When to File for Bankruptcy, How to Recognize the Warning Signs, and General Bankruptcy Advice

When to File for Bankruptcy, How to Recognize the Warning Signs, and General Bankruptcy Advice

When to file for bankruptcy is a question many people have asked themselves. We all make financial mistakes in life, most of them without serious long-term consequences. If you could go back and fix one critical mistake you made before you made it, wouldn’t you want to do that? Of course you would. Unfortunately, many of us do not recognize the signs of impending financial trouble and we take actions that threaten our financial future. Action: You begin to pay your regular monthly bills (mortgage, rent, utilities, etc.) with cash advances, or you are transferring funds between credit cards to keep the balances from exceeding the limit. Result: You are fooling yourself into thinking you can pay these high-interest debts at a later date. In fact, you are not really paying down the debt at all. This is like a Ponzi scheme where you are both the perpetrator and the victim! Action: You lower your payroll withholding to increase your take-home pay, and in the process incur substantial tax debt you cannot pay on April 15. Result: You are buying yourself some temporary relief in your monthly budget, but creating a much more serious problem. Taxes you cannot pay on April 15 incur significant interest and penalties. Filing an extension for your taxes does not prevent the interest and penalties from accruing. Action: You use an equity line-of-credit on your home to pay off high-interest credit card accounts. This converts unsecured debt into debt secured by the equity in your home. This can create a debt you may end up paying for decades, and even jeopardize your home if you cannot maintain the payments. Action: You borrow money from family or friends to “tide you over”. Result: My father always told me nothing comes between people like an unpaid debt. Do you want to ruin a friendship or poison a relationship over money? It’s not worth it. Action: You take money from an IRA or 401(k) retirement plan to pay bills. In my  professional opinion, this is the number one mistake people make. Result: This not only generates a large tax liability, but exhausts funds you will need for retirement, and that are already protected from your creditors. Now, while all these outcomes are undesirable, the negative effect of these mistakes can be magnified if you ultimately have to seek bankruptcy protection from your creditors. Here’s why: In some cases cash advances cannot be discharged in bankruptcy, and in extreme situations debts incurred at a time when you had the inability to repay them may even be non-dischargeable. This is known as a “credit card bust-out”. Back taxes are generally not dischargeable in Chapter 7, although they can be repaid through Chapter 13, often with no additional interest or penalties. When you pay off unsecured debt with your home equity, you transform an unsecured debt, which can usually be discharged in bankruptcy, to a secured debt which must be repaid to protect your home. Not a good trade. When you borrow money from friends or family, you naturally feel an obligation to repay those people. If you do, and subsequently file bankruptcy, those payments can be recovered from those you love for the benefit of your creditors. How will that make them feel? Many clients I see have completely exhausted their retirement accounts to service their debt, and end up filing...

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U.S. SUPREME COURT STRIKES DOWN MORTGAGE LIEN STRIPS IN CHAPTER 7 CASES

On June 1, 2015, in a blow to homeowner’s rights, by a 9-0 decision in Bank of America v. Caulkett, the United States Supreme Court struck down a Chapter 7 debtor’s right to “strip”, or void, a junior mortgage lien on a home; even if there is no equity in the home to support the second or third mortgage lien. Previously, if a debtor in a Chapter 7 bankruptcy proceeding owned real property which appraised for less than the balance on the first mortgage, the homeowner could seek a court order allowing release of the lien securing a second or lower priority mortgage loan. While such relief is, at least for the time being, still available to debtors in Chapter 13 proceedings, debtors in Chapter 7 now face the difficult choice of keeping an underwater property, or surrendering it back to the...

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Tackling Tax Problems in Bankruptcy

In my bankruptcy practice I regularly see people who owe taxes dating back years or even decades. Sometimes they avoid facing the problem simply by ceasing to file yearly tax returns. Ignoring the problem, of course, only makes it more difficult to manage. Here are three (3) steps I follow to tackle even the most difficult tax problems. File the returns. If necessary, help the client file original tax returns for the tax years at issue. An independent tax professional can ensure accuracy and objectivity. I have found that clients who prepare their own returns can be their own worst enemy. Understand how my client got into this situation. Sometimes it is under-withholding from payroll, or failure to remit estimated taxes. We address the underlying issue so the problem does not repeat itself. Devise a strategy to handle the problem. Obtain an account transcript from the IRS for each tax year in question. As of January of 2014 you no longer need a Power of Attorney to obtain tax transcripts. The IRS now permits individuals to obtain transcripts instantly and free at http://www.irs.gov/Individuals/Get-Transcript. Once an account is created there are a number of steps to verify identity and prevent misuse. This means that clients must either access the site themselves, or be present while I enroll in the service with their information. The transcripts reflect the critical dates to which the tolling and discharge rules apply. I use a tool found at www.TaxDischargeDeterminator.com for analyzing the various codes and dates on the transcripts. Once we have reviewed all the information we evaluate the client’s options for dischargeability of the taxes owed. Option 1: Wait to file Chapter 7 or Chapter 13 or to let the 10-year statute of limitations expire. Let tax debts age, either beyond the 10-year statute of limitation (subject to tolling) or until they meet the requirements to be discharged (subject also to tolling). In either event, we can work with IRS’ collection division to work out a minimal monthly installment agreement for the tax debts until either the time is right to file BK or the statute has expired. Option 2: File a bankruptcy immediately or in the near future. If we choose to file chapter 13, my client repays the priority or secured tax debt and will discharge unsecured taxes. Priority taxes and penalties may be paid over up to sixty (60) months in Chapter 13, generally without post-petition penalties and interest (if not fully secured), or with interest (if fully secured) or where a co-debtor is also liable. The “older” (non-priority) taxes will be discharged the same as other general unsecured debts. In Chapter 7, the priority taxes will survive but the non-priority taxes will be discharged. Finally, remember that for purposes of calculating debt limits in Chapter 13 tax debts are NOT consumer debts. Roderick Martin has more than two decades experience in Georgia bankruptcy courts. For more information, visit his office at www.cutdebt.com, or call 770.427.5853. For assistance with tax problems “nationwide”, contact Florida tax and bankruptcy attorney Larry Heinkel at either Larry@TaxProblemSolver.com or...

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Managing the Underwater Mortgage

Managing the Underwater Mortgage

When I was growing up my father was quite the home handyman and seemingly could fix anything around our house. He used to emphasize the importance of selecting the proper tool for every job. I like to think of my legal knowledge as a tool kit–there may be several ways to handle a particular problem, but some methods may be more effective than others. Among the most useful tools in the bankruptcy tool kit, and one unique to bankruptcy law and especially designed to help the homeowner with an underwater mortgage, is the “Mortgage Lien Strip”. Simply put, the Bankruptcy Code allows the owner of residential, or even commercial, property to “strip” away a Second or Third priority mortgage lien if there is no equity in the property above and beyond the balance of the primary mortgage to support the subordinate lien. Prior to 2008 I very rarely saw clients whose home was underwater–the assessed value was usually higher, often substantially more, than the loan balance. With the recession came a downturn in property values, and in some areas of Marietta and Cobb County the decline was as much as 50% to 75%. And where I used to commonly advise clients navigating the bankruptcy process to hold on to their home as the cornerstone of an investment or retirement portfolio; in recent years I have often found myself suggesting surrender of the property where there seemed to be little or no hope of the property ever being worth more than was owed. But where the client is otherwise in need of debt relief through the bankruptcy process, the mortgage lien strip can allow the homeowner to restore them to more or less a “break-even” position. In order to strip a mortgage lien, the homeowner must first be in an active Chapter 7 or 13 bankruptcy proceeding. The property must “appraise” for less than the balance on the primary loan. In most Northern District of Georgia courts the property’s tax-assessed value may be utilized, at least in an uncontested case. A “Motion to Strip” must be filed with the bankruptcy court, and the various lenders and servicers properly served. In the majority of cases the lender or servicer of the subordinate loan elects not to oppose the motion, and an Order stripping the lien is granted by the Bankruptcy Court. This Order must be filed in the real estate records of the Superior Court. Where the lender feels there is some equity in the property and the motion is opposed, often a compromise may be reached where the loan balance on the second mortgage can be reduced to reflect the actual fair market value of the property. Neither the bankruptcy itself or the lien strip prevent the homeowner from seeking a modification of the primary mortgage loan, and I am constantly amazed at how few homeowners seek relief from a high interest rate or crippling payment before seeking bankruptcy relief. The combination of debt relief, the mortgage lien strip and a loan modification can put the homeowner once again on the path to financial security. Before you make any decision about surrendering your home, you should consult a professional who is experienced in loan modifications and bankruptcy law on the best course of action. The Marietta law firm of Roderick H....

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Mortgage Forgiveness Debt Relief Act – Mortgage Debt Help

Mortgage Forgiveness Debt Relief Act – Mortgage Debt Help

Beginning on January 1, 2013, homeowners who choose — or are forced — to surrender their home may lose a valuable right. The law, known as the Mortgage Forgiveness Debt Relief Act of 2007, gives homeowners with an underwater mortgage needed tax relief from the IRS when their home is returned to the mortgage lender or sold for less than the principal loan balance.  A mortgage is considered “underwater” when you owe more than the property is worth. Whenever $600.00 or more of a debt is forgiven as a result of settling a debt for less than the balance owing, the creditor may report the amount forgiven to the IRS on a 1099(c) form as income. If you “short-sell” your home, or return it to the lender via a “deed-in-lieu of foreclosure” or foreclosure itself, you may be taxed on the difference in the value between what is owed on the mortgage and what the property is worth. This is true also for those whose principal is reduced through mortgage loan modification. For example, if you owe your lender $100,000, but the property sells for, or is worth, only $75,000 you may be taxed on the difference ($25,000) as “imputed income”– as if you had earned an extra $25,000 of income. You will be asked to pay tax on income you never received with cash you probably don’t have. The Mortgage Forgiveness Debt Relief Act presently allows certain individuals to avoid paying that tax–if they can establish they were “insolvent” at the time of the sale or surrender. The Act is part of the so-called “fiscal cliff” negotiations between Congress and the President. But if the law “sunsets” on December 31, 2011, as it will if it is not renewed, the only way to escape this tax will be to discharge the debt in a Chapter 7 or Chapter 13 bankruptcy. Of course, most families who find themselves in this predicament likely also have other debts which may necessitate filing of a Chapter 7 or 13. If you give up your home in a bankruptcy case, any tax which might have been owed on the sale or surrender of the property will generally be excused along with your other dischargeable debts. If you simply walk away from your home you may  be sued for any deficiency if the bank auctions the home for less than you owe. You may first want to consider a loan modification through which the mortgage company may (1) reduce you interest rate; (2) bring your loan current; and even (3) substantially reduce your principal. Before you make any decision about surrendering your home, you should consult a professional who is experienced in foreclosure and bankruptcy law on the best course of action. The Marietta law firm of Roderick H. Martin & Associates, P.C., has represented numerous Atlanta homeowners in successfully surrendering their homes without tax consequences. Contact us today so we can help you make an informed decision about the best way to handle your problem mortgage...

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Cobb County Bankruptcy Lawyer Roderick H Martin

Cobb County Bankruptcy Lawyer Roderick H Martin

Cobb County Bankruptcy Lawyer, Roderick H. Martin, invites you to his law firm for a free 30 minute consultation to discuss your bankruptcy questions and answers. Meet the team and take a tour of our office. You can find us near the court house in downtown Marietta at 279 Washington Avenue. Call 770-427-5853 to set up your appointment or you can email us at: rmartin@cutdebt.com

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