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.

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What does it mean when a debt is listed on my credit report as “charged off”?

I often get an inquiry from my clients who have a debt listed as “charged off” on the credit report.  My clients sometimes falsely believe that this designation means that they no longer owe the debt.  It certainly sounds like this could be the case but how often are things that easy in life?  If people could get debts charged off by just waiting then no one would ever pay them.

If a debt is reported on your credit report as charged off you do indeed still owe it.  What a charge off means on a credit report is that the creditor has determined that the debt is bad debt for them and therefore the creditor has sold the debt to a collection agency.  The original creditor then takes a tax deduction for the loss incurred on the charged off debt.  This means that your credit card company actually saves money on its taxes when you don’t pay your debt.

The collection agency which buys the debt then begins to add additional charges to it.  The debt takes on a new life and grows so this new debt collection company can make more money to collect it from you.  These debts though are transferred/sold to these collection agencies with the full rights to collect the full amount.  No lessening or forgiveness of debt occurs during this process and in fact just the opposite happens.  The debt continues to get bigger after the sale.  It does not matter if the debt buyer pays pennies on the dollar.  The collection company will still come after the debtor for the full amount.

These collection agencies are a very big business and they are very profitable.  They buy and sell these debts in lots numbering in the thousands.  Sometimes they just trade them.  If the collector sues you they will add court costs, attorney fees, and interest to boost it up even further.  It is not unusual to have a client come to me with a debt that has tripled over the years.

The good news is that bankruptcy ends the debt merry-go-round and the debt inflation.  It all ends when you pull the trigger and file a bankruptcy.  The debt, the collector, the lawsuit, and all of their various fees and charges just melt away.  You don’t have to argue about how much or whether you owe it and you don’t have to worry about a debtors exam or other techniques to get you into court to collect from you.

The collectors are skilled at collecting.  They are like the terminator and that is all they do.  They don’t care if you are sick, unemployed, pregnant, destitute, or if you have 10 mouths to feed.  They want their money and they want it now.  They get paid by collecting from you and they are trained not to listen to your sob stories.   They will hound you virtually forever unless you pay them or die or file for bankruptcy.

All this ends with a bankruptcy so contact a bankruptcy lawyer today to see if bankruptcy is an option for you.  If you have debts charged off or otherwise owed by you that you cannot pay then check into a bankruptcy to see it is right for you.  A bankruptcy attorney can answer your questions and should not charge for the initial consultation.

I am bankruptcy attorney in San Diego offering free consultations.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics or call me for a free consultation 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

What the heck is an bankruptcy adversary proceeding? Why would someone bring one against me?

Adversary proceedings happen sometimes in bankruptcy cases.  I write about this because a debtor will sometimes file for bankruptcy and then get a notice of an adversary proceeding that has been filed in the case.  This can cause tremendous worry to the client.  But don’t despair, a good attorney will be prepared to handle one of these cases and protect your rights.

An adversary proceeding is literally a lawsuit within a bankruptcy case.  A case within a case.  It means that someone objecting to or fighting about something in the bankruptcy case.  Somebody is letting you know that they have a problem with some aspect of your bankruptcy and they are going intervene in your case to get their problem/objection dealt with.

An adversary proceeding can be brought by just about anyone.   A debtor, a creditor, or even the bankruptcy trustee who is tasked with looking for things like fraud in a bankruptcy case. Almost anyone can file one if they have a legal claim against the debtor or his property.

An adversary proceeding most often happens when someone is intervening in the bankruptcy case to say that some debt is not dischargeable.  Allegations of fraud are the most common reason to file one of these.  Creditors or the trustee himself can file an adversary to challenge the dischargeability of some debt if fraud is suspected.  These are the cases filed under the “exceptions to discharge” under 11 USC § 523(a)(2) of the bankruptcy code.  In addition to fraud, but less often, misrepresentation, false pretenses or other allegations can be pleaded in these cases.

The fraud cases usually come down when a credit card company files an adversary challenging a large charge made on one of your credit cards prior to filing.  These same companies can also object to a large cash advance taken out on a card especially if the cash advance is taken out at a gambling casino.  (I have had a number of these cases over the years as this is more common than one might suspect).

There can be other larger allegations of fraud that can allege fraud over some asset like real estate.  These cases can reach into the millions.  If you find that an adversary was filed against you for very large debt then it is even more important to contact an attorney right away to protect your rights.  With all of these cases is the other side wins then the debt they are challenging will be deemed not discharged in bankruptcy and you will still owe it when the bankruptcy case is finished.  This tends to defeat the whole point of bankruptcy and therefore these cases must be dealt with quickly and correctly.

If it is the trustee who is trying to recover property for the bankruptcy estate (property that was transferred out of the estate prior to filing) then he would file an adversary action alleging fraudulent transfer.  In that case he would go after the recipient of the property which could be a problem if it is a relative or friend of the debtor.  (See here for more on fraudulent transfer).

Other reasons for adversary proceedings would be when a creditor believes a bankruptcy was filed in bad faith.  A debtor can also file an adversary proceeding against a creditor for violations of the bankruptcy automatic stay when a creditor attempts to collect a debt which he cannot because of the bankruptcy.  There are adversary proceedings filed by the debtor’s attorney to strip off second mortgages.

There are numerous reasons for adversary but contact a bankruptcy attorney right away if you get one filed against you.  There are distinct timelines to respond to one of these and definite procedures for doing so.

I am bankruptcy attorney in San Diego who handles adversary proceedings for both settlement and trial.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics.  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.

What is better when I am in debt, a debt settlement company or a bankruptcy attorney?

The answer to this question is easy.  A bankruptcy attorney is better than a debt settlement company and bankruptcy is almost always better than debt settlement if you wish to do it.  If you have debts but you don’t want to file bankruptcy for some reason then debt settlement through an attorney can be a good alternative.

I often settle debts for my clients who don’t wish to do a bankruptcy.  We look at the  client’s situation, evaluate the debts and the amounts owed, and we propose a settlement.  This settlement is forwarded to the creditors and in the settlement proposal we state that everyone must agree of my client will go bankrupt and the creditor will get nothing.

Creditors usually realize that bankruptcy attorneys will file a bankruptcy without a problem and they usually come around and agree to some type of settlement.  It does help though to have money to settle with as getting the creditors to accept payments is tough.  They want to settle the entire account if they are to take a reduced amount.  Remember that the collection agencies have bought this debt for pennies on the dollar so a definite reduced amount is far better than an uncertainty or nothing at all.

Debt settlement companies that say they specialize in settling debts (the ones that you see advertised constantly) are probably not a good option in my opinion.  These companies are very expensive, take a long time, and you get no legal protection.  My clients often pay thousands of dollars to these companies and sometimes they get few or none of their debts settled in the end.  (See my article on my website about debt settlement companies).

Clients come to me after having been sued by one of their creditors that was supposed to be taken care of in the settlements.  The client then often decides to go bankrupt anyway.  When we examine the contract the client signed with the debt settlement company we find that they are indeed paying thousands of dollars to have these people “settle” their debts.  The client then discovers that the settlement companies always put in their contracts that the companies don’t provide any legal protection if a creditor decides to sue.

And the creditors will sue.  These settlement companies work by charging you a large monthly fee which mostly goes to pay them in the beginning.  Then when you get done paying them they start putting money away for the creditors so they can offer them settlements one by one.  There is no assurance that the creditors will accept the settlement and the creditors who are last in line often sue anyway.

That is when we bankruptcy attorneys are called when it is too late to save you the money.  We can file the bankruptcy and get you out of the debts but if you had called us first we would have saved you the thousands you spent on the debt settlement company for nothing.

If you hire an attorney in the first place you would not only save money but by law the creditors would have to call us and not you.  Creditors are unlikely to sue once you engage an attorney because they know they must cease all contact with you by law and if they do file a lawsuit then we bankruptcy attorneys can immediately file your bankruptcy case and stop their lawsuit in its tracks.  The creditors would then lose all their filing fees and attorney fees and the underlying debt.

You can see that the creditors are thus very motivated to settle once a bankruptcy attorney enters the picture.  Call a bankruptcy attorney if you are thinking about settling your debts.  The attorney can file a bankruptcy or get you the best deal on a settlement probably far cheaper than a debt settlement company.

I am a San Diego bankruptcy attorney.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics.  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.

Debtors prison end run in California and elsewhere. Beware “Contempt of Court” and the Debtors exam.

Numerous articles are appearing recently about debtors prisons and whether a debtor can be thrown in jail for owing money to private individuals.  Debtors prisons were written about by Charles Dickens they were outlawed in the 1800s in America and we all thought debtors prisons were gone for good.

It seemed like a good idea a long time ago to not put people in jail for owing money to private individuals.  It appears that they have resurfaced in some state as I blogged about here  http://bit.ly/HPAMsQ  and here http://bit.ly/JmsMFt

I also blogged about how in the California constitution people could not be jailed for owing private debts here  http://bit.ly/I9TkYh .  This California constitutional prohibition of debtors prison seems to solve the problem in this state and we can rest easy because that is just other states that jail people for debts right?  Wrong.

I received comments on my blogs that related real life situations where people had been put in jail for owing debts here in California.  I also researched the issue some more and spoke to other attorneys to see what they were facing.  It appears that in the end judges can do an end run around this prohibition on debtors prisons  They do this with the contempt of court citation and the debtors exam.

A contempt of court citation comes if a judge issues a valid order to pay a debt, and the debtor has notice o the order, and then he debtor willfully fails to comply with the order.  The the debtor can then be jailed.  This comes up most commonly in child support cases where a party is ordered to pay and does not when it has been determined that he or she has the ability to pay.  I would argue though that this is an end run around the debtors prison prohibition because child support is a debt owed to a private individual.  Your ex is not a public agency.

In a number of other states creditors like credit card companies or other creditors have gone to court and moved judges to somehow issue these orders to pay.  When the debtors failed to pay the judge jailed them for contempt.  Some didn’t even have notice as the Sheriff showed up at their door one day and carted them away to jail.  (So such for the notice requirement).  These creditors have circumvented the laws, used the court to collect their private debts, and reinstituted debtors prisons.

I have not heard of these types of creditors getting judges to give them such orders for credit card type debt yet in California but I would not put it past them to try in the future.  For now the contempt of court citations seem to be limited to child support and unpaid court fines.  I don’t expect it to stay that way forever as word gets out of what other states are doing.

But remember always that a creditor in California can get you into a debtors exams. They have similar proceedings in other states.  These debtors exams are bad things all the way around for debtors to attend.  If a debtor is summoned to attend a debtors exam by a creditor the debtor must attend and a warning appears on the summons that failure to appear will result in an arrest warrant for the debtor.  So there is the first way that debtors exams can land you in jail for a private debt by failure to appear at a debtors exam.

This is exactly what happened to a debtor in Pennsylvania according to a blog I read online.  There a debtor failed to attend a deposition session for a type of debtor’s exam at a lawyer’s office and the lawyer immediately filed motions to have the debtor arrested which he was.  This same tactic could be used here in California if a debtor misses a debtors exam.  An arrest warrant will be issued for failure to attend the debtors exam or violation of a court order or contempt.  Creditors are aggressive and they will try anything to get around the California constitution.

If a debtor attends a debtor’s exam then he or she is required to answer questions under penalty of perjury.  These questions are very intrusive and they relate to the debtors entire financial situation.  All sort of personal questions about income, assets, and bank accounts could be asked for the purpose of getting the debtor to pay the debt.  If assets and income is uncovered in these exams then it is possible that the creditors could move for some kind of court order to force payment of the debts.  Violation of that order could also land a debtor in jail.  Debtors prison again.

There is a great way to avoid debtors exam, debts, and creditors though.  That would be to file bankruptcy.  A bankruptcy filing will stay the collection procedures for all dischargeable debts and a discharge will mean that the debtor is off the hook for the debt.  I filed a bankruptcy for a client the night before his debtors exam and he went the next day and the judge through the whole case out because of the bankruptcy stay.

If bankruptcy is unavailable there is the Fair Debt Collection Practices Act (FDCPA) that establishes procedures that debt collectors must file or face sanctions.  Contact an attorney for advice on FDCPA or bankruptcy.

I am a San Diego bankruptcy attorney.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics.  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.

Did you receive a notice of garnishment of your wages? Bankruptcy can stop it and get some of your money back that has already been taken!

Many of my clients come to me with wage garnishments already in place or they have received notice that one is about to begin.  A wage garnishment is when a creditor can reach out to your employer and seize part of your paycheck for some debt you owe.  These creditors are limited to taking no more than 25% of your take-home pay.  This amount can be large though and can make the difference in whether you can afford to pay your bills or not.

Before creditors can get this garnishment in California they must go to court and get a judgment and then file for the wage garnishment with your employer.  Once they get it the garnishment will continue until the debt is paid in full which can be some time if the debt is large.

Some of my clients have a $20,000 or $30,000 credit card debt or vehicle deficiency debt that is being garnished from their wages.  Most of these people can’t afford to pay their ongoing bills with their current income and a 20% pay cut makes their situation impossible.

It is best to catch this before the garnishment hits your paycheck but the good news is that bankruptcy can stop this immediately from happening.  If we catch the garnishment before it starts that is best.  But if we do not we can still stop it and wipe out the underlying debt.  We can even get back some or all of your money garnished if we file within 90 days of the garnishment beginning.  We will send a request to the creditor that they return the money and most will return it if a bankruptcy case has been filed.

So don’t despair if you receive a garnishment notice.  It is not the end of the world.  A wage garnishment can be stopped and the money can usually be returned.  You just need to call a bankruptcy attorney, let the attorney analyze your case, and file the bankruptcy.  And don’t worry about whether you owe the money or not and don’t worry about not paying it back.  It’s your federal right to file for bankruptcy and get a fresh start with your debts discharged so contact an attorney today and begin the process to return your income to you.

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

If you are considering bankruptcy and want to receive the Free e-book; “13 Things You Should Do To Prepare For Filing Bankruptcy” then please e-mail me at: farquharesq@yahoo.com.

What can I do if I can’t file bankruptcy for some reason? That’s easy, we settle!

(See my update on whether to use a debt settlement company or a bankruptcy attorney).

Yes, we can settle your debts!  Usually at a steep discount over what is owed.  You may have already received letters from creditors offering these discounts if you have held this debt for some time.  If a bankruptcy attorney calls the creditor and explains that you may file bankruptcy then you might even get a better settlement offer.

If you can’t file bankruptcy that means usually that you have too much income or too much property to file.  If your debts are fairly low then you may want to use that property or income to settle them.  Some of my clients have gotten or are getting a large payout on a lawsuit or an inheritance of some kind and they then would have too much money to file.  We then call the creditors and offer settlements and they are happy to get their money usually at a deep discount.

This may not seem like an option for you but you would be surprised how often this happens.  If you have some money or if you are due for a big payout in the future then it does not make sense to file for bankruptcy.  If the trustee finds out then he can keep the case open until those funds come in.  He will then use those funds to pay the debts in full if each creditor files a proof of claim and they usually do.  Since you are bound by law to report to the trustee anything that could be considered property to the estate it just does not make sense to file bankruptcy in some circumstances.

Some people just don’t want to file for bankruptcy.  If this is the case then you can also settle your debts.  The creditors will be happy to get paid.  Settling is not as bad as you might think.  A bankruptcy attorney has more clout and the threat of filing bankruptcy to use as leverage to get you a better deal.  A bankruptcy attorney should offer this as a service for those who cannot file for bankruptcy.  After settling these debts will be reported as “settled” on your credit report and in time your credit score will rise as these debts will no longer be reported as delinquent.

I am a bankruptcy attorney practicing bankruptcy law in San Diego CA.  Please visit my websites if you have more questions at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation 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.

What if I forget to list something in my bankruptcy?

No problem.  You can amend your schedules and add or change just about anything in your bankruptcy.  You are certainly not stuck with what you originally file and you can change your bankruptcy schedules at any time up until the case closes which is 90 days after you file.

In fact it is a common occurrence that attorneys file a “bare bones” bankruptcy petition.  This is when a bankruptcy is filed in an emergency situation.  Sometimes there is a foreclosure, lawsuit, garnishment or something else that forces a bankruptcy to be filed by a certain date.  If there is not enough time to gather all of the information to fill in the bankruptcy schedules then a bare bones petition will include just the name, address, and the creditors list.

The rest of the information as to real estate, personal property, income, expenses, statement of financial affairs is added later by amendment.  In this case you only have 14 days to add this stuff but in a normal amendment situation you usually have the full 90 days.

You may have a creditor that shows up after the filing.  No problem.  You just have your attorney amend and add the creditor.  There is a small fee but the creditor can certainly be added to the case as long as it is not closed

So you see you can add or change anything in a bankruptcy so don’t worry if you forget something initially.  You can change most things without too much trouble and add what you forgot.

I am a bankruptcy attorney practicing bankruptcy law in San Diego.  Please visit my websites at www.farquharlaw.com or www.fresdhstartsandiego.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.

7 reasons why the timing of your bankruptcy filing is crucial

Over the years I have seen that time and time again the timing of the filing of the bankruptcy is crucial for a debtor to receive the most out of the bankruptcy as he or she possible can.  Your filing discharges all debts before you file.  You can amend and add debts during the bankruptcy but after it’s closed it’s more difficult.

1)  If you are going to incur some unavoidable debt– in the near future you don’t want to file too soon.  You may want to wait until after the debt has been incurred.  Many people have a medical issue like an upcoming operation that is going to occur in the near future.  If that is the case then it is best to wait until that medical procedure is finished and you are billed for it.  Then we can add the debt to the bankruptcy and the debt can be discharged.

So if you have debts that will be incurred in the near future it is a good idea to wait to file so you can include them in the bankruptcy.

 2) If it has been less than 8 years since you file a chapter 7- Then you want to wait until the 8 years elapses before you file again.  If you file too soon the case will be dismissed.  We need to carefully examine when your last filing occurred before we file for you again.

 3) If some creditor has sued you– then you want to be sure to file in around 30 days after the suit was served on you (not 30 days after the suit was filed).  So try to remember when you were served with the suit and you have 30 days from that day to file the bankruptcy before the creditor can default you and begin to attempt to collect on your debt.

 4) If foreclosure has been started then you want to probably get the maximum time to stay in your house.  In this case you want to wait to file until the last possible day before the trustee sale where your house will be sold.  A filing the day before the sale will stop the sale and the creditor will have to file a motion for relief from stay to proceed with the sale.  From my experience this will delay the sale for around two more months on average in a chapter 7.

If you file a chapter 13 you can stop the sale but if you want to keep your house then you would have to have sufficient income to pay for it and in addition you would need disposable income to at least partially pay your unsecured creditors.

 5) If you are currently unemployed or underemployed and you believe that you might get a higher paying job in the future then you might want to file soon.  It is possible that the new job could pay you sufficient income that you would fail the means test and thus lose your ability to file a chapter 7 because you waited.

I have encountered this case a few times and would be a shame to not file quickly here.  To lose a chapter 7 can mean that you would be in a 13 where for up to five years you would be paying debts you could have discharged if you filed sooner.

 6) If you have recently charged some large amount on your credit card then you might want to wait for some time to elapse so that this charge ages.  This also occurs with cash advances.  Both can invite a fraud challenge from a credit card company if the charges are too large and too soon before the bankruptcy filing.

Here I like to look at the charges and see when they were made, for how much, for what purpose, and how recently.  I analyze the risk of filing on a case by case basis.

 7) If you just want to get started re-building your credit then you would want to push the bankruptcy forward and file right away.

For more info. check out my websites at:   www.farquharlaw.com or www.freshstartsandiego.com.

I am a bankruptcy lawyer in San Diego.

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.