Arizona Legal Brief » Bankruptcy News and Information

Recent Arizona Court of Appeals Decision regarding 1099c debt forgiveness tax– from elegal

JamesCork — Tue, 22 Dec 2009 20:35:11 +0000

Does a lender discharge a debt, within the meaning of Arizona law, by issuing an Internal Revenue Service Form 1099-C to a borrower in default? Read opinion.

This case raises the issue of the dreaded 1099c which is an IRS form that is issued by a lender when they forgive a debt. Outside the realm of bankruptcy forgiven debt is considered income by the Federal Government and you are taxed on it as income. Where this becomes most relevant in bankruptcy is in trying to decide to file bankruptcy before or after a home is foreclosed on. If the bank forgives the deficiency (difference between what you owe and what the home is sold for at the Trustee Sale) then you may open your mailbox to find a 1099c from the lender that has been submitted to the IRS and the deficiency is taxed as income. A similar occurrence may involve the short sale process. Debt which is discharged through bankruptcy is not subject to the “forgiven debt” income tax. This case does not involve bankruptcy but it does give some useful information on the 1099c.

In this case I think the court of appeals made the right decision by denying the moving party’s summary judgment and also reversing the lender’s summary judgment. It just seems too unjust that these people would be required to include the forgiven debt for income tax purpose and also be required later to repay the debt (along with interest and penalties).

In this economy, bankruptcy may be an answer for many – from ChicagoTribune.com

JamesCork — Mon, 19 Oct 2009 22:16:45 +0000

Chapter 7 and Chapter 13 each have their trade-offs.

for information on arizona bankruptcy lawyers or arizona general attorney see www.phoenixarizonalaw.com

By Mike Hughlett
March 15, 2009

You can’t make your mortgage payment. Or maybe you’ve lost your job and are faced with a mountain of credit card debt. Either way, you’re a casualty in the nation’s economic avalanche and you find yourself contemplating the last resort—bankruptcy.

It’s a solution Americans are increasingly choosing these days, a way to declare a financial fresh start, but one with risks.

Bankruptcies hit a peak in 2005, when more than 2 million Americans and businesses rushed to file before a more creditor-friendly federal law went into effect, according to AACER, a bankruptcy data firm. Filings fell considerably in 2006 and 2007, but last year climbed back up to 1.1 million. The vast majority of filings are personal bankruptcies.

By 2008, bankruptcy filings had begun reverting to a more natural rate, not the “artificial” rate just before and after the law change, said Robert Lawless, a bankruptcy expert at the University of Illinois’ College of Law.

And then there’s the economy. “There’s no question that people are hurting and it’s showing up in the bankruptcy courts,” Lawless said. Indeed, AACER reported that in February, personal bankruptcies experienced their biggest year-over-year jump—37 percent—since the bankruptcy law changed.

The growing tide of mortgage foreclosures is taking its toll. “There is a significant increase in real estate bankruptcies,” said Xiaoming Wu, a Chicago-based bankruptcy attorney.

Although bankruptcy can offer something of a fresh start, a filing will be on your credit record for at least seven years, which usually makes it harder to obtain competitive interest rates on loans. Several bankruptcy lawyers, however, said many of their clients already have poor credit records when they file.

So, how do you know when it’s time to file? Bankruptcy experts say there are no hard and fast formulas, but there are some rules of thumb:
•If you are regularly dipping into your retirement savings.
•If your wages are being garnisheed by creditors.
•If you see no possibility of repaying your debts (being able to muster only minimum credit card payments is a sign).
•If your house is in foreclosure proceedings.

Bankruptcy at least temporarily halts a foreclosure, but it doesn’t get you off the hook for missed mortgage payments. Your status as a homeowner, as well as your income, will likely determine whether you file a Chapter 7 bankruptcy or a Chapter 13.

Chapter 7 is cheaper, and gives you a quicker, more robust discharge of your debts,” Lawless said. In a Chapter 7, within six months, many if not all of your debts can be canceled, with exceptions including unpaid child support, student loans and taxes owed within the last three years.

But if your income is above a certain limit, you must file Chapter 13, which entails paying back some or all of your debts over three to five years. The Chapter 13 income threshold is determined by your state’s median family income, coupled with a complicated “means test” calculation, according to the FindLaw Web site.

Still, Chapter 13 can be the preferred route if you want to permanently fend off a foreclosure, and if you have significant equity in your home or car. In a Chapter 7 case, you are at risk of foreclosure if you can’t pay back past-due mortgage payments.

In Chapter 13, you can spread out repayment of back-due mortgage debt over three to five years. Also, Chapter 13 allows you to keep “non-exempt” property you may have to give up in Chapter 7, including equity in your home and car.

Exemptions vary widely by state. In Illinois, a home owned by one person would qualify for an exemption of up to $15,000 in equity; a home owned by two people, $30,000. (In Arizona the Home Equity Exemption is $150,000). That means you could lose equity above those ceilings in a Chapter 7 filing, money that could go to creditors. There is also an equity limit for cars. (In Arizona the limit is generally $5,000 for individuals and $10,000 for couples)

But in Chapter 13, you can keep non-exempt equity—that is, you don’t have to give up any property. “Chapter 13 is designed to be a trade-off,” said bankruptcy attorney Wu. “You keep assets you would lose in a Chapter 7, but creditors get money.”

Still, less than half of those who opt for Chapter 13 successfully complete their debt repayment plans, bankruptcy experts said. Many end up converting to Chapter 7, sometimes losing the houses and cars they were trying to keep.

Mike Hughlett is a staff reporter at the Chicago Tribune.

Sometimes, Filing For Bankruptcy Is Best – from MSNMoney

JamesCork — Mon, 19 Oct 2009 22:12:16 +0000

When bankruptcy is best

The fact that most people don’t rush into bankruptcy many, if anything, wait too long to file — doesn’t answer the question of whether it’s right in your particular circumstance. Because beyond the financial and legal aspects is the fact that you’re reneging on debt that you promised to repay.

Debt Settlers Offer Promises but Little Help – from NYTimes.com

JamesCork — Mon, 19 Oct 2009 22:06:00 +0000

Tyna and Willard Carter say they paid almost $4,000 for help paying debts and now owe more.

Tyna Carter, burdened with $25,000 in credit card debt, did not want to be a deadbeat. After looking for help on the Internet, Mrs. Carter, a West Virginia homemaker, wound up in the hands of a sweet-talking “credit specialist” from Texas.

5 myths about Bankruptcy – from CBS News

JamesCork — Mon, 12 Oct 2009 22:26:02 +0000