Tag Archives: bankruptcy

Foreclosure and What are the Tax Consequences, Do You Have to File For Bankruptcy?

By Ryan C. Wood

These past couple years have been very hard on homeowners.  Homes are being foreclosed on left and right.  If you have been caught in this crisis as well you may need to know what your options are after your home is foreclosed and whether one of those options includes bankruptcy.

Many bankruptcy attorneys ran into all kinds of scenarios regarding foreclosure and potential resulting debts during the mortgage meltdown.  For many homeowners the foreclosure was not their only problem with debts and credit card debts were also a major problem.  Luckily there is the Bankruptcy Code that provides a legal discharge of personal liability for all debts incurred prior to filing.  

If your residential property was foreclosed and you only had one mortgage on the property then you may not need to file for bankruptcy since the creditors cannot go after you for any deficiencies due to the One Action Rule.  However, under normal circumstances, even if the creditors do not go after you for the deficiency you may still owe a hefty chunk to the taxing authorities, the Internal Revenue Service (“IRS”) and California’s Franchise Tax Board (“FTB”).  That is because the taxing authorities could treat the cancellation of debt as a taxable event since you did not have to pay the deficiency to the mortgage creditor, and thus the money you did not have to pay them is considered income in the form of a 1099-C.  This is a harsh double whammy for homeowners who have lost their home and now they have a hefty bill they need to pay the taxing authorities.  Hopefully if your CPA did not identify your tax debt is related to your foreclosure the bankruptcy attorney you consult with will.  Not all 1099-C income is a taxable event that must be added to income.

Since the foreclosure rates have been so high in the most recent years the federal and state governments have created temporary laws that would help ease the financial hardship of homeowners who have lost their homes.  IRS created the Mortgage Forgiveness Act of 2007 which forgives up to $1 million in debt for the deficiencies related to the foreclosure of a primary home for a single or married filing separate taxpayer and up to $2 million for a married couple.  The debt has to be related to the house, either building, improving or maintaining it.  There could be multiple mortgages on the house, and as long as they were all used for the property, you would not have to pay taxes on the cancellation of that debt.  The trouble that a lot of homeowners run into is the fact that sometimes the second mortgages are taken out to pay off their credit card debt or buy new cars which have nothing to do with the house.  If that is the case the deficiencies on that debt are still a taxable event to the IRS.

California has a similar program that protects homeowners who have lost their homes in a foreclosure.  They exclude up to $250,000 of debt for deficiencies related to foreclosure of a primary residential property for a single or married filing separate taxpayer and up to $500,000 for a married couple.

Since both the federal and state governments are protecting only primary residences, if you have a rental property, or business property, or even second mortgages that were taken out to pay off debt that is not related to your home, the cancellation of such debt are still considered taxable events.  Be sure to seek the consultation from an  experienced bankruptcy attorney and not an attorney just jumping on the band wagon when the economy turns sour.  

Reaffirmation in Chapter 7 Bankruptcy

By Ryan C. Wood

When you file for Chapter 7 bankruptcy, all your dischargeable unsecured debt will be discharged once the judge signs the Order of Discharge.  This means that your personal liabilities to repay those debts are discharged, and you are no longer obligated to pay those debts.  If you have a secured debt, however (i.e. houses, cars, etc.), then although your personal liability to repay that debt is discharged, you would need to continue paying on it to keep that property, otherwise the secured creditor could repossess or foreclose on that property.

One of the things that your secured creditors may want you to sign after you have filed a bankruptcy case is a reaffirmation agreement.  A reaffirmation agreement is basically a new contract between you and the creditor indicating that you promise to continue making payments on that debt.  Since it is a contract that you have signed after your bankruptcy case, any liabilities arising out of the default of the debt is not discharged in your bankruptcy case.  The most usual type of reaffirmation agreements pertain to vehicles.  If you default on the payments, the creditor can repossess your vehicle and go after you for any deficiencies.  If you do not sign a reaffirmation agreement and you default on the debt, then the creditor cannot go after you for any deficiencies, as your personal liability was discharged in the bankruptcy case. 

If you do decide to sign a reaffirmation agreement, it needs to be filed with the court.  There may be a hearing on the reaffirmation agreement if you are not represented by an attorney.  If you have signed a reaffirmation agreement and changed your mind, you can cancel the agreement within 60 days or until the discharge of your bankruptcy case, whichever is later.  Since the future is uncertain, it may not be a good idea to sign a reaffirmation agreement unless you are absolutely certain that your job is stable or you receive favorable terms in the reaffirmation agreement, such as decreased interest rate or reduced monthly payments.  Otherwise, if you sign a reaffirmation agreement, and then you lose your job in the future, or receive a pay cut and are unable to repay the debt, then you will lose your property still owe on the deficiencies on the property. 

There are other options other than signing a reaffirmation agreement in your Chapter 7 bankruptcy case, including: surrendering your vehicle, redeeming your vehicle, or retaining your vehicle and paying the secured debt.  If you surrender your vehicle, any deficiency will be discharged in your bankruptcy case. 

Redeeming your property is when you pay the fair market value for your property rather than what you actually owe.  This may be beneficial if the value of your vehicle is significantly less than what you owe.  The only issue with redeeming your vehicle is that you have to pay the full amount of the fair market value of your vehicle. 

The other option is to retain your vehicle and continue making payments on it.  Most creditors will continue to accept payment on your vehicle and they will not repossess your vehicle if you are current on the payments.  Then, if you are unable to make your vehicle payment, then your vehicle will be repossessed, but you will not owe any deficiencies because you did not sign a reaffirmation agreement.  However, one of the risks in this option is that some creditors that will repossess your car even if you are current on the vehicle if you do not sign a reaffirmation agreement. 

If you have any questions regarding which options to choose to retain your vehicle, please contact us at Fremont bankruptcy attorney or Hayward bankruptcy attorney at 877-9NEW-LIFE or 877-963-9543 today.

Principal Paydown Plan, What is It?

By Ryan C. Wood, Attorney at Law

Since the beginning of the mortgage crisis there have been more than a few plans to help troubled homeowners.  Unfortunately the only one that is a reality is the HAMP program.  HAMP was supposed to help 9 million or more homeowners keep their homes and obtain loan modifications.  A better solution would have been to allow homeowners to obtain modification of their first mortgages when filing a chapter 13 bankruptcy reorganization case.  First mortgages have always been the sacred cow under the bankruptcy code.  They cannot be changed.  The push to amend the bankruptcy code to allow for the modification of first mortgages was killed in the Senate.

Now the Principal Paydown Plan (PPP) is the latest proposal to try and reduce the number of homeowners with negative equity in their homes.  Having negative equity is typically called having an undersecured or underwater mortgage.  An undersecured or underwater mortgage exists because the value of the property or home falls below what is owed on the mortgage(s).

So how can the PPP help?  First, the PPP would allow borrowers with negative equity to file a chapter 13 bankruptcy and reduce the interest rate on their first mortgage to 0% for the term of the chapter 13 plan.  The advantage of lowering the interest rate to 0% is all of the monthly mortgage payment would then be applied towards principal and not any interest.  This would result in the principal owed on the mortgage being reduced by significantly more than if interest were paid also.  Second, the actual monthly mortgage payment the borrower would have to pay each month could be reduced to a low as 31% of the borrower’s gross monthly income.  The bankruptcy judge would have the final say on how much the monthly mortgage payment would be each month.  The reduced monthly mortgage payment with 0% interest being paid could last a maximum of five years, the longest possible chapter 13 plan of reorganization.  Once the five years is completed, then the total principal balance left is amortized over 25 years with an interest rate based upon the Fredie Mac survey rate.

So why would mortgage companies and servicers want to agree to this program?  As part of the agreement the borrower gives up any future cause of action they may have against the mortgage company or service.  This is a big deal given the recent revelation that mortgage companies have forged documents and not serviced mortgage loans properly.

This plan is not perfect and mortgage companies and servicers would voluntarily agree to allow modification of the first mortgages.  Hopefully sometime soon the PPP will be a reality and we will have another tool in our belt to help homeowners.

For additional information about filing bankruptcy, please contact our Fremont bankruptcy lawyers or Union City bankruptcy lawyers to schedule a free consultation.

What Happens if You Have Gambling Debts Prior to Filing Bankruptcy?

By Ryan C. Wood

Whether you suffered a huge loss because you have a gambling addiction, or just had bad luck in the casinos that one time you now owe the casino money from a marker received.  The question is: what happens if you are unable to pay the casinos back?  Can you file for bankruptcy to have the debt discharged?  The answer is of course it depends and timing and circumstance are everything.  In a perfect world you will not have to deal with such a thing, but of course nothing is perfect.  This is especially true when talking about gambling.

Credit card used to pay for gambling debt

If credit cards were used to pay for the gambling debt, especially with online gambling sites, then the question of whether that debt is dischargeable in bankruptcy depends on the totality of circumstances.  The bankruptcy court can deny a discharge if they believe that filing the bankruptcy was an abuse of the bankruptcy process based on bad faith.  This is pretty rare in reality.  A discharge can also be denied if a creditor or party-in-interest files an adversary complaint alleging fraud was involved in incurring the debt.  At that time that you used the credit card to pay for the gambling, did you have the intention of paying it back?  Were you going to pocket the winnings, but try to discharge any losses incurred?  There are a lot of factors to look at in determining whether the bankruptcy filing was an abuse of the bankruptcy process.  The bankruptcy trustee will be bringing an action against the bankruptcy filer if they believe there was an abuse of the process.  The credit card lender can file a non-dischargeability action against the bankruptcy filer if they believe that there was fraudulent activity in obtaining the credit to gamble on the credit card.  If you pass the bad faith and fraud test, then the gambling debt should be dischargeable in bankruptcy.

Casino markers/counter checks/post-dated checks

If you are gambling in Las Vegas and a casino issues you a marker, counter check, or if you are signing a post-dated check, what normally happens is the casino would give you credit for a certain dollar amount on the marker.  The casinos will claim that you are promising to repay the amount at a later date and at the time that you sign the marker, counter check, or post-dated check, you are representing to the casino that you have the amount in your bank account.  If you win the money, hopefully you pay them back and they rip up the marker, and you get to keep whatever the remaining winnings are.  However, if you lose the money, a casino will still expect you to pay the amount that you received credit for.  If you do not have the funds in your bank account, then the casinos could turn the case over to the District Attorney’s office, where they could prosecute you not paying back the marker, counter check or post-dated chdeck.  If you do not respond, or if you are not from the Las Vegas area, there could be a felony warrant issued for your arrest.  This would be a criminal prosecution, and not a civil matter that could be dischargeable in bankruptcy. Bankruptcy proceedings would not be able to stop criminal actions against you or discharge potential resulting restitution upon conviction.  Thus, even if you file for bankruptcy, it may wipe out the debts that you have, but the district attorney’s office can still criminally prosecute you.  In addition, if you file for bankruptcy, a casino, at their discretion, can pursue a non-dischargeability action under 11 U.S.C. §523(a)(2) or 11 U.S.C. §523(a)(4).  If they win, and have the gambling debt deemed non-dischargeable, then you would still continue to owe the money even after you receive a discharge of your other debts.

The best you can do is seek to file bankruptcy prior to the filing of criminal charges or referral to the district attorney’s office for prosecution.  If you qualify you will receive a discharge and hopefully life goes on.  It also may be in your best interest to file a Chapter 13 case even if you qualify to file for Chapter 7 and pay something back to your creditors.  The casinos and your other creditors then file proof of claims in the Chapter 13 to prove what they are owed and get what they get via the Chapter 13 plan or reorganization and do not refer you for criminal prosecution.  Beautiful.  Life goes on.

Furthermore, Indian casinos are not subject to the Fair Debt Collection Practices Act (FDCPA).  Indian tribes have sovereign immunity, so you cannot sue them under the FDCPA even if they are calling and harassing you.

If you have gambling debts you need an experienced bankruptcy attorney to help you.  Some attorneys will just say they are not dischargeable without discussing with you the details to make a real determination.  There are all kinds of gamboling debts and how they were incurred and when matter.  While no one really wants to file for bankruptcy protection it can make all of your debt problems go away forever by federal court order.  A beautiful thing.  The best bankruptcy attorneys will usually provide a free consultation to confirm how bankruptcy can help and how much work and fees your case warrants.  You can spend thousands and thousands of dollars treating the cancer; or you can choose to file bankruptcy and cure  the cancer forever by law and receive a federal court order discharging your debts.