What Is the Mortgage Forgiveness Debt Relief Act?
The Mortgage Forgiveness Debt Relief Act was enacted in 2007 at the start of the housing crisis that devastated our nation's economy. The purpose of the act was to exclude from taxable income any money that was "forgiven" in a short-sale, foreclosure or loan modification plan.
]]> Many do not realize that ordinarily, any debt that is forgiven is treated as income by the IRS. This includes whatever money is forgiven in a principal reduction plan such as a loan modification or a short-sale. For example, if a home was purchased in full with a $250,000 mortgage and it is subsequently sold at a short-sale for $150,000, the portion of debt that is treated as income is $100,000.The hard part about the forgiven debt is that it is taxed as ordinary income. The MFDRA excluded that money from the income calculation, saving distressed homeowners thousands in tax liability.
Each year Congress has extended the MFDRA, allowing many homeowners a needed break in the face of home values that have plummeted over the past five years. This year, it seems that Congress is not interested in extending the act, despite the fact that the federal mortgage settlement and Obama initiatives favoring debt reduction have made loan modifications and short-sales easier than ever.
How Will the Expiring Law Affect Homeowners?
This puts homeowners in a very tight place. Bruce Judson, Entrepreneur-in-Residence at the Yale Entrepreneurial Institute told the Huffington Post he believes that we will see an effective stop in loan modifications and short-sales because people will not be able to afford the taxes that will be due as a result of their principal reduction. As a result, the creeping housing market will once again stop moving, causing a related negative effect on the nation's economy.
The best bet for homeowners looking to stop foreclosures on their home may be to investigate Chapter 13 bankruptcy. Not only can Chapter 13 bankruptcy be used to pay off delinquent mortgage balances over a period of time, but for those who qualify, it can also be used for stripping off a second mortgage on your home.
Bankruptcy offers many other benefits as well. The best benefit is that any debt that is discharged through bankruptcy is not subject to tax from the IRS. This includes forgiven credit card debt as well as any principal forgiven on a home.
Source: www.huffingtonpost.com, "Let's Risk Destroying the Housing Market and Any Economic Recovery!" Bruce Judson, 4 May 2012
]]>Those waiting were anxious to know how the state would use the $20 million it would receive as part of the settlement. Last week, Illinois Attorney General Lisa Madigan revealed her plan for the state's share.
]]> Illinois will use the money to fund statewide relief programs. In a press release, Madigan said, "We need to give homeowners a fighting chance to save their homes from foreclosure."The relief will include:
While the package sounds good, there are a few problems. The goal of the settlement is to prevent foreclosures, but there is reason to worry that many people may still not be able to benefit from it.
The problem with the settlement package is that it will not be able to help people whose mortgages were backed by Freddie Mac or Fannie Mae. That includes a significant number of Chicagoans.
People who won't be covered by the settlement may find relief in other ways. People who want to stop a home foreclosure may find debt relief by stripping off a second mortgage in a Chapter 13 bankruptcy. Other alternatives include negotiating a loan modification or arranging a short sale.
Chicago already boasts one of the largest foreclosure rates of any major metropolitan area in the country. Currently one in every 302 houses is either facing foreclosure or threatened with foreclosure.
www.chicagonow.com, "Strugglsing IL Homeowners, Renters Get $20 Million Piece of Big Mortgage Settlement Pie," Nick Moroni, 19 April 2012
]]>In total, 13,750 homes received a foreclosure notification in January. Illinois was one of only four states to see the numbers of foreclosure filings rise from last year. According to RealtyTrac Chicagoans should expect numbers like this to continue. This may leave many people wondering about their options for stopping home foreclosure in Illinois.
]]> People who want to stay in their homes but are short on funds to pay mortgage arrears typically take one of two options. Either they try to arrange a loan modification with their bank or they look into bankruptcy.Although both Chapter 7 and Chapter 13 bankruptcies will stop a foreclosure action temporarily, most people who are trying to save their homes through bankruptcy will pursue a Chapter 13 bankruptcy. People often choose Chapter 13 bankruptcy because it offers several advantages, such as stripping off a second mortgage, freeing up needed cash for overlooked expenses.
The appropriate solution will be different for everyone. Before making a decision, it is important to understand the pros and cons of loan modification and bankruptcy. People looking for straight talk often benefit from speaking with an experienced Chicago bankruptcy attorney who has also had success negotiating loan modifications.
Source: www.suntimes.com, "Foreclosures in Chicago Area Rise in January," Francine Knowles, 16 February 2012
]]>The temptation is great for many to avoid filing their taxes altogether. For those who do, it is easy to let one year slide into another and before realizing it, people may not have filed their taxes for several years. There are several reasons why people should not let this cycle continue and why it is important to file your taxes as soon as possible.
]]> It's the LawThe first reason to file your tax returns is that it's the law. You are required to file tax returns.
Even if you owe taxes, it is better to file your taxes than avoid them because the IRS has the ability to fine you for failing to file your taxes in addition to assessing fines for failing to pay the tax you owe. These additional fines can substantially impact the amount of money you owe.
Failure to File Limits Bankruptcy Options
There are statutes of limitation governing the collection of taxes by the IRS. The IRS has three years from when taxes are due to assess taxes and penalties for the tax year in question and 10 years to collect on those taxes. But people cannot rely on that as a reason to avoid filing their tax returns. The clock will not start running on the statutes of limitations until a tax return has been filed.
Perhaps more important are the implications for people considering bankruptcy. In order for personal income taxes to be dischargeable in bankruptcy, they must meet the following requirements:
If this sounds confusing, it can be. A Chicago IRS tax debt lawyer can review your tax situation and discuss your options with you.
Substitute Tax Returns Do Not Substitute for Filing Your Own
Sometimes the IRS will prepare a substitute tax return for an individual when they believe that person has had income for the year. There are two disadvantages to these substitute returns. Not only is the substitute tax return insufficient to start the statute of limitations on collections, but the IRS will also calculate the taxes owed without considering anything that might reduce tax liability such as tax deductions.
Source: www.forbes.com, "File Those Tax Returns," Stephen J. Dunn, 4 January 2012
]]>When you are struggling to make ends meet and juggling bills to make everything work, repossession of a vehicle is the last thing you need. Yet if you are like many households in and around Chicago, repossession of your car may be just around the corner.
For many, the very threat of repossession is frightening enough for them to look for other alternatives to manage their debt. If this is you, bankruptcy could be your best option.
]]> Whether pursuing a Chapter 13 or Chapter 7 bankruptcy, if you have been threatened with repossession, bankruptcy will offer a number of solutions. As soon as your bankruptcy has been filed, the automatic stay requires creditors to stop all collection activities, including repossession. Chicago car repossession attorneys will work to help you find a way to get back on top of your auto payments.What If My Car Has Already Been Repossessed?
Most auto loans use cars as collateral for the loan. If you fail to make your payment your car, the lender may threaten to repossess the vehicle. Exactly when the car may be repossessed is up to the lender. The auto loan contract governs the length of time you must be in default before your car can be repossessed.
But what if your car has already been taken? What you may not know is that bankruptcy can also be used to get your car back from repossession. In Illinois, you have 21 days from the day your car has been repossessed before the lender can sell your car. If you file a Chapter 13 bankruptcy in this time, you can use the bankruptcy to get caught up on your payments while keeping your car.
Source: www.ftc.gov, "Vehicle Repossession: Understanding the Rules of the Road,"
]]>However, in the aftermath of the recession, bankruptcy attorneys are observing a drastic change in public opinion. Whereas bankruptcy was once viewed - some would say unjustifiably - as the result of an individual's own financial irresponsibility, it is now being seen as the product of creditors' unfair practices.
Increasingly, bankruptcy filers are the victims of economic circumstance. They haven't behaved irresponsibly, they have simply fallen prey to the turbulent economic times - they lost jobs, got sick or had problematic mortgages and couldn't keep up with the bills. When lenders unexpectedly raised interest rates or refused to consider loan modifications, borrowers were left with no choice but to declare bankruptcy.
]]> Bankruptcy attorneys also report that new clients are showing up in their offices armed with information and ready to file. Since there's less stigma attached to bankruptcy, the lawyers surmise that potential filers are much more willing to discuss their financial troubles with friends and family.However, this change in public opinion doesn't necessarily mean that bankruptcy numbers are rising. Although bankruptcy filings skyrocketed at the beginning of the recession, as of September, 2011 they were down 17 percent from the year before.
Bankruptcies are Hard, but Necessary
The mere fact that the stigma surrounding bankruptcy is fading doesn't mean that filing isn't a hard thing to do. No one comes to the decision to pursue bankruptcy easily. However, once people begin to dispel the myths about bankruptcy, they frequently realize that the benefits of bankruptcy outweigh the repercussions of filing.
Source: The Washington Times, "Bankruptcy and Divorce no Longer Scarlet Letters," Myra Fleischer, Oct. 12, 2011.
]]>Families forced to make hard choices between essentials such as food or lights are often tempted to resort to online payday loans to tide them over until they can find a way to catch up. Here are some reasons why people may want to explore other options before turning to an online payday lender. There may be little relief once all is said and done.
Payday loans are supposed to operate as short term loans, with the full balance of the loan being paid on the borrower's next payday. But borrowers must beware. Read the fine print. Many lenders have renewal provisions in their contracts that allow them to automatically renew the loan, so instead of taking the full balance owed, they collect only a portion of it leaving the balance to explode at crushing interest rates.
]]> Insane Interest RatesPayday loans prey on the vulnerable, offering loans at high interest rates to cover the risk involved. The problem with these interest rates is that they make it virtually impossible to catch up. Interest rates may reach as high as 572 percent in some states, placing the borrower behind before they ever receive the money.
According to the Consumer Federation of America, Illinois has capped the interest rate for payday loans at 404 percent except in situations where the loan will exceed 120 days. Longer term loans have no interest rate cap.
Outside the Law
Although many states outlaw payday lending, many online lenders are able to get around state provisions because they are owned by Indian tribes and are exempt from state oversight under the cloak of tribal-nation sovereignty. CBS News reports that approximately 30 percent of all payday lenders are owned by Indian tribes.
Most borrowers are never able to repay these loans. Frustrated borrowers may find themselves forced to close their bank accounts to avoid having money drawn from their strapped accounts. Even with a closed bank account, they may face harassment for months.
Before taking out an online payday loan, borrowers should explore other options for a financial fresh start. The price for a payday loan ultimately isn't worth it.
Source: www.cbs.com, "How Payday Lenders Pull Off Crippling Rates," Armen Keteyian 26 September 2011
]]>The Fair Debt Collection Practices Act (FDCPA) is a federal law that lays out guidelines for any debt collectors attempting to collect on a debt. It was originally created to curb the swell of abuse from debt collectors and providing a means for consumers to challenge debts and report violations. The law also sets out penalties for debt collectors who violate it.
]]> Prohibited Collections ConductThe FDCPA outlaws a number of behaviors from collectors. Some of the most important limits are as follows:
Although the Federal Trade Commission (FTC) and the newly created Consumer Financial Protection Bureau have the authority to enforce the FDCPA, debtors typically hire a Fair Debt Collection Practices Act lawyer to initiate a lawsuit against the collector for violations. According to a 2011 FTC report, in 2010 there was a 15 percent increase in debt collection complaints over the previous year.
Permitted Collector Conduct and What You Can Do About It
Generally, collectors are permitted to contact the debtor by telephone, fax, mail, telegram or in person between the hours of 8 a.m. and 9 p.m. When they do so, they must identify themselves as a debt collector, tell the debtor who they are collecting for and let them know the call is an attempt to collect a debt.
There are a few things that the debtor can do to stop collector calls. This may not prevent a lawsuit, but should provide him or her with a brief respite. The debtor can send a written letters to the collection agency advising them of the following:
Ultimately, these letters will only hold off debt collectors temporarily and they will not prevent a creditor from filing a lawsuit to obtain a judgment. Also, it is important to note that the FDCPA applies only to debt collectors and does not apply to the original creditors themselves.
Individuals saddled with debt who have become afraid to answer their telephones should take action before their creditors do and ought to explore filing for bankruptcy for a fresh start and long term relief.
Sources: www.findlaw.com, "The Fair Debt Collection Practices Act" and
www.ftc.gov, "FTC Submits 2011 Fair Debt Collection Practices Report to Congress," 21 March 2011
]]>The burst of the real estate bubble devastated the financial futures of many families who had purchased investment properties hoping to take advantage of increased cash flows and supplement retirement portfolios. Many families borrowed against their homes, cashed in stock portfolios and borrowed from their retirement plans to take advantage of the unprecedented rise in real estate values.
]]> Those who still own investment properties are underwater on their mortgages, owing more than the properties are worth. A Chicago bankruptcy attorney may have a solution for these investors with a Chapter 13 bankruptcy.The bankruptcy laws allow investors to "cram down" the mortgages on their investment properties to their fair market values. To take advantage of the cram down provision, investors must be able to pay the full fair market values of their properties within five years through their Chapter 13 plans.
The cram down works by dividing the mortgage into two parts, a secured portion and an unsecured portion. The secured portion is equivalent to the fair market value of the property. This is what is paid during the plan. The rest of the mortgage is unsecured and gets disposed of with the other unsecured debts, such as credit cards, which are paid with any remaining money left over after the secured debts are paid.
Clearly, this may not be an option for everyone with underwater investments. However for those with incomes to support these plans, they are an excellent way to get out from under and re-establish their financial futures.
]]>The Case-Shiller home price index, compiled by Standard and Poor's, tracks the value of real estate in areas across the country by collecting data each month on sales of single-family houses. The S&P/Case-Shiller index reports home values down 32 percent from their peak in 2006. According to David Blitzer, spokesman for S&P, the trend is expected to continue.
The downward spiral of home prices came in two stages. After the spring 2006 high point, a period of three years of uninterrupted declines was recorded. Then, a 13-month increase with a 5 percent gain gave the market a false sense of hope until the rebound ended in June. Losses have been recorded every month since then and the market is edging toward a new low, being referred to as a double-dip.
]]> Declining home prices, unfortunately, lead to more foreclosures. Price drops mean houses may be worth substantially less than what the homeowners now owe on them, a phenomenon homeowners refer to as an underwater mortgage, which in turn leads to more foreclosures by lenders.Underwater borrowers have no home equity and no source of credit to tap into, should some type of financial disaster strike. This also cuts off refinancing options, because banks won't approve loans for homes without equity.
The hope is that conditions will improve when the economy begins to recover and job growth improves. Some people may not be able to wait that long if they are underwater in their mortgage loan or in danger of losing their house to foreclosure.
If you are unable to make your payments, it is important to consider your options. While the temptation may be to take the phone off the hook and throw the collection letters in the garbage, there may be options available that will help you save your house, like a special forbearance or loan modification.
There also may be opportunities available if you can't afford to keep the house but don't want a foreclosure on your record, such as a short sale or what's known as a deed-in-lieu of foreclosure.
Ultimately, if your house has lost value and you are having trouble making payments and are at risk of a possible foreclosure, you need to evaluate whether you can afford to continue making your payments until the market improves, or if it is time to consider other alternatives. Speaking with an experienced attorney may help you decide which route is the best for you and your circumstances.
Source: http://money.cnn.com/2011/04/26/real_estate/february_case_shiller/index.htm
]]>Keeping you informed about the legal process will help you make better decisions about your own bankruptcy and debt relief needs. This Blog page is intended to serve as a forum for discussing workers' comp case law and relevant court decisions. Periodically, this page will be updated with new information and topics for discussion, so please return often to see the most current post and comments.
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