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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When do I need a chapter 13 bankruptcy instead of a chapter 7?

Chapter 13 bankruptcies and chapter 7s are very different bankruptcies bur both have advantages and disadvantages.  A chapter 7 is good because it is clean and fast.  It discharges debts quickly.  It is all over in 90 days and you can then go on with your life if you qualify for the chapter 7.  Not everyone does qualify though.

Some people are “means tested” out of a chapter 7 because they make too much money to file one.  They have disposable income and thus bankruptcy law says that they must therefore file a chapter 13 bankruptcy if they want to file one at all.  (They would also qualify for a chapter 11 but that is another story).

Others don’t qualify if there is too much equity in their home.  In a chapter 13 they could then keep the home and continue to make payments on it in the 13.  One must always be careful that you do not violate the “best interests of creditors test”.  This is where the creditors have the right to demand that they get as much in a chapter 13 as they would in a chapter 7 liquidation.

The 13 differs from the 7 in that it is a payback plan where the debtor makes payments to the trustee for from 3 to 5 years.  In this period the debtor pays back some or all of his debts.  Most plans pay only a percentage of the debts but some do pay back 100%.  After the payback period is over then the unpaid debts (if there are any) will be discharged.

But why pay back the debts if you can discharge and escape them?  There are many reasons and one is the income limits of a 7 discussed above.  If you exceed these income limits then you cannot file a 7.  Debtors also file chapter 13s to take advantage of the lien strip and the cramdown.  See here for a blog on what is a cramdown?

The cramdown allows you to write down loans to the value of the property and is useful if you have property that is underwater.  The lien strip allows you to strip off or eliminate a second mortgage on a home if it is completely unsecured.  So if you have a home that is worth less than the first mortgage then the entire second mortgage can be eliminated after the 5 year payment plan is over.

Both of these cannot be done in a chapter 7 and if you want a cramdown or a lien strip then the chapter 13 is your chapter.  If your income is too high then a chapter 13 also makes sense.  There is one more advantage though to a chapter 13.  It can be dismissed by the debtor at any time.  Once you file one you are not locked in like you are with a chapter 7.

The disadvantage though is that you are locked into paying a trustee for a period of five years if you want to complete the plan and get a discharge.  Most chapter 13 fail because people can’t make these regular payments for five years to a trustee.  According to one article I read as many as 92% of them fail and are dismissed or converted to a chapter 7.  This is a very high fail rate and this is the reason why most people file chapter 7s.

You can pay a chapter 13 bankrupty off early though if you have the money.  So if you payments are $300 per month and you are three years in you could pay off the remaining two years early and get out of the 13.  Most people though don’t have the money to do this.

You should consult a bankruptcy attorney to see which chapter is right for 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 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 is a “cramdown” in bankruptcy?

Bankruptcy is filled with interesting terms like the “cram-down”.  A cram-down is just where property that is encumbered with a loan is restructured in a chapter 13 bankruptcy so that the debtor only has to pay the loan to the extent of the property’s worth.  A cramdown can also be done in a chapter 11 bankruptcy.

A cramdown can be a very helpful and powerful tool in a bankruptcy if a debtor has property that he wants to keep but is upside down (meaning he owes more on it than it is worth).  With a cram-down a debtor can strip away the part of the loan that is unsecured and pay the secured part in the 5 year chapter 13 bankruptcy period.  The unsecured part is the upside down portion.  So if you have a car worth $10,000 but it has a $15,000 loan on it then the cramdown would strip off the $5000 unsecured portion of the loan and let you pay the $10,000 secured portion.

The loan is actually bifurcated or divided into two parts in a chapter 13 cramdown.  The secured part is paid in the plan.  The unsecured part drops in with the general unsecured debts.  These debts are paid only to the extent that any unsecureds are paid.  Sometimes it can be very low like 10% or 20%.  The rest (80% to 90%) is discharged at the end of 5 years.  The creditor is thus forced to “eat” the rest of his loan and the debtor does not pay it.

Keep in mind that this is usually done in a chapter 13 bankruptcy.  A chapter 13 is a pay back plan where debts are paid out over 3 to 5 years.  In the chapter 13 the unsecured portion of the loan will be paid out of disposable income by the debtor.

Disposable income is the amount the debtor has left after he pays his bills.  This can be as little as a few hundred dollars a month that goes to pay unsecureds.  This same cramdown tactic can be used for furniture, jewelry or any other personal property.

There are special rules for car cramdowns though.  You must have owned the car for 910 days (2 and one half years) before you are eligible for the cramdown.  For other personal property it is only one year.

Real estate can be crammed down too in a chapter 13.  If you have a piece of real property that is an investment property and not your residence then it too can be crammed down in a chapter 13.  If a property is worth $200,000 but has $350,000 mortgage on it then the $200,000 can be paid in the plan and the $150,00 can be paid at the low rate along with the other unsecureds.

The $150,000 then would be essentially stripped off and would go away if a workable plan is proposed and is paid on over the five-year period.  This is obviously a tremendous advantage to the debtor and a great disadvantage to the creditor.  But remember too with real estate the secured portion ($200,000 in the above example) must be paid over the 5 year period just like with a car or other personal property.  This is of of course difficult for most debtors as the monthly payments would be very high.

Cramdowns are also available in a chapter 11 just like in a chapter 13 upon approval of the reorganization plan by the court and the creditors.

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.

Possible foreclosure settlement with the banks! $20 billion to be set aside by banks to fund mortgage modifications!

According to Fox Business there is a potential agreement to reach a settlement between the banks and the Department of Justice over the banks’ use of improper mortgage practices and robosigning.  There are numerous types of improper mortgage practices and robosigning was the practice whereby the banks signed batches of mortgages without reading them.  Bank of America and Chase are the banks that are announcing the settlement which is good because they are two of the largest banks.  I did not see Wells Fargo listed in the potential settlement agreement.

The settlement would contain $20 billion in a “monetary relief fund” that presumably would be set aside to use for mortgage modifications..  This would hopefully allow people who had previously been turned down for a modification in the past to now get a modification.  Also part of the deal is an overhaul of the entire mortgage system by putting in sweeping new guidelines that would fundamentally change the industry like the Tobacco settlement changed that industry in 1998.

None of the banks nor the justice department is commenting on the deal and there are several sticking points.  The banks want immunity from lawsuits if they do this overhaul and set aside $20 billion.  Several states have problems with giving the banks immunity.  California has already apparently said that it won’t and it has backed out of the settlement.  Arizona and Nevada are separately suing Bank of America and New York state has its reservations too.

There are numerous class action lawsuits filed against the banks which the banks want to get dismissed as part of the settlement.  Also its unclear what the requirements will be to receive one of these settlement mortgages/modifications.  The administration has a bad history of running these programs.  The article points out that the Emergency Homeowners’ Loan Program (EHLP) was just shut down as it was badly administered, had too high income requirements, and failed to help nearly the number of people who it was designed for.

It’s hard to say what will come out of this.  If $20 billion is set aside then there will be a pool of money to lend to people or to fund modifications that were previously denied.  That would be a good thing.  But if this program is as poorly run as EHLP then people may have trouble accessing it.

It would be a good thing though if there were new standards for determining what was required for a modification.  My clients would universally all tell the same horror story of what happened when they applied to get a bank to modify their loan.   They would send the same documents to the bank over and over again and each time they called they would speak to a new person at the bank.  No one at the banks knew what was going on or what was needed to process the application.  They would eventually give up or they would be denied because they suddenly made too little money.  Sometimes they would be paying the new modified rate for a year when they were denied.

This is a system that is broken beyond repair and which needs some standards and some predictability.  Why can’t there be set rules governing mortgages and mortgage modifications?  Why can’t those rules be written so that people can understand the rules and know what is required of them?  Why can’t they have some assurance that if they follow these rules or comply with these requirements they will get their mortgage or their loan modification?  It’s not rocket science and it the mortgage industry should not be an enigma wrapped in a riddle surrounded by a mystery as Winston Churchill said.

So I look forward to more straight forward standards and lets hope that something good comes out of this settlement so more people can modify their mortgages and keep their homes.  In the mean time I always advise my clients that if they have a lot of other credit card type debt then they should file for personal bankruptcy.  This will eliminate these payments and free up income so they can qualify for a modification.  It will certainly help their debt to income ratio.

I will give more updates in the future if and when this settlement is reached.

I am a bankruptcy attorney 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.  If you or someone you know is considering bankruptcy then get my FREE E-BOOK “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” bt e-mailing me at; farquharesq@yahoo.com.

Shadow market tsunami!- It will take 4 years to sell all of these foreclosed homes! Good time to file bankruptcy.

(For an update on the curent state of foreclosures see this blog:  http://bit.ly/JGU1dZ ).

According to an article in the Daily Real Estate News it will take 4 years to clear the backlog of real estate “shadow inventory”.  The banks don’t admit that they have this inventory but they do.  Now we find out that there is indeed a four-year supply of these homes and the supply appears to be growing.

This is why home prices should remain depressed for some time.  Even if the overall economy turns around the housing market still operates on a supply and demand basis.  If there is this huge inventory of foreclosed homes that the banks are holding off the market then it will take some time before it is moved through the system.  We now get the word that there is this four-year supply of these shadow homes out there waiting to be sold.  I look for housing prices to be depressed for at least that long.

Scarier still is the statistic that this shadow market is up 11% in the fourth quarter of 2010 and up 40% from a year ago and the number of homes that are actually part of this shadow inventory appear to be growing.  According to the article Standard & Poors defines shadow inventory as properties with borrowers who are 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned (REOs). 

They point out that shadow inventory peaked in 2008 but that is probably because banks are currently waiting longer to foreclose on properties.  I have clients who have homes that they have stopped paying for and that they have moved out of a year or two ago and no foreclosure has been started.  It seems that banks are slowing down their rate of foreclosure processing.  This inaction creates more shadow inventory because there are now more homes that don’t show up on anyone’s radar.  These homes that don’t get moved through the system are in limbo and whether occupied or unoccupied realtors cannot list them for sale.   The number of homes like this are growing.

The article prints a chart where they show the number of months that it will take to clear these shadow homes.  It ranges from a high of 130 months in New York to a low of 25 months in Phoenix.  The other cities are Atlanta 49, Boston 71, Charlotte 65, Chicago 59, Cleveland 57, Dallas 56, Denver 38, Detroit 31, Las Vegas 33, Los Angeles 50, Miami 60, Minneapolis, 38, Portland 51, San Diego 39, San Francisco 42, Seattle 59 Tampa 57, Wash. D.C. 50.  It is clear from this chart that this is a nationwide problem of a shadow inventory of unsold and unlisted homes.

New York alone has $116.7 billion in shadow inventory according to Standard & Poors and because of the slower liquidation rate there New York will take 2.7 times longer to clear this inventory.  Los Angeles has a larger volume of shadow mortgages, $173.1 billion, which amounts to 31.5% of all outstanding mortgages.  L.A. has a faster rate of liquidating distressed properties.  My own city of San Diego has a 39 month backlog of shadow homes.

Default of home mortgage modifications remains high also.  80% of people have defaulted on their modified loans in the past and though the default rate is declining they say it still remains high.  My clients report extreme difficulty in getting their banks to agree to modifications of their mortgages.  It’s discouraging that such a high percentage of modifications go into default if people do in fact manage to get through the very difficult modification process.

The funny part is that the banks repeatedly deny that there is a shadow market or shadow inventory of unsold homes.  Realtors know that there is such a market as they can’t get listings for many of these homes that banks are holding off the market.  If banks now slow down or stall the foreclosure process then it will only increase this shadow inventory and increase the amount of time necessary to clear it before housing prices can rebound.

Don’t be surprised if the real estate market lags well behind any other economic recovery that happens in the country.  It is also possible that this huge inventory will act as a drag on the overall economy and prevent a recovery.  It could become what some have labeled as a “shadow tsunami”.

It is obviously a good time to buy a house though if you are going to keep the home for a while and its a good time to stay in your home longer if you are currently in a foreclosure.  It is also a good time to file for bankruptcy as prices will still be low in two years.  It takes two years to elapse after a bankruptcy before you can get a FHA loan approved.  Don’t allow your home to be sold at a foreclosure sale though as then you will have to wait five to seven years to buy a home.  Better to do a short sale and save your credit.

I am a bankruptcy attorney practicing in San Diego.  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 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.

Help coming for mortgage payments? FDIC head Sheila Bair recommends at least a 25% reduction in mortgage payments.

According to Fox business and The Street FDIC (Federal Deposit Insurance Corporation) head Sheila Bair is asking for at least a 25% reduction in mortgage payments on properties that are going into foreclosure.  She said this at a symposium on “Mortgages and the future of housing finance”.  She appears to be asking for this mortgage rate reduction because of the robo-signing scandal where bank employees sign foreclosure documents without reading them.

The banks are trying to downplay the robo-signing calling it just a failure to dot some “i”s and cross some”t”s but I think it is much bigger than that.  The banks seem to not care about doing modifications for their borrowers.  They seem to be processing these foreclosures as fast as they can.  The incentives seem be there for them to go through with foreclosures instead of them trying to keep people in their homes.

My clients are having trial modifications declined without notice and for no reason when they are making the payments on time for many months.  Others are being told they cannot afford a lower payment when they are making a higher one.  Each time you call the bank you get a different person who has a different story.  And they continually lose documents that you send them.  That does not sound like an organization that is functioning properly.

Fed chairman Bernake has said that the Fed is working together with the Department of Labor, Treasury, and the FDIC to stem the foreclosure crisis.  Hopefully, with all of these government agencies, something good will come out of this for mortgage holders in default who don’t want to lose their house.  After all they are from the government and they must be here to help.

Bair at the FDIC is asking for a 25% reduction in your mortgage payment or some “safe harbor” for those who can’t make the payment. Will this get done?  Will something else happen?  We don’t know but stay tuned because there is tremendous political pressure out their for some relief.  The sheer volume of distressed homes is overwhelming and I think everyone realizes that here has to be a solution other than mass foreclosures.

Stay tuned for the next shoe to drop.  I have a feeling its coming soon…..

I am a bankruptcy lawyer practicing bankruptcy law in San Diego.

Please visit my website and blog at:  www.farquharlaw.com