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.

Americans owe more than $1 trillion in student loan debt! What does this mean?

According to an article in the Wall Street Journal today student loan debt has exceeded $1 trillion.  According to the article all this student loan debt could lead to consumers postponing buying homes which could severely impact any possible economic recovery.  This new debt estimate comes form the new agency called the “Consumer Financial Protection Bureau” (CFPB)  which was recently created ostensibly to protect consumers.  The $1 trillion estimate of total student loan debt in this country exceeds the old estimate done by the Federal Reserve Bank of New York by 16%.

The reason for the increase in the estimate for total student loan debt is because this time the new agency used a survey of private lenders to come up with their figures.  In the past estimates have been apparently based upon consumer credit reports.  I don’t know why this estimate is so much higher because credit reports usually always list student loans on them.  But it is possible on the other hand that the private lenders could be remiss in listing these on consumer credit reports because of the bankruptcy laws.  See here for my update on student loan debt.

After 2005 all student loans became non-dischargeable in bankruptcy whether they were backed by the government or not.  A strictly private loan to a private institution therefore survived bankruptcy.  It is possible that because these lenders now that there loans are safe from discharge that they get lazy.  They can always pop up and try to collect a student loan (even a private one) without the fear of the debtor filing or threatening to file a bankruptcy.  Therefore it is possible that a survey of these lenders themselves will yield a more accurate assessment of the true amount of student loans owed out there.  See here for my blog about private student loans.

Officials at the CFPB say this increase could be attributed to the fact that state budgets are being cut, more students are going to school instead of working because of high unemployment, and because tuition is increasing.  Also they say that interest is increasing on these loans and more and more students (or former students) are behind on their loans.

Then they remind us that first time home buyers are a big part of the housing market and these debtors are increasingly postponing the buying of their first house.  This can have a tremendous effect on any potential recovery and the economy as a whole.  The people interviewed in the article are increasingly nervous as they are saddled with ever increasing debt and they wonder if they should continue their education.  The CFPB reiterates how important education is for getting the skills necessary to get a good job in the end.

I agree with the idea of the importance of education and I too am concerned about all of this student loan debt being incurred by people who probably cannot pay it back.  As a bankruptcy attorney I see this every day and I advise bankruptcy for these people.  But student loan debt is different from credit card or other types of debt.  Since 2005 it has all been non-dischargeable in bankruptcy even if the government has no involvement in the loan.

I therefore believe that Congress should pass a law that allows the discharging of student loan debt in bankruptcy after a certain number of years.  It could be 5, 10, or 20 years but the debt should not last forever or until a person dies.

I am a bankruptcy lawyer practicing bankruptcy law in San Diego.  For further information please visit my website ar www.freshstartsandiego.com or www.farquharlaw.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

Is the economy improving? Will I be “means tested” out of bankruptcy if I get a good paying job?

I don’t know if the economy is improving but if you are going to be starting a new job soon it could mean that it’s a good time to file bankruptcy.  If you have been unemployed and you have a lot of debts that you wish to discharge in bankruptcy then it might be good for you to file before you get a new job.  If the economy is actually improving then so will job prospects.  If you get a new job then this will possibly impact your ability to file.  If you make too much money you may be “means tested” out of bankruptcy.  There are limits to how much income you can make and still file a chapter 7 bankruptcy.

The means test was added in 2005 to force people into a chapter 13 so the creditors could get some sort of payments on their debts.  The law was lobbied for and written by the credit card companies and big banks (same thing).

At the time of this article in San Diego county income limits range from just over $47,000 per year for an individual to $77,596 for a family of four.  (You add $7,500 per year for each family member after 4 people).  If you make more than these amounts that are allowed for your family size then you would go into the means test.  When you are in the means test then all of the deductions for mortgages, cars, healthcare, charity, and taxes are subtracted from your income to see if you pass.  If you do not pass the means test then you must do a chapter 13 bankruptcy as you are “means tested” out of a chapter 7.

It is far better though to not go into the means test at all.  It is better to fall below the means test cut-off line and not take the test at all.  If you file while you are still unemployed or soon after you job starts then you will have a higher chance of coming in below the means test limits.

If your income is going to go up significantly then it is a good time to file sooner rather than later.  The means test looks back six months so if you just started a job then you would still be okay but don’t delay the filing and risk not qualifying for a chapter 7.   A chapter 7 will allow you to eliminate all of your dischargeable debts and then get a fresh start as you move on with your life and your new job.

Remember that most people can keep most of their assets in a bankruptcy and most people can eliminate all of their dischargeable debts.  Some debts are not dischargeable but consult me or another bankruptcy attorney if you are wondering which debts are dischargeable.  Also you can file alone and your spouse does not have to file with you.  Bankruptcy will remain on your credit report for up to ten years but with the proper re-building most people can get their score up significantly after two or three years.

So bankruptcy is not the end but a new beginning!  It is a fresh start that many need!  It might be a good time to file now though if you are going to start a new job so you can start a new life debt free!

I am San Diego bankruptcy attorney.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation 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.

Should American states like California and Illinois file for bankruptcy? Turns out it can be done but with a cost!

A number of the states in the USA are completely broke with little chance of paying off their debts.  California is one that reportedly has a $500 billion unfunded pension liability problem.  $500 billion is obviously more than the citizens of the state of California can pay so some have talked about the possibility of a federal bailout.  I am personally against a bailout because it will only continue the problem of overspending and unfunded pension liabilities that California can’t afford.

Numerous other states have huge debt problem often related to their unfunded pension liabilities.  Hawaii, Connecticut, and Massachusetts, Oregon and New Jersey are among the small states mentioned.  California, Illinois, and New York are the large states with huge debt problems.  One article says as many as 46 states need bankruptcy.  According to reports I’ve read Utah seems to be the best financially managed state in the union and it has little debt.

For many states it was the housing collapse that resulted in a great reduction in tax revenues that started the slide.  For other like California the unfunded pension problem has been building for years.  For states like New Jersey and Nevada, who relied on gambling taxes, times are really tough as people have slowed down on gambling because of the slow economy. But most states that are in financial trouble seem to have some level of this same unfunded pension liability problem.  A state bankruptcy would allow the bankruptcy courts to throw out these pension contracts just like with a city if the law can be changed to allow states to go bankrupt.

As I wrote in a previous blog, states are sovereign entities and they thus cannot go bankrupt.  But there is a way for California and the other states to make it happen anyway.  Congress can pass a law allowing the individual states to declare bankruptcy but the states would have to petition the Congress for such a right.  Without the petition the law won’t change and states will be stuck with their debts.

Congress passed the law that originally created chapter 9 municipal bankruptcy seventy years ago during the great depression.  Chapter 9 allowed cities and counties to file for bankruptcy protection and 600 such entities have taken advantage of this law since it was passed in the 1930s.  Presumably Congress could now authorize a whole new chapter in the bankruptcy code.  We could call it “chapter 10.”  A chapter 10 would eliminate the barriers to states filing and eliminate the “sovereign entity” problem that still exists today.

Apparently Newt Gingrich is in favor of just such a law.  Ironically it is the republicans, who are not normally bankruptcy friendly, who seem to be more in favor of just such a law.  This appears to be because the republicans do not want any state to receive a federal bailout which would impose a tax on the whole country to pay for the worst fiscally managed states.  If  states like California, Illinois and the others would file bankruptcy then a federal bailout would be unnecessary.

With a bankruptcy these states can eliminate their debts such as the unfunded pension liabilities that have plagued cities.  With a bankruptcy the state can also save its assets.  In a chapter 9 bankruptcy the law is clear that the bankruptcy court cannot interfere with the city’s day-to-day activities and the cities can even borrow money during the bankruptcy.

In a chapter 9 municipal bankruptcy the court also cannot force the city to sell any of its assets like city land or buildings.  Presumably this would apply to states’ bankruptcies too.  A state could therefore keep all of its assets during and after the bankruptcy.  As I reported in a previous blog this is because of constitutional protections like separation of powers that prevent a court from interfering with any day-to-day functioning of a city because a city is a public entity.  A public political entity like a city (or a state) simply cannot be operated or directly interfered with by a bankruptcy court.  This is made clear on the federal courts website under chapter 9 bankruptcies.

A state could presumably enjoy these protections in a chapter 10 bankruptcy just like the cities can protect their assets under chapter 9.  Bankruptcy would mean for these states that they could continue to run their affairs as usual with no interference from the bankruptcy court and they would not have to sell any assets.  They could just cancel the debts of all kinds including these pension contracts that were negotiated with the unions.  They could renegotiate new contracts that the states could afford and that were on par with what people earn in the private sector.  Bankruptcy could indeed save the states from disaster and financial ruin.

But there is a price to pay for all of this.  State bond interest rates will have to  increase to reflect the new threat that a state can go bankrupt.  There is currently no such threat as states cannot now go bankrupt so state bonds are given a very good rating.  Since bond investors will now have to risk that the state can go bankrupt and wipe out their investment, the state will have to pay a higher interest rate to attract investors.  Presumably once the law is passed allowing states to go bankrupt then any state can declare bankruptcy as often as the law allows.

I would argue that if the states don’t get this debt problem under control then the bond rates could increase anyway as they would have a greater risk of defaulting on the bonds.  The bond issue can be dealt with so the effect of a bankruptcy on state bonds will be lessened.  Bonds could be given some kind of special preference for instance.  If the states can protect the bond holders position in the bankruptcy or reaffirm (agree to pay) the bond debts then the harm to the bond market could be minimized.  Then states could still find buyers for bonds in the future when they need a new road or bridge or airport.

My advice to the states with the most debt is to strongly consider the bankruptcy option.

I am a San Diego bankruptcy attorney.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call me for free with any bankruptcy or debt related question you might have at (619) 702-5015.  Call now for a free credit report and analysis!

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

Don’t spend down any of your retirement before you file your bankruptcy.

I should add, unless it’s over $1 million.  That’s right.  You can save up to $1 million in a government approved retirement fund like a 401k  or IRA and it will be exempt in the bankruptcy.  That means you can get rid of your debts and keep the retirement fund to spend as you wish.

The government did this in the 2005 changes to the bankruptcy laws because they wanted people to be able to keep their retirements so they would not become destitute after a bankruptcy and then become wards of the state.  It is a great rule for debtors because this is obviously a lot of money that creditors can’t touch in a bankruptcy and its money that you can keep.

Yes, you can file bankruptcy, discharge your debts, and keep your retirement money intact.  It’s a pretty good deal and one of the few good things that came out 2005 revision of the bankruptcy laws.  That law was written by the credit card companies themselves through their lobbyists and it was designed by these companies to reduce the amount of money they were losing in the bankruptcies of their customers.

We are lucky therefore that they didn’t just change the law to allow them to get access to these accounts.  They did not though so for now you can keep your retirement funds in a bankruptcy.

File bankruptcy soon (if you need to) before they send their lobbyists in the alligator shoes to stroll the halls of Congress again to take back your right to keep your retirement in bankruptcy!

I am a bankruptcy lawyer practicing in San Diego.  For further help please visit my website at www.farquharlaw.com.

What do the election results mean for bankruptcy and foreclosure?

The reality of our political situation is that no matter what you think of any political party, the democrats are in general friendlier to debtors.  I am not a democrat or a liberal but I say this because it is just the way it is.

So if you are in debt the democrats will probably pass more laws that will help you (years ago Hillary Clinton put forth legislation to make student loans dischargeable in bankruptcy).  With the Republican takeover therefore there will probably not be as much relief  for debtors as there would be if democrats stayed in power.

For instance the writing down of mortgages to the value of the homes is being proposed by a democrat.  This is being sponsored by the democratic senator from Rhode Island and it will probably not happen now because the dems lost the house.  Neither will a foreclosure moratorium.  A halting to all foreclosures has been called for but it is unlikely top pass with republicans controlling the house of representatives.  Republicans are more likely to want to see the foreclosures happen.

But that does not mean that republicans are more in bed with big banks.  They just believe in personal responsibility and that if you can’t afford a mortgage then you should go out of your house.  For many of my clients this is my advice and I point out to them how it’s probably cheaper to rent than to make their high payments for an upside down house.  But for others I advise them to try to get a modification and stay in the home because they are attached to the home or they have made major improvements to it.

The republicans will be faced with the emergency of an increasing number of these foreclosures and they may be forced to take more drastic action than they would otherwise take due to seriousness of the problem.

Remember too that bankruptcy is still going to be always available and it is unlikely to change.  The law was majorly overhauled in 2005 and will probably be only tweaked now.  That 2005 bankruptcy law and the means test that it created is considered unfriendly to debtors.  If your income is too high then you are forced into a chapter 13.

Vice president Biden voted for that 2005 change to the bankruptcy law along with many other democrats so it was not just republicans who supported it.  But bankruptcy is still available and its often the most sensible solution for people who do not have too much income but they do have a lot of debts they cannot pay.

So there is unlikely to be a foreclosure freeze now or a mortgage write down but there may be some other relief coming for debtors if both parties can work together.

I am a bankruptcy lawyer in San Diego.  If you need more help please visit my website at www.farquharlaw.com.