Wednesday, March 30, 2011

Free 2011 Massachusetts Bankruptcy Handbook

To request your free 2011 Massachusetts Bankruptcy Handbook: A Consumer's Guide to Understanding Chapter 7 & Chapter 13 complete and Submit the Form here to send us an email request now.

Bankruptcy in the United States is permitted by the United States Constitution (Article 1, Section 8, Clause 4), which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." As such, Constitutional recognition of bankruptcy law is amongst the oldest in the United States, predating even the Bill of Rights. Even 224 years ago, the Founding Fathers and the draftsmen of this Country's earliest laws recognized that sometimes people got in over their heads as a result of insufficient planning or factors beyond their control. They understood that it was in the best interests of both debtors and the economy as a whole to provide people with a fresh start in the event someone found themselves with debts they were unable to pay.

Despite the fact that the Constitution specifically permits Congress to enact bankruptcy legislation, there is still a significant cost, both economic and emotional, in seeking the protection of the Bankruptcy Court. So, if you or someone you know is considering bankruptcy, request a free copy of the 2011 Massachusetts Bankruptcy Handbook, which will help you understand what the advantages and disadvantages of bankruptcy are, and whether or not you qualify.

Tuesday, March 29, 2011

The Emergency Chapter 13 – Skeletal Filings and What to Expect

You’ve been working with your bank on a mortgage modification, short sale, or deed-in-lieu of foreclosure. For whatever reason, your preferred course of action doesn’t work out, and you receive a foreclosure notice. The worst thing you can do is ignore it, but what happens if you do?

A complete Chapter 13 filing can take your attorney some time to prepare, and is usually approximately 30-50 pages long, depending on the complexity of your case. However, you may not have that much time, especially if a foreclosure auction is only days away, or the IRS has started to levy your paycheck. If you find yourself facing a foreclosure auction and want to try to keep your home, an emergency Chapter 13 filing may allow you to keep your home, pay back mortgage arrears over a 5 year period, and get current on other non-dischargeable debts, such as taxes and student loans.

Your attorney will work with you on the following documents, which can be prepared within hours, and filed with the court.

1. Ensure all tax filings are current.
2. Take pre-petition financial management course on-line.
3. Prepare and file voluntary petition.
4. Prepare and file Statement of Social Security Numbers.
5. Prepare and file Declaration of Electronic Filing.
6. Prepare and file Chapter 13 Agreement between Debtor and Debtor’s Attorney.
7. Prepare and file Joint Certification of Section 522(q) Obligations.

Once the above are filed, the Automatic Stay in bankruptcy will prevent further collection actions by your creditors. Foreclosure auctions will be postponed, lawsuits and other collection actions will be stayed, and garnishments will cease.

Immediately begin preparing all documents your attorney tells you to prepare the remainder of your bankruptcy case. The Court will issue an Order to Update regarding the missing filings. Generally, the order will require that you file all deficient (missing) documents in a period of time set by the court. This is a typical timeline for these filings:

1. In one week: File the Creditor Matrix (a list of all individuals and corporations you owe money to).

2. In two weeks: File all Schedules (outlining Real Property, Personal Property, Property Claimed Exempt, Creditors Holding Secured Claims, Creditors Holding Unsecured Priority Claims, Creditors Holding Unsecured Non-Priority Claims, Executory Contracts and Unexpired Leases, Co-Debtors, Current Income of Debtors, and Current Expenses of Debtors), Declaration Concerning Schedules, Statement of Financial Affairs, Statements of Intention, B22C Statement of Current Monthly and Disposable income with Calculation of Plan Duration, the Chapter 13 Plan, Evidence of Current and Sufficient Liability and Property Insurance, and the Disclosure of Compensation of Attorney.

Requests for more time must be made by motion, and the court will often grant a 2-week extension.
In any case, the most important thing you can do is immediately prepare your financial records, and provide them to your attorney. If this is not done immediately after filing the skeletal petition, then you may not meet these court deadlines. The Bankruptcy Court’s deadlines are very strict, and missing one or more may be grounds for having your case dismissed. If your case is dismissed you'll be back to square one and may not be able to file again.

Friday, March 25, 2011

One thing Facebook is not good for: Collecting Debts!

Facebook, Twitter and social networks have grown well beyond their initial intentions. Like many online tools, businesses have found ways to use these networks to their advantage, whether through traditional straightforward advertising, or guerrilla marketing strategies. In some ways the possibilities are endless. But, a debt collection agency in Florida recently discovered one of the limitations on using these networks.

According to a recent article on The Washington Post online, a Florida judge ordered Mark One Financial LLC of Jacksonville, Fla., a debt collection agency, to not use Facebook or any other social media site in an attempt to locate a woman over a $362 unpaid car loan. The Judge also prohibited the company from contacting the woman's Facebook friends.

The Judge felt, and I can understand why, that contacting the debtor on a public forum such as Facebook was a violation of the debtor's privacy. But just because they can't contact you, doesn't mean debt collectors aren't still using social networks and online resources to find out information about you. Remember that anything you post online is now out there and available for your creditors to find.

For more information about Massachusetts law relating to Debt Collection and fair practices visit the Massachusetts Trial Court Law Libraries page here.

Friday, March 11, 2011

Bankruptcy and Taxes: Does a Bankruptcy affect Cancellation of Debt Income?

With the housing market collapse and the rise in short sales and foreclosures, many former homeowners are faced with the consequences of left-over debt from their mortgage. While deficiency judgments will force many into bankruptcy, there are also problems when the debt is forgiven in the form of cancellation of debt income.

What is cancellation of debt income? Generally, debt that is forgiven by a lender creates tax consequences for the debtor – the lender issues a 1099-C on the cancelled debt, and the IRS considers the cancelled debt as income to the debtor. However, there are exceptions to this rule, and, depending on the circumstances, cancelled debt may not create any tax liability, even if the debtor is no longer required to pay the debt. This (rather lengthy) article discusses the impact of bankruptcy on cancelled debt. (Note: The IRS Code has other exemptions that may apply and eliminate some or all tax liability on cancelled debt, such as The Mortgage Forgiveness Debt Relief Act or the insolvency exception to cancelled debt income. These exceptions are beyond the scope of this article, and will be addressed separately in future posts.)

Scenario 1: You file for bankruptcy, and receive a discharge of your dischargeable consumer debts. Are you required to pay taxes on the debt that was discharged in the bankruptcy?

Answer: No. According to 26 U.S.C. § 108(a)(1)(A):

Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—

(A) the discharge occurs in a title 11 case [i.e., Bankruptcy],
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness,
(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2013.

Therefore, as long as the debt was properly discharged in bankruptcy, the cancelled debt will not create any taxable events for the debtor.

Scenario 2: You have your house listed in a short sale, which the bank approves. Unfortunately, other factors ultimately require that you file bankruptcy. After you file (or after you receive your discharge), the mortgage lender sends you a 1099-C for the cancelled debt income of the forgiven balance of the mortgage. Do you have to pay taxes on the cancelled debt income?

Answer: No. As above, since the discharge of the underlying debt (the first mortgage, in the example above) occurs in a bankruptcy case, 26 U.S.C. § 108(a) applies. In this case, the code requires that the amount of the debt, although “forgiven” by the mortgage lender, was discharged in bankruptcy, and therefore, excluded from the debtor’s gross income.

Scenario 3: You are attempting to avoid bankruptcy, and have your house listed in a short sale. The bank approves the short sale, and you are hoping that your real estate attorney will be able to convince your lender to “forgive” the deficiency. The lender does in fact forgive the deficiency, and sends you a 1099-C for the cancelled debt income of the forgiven balance of the mortgage. Unfortunately, other factors (such as a second mortgage that will not be “forgiven” or credit card debt) ultimately require that you file bankruptcy. Do you have to pay taxes on the cancelled debt income?

Answer: Scenario 3 creates a question of timing. Here, the difference between this example and the example above is that the lender “forgave” the debt and issued a 1099-C before the debtor filed a bankruptcy case. This raises the question as to whether the debt was legally cancelled by the lender, and therefore could not have been discharged in bankruptcy.

So, then, the question becomes: “Can a bankruptcy filing discharge debt that has already been forgiven, in order to avoid the tax consequences of cancellation of debt income?”

The mere fact that a creditor has issued a 1099-C is not, in and of itself, an admission by the creditor that it has released the debt and can no longer pursue collection, nor does a 1099-C legally discharge the debtor from liability of the debt that is described on Form 1099-C. See In re: Zilka, 407 B.R. 684, 688-689 (2009).

Zilka was not the first time the Court was required to address this issue, and specifically stated in its ruling:

The Internal Revenue Service, which regulatory agency is the one that promulgated 26 C.F.R. § 1.6050P-1, and whose interpretation of the same is thus entitled to great deference (citation omitted), does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection [thereon]. See 2005 WL 3561135 at 689 (Dec. 30, 2005).
Forms 1099-C, as a matter of law, do not themselves operate to legally discharge debtors from liability on those claims that are described in such Forms 1099-C. See Owens v. Commissioner, 67 Fed.Appx 253, ___, 2003 WL 21196200 at 3 (5th Cir.2003) (issuance and filing of Form 1099-C does not constitute actual cancellation of the loan).
Form 1099-C…only serves to report (strictly for tax purposes) information regarding an event that has already happened, which reporting of information cannot possibly be stretched or strained to also constitute a present contractual agreement not to sue, or a present contractual renunciation of rights against, a debtor. See Leonard v. Old National Bank Corp., 837 N.E.2d 543, 545-546 (Ind.Ct.App.2005) (filing a Form 1099-C is merely an informational filing with the I.R.S., done to report an event that has already happened, and thus does not operate to cancel debt itself).

See In re: Zilka, 407 B.R. 684, 688-689 (2009). See also IRS Publication 4681.

Based on the above precedent, even if a lender issues a 1099-C prior to a bankruptcy filing, the issuance of the 1099-C does not serve to legally discharge the debt. If that debtor then files bankruptcy, they should then include that debt on their bankruptcy schedules to ensure that it is discharged. And as long as the debtor included the underlying debt in the debtor’s bankruptcy case (and ultimately received a discharge of that debt), 26 U.S.C. § 108 applies, and the mere issuance of the 1099-C prior to the bankruptcy case, the cancelled debt will not create any taxable events for the debtor.

Finally, when a lender issues 1099-C, even if no tax is due, the debtor should discuss this issue with a CPA to ensure that his tax returns are properly filed to exempt the 1099-C income from the debtor’s gross income.

If you have any questions regarding the tax consequences of bankruptcy, contact Attorney Matthew P. Trask to schedule an initial one-hour consultation. Attorney Trask would like to thank Kathryn Collins, Esq. and Jason Cooper, CPA for their assistance in preparing this article, and would also like to thank Mark Tanney, Esq., a Maryland Bankruptcy Attorney, for his insights which inspired this article.
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