?

At least one analyst thinks so.  According to financial advisor and author Dan Shaffer America and the rest of the world are currently at the beginning of a deflationary depression period.  He believes that we are presently seeing the beginning of this depression and it will last for many years to come.  Presumably overall prices will fall dramatically in this period according to Shaffer’s prediction.

He says that governments have borrowed huge amounts of money and this has driven up public debt dramatically.  We have had TARP and the stimulus package to name a few of these public spending programs but none of them have stimulated the economy.

We still have high unemployment and no sign of a real recovery.  According to an article posted online recently in Yahoo Finance the economy is sputtering.  Unemployment rose in May officially from 8.1% to 8.2%.  Far fewer jobs were created than were anticipated according to the article.

Shaffer points out that Chinese manufacturing is stalling and there is the European economic crisis.  Several countries in Europe have massive debt problems with Greece at the forefront but Spain, Italy and others are all in trouble too.  Manufacturing in Britain is shrinking at a fast pace and even France and Germany are showing a slowdown in the manufacturing sector according to the Yahoo Finance article.

Shaffer seems to indicate that all of this government spending has only served to pump more air into a series of bubbles.  We have already seen the housing bubble burst but their are others that are ready to burst he says.  There is the manufacturing bubble and the student loan bubble not to mention the overall consumer debt bubble.   He indicates that all of these bubbles must eventually burst when the air (government spending) is withdrawn as it inevitably must be.

In America the Fed has responded to this overall economic crisis by dropping interest rates to historic lows.  Interest rates are now lower than what they were even in the great depression and they are at the lowest level in history according to Dan Shaffer.  According to the Yahoo Finance article the Fed has bought $2.3 in bonds to help the recovery.  The Fed has also signaled that it will keep these interest rates low until late 2014 at least.

In the article they state that there is little more that the Fed can do as it has dropped interest rates as low as they can for the foreseeable future and it seems to have little effect.  The federal government too is in trouble too as it has borrowed and spent with TARP and the stimulus package around $2 trillion and this has not created growth in the economy.

So now the government is out of options.  They have borrowed, spent, and the fed has lowered the interest rate to zero.  What else can the government do?  We now have a $16 trillion public debt to show for these borrowing and spending policies and little economic recovery.  The spending has indeed left us with nothing but record large government debts.

I hear echoes of history here where FDR’s treasury secretary Henry Morgenthau, Jr. said “we have tried spending money.  We have spent more than we have ever spent before and it does not work”.  He was speaking here of FDR’s new deal which he was a primary architect of.  The new deal policy was to borrow and spend money endlessly in an attempt to stimulate the economy but at the end of 8 years the unemployment rate was just as high as it was when FDR’s administration began spending money.

Today we have done almost exactly what was done in the 1930s with similar results.  You think we would learn from history that this massive borrowing and then spending does not lead to recovery but just to massive debt.  Now with the heavy debt load and the lack of recovery the American public naturally wants to put a brake on the spending.

A public demand has been building for the last few years that government spending be curtailed.  We have seen this with groups like the Tea Party and others that have demanded an end to this spending and a reduction of deficits.  Whether you agree with these groups or not their demand have reached the ears of Congress.

This is where Shaffer seems to believe that we will get into trouble.  He claimed recently on Fox business that this government spending does eventually find its way into the private sector.  When government spending is lowered in the near future he says this will result in less buying power for world markets.  This could result in deflationary pressures throughout the world as the bubbles burst.  Prices could then dramatically decline instead of increase.

He seemed to say that government spending has propped up the stock market although temporarily.  Now that the times have changed and people want to put the brakes on borrowing and spending this removal of the government money will result in severe economic problems because of a collapsing of prices.

The government has also tried printing money with QE1 and QE2 and there are calls to do a QE3.  I argued in a previous blog that this will only lead to massive inflation and that could lead to disaster.  This is what lead Germany to Hitler through the massive money printing and inflation of the Weimar republic.  The National Socialists (NAZIs) were just another political party with limited influence until the money printing inflation cycle drove the German economy to a terrible crisis.  This all made people turn to Hitler for a solution and we all got the holocaust of World War Two with 60 million dead.

I believe that Shaffer’s theory of a massive price reducing deflation instead of hyperinflation must be considered as a real possibility.  It is certainly another possible outcome of the current economic crisis.  Prices could dramatically fall when government spending is inevitably withdrawn.

Is it more likely that prices will collapse as government withdraws spending?  Are we headed into a deflationary downward spiral or is it more likely that massive inflation will occur as governments print more money?

We don’t know for sure.  Our debt situation and money printing policies are similar to the Weimar Republic of the 1920s but the argument for deflation is also compelling.  Will prices drop dramatically or will they inflate beyond all expectations?  Either way we appear to be headed for a crisis in the world.  We have been there before but the results were not good.  When economies collapse and order is gone people yearn for someone to restore order.  That person or persons could become a detriment to the whole world like Hitler was in the 1940s.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.   Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Yes, it is a bad sign if you can’t speak to or meet with your attorney about your bankruptcy!

guy on phoneI have heard the horror stories in my office.  In another district in California someone told me this horror story.  She did a bankruptcy with an attorney or so she thought.  She met with the paralegals and secretaries and the case progressed but she had some legal questions she need to ask at one point.  She had not met with he attorney yet but she anticipated no problem.  Who could object to speaking to their client she thought.  Even if it was on the phone.

When she called the legal assistants and asked if she could speak to the attorney they told her that it would be no problem as long as she paid $200 per hour to do so.  I never saw her fee agreement but I can’t imagine how that could be okay anywhere.  If you hire an attorney you obviously want to speak to him or her.  It is okay to talk to some legal assistants but at some point you will want to meet with and speak to the attorney.

Not so in that case and this client did not pay the $200 and did not meet the attorney until the 341 hearing and was never able to speak to him about the legal ramifications of filing bankruptcy.  I would ask why have an attorney at all?  If this is the level of service then why not have a legal assistant do it or do it yourself?

I have heard of many other stories of not being able to speak to an attorney.  The attorney only communicates through e-mails or rarely returns call or just continually puts clients off on the assistants.  Many of the larger firms with support staff seem to be guilty of this.

We attorneys who do speak with and meet with our clients believe that none of this is a good idea.  You need legal advice from an attorney in a bankruptcy and neither you nor a legal assistant can provide that.  In the above horror story though the client thought she was getting an attorney but she was not.  She was only able to deal with legal assistants, secretaries, and possibly paralegals.

I do not believe that this is any kind of good legal representation and I believe that most good attorneys will agree.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.   Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Picture courtesy of Jedimentat 44.

Stockton California gets close to filing chapter 9 bankruptcy. Largest city to do so yet!

Stockton California edged closer to filing for chapter 9 bankruptcy protection on June 6, 2012.  The city council authorized the Stockton city manager to file bankruptcy by a 6 to 1 vote after an intense 4 and one half hour public meeting according to an online article in the Los Angeles Times.  The city manager will file for bankruptcy protection for the city if the current attempt at mediation fails.

Stockton had apparently stopped making payments to creditors back on March 27th 2012.  At that time they entered into these mediation discussions that have since failed to resolve their problems.

And it is unlikely that these mediations will work.  The city has released a public statement calling their situation “dire” and that there will be a 26 million deficit by July 21, 2012.

According to the article Stockton is a river port city with 290,000 in habitants east of San Francisco that has the second highest foreclosure rate in the nation as well as a very high crime rate.  An article posted online by USA Today describes Stockton as a “crop abundant” central valley city with high foreclosure, crime rates and unemployment rates.  But it also says that Stockton was named America’s “most miserable city” in a national magazine- twice.

But then the article got to the real reason for the Stockton bankruptcy.  In one sentence they said it all.  Stockton is embroiled in an ongoing dispute with police and city worker unions over pensions.  Here go those public pensions again backed by public unions.

There are many cities with this same problem across the nation right now.  I have blogged about Harrisburg Penn. and Detroit Mich.  Harrisburg filed for chapter 9 bankruptcy and I believe that Detroit may have to eventually along with many other U.S. cities.

These cities have had disputes with public unions over pensions.  These pensions (and other benefits) were promised to city workers in good economic times.  And they were promised by politicians who have since retired.  And these unions often promise the politicians votes if the politicians agree to these pensions.  The politicians do grant the unions what they want because it is someone else’s money that they are giving away.

It is the taxpayers money that is promised to these unions by politicians who want votes.  The politicians don’t have to pay, they just want to get elected.  We see this time and time again.  Here in San Diego the unions were promised contracts that tripled their benefits.  San Diego could not afford it any more than could these other cities and as soon as the economy collapsed San Diego faced bankruptcy like hundreds of other cities could.

This is why FDR himself did not like the concept of collective bargaining for public worker unions.  If city worker unions can collectively bargain and demand benefits from politicians it sets up a whole conflict of interest.

The politician who agrees to give public unions their benefits is not like a president of a public company.  The politician will just award the benefits that the public unions demand if the unions agree to reelect him which they do.  That does not happen in a private company.  Private workers don’t vote for a company president who will give them more stuff.  Even if they did it would not come out of taxpayer pockets so no one would care.

No doubt the city worker unions of Stockton are saying raise taxes on the people and businesses of Stockton to pay for their union benefits.  This is what we hear from other public unions in other cities.  The people of Stockton are getting foreclosed on and they are probably facing unemployment so they can’t afford more taxes.  The same would go for businesses who would relocate if their taxes were raised.

I wrote in my other blogs about the unfairness and absurdity and unworkability of this kind of taxation.  In many cases taxpayers and businesses would be asked to pay larger taxes to pay the benefits of city workers when the taxpayers cannot afford anything like those benefits themselves.  Remember that in San Diego they tripled city worker benefits before the city went broke.  Who else could demand a tripling of their benefits?  Not me.

I also wrote about how I believe that a city exists or should exist to benefit its residents.  A city is not there to benefit its workers over its residents.  I agree with FDR that public unions should not be able to collectively bargain with a city and demand more benefits.  It is a definite conflict of interest where the taxpayer gets screwed and the city ends up in bankruptcy.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.   Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

What do I do if I get a 1099-C from a creditor for “forgiveness of debt tax”?

Don’t worry if you get a 1099-c from a creditor.  Study up on the issue and then consult a tax counselor for more advice.  Most tax advisors know all about 1099-c and its tax consequences.

Any debt forgiveness can result in taxable income in the eyes of the IRS.  The IRS considers forgiven debt to be income to you that is taxable.  This is true even though it is “phantom income” that you will never see.

Forgiveness of debt income can be on a settled credit card but more often it is concerning a mortgaged home that was foreclosed on or short sold.  Sometimes it is called “cancellation of debt income” or COD.  This can result in tremendous taxes owed by you to the IRS.

The good news is that if you short sold your home or had it foreclosed on you will be allowed to exclude up to $2 million in debt forgiveness with the Mortgage Forgiveness Debt Relief Act of 2007.  This law allows exclusion of this excluded debt from taxable income through 2012 unless Congress acts to extend it.  This act was passed during the home foreclosure crisis to give relief for homeowners who have had to abandon their homes.

The debt you incurred (and which was forgiven by the bank) must be to buy, build, or substantially improve your principal residence.  So business property, second homes, investment property, rental are all not covered by the Mortgage Forgiveness Act.

There are other ways to get out of this potential COD income though.  The most notable is bankruptcy.  If you file for bankruptcy then insolvency is presumed and you just file the IRS form 982.  Your accountant or tax preparer can help you with this.  This form has boxes you check and if you filed bankruptcy or were insolvent when the debt forgiveness or cancellation occurred then you check the box and file the form with your taxes.

So ask your accountant or tax advisor about form 982 if you received a 1099-c or if you are worried about the tax implications of a short sale or foreclosure on your home.  Remember that there is a law out there that helps you.  If you get one after 2012 and Congress lets the law expire then remember that there is bankruptcy or insolvency that will exclude the amounts of debt forgiven from your income and you therefore won’t owe any tax on it.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!   For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Do I have to go to court if I file bankruptcy?

courthouse 4The answer generally is no you don’t have to go to court for most bankruptcies, especially the chapter 7.  In a chapter 7 bankruptcy you go to a 341 hearing with a bankruptcy trustee presiding but you don’t have to go to court usually.

These hearings are much more informal than a court proceeding and they usually last for only a few minutes.  The trustee will ask you about your assets, your income, and any other questions he or she has about your bankruptcy schedules.

If the trustee sees anything wrong he will call for a continuance of the 341 hearing and ask for clarification or more documentation.  If there is nothing wrong then he will conclude the hearing and you will be done.  With a chapter 7 you will then wait for your discharge and closing of your case.

If the trustee finds something wrong with the case then you could end up in court.  The trustee could file some challenge to your case as could a creditor that does not want his debt discharged.  These challenges are somewhat rare though especially if a competent bankruptcy attorney files your case and thoroughly investigates all aspects of you financial situation beforehand.

These challenges to your case would be addressed by the trustee or the creditor filing an adversary proceeding.  If an adversary proceeding is filed in your case then you probably will appear in court.  These are somewhat rare though and most bankruptcies sail through the 341 hearing and never go near a courtroom.

Another example of a situation that could land you before a bankruptcy judge is the reaffirmation hearing.  A reaffirmation hearing is when you reaffirm a debt for which your personal liability has been discharged in the bankruptcy.

This most often happens in a case where you financed your car.  A car company wants you to in effect sign back up for the debt or they may elect to repossess the car after the bankruptcy stay lifts.  This is especially true if your income is less than your expenses on schedules I and J which is common for chapter 7 debtors who file bankruptcy.

If the trustee wants to object to your discharge then the same could happen and if he wants to take property then he could file an adversary proceeding that could land you in court ut this is very rare.

These things are not all that common though and a good bankruptcy attorney should be able to guide you through the process and advise you on the possibilities of going to court.  Usually though you should only see the 341 hearing room and the bankruptcy trustee for you chapter 7 bankruptcy.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Courthouse photo courtesy of w.marsh.

What is a bankruptcy reaffirmation agreement? Do I need one?

contractA reaffirmation agreement is simply an agreement that reaffirms or recreates a contract that has been broken by your chaper 7 bankruptcy.  After you file for bankruptcy all of your previous contractual obligations for things like credit cards, auto loans, jewelry and furniture loans, mortgage loans, and leases for personal or real property go away.  You no longer have those contractual obligations once you pull the trigger and file your case.  If your case goes all the way to discharge then these obligations go away forever.

This is what makes bankruptcy such a powerful tool for people.  Any contract that is difficult, onerous, or they just can’t afford is cancelled by bankruptcy.  This is what gives you a fresh start when it is all over as you can go on in life free from these big contractual balls and chains.

The problem is that some of these creditors have a secured interest in some property you bought from them.  This is not true of credit cards which are unsecured but it is true of cars, boats, jewelry, and furniture as well other types of property you could finance.  Whenever you buy something and make regular payments for it the seller probably took a security interest in the property you bought from them.

Though the contractual obligations owed by you are cancelled in a bankruptcy this security interest gives finance companies certain rights in the property that you purchased.  They can move against the property to repossess it after the bankruptcy case closes (or if they file a motion for relief from stay).

It used to be before the 2005 bankruptcy law change that you could buy a car, go bankrupt, and then continue to pay for and keep the car.  This was called the “ride through”.  You had that right before 2005 and people regularly did this in bankruptcy.  The creditors hated this because you could turn the car in at any time thereafter and be done with it.  Creditors could not then come after you for the “deficiency balance” because the contract was cancelled in bankruptcy.  They would be stuck with only the car of limited value.

So the creditors eliminated this option in the 2005 law.  A case called “Dumont” in the 9th circuit confirmed this and that was that.  Now the ride though option is gone and you must either reaffirm, pay off the balance, or surrender the car.

Even having said this though there is a loophole out there.  Most creditors will allow you to keep the car and pay though they are not obligated to do so because they don’t want people to return cars.  Many bankruptcy filers will not reaffirm and if the car company wants the car back then they will return it.  We call this “let them eat steel” because the finance companies then sell this car at a great loss when the could have had some payments.

Many car companies recognize this fact and they have allowed the “ride through”.  They therefore don’t exercise their legal right to repossession and they allow you to keep the car as long as your payments are current.

But there are those others like Ford and in San Diego the San Diego County Credit Union.  These lenders tend to demand that debtors sign and file reaffirmation agreements with the court or they will pick up their cars.  It appears that they may just want to make a point or scare people into signing reaffirmations.

It gets complicated here but you must at least attempt to get a reaffirmation agreement in the court or the creditors can and some will pick up cars.  Losing the car can be extremely inconvenient for those who want and need the car or for those who recently put down a large down payment.  It is also true that financing a new car can be difficult and costly right after a bankruptcy so sometimes reaffirmations make sense.  (Have your bankruptcy attorney discuss these issues with you when you are considering signing one).

If you go into court and attempt to get a reaffirmation and it is denied for some reason by the judge who does not think it in your best interest then there is still an out.  Many judges will insert special language into the judicial order that denies the reaff. that will prevent any pick up of the car by the finance company.  Consult your bankruptcy attorney in your area as he or she should know which judges do this and he will be sure to request such language into the judicial order.

This is especially necessary if you have one of those lenders who tend to be more demanding like Ford or in San Diego, the San Diego County Credit Union.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Contract photo courtesy of Steve Snodgrass.