What you need to know
Deciding if filing bankruptcy is necessary is not an easy decision. Informed advice from an lawyer regarding the positive and negative effects of bankruptcy can make the process less stressful. Most people leave a bankruptcy consultation with the knowledge they need to make the best decision on the filing of bankruptcy. The content in this site can provide some idea of how various debts may be handled in a typical bankruptcy case. These examples are provided as typical cases, this is not be be construed as advice in your particular case. For information specific to your case, please call us to schedule a free consultation.
Car loans are similar to home loans in that they are secured debts. Secured means that the vehicle purchased is security for the debt. A common question is "Can I keep my car". The answer is, generally, yes you can, subject to several considerations, such as your income, the value of the vehicle, the amount of the loan on the vehicle and other factors. This is a subject that we can discuss in more detail during a consultation. When we are retained in your case, we will include negotiating the terms of an agreement with the vehicle lender.
The filing of a bankruptcy case will stop nearly all collection actions against, this would include the repossession of a vehicle. If a vehicle has already been repossessed the filing of a bankruptcy may assist in getting that vehicle returned without paying the past due amount. In a Chapter 7 you might be permitted to keep the vehicle and continue making the agreed upon payments on the loan. A Chapter 13 bankruptcy will give you the opportunity to possibly refinance the debt of the vehicle at a reduced amount and lower interest rate.
Credit card debt represents the majority of the average consumer's debt. It is probably the most common form of consumer debt. It is particularly difficult to manage when ones personal finances take a turn for the worst because the credit card companies will automatically raise interest rates at the first sign of trouble. Often it is these rate increases that cause individuals to resort to the bankruptcy courts.
When you file bankruptcy the credit card companies will terminate your account. Even if you have a zero balance on the card it will probably be terminated. You may be able to reapply for credit once your bankruptcy case is completed. Most people are able to re-establish a credit card after filing a bankruptcy.
As a result of the housing melt-down foreclosure has become a fact of life in America. Deciding whether or not to keep your house or let it go to foreclosure is a major decision. However it is best made before you throw too much good money after bad. An informed decision will allow you to assess the positive and negative effects of a foreclosure and/or bankruptcy on your credit history. Many individuals are able to obtain a home loan in as little as two years after completing a bankruptcy case.
If you are behind in your mortgage payments a chapter 7 bankruptcy will only serve to delay a foreclosure, it will generally not be helpful in helping you keep your home. A Chapter 13 bankruptcy, on the other hand, will afford you the opportunity to restructure your debt to some extend, and allow you to retain ownership of your home. If you have negative equity in your home and you have a second junior loan that has zero equity you may qualify to "strip" that lien off your home completely.
TAX ISSUES IN FORECLOSURE
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
If you are considering filing for bankruptcy and a foreclosure is imminent you may want to retain a professional to discuss the tax ramifications of filing prior to the foreclosure sale, rather than waiting until after the sale. Filing before the sale discharges the debt and eliminates the tax consequences of cancellation. If you file after the foreclosure sale the cancellation has already occurred and taxes may be due on the cancelled amount.
This does not mean that the debt can not be discharged, but it will not be as simple a task. If you are insolvent at the time of the cancellation then the tax can be avoided. If you were not insolvent then the tax debt must qualify for discharge under the tax rules, a much more difficult hurdle to clear.
Another issue to consider, separate from cancellation, is the implications of a foreclosure sale on capital gains. This gain is taxable and is only dischargeable under the rules for taxes in bankruptcy. Capital gains problems often occurs when an equity line of credit is taken against a home. For example, you purchase a home for $100,000. The home increases in value to $250,000. You take a $50,000 loan to remodel your kitchen and build a pool. You later borrow $40,000 to buy a new car. You default on your first mortgage and the lender forecloses on the property for the amount of $170k.
The basis in the home for tax purposes is $150k (the original 100k + improvements). The property sold for $170k resulting in a gain of $20k. ($150k-170k=20k). You would owe capital gains on the $20k. This tax debt would be dischargeable only under the rules for taxes in bankruptcy.
Medical bills are one of the primary reason many individuals find themselves in bankruptcy. This is becoming an increasing problem as more people find themselves uninsured or underinsured. Medical bills are not handled any differently than any other unsecured debt.
Repossession of a vehicle or other item can present a great hardship when a person is in a time of financial difficulty. Ordinarily you would have to bring the loan current in order to get the property returned. You may be able to get property returned after filing a bankruptcy, without making the delinquent payments. If you file a Chapter 13 Bankruptcy you may be able to re-finance the vehicle in what is known as a "cram-down". Using this process you pay the loan off at fair market value and at a fixed rate of interest set by the Chapter 13 Plan. This process is limited to vehicle loans that are older than 910 days (two and a half years). This option would be discussed in more detail during a consultation.
Frequently asked questions
Will I have to go to court?
The vast majority of bankruptcy cases do not require your appearance in the Bankruptcy Court. You will be required to appear at a creditors meeting. This is not in a courtroom and it is not before a judge. See Creditors Meeting below.
Will I lose my property?
Filing bankruptcy does not mean that you will lose any property. Although a Chapter 7 bankruptcy is referred to as a "liquidation", the majority of the cases are in fact classified as "no asset" cases. This is not because the debtor did not own any property. Either all the debtors property was encumbered by liens, or the property was considered exempt. This classification will be discussed in more detail during your consultation
Will I lose my car?
If there is a loan on your vehicle you will generally be afforded an opportunity to keep that vehicle and keep making payments on it in a Chapter 7 case. If there is no loan on your vehicle you may or may not be able to retain the vehicle, depending on a number of factors that would be discussed in more detail during your consultation.
If you file a Chapter 13 you may be able to effectively refinance the vehicle loan and pay a reduced amount at a lower interest rate. There are a number of factors including when you purchased the vehicle and the value of the vehicle and other facts. This will be discussed in more detail during your consultation.
Will I lose my house?
A Chapter 7 will delay a foreclosure but it will not stop it. IF you qualify to file a Chapter 13 you may be able to take steps to both delay the foreclosure and save your home. A consultation would be required to determine if a Chapter 13 would be appropriate in your case.
Will this affect my current employment?
Bankruptcy will have no effect on most peoples current employment. Some jobs with require a credit and background check, and a bankruptcy could disqualify you from employment.
Will this affect my future employment?
Bankruptcy will have no effect on most peoples future employment, however there are a small number of jobs that a bankruptcy could negatively effect. If you work in such a profession this will be discussed at your consultation.
Will bankruptcy affect my credit?
Yes, it is reported on your credit. However, bankruptcy is a double edged sword. While bankruptcy is considered black mark on your credit, it does serve to clear off bad debt, and that will improve your credit.
Will I be able to buy a house after filing bankruptcy?
You usually can not get a home loan immediately after filing. You generally have to wait two years before you can qualify for FHA financing on a home.
Will filing bankruptcy affect my spouses credit?
The bankruptcy goes on the credit file of the filing individual. If you spouse does not file then the bankruptcy will not appear on their credit file.
What is a creditors meeting?
When the bankruptcy case is filed the court sets a date for a creditor's meeting, also known as a 341(a) meeting. This meeting is about a month after filing. You are required to attend the meeting. They usually only last a few minutes, and require you to answer some questions, most of which you heard prior to the meeting. Creditors have the opportunity to ask you about your assets. Most creditors do not attend. The Trustee will ask a number of questions, possibly some specific questions about your income or assets. We will attend the creditor's meeting with you, and will be available to answer any questions or concerns you may have.
Who is the trustee and what does he do?
The trustee is a neutral party to the bankruptcy, he does not work for the Court or for the creditors, nor does he work for yo the debtor. His job is to administer the case, gather any assets and liquidate them for the benefit of the creditors.
Can a creditor object to my bankruptcy?
In some cases a creditor may formally object to the bankruptcy. Usually it is in a situation where debt was incurred close to the time of filing, or incurred under fraudulent circumstances.
What is a Chapter 7 Bankruptcy?
A Chapter 7 is also called a "liquidation", even though there is almost never an actual liquidation of property. This type of bankruptcy discharges certain unsecured debts. A Chapter 7 may not have much effect on secured debt, such as home or automobile loans. Although a Chapter 7 will discharge personal liability for the debt, it will only delay, not stop, a foreclosure or repossession. Those types of debts can be included in a Chapter 7, but are usually more effectively dealt with in a Chapter 13 bankruptcy.
What is a Chapter 13 Bankruptcy?
A Chapter 13 Bankruptcy is also called a "reorganization". When you file for bankruptcy under Chapter 13 you are able to effectively reorganize and pay your debts, often in a reduced amount and at a lower interest rate. Unlike private credit counseling, the creditors are required to accept the terms of a Chapter 13 Plan of reorganization. A Chapter 13 has traditionally been used to prevent a foreclosure or repossession. Another powerful aspect of the Chapter 13 bankruptcy is the ability for the debtor to "strip liens". Lien stripping is an court order removing a junior line that is wholly unsecured (has no equity). Since the reforms of 2005 more high income earners have been stopped from filing a Chapter 7 and have used the Chapter 13 for debt relief.
What is Credit Counseling?
Prior to filing a bankruptcy each debtor must complete a credit counseling session with an approved provider. Your attorney can recommend an approved provider, or you can find one on the internet. Most debtors complete the session on the internet or by phone, the cost is under $50.00. The best deal is to purchase a counseling session and a post filing education course (also mandatory) as a package. For more information click here to go to the United States Trustee's website.
What is Debtor Education?
Debtor Education is a class you are required to take after the bankruptcy case is filed, but before the debts are discharged. If the education is not completed the case can be closed with no discharge being entered. This education is usually done on the internet for a small charge. When this education is completed you will receive a certificate of completion which your attorney will file at the court.
What is the Means Test?
The Means Test was a mathematical test which Congress mandated as part of the reforms of 2005. This test establishes eligibility for Chapter 7 based upon income earned in the six months prior to the filing of the bankruptcy. The basic test sets the income limit at the median income of the district in which the debtor files. There are a number of factors that can affect the outcome of the formula so it is best to consult with an attorney to determine your eligibility under the Means Test.
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