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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The economy might be improving. It therefore might be a good time to file bankruptcy.

The economy appears as if it might be improving.  If this is true the in a better economy it is more likely that you will obtain a better paying job.  Therefore it might e a good time to file for bankruptcy before you get this job and you become “means tested”out of a chapter 7 bankruptcy.

Believe it or not many people wait too long to file and then they cannot file because they earn too much income or they receive too much property.  If you might get a job with a moderate to high income in the near future they it would be advisable to file for bankruptcy now when you have an underpaid job or if you are altogether unemployed.  You should only file of course if you have large debts you cannot currently pay.   (See here for my website article on why you should file for bankruptcy).

There is a  problem with waiting to file for bankruptcy though.  When you get a good job you may get enough income to survive and pay your bills.  his is a good thing but your income may be too much for you to easily file for bankruptcy.  There is a thing called the means test which will force you to pay back your debts in a chapter 13 if you make too much money.  The artificiality of the means test may create a situation where on paper you have enough money to pay back our debts but in reality you do not.

The means test may show extra income in your household when you look in your account and see none.  That is when you will wish you had filed for bankruptcy and rid yourself of your debts when you could have with no problem.  Don’t let those debts follow you into your new life.  Those old credit card debts are usually attributable to your borrowing money to survive when things were very bad.  They usually do not reflect a wasteful or luxurious lifestyle but mere borrowing to survive.

Also remember that if you are going to receive some property by will, trust, winnings, or gift then that too may make it harder to file for bankruptcy.  This is also true if your home or other asset will increase in value.  Better to file now before these things happen.

Why then let these old debts impact your future life after you come out of the bad times.  You will need the money you will earn from you job to pay for your family’s expenses.  Don’t wait until you get too much income or assets that will push you out of bankruptcy.  Excercise your federal right to file for bankruptcy and rid yourself of these old debts.  Get a fresh start but do it now while you can and your income is low and your assests are few.  You do not know what the future holds.

I am a San Diego bankruptcy attorney.  For more information please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.

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.

Will I pass the means test in bankruptcy but I have a spouse who makes good money but is not filing?

Good news!  That is okay!  Generally a non-filing spouse’s income is included in the bankruptcy means test as household income even if the spouse is not filing bankruptcy unless the spouses live apart.  But if your marriage is a recent marriage of less than six months then not all of the non-filing spouse’s income will be included in the household income calculation anyway.

If it is a marriage longer than six months then there is something called the marital adjustment which will allow you to reduce the amount of your spouse’s income that will appear on the means test.  The marital adjustment appears on line 17 of the means test form 22A.  There are several lines there but you can add an attachment as I did recently in a case.   This marital deduction allows you to deduct from your spouse’s income all of your spouse’s expenses that your spouse pays separately.

The first one is the deductions that come out of the non-filing spouse’s paycheck.  The non-filing spouse will have taxes, insurance, union dues and even a retirement deductions taken out of his or her paycheck.  The income for the spouse goes into the means test in the gross amount but the deductions are taken out here.  The retirement can be included here where it would not be for the filing spouse unless the filing spouse had a mandatory retirement.

Remember that this spouse is not filing bankruptcy and can spend money and take deductions as needed.  The non-filing spouse is not attempting to discharge their debts so the trustee has much less control over what they take on deductions than he or she would over a party that is filing for bankruptcy. But still the Trustee can challenge these marital deductions so it is good to have a bankruptcy attorney to analyze which ones can be justified.

The non-filing spouse can also take his or her credit card payments as marital deductions.  These payments will have to be made after the bankruptcy as they are not being discharged and thus they can be taken here.  If the non-filing spouse has a car of their own then they can take those car expenses there too if they have not already been taken in the car section of the means test.  The same would go for a separate cell phone.

There are other expenses too like separate student loan payments that the non-filing spouse can take.  Also if they have traveling or food expenses for themselves or if they pay child support for a child from a previous marriage then they can take those expenses.  Anything that is truly an expense just for them and was not paid on a regular basis for the household expenses for the debtor or the debtor’s dependants.

This gives you a lot of leeway for expenses to be included here that you or your attorney can come up with that meet this criteria.  Most people do have these expenses that are separate and distinct from the expenses that are contributed to the household.  This is because most people, even if married, these days have separate and distinct lives.  They may have many debts and obligations and expenses left over from before the marriage or just expenses that are truly just for them.

So don’t despair if you don’t pass the means test with your spouse’s income.  The marital deduction sections may make bankruptcy possible.  If it seems too complicated then contact a bankruptcy attorney who will help you decide which expenses can be taken on the marital deduction section of the bankruptcy means test.

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 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 need an attorney to file for bankruptcy?

The short answer is yes!  Don’t try to file a bankruptcy without one!

Your attorney will know the law first and foremost.  The attorney will know if you have too much property or income for instance as he will do a means test calculation for you as is required by the law.  I recently came in on a bankruptcy case where a bankruptcy filer should never have filed a case because this person had non-exempt income or assets.

The trustee just claimed all of those assets for the creditors as they will do when there are assets available to seize.  If an experienced bankruptcy attorney would have been consulted in the beginning then they could have advised the client not to file for bankruptcy at all in that case.

The client could have saved the filing fee, attorney’s fees, administrative fees and they could have worked out a deal to pay the debts back.  As it turned out the client had to surrender assets necessary to pay all of these costs and he had to pay the debts back in full.  It would have been much cheaper not to file bankruptcy in the first place and to make matters worse the clients assets were tied up for over a year.

Secondly you need an attorney because the attorney will know the bankruptcy procedures.  Filing for bankruptcy requires many procedural steps which are difficult for the novice to comply with.  An attorney will file the case electronically with special bankruptcy software that automatically complies with the procedural requirements of the court.  I have seen many filers in 341 hearings who didn’t know what they were doing so they made serious errors.  These errors usually result in delays and continuances and sometimes in dismissals of the bankruptcy case.

If the case is dismissed then the debts come back into play and the whole reason for filing is negated.  Now you have lost the filing fee and you will suffer other penalties like losing the automatic stay for a year.

Thirdly you need an attorney because if you hire one you should get an expert who knows the law,and  the procedure but also someone who knows the trustees.  Each bankruptcy trustee is a little different and each has slightly different requirements.  An experienced attorney will know what each one needs and what each one likes to receive in terms of supporting documentation.  This will inevitably help you through the process in the smoothest and quickest fashion.

Lastly with an attorney you get someone to accompany you through the process.  I accompany all of my clients to the 341 meeting of creditors and I am available for any questions that they might have about the process at any time.  This helps people to have fewer fears and worries about something that people naturally are very scared about.

So there are many reasons to hire an experienced bankruptcy attorney to help with your bankruptcy.  Remember too that the attorney is the only one that can represent you in court in the unlikely event that things go badly.  So if you are considering bankruptcy then hire an attorney and don’t do it yourself!

I practice bankruptcy law in San Diego California.  Please visit my website for more information on filing bankruptcy at: www.farquharlaw.com.

How much does a bankruptcy cost? Can I make payments?

Most bankruptcy cases can be handled for less than $2000 and some for far less than that.  There are some factors that increase the cost of the bankruptcy.  There is a base charge but if you have multiple cars or a lot of other personal property then the bankruptcy can cost more.

Houses are extra and some people have several.  Houses require valuations, payoff balances and insurance and we have to make sure any equity is protected.  All of these documents have to be sent to the trustee.  This takes extra time so it increases the cost.

Businesses are extra too.  With a business we have to look at your business inventory to list in the bankruptcy and we have to get profit/loss statements to show what income is received from the business.  This takes extra time and effort and thus it costs a little more if you have a business.

If you are filing with your spouse (and you don’t have to) then there is a small charge for the extra person because their income and assets must be included in the bankruptcy along with their debts.  An extra credit report must be pulled for the spouse too.

If you are filing a simple individual case with little of no assets and you have a job or are unemployed with no house then the case can be done very cheaply.

Yes!  You can make payments until the full balance is paid.  The case cannot be filed until its paid for but in the mean time we can stop the creditors from calling you.

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 at (619) 702-5015.   For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

How do I file for bankruptcy? What is the process?

Filing for bankruptcy is easier than you might think.  If you are hiring a bankruptcy attorney to file it for you then he or she should be very familiar with the process.

You will be asked about income, expenses, and assets.  You will need to list all of  your personal and real property.  Most people have a car, a bank account, furniture, clothes and maybe some jewelry.  Others have a house. All of this will be listed along with any loans you have on any property.  Your income will be determined by 6 months of pay stubs of with a profit and loss statement if you have a business.  Your expenses you can list also.

Next comes your debts.   Your attorney will list your debts in the bankruptcy and most can download them from you credit report.  There will be a few questions about when the debt was incurred if they considered high but for the most part your unsecured debts are dischargeable.  If you have student loans, some taxes, or spousal/child support debts then those would not be dischargeable.

The attorney will get more information from you and fill out the rest of the schedules like the statement of financial affairs and he or she will complete the bankruptcy schedules.  You then will sign the documents and most attorneys will file electronically after that.  Most attorneys will take the necessary time to do this but in an emergency the whole process can be done rather quickly.

You will then get a meeting of creditors 30 days after the bankruptcy filing.  There a trustee will ask a few simple questions unless there are more serious issues.  Your attorney will attend this hearing so if you get stuck they are there to help you.  Creditors rarely attend this meeting and if they do then there are only a few questions they can ask.

Sixty days after the hearing you get your discharge if there are no holdups or problems with the case.  You are now debt free and able to move on with your life and a fresh start.   There that wasn’t so bad was it?

I am a bankruptcy attorney in San Diego.  Please visit my website for more help at www.farquharlaw.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.

What is the means test?

The means test is a provision added to the 2005 Bankruptcy Reform Bill.  Many clients believe that it is designed to throw them out of bankruptcy.  It is not.  It is merely designed to throw you out of a Chapter 7 and into a Chapter 13 bankruptcy because you supposedly have the “means” to pay all or part of your debts back in a chapter 13.  You would therefore not be eligible for a chapter 7.   You are not thrown out of Bankruptcy though as another chapter is available to you.  If you don’t pass the test because you make too much money and you filed anyway they will allow you to convert the case to a chapter 13.  Check back for my next blog on the differences between a chapter 7 and 13

The means test is a test where you enter your gross monthly average household income for the last six months and you see if you make more money than the average person in your county.  At the time of writing this, the yearly averages for San Diego county are: $47,969 for 1 person in the household, $64,647 for 2 people, $70,638 for 3, and $79,194 for 4.  You get full credit for each child in the house and you are allowed to make extra money for each one.

If you make more than these allowed amounts you go into the means test.  You then deduct all of the allowable expenses.  First there are your taxes, then medical insurance, and union dues that are allowed to be deducted from the total.  You then get “standard” deductions for medical, housing, living and car expenses.  Many people will lose out here because their actual expenses for these items exceeds what the means test allows and then you will often not be allowed to take them even if you actually do spend that much money on those items.

You will be able to take all of your secured creditor payments for mortgages, and cars, and even thing like jewelry,  electronics, and furniture.  Since you are obligated to make those payments (or lose the item you financed) you can get full deductions for these in the means test.  Then there are additional categories for allowed deductions for things like childcare, charity, care of elderly, certain education expenses, among others.

After all of that is deducted and calculated you see if you pass the means test.  I do it all on software that calculates it for me and tells me if you pass or not.  This test should be done first thing in the Bankruptcy case if there is a situation where a person or a family earns a fairly high income.  The means test looks back six months to see what your average income was in that period so if you just lost your job you may have to wait to file so that you 6 month average income will decline.

The means test is a somewhat complicated test and it is best to have an attorney do this for you and advise you of options if you fail it.  If you are going to get a raise though you might want to file before your income increases so you can get you chapter 7 discharge.

Don’t despair though as most Bankruptcy lawyers are used to dealing with the means test and they (and good software) can guide you through it.

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.