Money Law Blog

"Too Broke to Go Bankrupt" - A Telling News Item

Tue, 08 May 2012 12:45:58 -0500

The emerging trend, according to a recent CNN Money article, is that the economy has tanked to the point people can't even afford to file for bankruptcy.

Probably true, based on the experience of this law firm. When the crash hit in 2007, the biggest problem was the wave of toxic mortgages re-setting to interest rates, and consequently payments, that shot to absurd amounts. Home owners couldn't make the payments, so bankruptcy was one way to eliminate the debt and stop the foreclosure long enough to get out of the house and not have to abandon your toothbrush and Fido. This event, in turn, triggered the economic down-turn, the lay-offs and decline in income that bring us to where we are today.

The 2005 "reform" of bankruptcy law has compounded the problem for debtors by requiring more paperwork and thereby increasing costs. Among the most ludicrous requirements is pre-filing debt counseling. Bankruptcy is the last thing debtors want to do. If debt management re-payment plans were a solution, they would be doing them.

The average attorney fee for a Chapter 7 bankruptcy is $1,500 (and that is more or less what bankruptcy lawyers charge in DC, MD and VA.) But, says the article, it is expected that between 200,000 and one million consumers will not be able to afford even that.

Our bankruptcy and tax law firm has recognized this reality. That is why we have set up a new program to make legal representation in bankruptcy more affordable to debtors in DC, MD and VA. The initial cost to start is minimal and the monthly payments within reach. In the meantime, you have legal representation, an advisor, and someone to "run interference" (if I may borrow a sports term) with creditors. Take a look: FINANCED BANKRUPTCY℠.

Call us, and we'll discuss your situation.

Bankruptcy: It's NOT the End of Your Life. An Entrepreneur's Journey.

Tue, 03 Apr 2012 18:12:13 -0500

Samuel Clemens' (or Mark Twain, under his better-known pen name) complaint about the reports of his death having been greatly exaggerated is apt also for what most people think about bankruptcy: It's NOT the end of your life.

An essay by a high-tech entrepreneur and his personal bankruptcy that was published recently in the Washington Post makes this point very well.

I won't bother to comment on it, because the author himself does a masterful job of describing how his own financial problem developed, his bankruptcy filing, and the changes in his attitude about bankruptcy as he launches another new start-up company.

I commend it to anyone who is considering filing and still has doubts.

The author also makes some very good points about "boot-strap" financing a business and living debt-free.

If you want to discuss your situation personally, the initial consultation is free at our tax and bankruptcy law firm.

Common Mistakes To Avoid Before Filing Bankruptcy -- They Are So Painful!

Sat, 17 Mar 2012 17:38:12 -0500

Often, debtors come to the bankruptcy lawyer's office after already having made costly mistakes that could easily have been avoided, including:

Borrowing against a home to pay down credit cards. Now the debtor has turned what, in many cases, was unsecured debt, which could have been wiped out completely, into secured debt that the debtor must pay off or lose the house. Worst yet are predatory loans where the payments are so onerous as to make foreclosure almost a certainty.
Borrowing against a 401K plan. The debtor takes a loan out against a 401K plan and then finds he can't make the payments. If the debtor defaults, a distribution of the full loan proceeds will be declared for that tax year. The debtor will now have a tax liability (that cannot be discharged) equaling about a third to a half of the loan taken out to pay debt that was probably dischargeable in the first place.
Moving debt around to take advantage of low-interest credit card offers. If the debtor files bankruptcy within a short time after this transfer, lenders left "holding the bag" often move in court to block the discharge claiming fraud for incurring the debt when the debtor knew he would not be able to pay it back.
Playing the "ostrich." Unable to face his or her financial problems, the debtor avoids getting help. For persons with back tax debts, the delay permits interest on priority taxes (that you must pay off) to build and also gives the IRS time to file a tax lien, again making what may have been a dischargeable tax debt into secured debt the debtor must now pay off.
Getting help from the "one trick pony." When shopping for help, pay attention to 1) the range of solutions, and 2) the effectiveness of the solutions the debt professional offers. Ask questions of the following persons you approach for help:

Credit counselors. How much of my debt will be completely wiped out? Will I have to pay income taxes for the debt that is wiped out? (You probably will, especially if the creditor reports "cancellation of debt" income for you to the IRS.) How much will I have to pay in total? How many months will it take to be debt free? How much total principal and how much total interest will I pay? Will my interest rates go up?

Accountants and enrolled agents. For debtors with tax debts, be aware that neither one of them can offer the bankruptcy option unless they have a license to practice law. Usually they will offer only an offer in compromise, which may not be the best option for your case, or an installment agreement which is almost no relief at all. Ask: Would this tax debt be dischargeable in bankruptcy? Are you making a guarantee that my offer will be approved? What amount will be accepted as an approved offer by the IRS? How long will it take? As for an installment agreement, it's just that: Pay over time while interest and penalty charges continue to grow.

Attorneys who practice only Chapter 7 bankruptcy. This is a bit like going to a doctor who can prescribe only one type of medicine. Your specialist should be able to perform a full diagnosis and then prescribe a range of treatments. Ask: Does the attorney prepare, file and represent debtors in Chapter 13 or Chapter 11? What are the local Chapter 13 trustee's preferences as to the type of plans he or she will accept? How much of his or her practice is devoted to bankruptcy? How long has he or she been practicing this area of the law? For tax problems, does the attorney practice before the IRS? What options does he or she offer?

Our tax and bankruptcy law firm serves Virginia, Maryland and DC. Call us.

Hire Your State's "#1 Bankruptcy Filer": You May Finish The Case As Befuddled As You Started

Fri, 09 Mar 2012 19:53:47 -0500

Abraham Lincoln, a lawyer by profession, was exactly on the mark when he said: "A lawyer's advice and time are his stock in trade." That's what we sell -- our time (as well as our knowledge).

Now put that together with another old, but very true, saying: "You get what you pay for." So. . . when you go for cheap, you are bound to get less of that lawyer's time and attention. I have explained how this works before here in a prior blog posting about cheap lawyers and bankruptcy mills.

I state the foregoing (if you will indulge me in a little legalese) as an introduction to the present rant. Excuse me while I spout.

This the second time in a week that I am doing a consultation answering legal questions for former clients of a bankruptcy attorney who bills himself as the "#1 Bankruptcy Filer" in his state. (Although that statement connotes he's the best in quality (an advertising assertion, which, by the way, may run afoul of the state bar association professional ethics rules) actually it just means his office happened to file more cases than anyone that calendar quarter).

It's annoying, to put it mildly, and infuriating, to be more precise. I'm spending my time, doing a free consultation and clarifying issues that should have been explained by the attorney they paid to do the case.

It points up something that you need to take into account when you hire your bankruptcy attorney: Make sure he or she, or knowledgeable staff, is available and competent to answer your questions. This is the intangible that represents the real value when you hire a legal adviser.

Don't be one of those who calls around asking: "How much do you charge?" You'll get a low, low price and nobody there to provide you with a key component of the service: counseling. It's not for nothing that attorneys are also referred to as "counsel."

Don't get short-changed. The attorney and staff, while sometimes not immediately available, should eventually be able to answer your questions -- before you have to go elsewhere.

Call our law firm if we can help you.

When NOT to File for Bankruptcy: A Case Study

Mon, 05 Mar 2012 19:23:36 -0500

Bankruptcy is a very effective tool to deal with financial problems. There are times, however, when it just does NOT make sense. The following facts are from a consultation where I advised AGAINST a filing.

The gentleman had a condominium which had become a financial burden. Like a lot of property purchased shortly before the financial crisis, this one had depreciated significantly. It was a small, 840 square foot condo purchased for about $300,000 in 2006. Upon listing with a realtor, the best offer he could draw $185,000, but the lender would not approve the short sale. He had two mortgages. The payment on the first was about $1,400/month, and the second was about $400/month. The monthly condo fee was $275/month. With rent coming in at $1,500/month, he had to put in $575 a month from his own pocket to carry it. He had recently been pre-approved for a loan to purchase a larger $400,000 for his wife and new baby. He complained he could not afford to keep on paying the condo.

Given his income of $82,000 a year and wife's $51,000 a year, if they declared bankruptcy, they would likely not qualify for a simple Chapter 7 and would have to pay all disposable income into the court for the next five years. Furthermore, the wife had $16,000 in a money market fund, so the minimum contribution over time would have to be a minimum of $11,000. (Since the couple lived in Virginia, that state's $5,000 homestead exemption would apply.)

I advised him that bankruptcy should be only a last resort. Instead, there are other options that should be explored first. The $16,000 cash (and possibly additional funds from a hardship distribution from the $60,000 they had in a 401K) could be dangled in front of the second mortgage lender to try to obtain a lump sum payment in return for a release of the second mortgage. The second mortgage was, for all practical purposes unsecured, so that if the property went to foreclosure, the second would end up with nothing anyway. Some money would be better than none, to this lender.

Once the second mortgage was gone, the net negative income would drop to about $175/month, which could be manageable with some belt-tightening of his household expenses. Furthermore, the net debt against the property would drop to about $232,000 (the amount of the first mortgage). With a present value of $185,500, the property could recover to positive range in a few years.

The situation would not be entirely cost-free, but the trade-off -- in this case -- to a bankruptcy filing, in my opinion, was worth it.

It's the policy of this office to be absolutely honest, even when we lose business. We win by knowing we do the right thing for our clients or prospects.

Nevertheless, in the end, it's the client's decision, and we respect that. Call our law firm, if you want to discuss your situation.

Bankruptcy? It May Even Help Your Security Clearance.

Sat, 04 Feb 2012 13:05:56 -0500

Practicing bankruptcy law in the greater Washington, DC area, we often get this question from nervous government employees and defense contractors: "If I file bankruptcy, will I lose my security clearance?"

The answer is: It's not the bankruptcy itself that is the problem. It's the underlying circumstances leading to the bankruptcy that is the determining factor.

Think about it. If you got a very serious illness and racked up a million dollars in medical bills you could not pay, and needed bankruptcy relief to stop the collection calls, lawsuits and garnishments, does the bankruptcy -- in any way -- reflect upon you personally as a security risk? Was the illness your fault? Is it evidence of a personality defect that would make it more likely you would breach security? I think you know the answer.

Where the circumstances leading to the bankruptcy were financial irresponsibility, then that's another matter. But then, the late charges, delinquencies, high credit balances, judgments, tax liens, etc. would already exist on your credit report. If anything, the bankruptcy would actually show you acting responsibility by exercising your legal right to "wipe the slate clean" and get the "fresh start" the law allows.

The US Air Force Academy's website discusses this issue and provides some interesting guidance: (The highlighted text is mine.)

Will Bankruptcy Affect My Security Clearance?

The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don't file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command.

Call us and make an appointment. We'll analyze your situation, and discuss all options to address your problem in person.

Three Big New Year Resolutions for Small Businesses and the Self-Employed

Thu, 29 Dec 2011 09:11:51 -0500

Tis the time for resolutions. As an attorney specializing in the financial woes of small businesses and the self-employed in DC, VA and MD and drawing from my 22 years of experience, here are three tips to consider as you draw up your list for 2012:

1) Keep books. It's that simple. So many of the financial problems of small business could be solved simply by keeping regular books, including:

Cash flow problems. This is almost certainly the leading factor causing a bankruptcy filing. Often, the business will actually be profitable or have positive net value, but because the managers have not managed the finances to maintain liquidity, they cannot pay bills on a current basis. This, in turn, leads to the debt enforcement actions that force the business to seek bankruptcy court protection so that it can reorganize its finances. It might have been avoided if the managers kept regular books and knew where they stood in terms of cash, account receivables and payables.

Tax problems. Without keeping books, business may rely solely on what is in the bank account as a gauge of how they're doing. Unfortunately, the balance in the account does not take into account non-cash accruals that have built up during the year, the most critical being taxes. At year end, they don't have cash enough to pay the tax bill.

Getting loans or selling your business. Persons evaluating the business as purchasers or lenders will not give you financing or top dollar unless there are regular books showing the business' performance over time or its ability to service the debt. (By the way, as a business owner you need to look at your business as a asset for eventually sale and not merely as a job provide you solely with income.)

2) Watch how you pay the people who work for you. Again, this is near the top of the list of small business problems seen by our DC-based tax and bankruptcy law firm. Know how the tax law distinguishes "independent contractors" from "employees," and how that law requires the business owner to withhold taxes and contribute to Social Security and Medicate for the latter, or face personal fines -- basically equal to that amount -- for NOT doing so. It's not fun.

3) Get help from professional accountants and business lawyers. No one wants to pay for advice at the front end, but when the problems hit, the cost can be much, much more. It's a cliche, but true: An ounce of prevention is worth a pound of cure.

The Tax Man Cometh: IRS and MD, VA, DC State Tax Agents Increasing Exams and Collections

Thu, 07 Jul 2011 13:35:29 -0500

The evidence is coming in, and it makes absolutely perfect sense: The federal and state governments are ramping up tax examinations and collections to bring in more money.

Just this morning in our tax and bankruptcy law firm: Five new cases, not including the other tax cases on my desk. I sensed this was coming. It's a no-brainer for a policy-maker: Why raise taxes and antagonize the citizenry, when you can just enforce more aggressively what's already on the books?

The difference between what is collected on time and what is legally owed to the government is known as the "tax gap." IRS has examined the problem and published its a study.

IRS estimates that, for the 2001 year studied, the federal government was losing about 15 to 16.6 percent of the dollars owed to it. (Since most states mimic the federal tax scheme, the state loss in Maryland, Virginia and the District of Columbia would be comparable.)

As a dollar figure, it amounts to between $312 billion and $352 billion. Collecting that is not chump change and would have a significant impact on public financing. Hence the collection initiative.

According to the study, there are three components making up the "tax gap":
1) Failure to file tax returns.
2) Underreporting of actual income on tax returns.
3) Underpayment of the tax stated on the tax return.

Underreporting occurs when the taxpayer files a return but omits reporting some income and/or overstates or takes deductions or credits to which they are not entitled, whether purposely or out of ignorance.

Underpayment occurs when the tax return is filed reporting the correct tax amount, but the taxpayer does not, or cannot, make full payment when due.

Many of the tax problems we see in this office can be traced to incompetent or downright criminal tax preparers. However, when the taxpayer is caught by the IRS or state tax agents the tax preparer will be of interest to them, but the tax preparer's conduct generally is not a defense for the taxpayer to the tax liability.

My advice: Avoid a tax preparer without demonstrated licensing, education, and experience. Some questions to ask:

What are your credentials? Generally, you can trust tax preparation by a CPA, tax attorney, or a preparer with a large, national company that has been in business for a long time.

Of what tax organizations are you a member? Membership in an organization indicates they are serious about what they do, want to keep up with developments in the field, and are not afraid to be in the company of peers.

What education do you have? Look for a bachelors degree in accounting, finance, or business administration.

Do you have a license? Attorneys need to be licensed in the state in which they practice or offer services, and CPAs have to pass a rigorous exam. Unfortunately, generally you do not have to be licensed to offer tax preparation services. (Although the IRS is considering licensing.) At a minimum, ask to see a business license, which is required in most jurisdictions. This will indicate the preparer is not afraid to make himself or herself known to the local government and meet some basic qualifications.

What the most current tax scams we are seeing perpetrated by fly-by-night tax preparers:

Taking TWO head of household deductions by having the couple do two tax returns claiming they live in separate residences. Often they use a relative's address.

Qualifying for the earned income credit or taking more exemptions by claiming children who do NOT reside with the taxpayer.

It's up to you to be informed. Be careful and seek out competent counsel.

Credit Card Lawsuits: You May Be Able to Fight and Win

Mon, 27 Jun 2011 19:32:10 -0500

Sometimes it is worthwhile to put up a fight when you're being sued on a credit card or mortgage loan deficiency. The truth is, many times, the lender does not have the evidence available to prove the case, or does not have the means to get the proof admitted into evidence -- a crucial step to win a judgment for the debt against the borrower.

J.P. Morgan Chase & Co. tacitly admitted this recently when it voluntarily dismissed more than a thousand of its credit card lawsuits across the country. The company won't admit WHY it took this step which was reported in last week's Wall Street Journal.

It has been coming to light in the courts, however, that, just like the "robo-signers" that surfaced with the foreclosure mess, credit card lawsuit affidavits of the debt allegedly owed have been signed by employees who are not personally-familiar with the company records and have not verified the debt.

Rather than risk public disclosure and embarrassment, speculation is that the company decided to withdraw the cases until the documentation could be fixed.

For the poor soul facing a lawsuit, it is important to know that the collection "model" used by the credit card companies is based largely on the fact that very few debtors respond to the suit. In fact, about 94% of suits end up in "default judgments" because there is no response by the defendant.

To defend, you may have to have some knowledge of the law. This attorney frequently sees unrepresented debtors showing up in court and responding in this typical fashion to the judge's query as to whether they owe the debt: "I cannot afford to pay." By responding this way, the debtor has implicitly admitted the debt is owed, hence, the judge will issue judgment, and not being able to pay is not a valid legal defense to establishing the liability.

The debtor will have to, in good faith, contest the liability and ask for trial. Some understanding of the rules of evidence and "discovery" are helpful to know what proof the lender will have bring forward, how the debtor can ask for it, and what the lender's attorney will need to establish to get it admitted into the record.

It's not foolproof, but sometimes worthwhile, particularly when the debtor cannot simply declare bankruptcy, maybe because he has property which cannot be protected and which he would lose, or other personal reasons.

This law office specializing in financial matters in DC, VA and MD has successfully defended creditor lawsuits and settled others. One current case involves a suit for $185,000 for a second mortgage that was left over from a foreclosure on the client's home. Today, we got a letter from the lender who has brought his settlement offer down to $30,000 -- not a bad discount.

It doesn't hurt to investigate all the options. Don't be in the 94% who just let the lender get a judgment against them without a fight.

How to Get Back A Repossessed Car, Lower the Interest Rate and Maybe Pay Only What It's Worth

Thu, 19 May 2011 12:40:56 -0500

It's a little known, but extremely valuable, technique employed by experienced bankruptcy lawyers: Using the "automatic stay" feature of bankruptcy to get a repossessed car back into the hands of its owner.

Our DC-based bankruptcy law firm used it the other day to get a car back for a young man in Northern Virginia who needed his car to get around and commute to his job.

When a car is repossessed, physically it comes under the control of the lender. However, legal title does not pass, and remains with the owner, until a legally-valid auction has been conducted and title then conveyed to the winning bidder, which oftentimes is the lender.

Until that auction takes place, which also must be conducted according to procedures stated in the contract and/or state law (and which usually includes notice of the auction date, time, and location to the owner), legally the car still belongs to the individual.

If a bankruptcy is filed by the owner, the "automatic stay" (a court order requiring debtors to stop enforcement action) comes into existence halting the auction. Our firm's practice is to immediately fax confirmation of the bankruptcy filing to the lender, and then make arrangements for the owner to pick up the car.

To keep the car, the owner must become current on the loan by paying all arrears, late fees and costs of repossession, and also make the regular payment going forward. The owner has to bring the loan current and re-start payments shortly after filing in Chapter 7, or the lender will ask the court for permission to "lift the stay" and proceed once again with the repo. Otherwise, if the owner has the money, or can raise it quickly, he can exercise redemption rights in Chapter 7 and fully pay off the car at its current value in a lump sum payment.

Chapter 13 bankruptcy offers additional options, such as paying the arrears and costs, through a plan of 36 to 60 months. And an even more powerful right exists in Chapter 13 to re-set high interest rates to a little more than prime, and/or pay only what the car is worth through the plan (if the owner has owned the car for more than two and half years, or the vehicle is used in his business) in what's known as a "cram down."

Automobile lenders are getting more aggressive and creative. Recently one of our clients had her car repossessed on a Sunday from a supermarket parking lot when she went out briefly for groceries. Obviously the lender staked out her home waiting for an opportunity.

It can happen, but remember that it's not the end of the story. There are still ways to fix it.

The Non-Filer's Dilemma: Should I File My Taxes?

Mon, 11 Apr 2011 14:27:20 -0500

Undoubtedly, as tax day approaches, there are people right now who are struggling with the question: "I haven't filed in [fill in the blank]____ years. Should I file this year?" As a tax and bankruptcy lawyer serving individuals and businesses in Maryland, Virginia and DC, this law firm is very familiar with this taxpayer's quandary.

On the whole, it's better to file -- even if you can't pay -- for a number of reasons:

• IRS, and the state tax authority, make a distinction when it comes to charging you with civil tax infractions. There are a separate set of penalties added to your tax bill for "failure to file" and "failure to pay." Go ahead and file, at least. You'll save yourself some money in penalties.
• If you can't pay the tax bill all at once, you can always ask for an installment agreement to pay over time. For tax debts of $25,000 or less in combined tax, penalties, and interest, you are virtually guaranteed an installment plan and at a monthly payment you propose and can afford. Note that you will still be accruing interest and penalties so that the tax debt grows at about a 25% rate. You will need to make a large payment to actually pay down the tax bill. Don't end up like a lot of the taxpayers who come into our office and lament: "We've been paying IRS for several years now, and it's not going down!" Otherwise, at most, you are buying time.
• If you can't pay at all, you can always ask to be placed in "uncollectible status." However, if successful, that only forestalls the day of reckoning. Eventually, it's hoped, you will be earning more, and when that happens the taxman will see it from W-2s sent to the agency, and he will come a-knocking for what's owed.
• Three years from now, if you're still in a financial fix, you can completely discharge the tax debt in a bankruptcy. One of the key requirements to discharge a tax debt is that you must have filed a tax return for that tax year more than TWO years before the bankruptcy filing. The two-year rule for tax returns causes a serious problem for serial non-filers. We often see taxpayers who have not filed for many years who now want to resolve the back tax problem. We can help them to freeze the last three years of taxes from growing and pay them off in a Chapter 13 bankruptcy, but there is no discharge, unfortunately, for the other years. There are solutions, but it's much more complicated, expensive and uncertain.

There's a saying you've surely heard before, but it is very, very true: Nothing's as certain as death and taxes. If you have a social security number, IRS knows where you work, have bank accounts or maintain investments. Eventually, IRS will prepare a taxreturn for you, but with minimal, if any, deductions such that your tax bill will be much larger than if you prepared it yourself. Also, before IRS or the bankruptcy court considers tax relief in your case, you will have to get all the missing tax returns prepared and filed. So, why wait? Just get it done.

Mortgage Loan Modification Update: State Attorney Generals and Federal Government Press Banks For Reforms

Thu, 24 Mar 2011 11:14:16 -0500

Homeowners in DC, VA and MD seeking loan modifications to save the family home may see improvements in the currently messy process if a group of state attorney generals and federal officials are successful in on-going settlement talks with major US banks.

"What we're really trying to do is change a dysfunctional system," Iowa Attorney General Tom Miller, the point man for a 50-state effort, told the Washington Post in a March news article. "We really want to try and change all that."

Homeowners who have asked mortgage lenders (or more specifically, the mortgage servicing department of banks who administer the loans on behalf of bond investors) know very well the many and outrageous modification abuses including:

Losing homeowner's modification applications and causing them to have to submit the documents numerous times, or giving up altogether.
Leaving homeowners in the dark for months or years as to the status of the applications.
"Dual tracking" homeowners so that while the modification is pending the loan is also put on track for a foreclosure catching the homeowner unaware as he or she is awaiting a decision.
Rejections of the modification application without a statement of the reason(s).
Fraudulent statements from mortgage servicers misstating the amount owed by employees who swear to, but have not actually checked, the lender's records.
Employees at the mortgage servicing departments telling homeowners to make a reduced payment pending the modification, then holding the homeowner in default for thousands of dollars later when the modification is denied. It's either pay up all at once or go to foreclosure.

Many of the mortgage modification abuses have been written about in this blog based on the experiences of the clients of our bankruptcy law firm.

The government's initial 27-page proposal provides for some important reforms:

A time-line for decisions.
Guidelines for determinations, and possibly mortgage principal reductions.
A web-based portal for homeowners to track the application in real time.
A ban on "dual tracking."

Most importantly, the proposal provides for penalties for the mortgage servicers. For this writer, that would be the single most important reform. At present, lenders operate with impunity. There is no law that clearly holds mortgage servicers accountable. Penalties would put teeth into the reforms and, it's hoped, put an end to the abuses.

Lost A Property in Foreclosure or Short Sale and Now You Owe Taxes?: What To Do About Form 1099-C

Sun, 20 Mar 2011 17:00:52 -0500

It feels like another kick in the teeth: You lose a home or rental property in a foreclosure or short sale, get a Form 1099-C from the mortgage company, and now you have to pay income taxes on it, too? Like a lot of things in the law, it depends.

It's a curious, but absolutely-settled principle of tax law, that a debt that is forgiven by a lender becomes taxable income to the borrower. Basically the accounting works like this: When you took out the loan it's not considered income because you have an obligation to pay it back. When, however, that obligation is removed, you become richer by the amount of debt that you will not have to pay, and the tax law says that must be recognized and you must pay income taxes on it.

Unfair, you may say, but it's the law. In late 2007, federal lawmakers decided to give SOME relief to taxpayers losing personal residences and changed the law so that the resulting income could be excluded from income tax, if the forgiveness (also known as "cancellation in indebtedness" and
"cancellation of debt" ("COD") income) meets key requirements:

The mortgage debt was for a principal residence (that is, the property was the taxpayer's "home" under the law) and,
The mortgage debt was the original loan used to purchase the home, or, if the loan was a refinance of the original loan, the proceeds from the refinance were used to make improvements to that property.

Note that the author of this blog emphasizes the term "some" because there is a lot of misinformation out there, probably propagated by commission-hungry, short-sale realtors, that there is a blanket exclusion from COD income for all primary residence mortgage debt forgiven in short sales (or foreclosures, which, for the tax law, are functionally the same).

Nope, doesn't work that way. If the loan was a refinance or second mortgage where part of the proceeds was used to pay off car loans, credit cards, take vacations, etc., those proceeds will NOT qualify for income tax exclusion under the tax law.

Your tax preparer will need to fill out Form 982 and see if the COD income reported to IRS on the Form 1099-C can be excluded under the exceptions available. Our DC-based tax and bankruptcy law firm has prepared an guide to the tax effects of foreclosures and short sales explaining the issue.

One of the most important exceptions is the "insolvency" exclusion. You can exclude the COD income from taxable income to the extent your net worth calculation shows you are insolvent.

If you use that exclusion, it's a good idea to keep the documents you use to calculate your net worth. Generally, the government has three years to audit your tax return. Values of assets and debt balances can change significantly in the interim and determining them years later will be impossible.

Remember, finally, that a discharge in bankruptcy avoids the tax issue entirely. So, if you're not sure the lender will forgive the debt after the foreclosure, or if you know the debt will be forgiven but are unsure or worry about the tax consequences, you may want to consider that option.

Bank of America Modification/Foreclosure Scam Gets It Sued in Arizona. Same Abuses Happening in MD, VA and DC.

Mon, 20 Dec 2010 18:25:39 -0500

Last Friday, the attorney generals of Arizona and Nevada filed suit against Bank of America alleging state consumer fraud violations for a practice that's come to be known as "dual tracking" -- bank employees are telling homeowners seeking modifications to make a reduced payment while the "modification is pending."

All the while, the lender is still holding the homeowner in breach of the contract and taking payments until such time as it decides to go ahead and foreclosure. It's a slimy tactic. If the homeowner knew they were getting nothing for the deal it would have been better to save the money and short sell or surrender the property in bankruptcy.

This bankruptcy law firm has seen a number of similar cases during the past year with homeowners in Maryland, Virginia and DC. We have written about this abuse against homeowners in another posting on this blog.

Most states, including Maryland, Virginia and DC, have similar consumers laws addressing "unfair and deceptive acts and practices."

Good for you Arizona and Nevada. May this suit go places.

Small Businesses and the Self-Employed: Five Tips to Avoid An IRS Tax Audit

Thu, 16 Dec 2010 18:48:55 -0500

The Internal Revenue Service reported this week that IRS audits are up 11% for this year. Frankly, it's not real surprising.

It's during hard times that taxpayers feel the pinch and are more likely to cut corners and try to pay a little less into the public fisc. Likewise, as tax revenue goes down, the government will look for more income by increasing audits, publicizing that fact, and thereby scare more taxpayers into compliance.

This tax law firm expects to have more than the usual number of cases in the near future as more unlucky taxpayers get caught in the taxman's web.

Here are tips to avoid an audit, especially for the self-employed and business owners, who tend to be favorite enforcement targets for IRS:

Be scrupulously honest. Report all income, even when you don't get a 1099 or W-2. Deposit all cash, religiously, into the business account. Don't take cash, bypass depositing it into an account, and use it to pay expenses. If the agent sees a lot of this, it'll make the case easier for unreported income. Remember: The burden of proof is on the taxpayer. Ignorance and sloppiness are not an adequate defense. Regarding deductions, don't try to reach. Always ask yourself: Is this a defensible position? Am I clearly entitled to the deduction? Here's an expression one hears often: "Pigs get fat, hogs get slaughtered." I'm told it was first uttered by a judge -- in a tax case.
Speaking of deductions, beware of "constructive dividends." This is a favorite of the IRS. Small business owners often use the corporate account to pay for personal goods or services, such a car used for the personal errands of the owner, non-business meals, vacations, home improvements, and so on. IRS and the state tax agents know it, and look for it. If it's personal, report it in your personal income tax return or reimburse the company and make sure to give it only the correct tax treatment as compensation, or dividend, in consultation with your accountant. This is often one of the charges in a tax criminal case.
Use a reputable tax preparer. Tax is very complicated. Furthermore, the law changes every year. The person preparing your return should have credentials (education and experience). Mistakes, including math errors, in one part of the tax return increase the odds that the whole return will be audited. Don't pick someone because they promise to get you the biggest refund or the lowest tax bill. That's a red flag signaling a fraudster. You don't want to be questioned by the IRS when they investigate this scammer's entire client list.
Keep good records. Of course this is something you should have done throughout the year, but you can still heed this advice for the coming year. Keep your receipts, especially for expenses you deduct. You will be asked for them on audit. Remember: To deduct actual mileage you must keep a "contemporaneous" log, i.e. at the time of the trip, not a reconstruction weeks afterward. Likewise, you want to have invoices for an payments you make. (Otherwise, on audit, how do you prove the deduction you took for office supplies wasn't just money you pocketed? Bring the paid bills from Staples.) Meticulously deposit all your income into an account and pay your bills out of that account or designated credit cards. If you're self-employed, or have a side-line business in addition to your employment, DO NOT commingle income and expenses of your business with your personal. Keep and use separate accounts, ATM cards, and credit cards for your personal transactions and your business transactions. One of the biggest problems we face as tax practitioners working with small businesses is the lack of good record-keeping. Just keeping "books" makes such a difference for business planning and profits, as well as defending an IRS audit
Keep regular books if you have a business. It's good business practice, too, to keep books during the year. Many of our clients get into tax trouble because they didn't pay estimated taxes during the year and so don't have the cash (or available credit) to pay when they file the tax return for the year. Had they paid estimated taxes during the year, this would have been avoided. From a business point of view, they would also had a better idea of profitability had they taken into account tax "accrual" expenses building up during the year. So many contractors under-bid because they don't take taxes into account, and end up subsidizing the buyer with the tax liability they will later face!

Good luck, but if you end up getting snagged, for individuals or businesses with tax problems in Maryland, Virginia and DC, we're happy to talk to you about ways you can minimize or eliminate tax problems and get back on track.