Chapter 7 Credit Card Debt

The Bankruptcy Code forgives many honest financial mistakes. However, it also provides creditor remedies for debts that may be less than honest. The Bankruptcy Code allows a creditor to object to the discharge of a credit card debt when there is evidence that the debtor has committed fraud. 

A bank objecting to the discharge of a credit card debt on the basis of fraud will file an adversary case against the debtor. The fraud claim is usually one of two types: (1) fraud in obtaining the credit; or (2) fraud in incurring the credit. 

A bank may claim that the debtor committed fraud in obtaining the credit card.  If the creditor can prove that the card was obtained under false pretenses (i.e. that the application was false), the credit card debt may be declared non-dischargeable because of the fraud. False pretenses may include many things, but is usually lying about financial stability or income. 

The bank may claim that a charge was made when the debtor was unable to repay, and had no intention to repay the debt. Because proving this may be difficult for the creditor, the bankruptcy law presumes that a charge is fraudulent if luxury goods are purchased, or a cash advance is taken, shortly before the bankruptcy case is filed. It is then up to the debtor to prove that the charge is not fraudulent or the charge is not included in the bankruptcy discharge. 

Banks routinely check the bankruptcy debtor’s account for signs of fraud. Some red flag actions include: 

• Filing bankruptcy on a new card;
• Taking a cash advance prior to filing;
• Charges for travel or vacation;
• A debt transfer from one card to another;
• Credit charges while unemployed; and
• Charges made after consulting a bankruptcy attorney. 

The more time between the credit card activity and the bankruptcy filing, the less likely the charge will cause a discharge dispute.  The best advice is: if you are considering bankruptcy, stop using your credit cards.  Consult with your bankruptcy attorney regarding the best way to discharge your credit card debt.

Report Finds Many U.S. Homeowners are Underwater

Home values in the United States have plummeted 26.7 percent since peaking in 2006, according to a report released by Zillow.com.  The report also sites the hardest-hit cities are Miami-Fort Lauderdale, FL; Detroit, MI; Pheonix, AZ; Riverside, CA: and Orlando, FL, each recording more than a 50% dip since 2006. Zillow estimates that 27% of all U.S. homeowners have negative equity in their property.  The Zillow press release can be found here. 

Some economists are predicting that the real estate market will bottom out soon and then begin a slow recovery process.  Sadly, foreclosures may rise again in 2011 and reverse the negative equity statistic as people with underwater mortgages lose their homes.  Nationally, about one home in every 1,000 was foreclosed on during December, 2010. 

Foreclosure is a very stressful process.  It is a public record and is often published in the newspaper.  A foreclosure can happen rapidly and often forces the homeowner to move before ready.  This can be a major disruption to family and children.  Of course it impacts your credit score for years. 

By filing bankruptcy, the foreclosure process can be avoided.  In some cases, a Chapter 13 bankruptcy can provide the debtor time to cure an arrearage over three to five years in small payments and stop foreclosure completely.  In other cases bankruptcy can strip away an entirely unsecured second mortgage, thereby freeing up money to pay the first mortgage.  Lenders are also able to modify your home mortgage during bankruptcy through the federal Making Home Affordable Program. 

If you are underwater and struggling to pay your home mortgage, speak with an experienced attorney and learn how the federal bankruptcy laws can help you.  Whether you need to pay past-due mortgage payments, strip away a junior lien, or surrender the property and “walk away,” your bankruptcy attorney can explain the costs and benefits of each option.  Call today and get the advice that can help you build a better financial future.

Short Sale Tax Consequences

A short sale is the sale of real estate for less than the balance owed on the property. Short sales are common in today’s real estate market, where home prices have fallen and the home owner is no longer able to pay the mortgage loan. A short sale takes cooperation between the home owner and the lender to sell the property at a loss. Both parties must consent to the sale. A short sale can avoid a foreclosure, which can be mutually beneficial to the parties. The lender avoids the expense of a foreclosure and the home owner avoids the negative impact on personal credit. 

Short sales were seldom used by homeowners prior to the mortgage crisis because a short sale results in a deficiency balance obligation to the homeowner. The home owner was sometimes sued for the difference between the amount owed on the home and the short sale price, or, more commonly was taxed by the IRS on the amount “forgiven” by the lender. Either way, a short sale created another heavy burden on the home owner. 

In response to the mortgage crisis, the Mortgage Forgiveness Debt Relief Act was signed into law in 2007 which excludes from income a discharge of debt on a principle residence. Debt forgiven by a lender in connection with a foreclosure, refinance, or short sale in calendar years 2007 through 2012 is eligible for this relief. Up to $2 million is excluded ($1 million if married filing separately). This relief only applies to a principal residence, and does not include a second home, credit cards, or a car loan. 

A forgiven debt is generally taxed as income to the tax payer, but that is not always the case. The most common exclusions of this tax are: (1) if the tax payer was insolvent immediately before the debt was forgiven; (2) if the debt was discharged in bankruptcy; or (3) if the debt is a qualified principal residence indebtedness until 2012. 

If you are struggling with a home mortgage and need to walk away, consult with an experienced bankruptcy attorney and learn how the law can work for you. Your attorney can explain your options and together you can make the decisions for a better financial future.

How Chapter 7 Affects Sole Proprietors

Most businesses are legal entities separate from the individual owners. Microsoft, for instance, is not the same as Bill Gates. Corporations, LLCs and the like are recognized as operating independent from the business’s owners. When an incorporated business files bankruptcy, the owners are not in bankruptcy, and vice-versa. 

On the other hand, when the business is a sole proprietor, the owner is the same as the business. The business is not a legal entity that is separate from the individual. In fact, the business is not recognized as existing apart from its owner. The business income, expenses, property, and debts all belong to the owner. Therefore, when a sole proprietor files bankruptcy, the business is also bankrupt. 

The Chapter 7 trustee who administers your bankruptcy case is under a mandate to seize control and cease operations of your business. The main reason for this is that the business assets are considered personal assets and part of the bankruptcy estate. Fortunately, in most cases personal exemptions are able to protect tools and equipment used in the sole proprietor’s business. 

Accounts receivable are also part of the bankruptcy estate, so it is important to provide accurate business records to assist your attorney before your bankruptcy is filed. The trustee will want to see all gross income received by the business, and all business expenses. Since this gross income is included in your personal gross income, business income can sometimes push the total family income over the qualifying ceiling for Chapter 7 bankruptcy. Additionally, business debt is considered personal debt, so it is generally included in the bankruptcy discharge. 

Every sole proprietor bankruptcy case is different. For instance, in a case where the debtor runs a day care from her home, there may be little or no business inventory or assets. In bankruptcy terms, there are no business assets for the debtor’s estate. However, where the sole proprietor runs a restaurant, there may be significant assets for the bankruptcy estate. It is important for you to speak candidly with your attorney and discuss your sole proprietor business thoroughly. Your attorney can effectively advise you on the best future action including whether it is permissible to continue business operations, whether you should form a corporation or LLC, or taking some other action to best protect your interests. If you are dealing with a personal financial difficulty, speak with an experienced bankruptcy attorney before making any decisions regarding your sole proprietor business.

Discharging Tax Debt in Bankruptcy

Certain debts have been given special status by the Bankruptcy Code and are generally excluded from the debtor’s bankruptcy discharge. Child support obligations, student loans, and income tax debts are three of the most common types of debts that are not dischargeable. However, each of these debts may be eligible for discharge in bankruptcy under certain circumstances. 

The rules for discharging an income tax debt can be complicated, and the debtor’s ability to discharge all or a portion of the tax debt or penalties may depend on whether the case is filed under Chapter 7 or Chapter 13 of the Bankruptcy Code.  An income tax debt arises from a tax return for a particular tax year.  In general, an income tax debt for a particular tax year may be discharged if the following criteria are met: 

1. The due date for filing the tax return was at least three years prior to the bankruptcy filing date. This due date includes any extensions. 
2. The tax return was filed at least two years prior to the bankruptcy filing. This date is the time the return was actually filed with the IRS.  
3. A tax assessment was made at least 240 days prior to the bankruptcy filing. The tax assessment is usually measured from the IRS proposed assessment sent to the taxpayer. 
4. The tax return was not fraudulent, and the taxpayer has not attempted to evade the tax laws. Dishonest taxpayers do not receive the benefits of the bankruptcy laws. 

Taxes that do not meet the above criteria are not included in the bankruptcy discharge. This includes income tax debts from unfilled tax returns. Even if the IRS assessed a tax many years ago, if the taxpayer failed to file a return, the debt is not dischargeable. 

When an income tax debt is discharged in bankruptcy, any tax penalty is also discharged. However, in some cases the tax penalty may be discharged, even when the tax debt itself is not discharged. For instance, in a Chapter 7 case tax penalties are discharged if the penalty is associated with a tax debt more than three years old. In a Chapter 13 case all unsecured tax penalties are dischargeable, and receive the same treatment as all other unsecured debts during the term of the bankruptcy repayment plan. If the debtor is repaying a tax debt through the Chapter 13 bankruptcy case, no new tax penalties will accrue. 

The federal bankruptcy laws contain specific provisions for discharging income tax debt. Bankruptcy can provide you with time to repay your obligation, without the threat of IRS seizure or garnishment; or, in some circumstances, can permanently discharge your tax debt. Your bankruptcy attorney can explain your legal rights and the available opportunities to free yourself from your income tax burden.