Most bankruptcy cases are of short duration, with definitive ends, particularly chapter 7 cases, which can usually be resolved within four months or less. Every once in a while, however, a bankruptcy can take on new life in unexpected way. Such is the matter I'm now involved with.
Several years ago I managed a chapter 7 case for a New Jersey couple who owned property in a managed community. The housing crisis was in full swing at the time, and because the property was under water, I recommended that they not reaffirm the mortgage, but just pay it through the bankruptcy, as can be done with secured real property. But several years later, they decided they could no longer keep paying the mortgage, for several good reasons, and they notified the current mortgage company (who had come to administer the loan through the consolidation of several lenders) that they were vacating the property and would make no more payments. Nevertheless, they kept in the back of their mind that they might try to put it on the market, so they regularly returned to check up on the property, maintained the area, and generally made sure the property was maintained. They also made regular payments to the home owner's association.
Almost a year into this arrangement, the couple showed up at the house one day to find the locks on the door had been changed, and a no trespassing notice had been attached to the property. Well, at this point, the they decided that the mortgage company could have at it, and ceased making any effort at maintenance or keeping up with any accounts associated with the property. Two months later, foreclosure was filed, which was the mortgage company's right, and a default was entered against the couple eleven months later.
However, two months following the entry of default, the couple was served a complaint filed by the home owners association seeking all the association fees due since the couple was locked out. This is where I got involved. Normally, only HOA fees that have accrued prior to the filing date are discharged in bankruptcy, and any assessed fees that become due after the filing date are not discharged. I felt this was a special case, though, because the couple had been put out of possession by the mortgage company, and I agreed to defend against the HOA suit.
In the couple's defense, we raised the defense that when they had been locked out, they were no longer members of the association and thus, not subject to the association due. Additionally, we raised an affirmative defense to the effect that a third party, i.e., the mortgage company, who not part of the suit, was liable over to the couple for payment of the fees, because they had taken possession of the property. Ultimately, we came to the conclusion that it might be better if we simply pled the mortgage company into the case as a third-party defendant, so we did, and served our third-party complaint on their headquarters out in the Midwest.
The mortgage company was not amused. In response to our complaint, it filed a motion to dismiss, arguing that the case was a matter of contract, and that the couple had agreed to pay all the HOA fees as part of the mortgage documents, and the matter of liability was open and shut. In response, we argued that New Jersey case law has clearly established that a mortgagee who takes possession of a property in default has a duty to act as any prudent owner would, and there is a duty to maintain property, pay taxes, etc. It just wasn't clear whether HOA fees were covered under that general policy, even as we argued that a lockout is nothing less than total control and possession over the property, and such expenses should be included.
The judge agreed with us, and explained his reasons in an detailed attached opinion.
Now, I do very little HOA or condo law, but I've been told by others that this ruling is a Big Deal, because no other opinion has held just this. Just imagine how many people get turned out of their homes because of economic reversals -- only to be faced with further expense from the condo association because the mortgage company drags its feet through the foreclosure process. And if mortgage companies continue to do as they do, they may, under the right circumstances, face the prospect of extra liabilities and expenses resulting from their lackadaisical attitudes. After all, HOAs seeking compensation for service would have much deeper pockets than those of bankrupt homeowners to dig into.
I do not know yet how the rest of the case will proceed from this point forward, what final judgment will be entered and whether this particular decision goes up on appeal. But it is somewhat humbling when you realize just what potential impact a $4,100 claim filed in the Special Civil Part may have.
Thursday, February 5, 2015
Thursday, February 20, 2014
Discharged Debt as Imputed Income?
I recently had a client contact me who had just gone through bankruptcy and received a discharge a few months earlier. She reported that she'd received a 1099-C form from one of her larger creditors, and it looked like they were reporting the discharged debt as imputed income. Her question was whether she needed to pay income tax on this cancelled debt. The answer was no.
A limited class of creditors are permitted to send 1099-C forms to debtors who receive cancellation of their debt through bankruptcy, usually those that receive most of their most of their profit from the lending of money. The debt cancellation has an obvious tax benefit to the creditor. In this instance, the creditor was an "investment group" that "invested" in the purchase and collection of old debt. However, regardless of whether the 1099-C issued by this particular creditor was proper or not, the amount of declared cancelled debt would not be imputed as income to the debtor. Here's what the IRS has to say about debt discharged through bankruptcy:
As an aside, even cancelled debt not obtained through bankruptcy may be excluded from income, if the taxpayer is "insolvent" prior to the debt being cancelled. Insolvency is determine by a calculation of debt versus fair market value of your assets. More information regarding this exclusion from income is given at the link provided above.
The bottom line is that, once a debt is discharged through bankruptcy, it is gone. Even if the creditor wants to take a bite out of Uncle Sam to get some of it back, the debtor is off the hook.
A limited class of creditors are permitted to send 1099-C forms to debtors who receive cancellation of their debt through bankruptcy, usually those that receive most of their most of their profit from the lending of money. The debt cancellation has an obvious tax benefit to the creditor. In this instance, the creditor was an "investment group" that "invested" in the purchase and collection of old debt. However, regardless of whether the 1099-C issued by this particular creditor was proper or not, the amount of declared cancelled debt would not be imputed as income to the debtor. Here's what the IRS has to say about debt discharged through bankruptcy:
Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.IRS Publication 4681, p. 5. To declare the cancelled debt as being excluded from income by reason of bankruptcy, taxpayers must complete and file form 982 with their returns.
As an aside, even cancelled debt not obtained through bankruptcy may be excluded from income, if the taxpayer is "insolvent" prior to the debt being cancelled. Insolvency is determine by a calculation of debt versus fair market value of your assets. More information regarding this exclusion from income is given at the link provided above.
The bottom line is that, once a debt is discharged through bankruptcy, it is gone. Even if the creditor wants to take a bite out of Uncle Sam to get some of it back, the debtor is off the hook.
Sunday, December 1, 2013
Keeping Your Vehicle Through Bankruptcy
One of the questions most people ask when discussing bankruptcy is whether they can keep their car or truck if they file for bankruptcy. The answer, in most cases, is "yes."
The theory behind bankruptcy administration is that the Trustee takes possession of all your assets and distributes it among your various creditors. In application, the Bankruptcy Code allows a debtor to exempt certain items of property, up to a certain value, from the bankruptcy estate. The values change from time to time, but in most cases, I find that a debtor can exempt all of their assets from seizure. But motor vehicles are also open for special treatment.
If you own your vehicle outright and its value falls at or below the exemption limit, then the solution to keeping the vehicle is simply a matter of exempting it from the bankruptcy estate. The complications arise when the debtor still has an outstanding loan on the car.
The Bankruptcy Code allows a debtor to “reaffirm” an auto loan. This means that, even though the loan could be discharged through bankruptcy, the debtor has chosen to assume liability for the debt once the bankruptcy is completed. It’s as if the auto loan was untouched by the bankruptcy process. It also means that if the debtor defaults on the loan following discharge of the other debt, the loan company can still repossess the vehicle and seek judgment for a deficiency after the vehicle is sold at auction.
Sometimes the vehicle is worth more than the remaining loan balance. This is a fairly rare occurrence, but when it happens, the solution is to find where the equity can be exempted under the Code. Usually, if the equity is just a few thousand dollars, the exemption can be found.
More often, the loan is significantly more than the value of the car. When this happens, another possibility opens up – reducing the actual balance of the loan and paying that amount to the creditor in exchange for free title to the vehicle. In this way, the debtor can realize significant savings in the total cost of the vehicle. How the reduction is made differs between a chapter 7 or chapter 13 bankruptcy.
In chapter 13, the debtor petitions the court to determine the retail value of the vehicle, and the secured amount of the auto loan is “crammed down” to the determined value. This value is entered into the repayment plan as a secured debt and would normally be paid off entirely, while the remaining amount of the loan is treated as unsecured debt, which may or may not be paid off through the Plan. One caveat to this option: cramdown can only be used if you have already owned the vehicle for a minimum of 910 days, or 2 ½ years.
In chapter 7, the process is different, and is referred to as “redemption” of the collateral (the vehicle). The theory is that the lender can repossess the vehicle upon default and sell it at retail value. But it cannot seek a deficiency from the debtor for the remainder of the loan amount, because that obligation was discharged by the bankruptcy. The resale amount is all the lender can expect to recoup from repossessing the vehicle. The process of redeeming the vehicle loan gives the debtor the opportunity to purchase the vehicle from the lender at an amount the lender could expect to receive at resale. Like the chapter 13 cramdown, redemption can allow the debtor to realize a significant reduction in the total purchase price of the vehicle.
Unfortunately, most chapter 7 debtors do not have an extra several thousand dollars available to pay to the lender. As a result, redemption is rarely used, and the debtors most often rely on the reaffirmation process to keep their cars. In some instances, though, the debtor may turn to a redemption loan company to borrow the money necessary to purchase the car. If qualified for such a loan, the debtor would petition the court for an order determining the retail value of the vehicle and allowing them to take out a loan to redeem it. The whole scheme must be in the debtor’s best financial interests for the court to approve it.
So, there you have it. In most instances, a debtor can keep their vehicle when they file for bankruptcy, and in some case, actually realize a significant savings over the total purchase price of their car. When discussing your potential bankruptcy, an experience attorney should be able to discuss these options with you and be willing to work the necessary calculations and tactics to your advantage. If not, look for another attorney.
The theory behind bankruptcy administration is that the Trustee takes possession of all your assets and distributes it among your various creditors. In application, the Bankruptcy Code allows a debtor to exempt certain items of property, up to a certain value, from the bankruptcy estate. The values change from time to time, but in most cases, I find that a debtor can exempt all of their assets from seizure. But motor vehicles are also open for special treatment.
If you own your vehicle outright and its value falls at or below the exemption limit, then the solution to keeping the vehicle is simply a matter of exempting it from the bankruptcy estate. The complications arise when the debtor still has an outstanding loan on the car.
The Bankruptcy Code allows a debtor to “reaffirm” an auto loan. This means that, even though the loan could be discharged through bankruptcy, the debtor has chosen to assume liability for the debt once the bankruptcy is completed. It’s as if the auto loan was untouched by the bankruptcy process. It also means that if the debtor defaults on the loan following discharge of the other debt, the loan company can still repossess the vehicle and seek judgment for a deficiency after the vehicle is sold at auction.
Sometimes the vehicle is worth more than the remaining loan balance. This is a fairly rare occurrence, but when it happens, the solution is to find where the equity can be exempted under the Code. Usually, if the equity is just a few thousand dollars, the exemption can be found.
More often, the loan is significantly more than the value of the car. When this happens, another possibility opens up – reducing the actual balance of the loan and paying that amount to the creditor in exchange for free title to the vehicle. In this way, the debtor can realize significant savings in the total cost of the vehicle. How the reduction is made differs between a chapter 7 or chapter 13 bankruptcy.
In chapter 13, the debtor petitions the court to determine the retail value of the vehicle, and the secured amount of the auto loan is “crammed down” to the determined value. This value is entered into the repayment plan as a secured debt and would normally be paid off entirely, while the remaining amount of the loan is treated as unsecured debt, which may or may not be paid off through the Plan. One caveat to this option: cramdown can only be used if you have already owned the vehicle for a minimum of 910 days, or 2 ½ years.
In chapter 7, the process is different, and is referred to as “redemption” of the collateral (the vehicle). The theory is that the lender can repossess the vehicle upon default and sell it at retail value. But it cannot seek a deficiency from the debtor for the remainder of the loan amount, because that obligation was discharged by the bankruptcy. The resale amount is all the lender can expect to recoup from repossessing the vehicle. The process of redeeming the vehicle loan gives the debtor the opportunity to purchase the vehicle from the lender at an amount the lender could expect to receive at resale. Like the chapter 13 cramdown, redemption can allow the debtor to realize a significant reduction in the total purchase price of the vehicle.
Unfortunately, most chapter 7 debtors do not have an extra several thousand dollars available to pay to the lender. As a result, redemption is rarely used, and the debtors most often rely on the reaffirmation process to keep their cars. In some instances, though, the debtor may turn to a redemption loan company to borrow the money necessary to purchase the car. If qualified for such a loan, the debtor would petition the court for an order determining the retail value of the vehicle and allowing them to take out a loan to redeem it. The whole scheme must be in the debtor’s best financial interests for the court to approve it.
So, there you have it. In most instances, a debtor can keep their vehicle when they file for bankruptcy, and in some case, actually realize a significant savings over the total purchase price of their car. When discussing your potential bankruptcy, an experience attorney should be able to discuss these options with you and be willing to work the necessary calculations and tactics to your advantage. If not, look for another attorney.
Wednesday, June 27, 2012
Commentary -- Bankruptcy as a Pro-active Financial Tool
BANKRUPTCY. The word tends to conjure up images of moral
turpitude, lack of character, and failure.
This attitude, though, has no basis in fact. Bankruptcy as a legal process was well-known
at the founding of our nation, and is provided for in our Constitution. Even long before that (if one seeks counsel
in the Bible), Deuteronomy 15:1 admonishes creditors that "[a]t the end of
every seventh year you must cancel the debts of everyone who owes you
money." "Moral
turpitude," indeed!
The economic climate since 2008 has
wreaked havoc on the financial stability of most of our citizens. The failure of our economy to sustain growth
has resulted in the elimination of many good jobs capable of supporting a
family, the devaluing of real estate that many borrowers were told could form
the basis of an investment, and the shrinkage of many, many other financial
investments made by ordinary people, under the guise that the firms handling
those investments would hold the investors’ interests above all else. As a result, way too many family homes have
been lost through foreclosure, in some instances enough to blight entire
neighborhoods; retirement and other savings have been wiped out; unemployment
and the inevitable credit defaults have risen to an all-time high. The fault is not all due borrowers' unrealistic
desire for "more, bigger and better."
To a large extent, much of the blame must fall squarely on the shoulders
of government fiscal policy, deregulation, creditors' greed, and – well, the
greed of the financial sector in general.
The promise to repay a debt is not a moral obligation, it is a
contractual one, based on realistic financial considerations. It is an agreement between two parties, both of which are
theoretically capable of dealing with each other as equals. It is based on certain financial assumptions,
i.e., that the parties will deal fairly and squarely with each other, that the
lender has the ability to provide that which the borrower desires, and that the
borrower has (and will continue to have) the ability to repay the debt
according to the agreed-upon terms. Most
of the time, the agreement works out more-or-less to the benefit of both
parties. But what happens when one or
more of those assumptions change?
In contract law, "impossibility of performance" may sometimes be
a valid defense. But not when applied to credit and debt collection. What is the fate of the
person who loses his job and can no longer repay the debt under the terms set
by his creditor? What defense has the
small business owner whose lender, sensing a weakening economy, withdraws the
line of credit, thus cutting off the business’s oxygen and leaving nothing but
debts? Under our current laws, inability
to pay is NOT a defense. The creditor
retains the legal option of forcing payment, by levy and seizure of assets and
wages, and in some US jurisdictions, by imprisonment. SEE: Debtor's Prison
Bankruptcy provides a debtor with legal protection
against the rapacious creditor who demands performance of the credit agreement
despite the debtor's inability to perform.
Make no mistake, the bankruptcy laws do not operate
solely for the benefit of Joe Average citizen and his family. Many others have filed for bankruptcy,
including presidents Grant and McKinley, Mark Twain, Henry Ford, Walt Disney, and
numerous other well-known and respected people.
Bankruptcy relief has also been sought and granted to some of the nation's
largest corporations. Can any one name a
major airline carrier that hasn't been in and out of bankruptcy at least
once? Chrysler, CITgroup, Trump Resorts,
the Philadelphia Inquirer – all have petitioned for bankruptcy relief
recently. It was once said that
"what's good for GM is good for America" – and bankruptcy restored GM
to financial health. THAT is the purpose
of bankruptcy.
The recent economic crisis has been like a tornado
tearing at our financial expectations, and it has taken its toll on everyone,
big and small. Many feel that the worst
is over, and recovery is on its way. One
of the first tasks of recovery, though, is to clean up the debris left in the
wake of the disaster. Part of preparing
for a new financial future is jettisoning the oppressive and useless burden of
old debt. Once unencumbered by the
global excesses of the past, one can move forward into a brighter future. Bankruptcy is the legal tool specifically
designed for that task.
Bankruptcy --
moral turpitude and failure? Not at all!
In the right circumstances, it can be sound financial strategy.
Wednesday, May 2, 2012
Sometimes it's nice to be able to see the future
This little bit of information hit the news last week:
EEOC says transgender people protected
It's a pretty important decision for a small segment of our population that has consistently found itself on the outside of anti-discrimination laws. When you think about, the decision makes perfect sense; however, our legal system can be all about splitting hairs, and as the case history of transgender anti-discrimination bias shows, a hair can be split very cleanly when it serves a particular end. The writing has been on the wall (or in the journals) for at least a decade and a half, though. In fact, those of you who have delved deep into my website may have discovered this article I published in 1997 outlining the same argument the EEOC just adopted:
REEVALUATING HOLLOWAY: TITLE VII, EQUAL PROTECTION, AND THE EVOLUTION OF A TRANSGENDER JURISPRUDENCE
Now, if only my stock picks had been as prescient . . .
EEOC says transgender people protected
It's a pretty important decision for a small segment of our population that has consistently found itself on the outside of anti-discrimination laws. When you think about, the decision makes perfect sense; however, our legal system can be all about splitting hairs, and as the case history of transgender anti-discrimination bias shows, a hair can be split very cleanly when it serves a particular end. The writing has been on the wall (or in the journals) for at least a decade and a half, though. In fact, those of you who have delved deep into my website may have discovered this article I published in 1997 outlining the same argument the EEOC just adopted:
REEVALUATING HOLLOWAY: TITLE VII, EQUAL PROTECTION, AND THE EVOLUTION OF A TRANSGENDER JURISPRUDENCE
Now, if only my stock picks had been as prescient . . .
Wednesday, March 7, 2012
Movin' Uptown
I'm moving forward and moving uptown a bit; the deal for the new office in Philly has been finalized. As of April 1st, the office will be still be located in Center City, but more accessible at the following address:
Law Office of Kristine W. Holt
1211 Vine St., Ste. 107
Philadelphia, PA 19107
I got in on the ground floor of this renovated office building on the north side of Vine, and the suite itself is more spacious than what I've been working from for the past several years. Unlike in the middle of Center City, there is a generous amount of on-street parking available in front of the building, and a reasonably priced parking lot just yards away at the corner of 12th and Vine. From New Jersey, it's just a hop across the Ben Franklin Bridge and onto Vine Street. The travel from other outlying areas is just as convenient, without the congestion of deep Center City traffic and the hassle of finding a place to park. And for those who live in town, the office is located just a block north of the convention center, and is served by Septa.
Like the new place in New Jersey, I'm looking forward to seamlessly setting up shop on Vine St., and providing the same services I have since 1999.
And with this, I think the major immediate changes to the practice are done!
Law Office of Kristine W. Holt
1211 Vine St., Ste. 107
Philadelphia, PA 19107
I got in on the ground floor of this renovated office building on the north side of Vine, and the suite itself is more spacious than what I've been working from for the past several years. Unlike in the middle of Center City, there is a generous amount of on-street parking available in front of the building, and a reasonably priced parking lot just yards away at the corner of 12th and Vine. From New Jersey, it's just a hop across the Ben Franklin Bridge and onto Vine Street. The travel from other outlying areas is just as convenient, without the congestion of deep Center City traffic and the hassle of finding a place to park. And for those who live in town, the office is located just a block north of the convention center, and is served by Septa.
Like the new place in New Jersey, I'm looking forward to seamlessly setting up shop on Vine St., and providing the same services I have since 1999.
And with this, I think the major immediate changes to the practice are done!
Sunday, March 4, 2012
On the move!
Well, one never knows how quickly things can work out, right? At the end of January, I consolidated my two offices to Philadelphia, for an uncertain duration. As it turns out, I'm now reopening the New Jersey office at a new location, one that is conveniently located and easier to find for New Jersey residents living in the Philadelphia metro area. On April 1, 2012, I'll be open for consultations in New Jersey again at the following locations:
Winslow Professional Center
339 Rte. 73 North, Ste. 11A
Berlin, NJ 08009
Just a couple miles south of Berlin on rt. 73, the new office is a mere 10 minutes from Voorhees, Williamstown and Sicklerville, 20 minutes from Turnersville and Hammonton, and just slightly longer from Collinswood, Cherry Hill, Mt. Laurel and Medford.
I'm really excited about meeting everyone at the new office!!
Winslow Professional Center
339 Rte. 73 North, Ste. 11A
Berlin, NJ 08009
Just a couple miles south of Berlin on rt. 73, the new office is a mere 10 minutes from Voorhees, Williamstown and Sicklerville, 20 minutes from Turnersville and Hammonton, and just slightly longer from Collinswood, Cherry Hill, Mt. Laurel and Medford.
I'm really excited about meeting everyone at the new office!!
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