Recent Blog Posts

Beware! A Strategic Default Hurts Your Chances for Future Mortgage

San Diego Bankruptcy Attorney — Wed, 14 Mar 2012 00:05:00 GMT

You may be unaware that walking away from a home loan could make it exceedingly difficult to secure a mortgage in the future. In light of the economy and because the value of homes are decreasing, many consumers are choosing to follow through with foreclosure instead of fighting to keep their home. The majority of homeowners who opt for strategic default actually owe more on their home loan than the property is worth, and they choose foreclosure because they would not benefit from a short sale.

The state of California has reported some of the highest rates of foreclosure notices, as have Nevada and Arizona. A recent report from CNNMoney.com conveyed that lenders are starting to pay attention to more than just credit scores when they consider granting a mortgage. If you have faced a foreclosure but you weren't in a position of dire financial need, a lender could back away from offering you another mortgage.

Strategic decisions to default on paying mortgages are usually bad decisions, and there are other options that leave you better off down the road. With the help of a San Diego bankruptcy lawyer from our firm, you can find the financial solution that is best for you and your family. At San Diego Bankruptcy Pro, our talented legal team is fully capable of reviewing your current situation and offering you profound, straightforward legal counsel. When you contact a San Diego bankruptcy attorney at our firm, you are taking the first step towards a brighter financial future. Call today.

Welcome to our San Diego bankruptcy blog!

San Diego Bankruptcy Attorney — Thu, 12 May 2011 20:37:00 GMT

We are proud to announce the launch of our newly updated website and bankruptcy blog!

Are Retirement Accounts Exempt?

Jon Cooper — Mon, 11 Apr 2011 21:45:00 GMT

If you are considering bankruptcy as an option to get out of your financial troubles, you may be wondering whether you can keep your retirement account. The basic rule is that you can protect your accounts “to the extent they are reasonably necessary for the support of the debtor and any dependent of the debtor.” However, the account must be of the type that “qualifies under Section 401(a), 403(a), 403(b), 408 or 408A of the Internal Revenue Code. Assuming you have the right type of account, the amount you can have in it while filing for bankruptcy can be quite large.

Of course if you have this type of asset, or any other assets for that matter, it is imperative you speak with a qualified bankruptcy attorney to evaluate your situation so you can be sure to protect all of your assets.

Liability After Foreclosure or Short Sale

Jon Cooper — Sun, 11 Jul 2010 21:45:00 GMT

I often get asked whether there is any personal liability after a home is foreclosed on or after a short sale. The answer depends on several factors. Certainly filing for bankrutpcy will eliminate any personal liability in these situations; however, there may not be any liability to worry about in certain circumstances and if the homeowner has no other debt, a bankruptcy filing may not be in their best interest. A consultation with an experienced bankruptcy attorney is required to learn all of your avaialable options to deal with a foreclosure or short sale.

Please see my prior posting regarding this issue. In addition, and to clarify things, I have included the following from an IRS Publication which is right on point:

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.The Mortgage 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, qualifies for the 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 does not 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.More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
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 normally 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.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

These exceptions are discussed in detail in Publication 4681.

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.

If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?
Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.

If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

What if I disagree with the amount in box 2?
Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.

How do I report the forgiveness of debt that is excluded from gross income?
(1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.

(2) File Form 982 with your tax return.

My student loan was cancelled; will this result in taxable income?
In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation.

Are there other conditions I should know about to exclude the cancellation of student debt?
Yes, your student loan must have been made by:

(a) the federal government, or a state or local government or subdivision;

(b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or

(c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.

Can I exclude cancellation of credit card debt?
In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.

How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.

To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation. You must also reduce your tax attributes in Part II of Form 982.

My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?
Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples.

Are there any publications I can read for more information?
Yes.
(1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.

(2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.

Some Bankruptcy Facts…

Jon Cooper — Sat, 15 May 2010 21:55:00 GMT

Home Equity Lines of Credit (HELOC’s) are dischargeable in bankruptcy. There is a lot of different and confusing information out there about whether there is any personal liability for a HELOC or 2nd or 3rd Deed of Trust (commonly referred to as mortgages) when a homeowner defaults and the lender is forced to foreclose.

First of all, under the Mortgage Forgiveness Debt Relief Act of 2007, there may not be liability anyway if the property was the debtor’s primary residence and other time sensitive factors are met. However, even if the Mortgage Forgiveness Debt Relief Act of 2007 does not apply, personal liability related to Deeds of Trust can be discharged in bankruptcy.

Furthermore, 2nd and subsequent loans on a primary residence can be wiped out in a Chapter 13 bankruptcy where the current fair market value of the home is less than what the debtor owes on his 1st Deed of Trust. An experienced bankruptcy attorney can advise you properly and guide you to the best solution for your unique situation.

Most people keep all of their property when filing for bankruptcy. Unless you have an unusual amount of assets, you will likely be able to keep all of your property. First of all, many debtors are concerned they will lose their household goods and furnishings just because they filed for bankruptcy. This is simply not true. The laws provide for certain exemptions which allow debtors to protect their property. For example, regular household goods and furnishings are exempt in virtually unlimited amounts, so there is no need to worry that the trustee will sell your clothes or furniture. In addition, there are many other exemptions a debtor can use to protect virtually any kind of asset, up to a certain amount. Consult with an experienced bankruptcy attorney to assist you with proper exemption planning so you can keep your assets.

Retirement Accounts are Protected. Many people make the mistake of using their retirement funds to try and stay afloat. What most people don’t realize is that IRA, 401k and certain other retirement funds are exempt in very large amounts. There is no need to wait to file bankruptcy just because you have a large amount of retirement money. In fact, it often makes more sense to file sooner rather than later so you can keep your retirement funds. Only a qualified bankruptcy attorney can evaluate your situation and provide the proper strategy concerning the timing of your bankruptcy filing.