Florida Bankruptcy Law Blog

Proposed Law Eliminates Tax Penalty From Foreclosure

One of biggest problems for people facing foreclosure of investment property in today’s real estate recession is tax liability for the difference between the mortgage balance and the value of the property at the foreclosure sale or at time of a deed in lieu or short sale. The Wall Street Journal reports that there is a bill in the House of Representatives to eliminate income tax liability for debt forgiveness for homeowners. The bill passed Ways and Means Committee, and according to the paper the bill has bi-partisan political support. The law if passed would remove a significant tax penalty for people facing the loss of real estate during the current market downturn.

Avoiding Tax Liability From Deed In Lieu Or Short Sale

Here’s another idea about dealing with the threat of deficiency judgments and the income tax consequences of a deed in lieu or short sale. At a social gathering over the weekend I had a conversation with Larry Kosto, a well-known creditor collection attorney, about how debtors can avoid income tax liability when a bank forgives debt underlying a mortgage. Larry said some of his creditor clients who are amenable to taking a deed in lieu or a short sale have entered into a written stipulation with the borrower that the value of the property surrendered is equal to the amount of the underlying debt. In such event, the lender is agreeing that it is fully satisfied by taking back the property. There is no deficiency liability. If the lender does not pursue a personal judgment against the borrower the borrower has not benefitted from taxable forgiveness of debt.

If you negotiate with your mortgage lender about voluntary surrender of the property see if they will stipulate that there is no difference in the amount of debt and property value to avoid potential income tax liability from debt forgiveness.

Recovery In Class Action Lawsuit After Bankruptcy Closed

When you file a bankruptcy petition you are supposed to list all claims you have or may have against someone else. It doesn’t matter whether you believe your claim is likely to be successful or that you think you will ever collect any money; if you are aware of a potential, long-shot claim its best to list it. This week a new client told me a story about his bankruptcy that illustrates the importance of listing claims.

The client filed bankruptcy years ago- his case is now closed. Before he filed he filled out a form he received from a class action lawsuit. Many people receive these forms, and very few ever result in any recovery. His bankruptcy attorney suggested he not even list the claim because it had absolutely no value at the time he filed. A few months ago, without any warning, the client receives a letter from the class action attorneys saying that the defendants are interested in settling his claim for hundred of thousands of dollars. The class action attorneys found out he had previously filed bankruptcy after the class action case began. They will not finalized settlement of his claim until he resolves the rights of the bankruptcy trustee to the claim settlement.

If he has listed this class action on his bankruptcy schedules, even for a value of $1.00 or "value unknown", and put the claim under his schedule of exemptions the debtor would have been entitled to now keep the full value of the settlement according the majority of cases I found. However, because he failed to list the class action claim the entire claim is property of his bankruptcy estate after the case is reopened to report an additional asset and a potential recovery for his creditors. The lesson is: list all your potential assets and claims even if you are convinced they are worthless. If your claim appears worthless it is highly unlikely the bankruptcy will assert any rights in the claim and any windfall recovery after bankruptcy is yours to keep.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Suits Under Mortgage Note Rather Than Foreclosure Of Mortgage

More than half of my bankruptcy calls are from people facing foreclosure on their investment property and who fear a deficiency judgment. One person asked me today if it makes a difference whether a bank sues for foreclosure or whether the bank sues on the promissory note underlying the mortgage security. For general information, most lenders sue to foreclose mortgages in default because foreclosure gets the lender the title to the property. After recovering the property, the lender may choose to pursue a judgment for the deficiency between the amount owed and the property value. To get a deficiency judgment the lender has to prove that the property value on sale date was less than the mortgage debt balance.

A lender can also sue the borrower for a default under the promissory note without pursuing a foreclosure and recovery of the property. If payments are past-due most promissory mortgage notes allow the lender to accelerate the note and demand full payment of the note. If the borrower does not pay off the note immediately the lender can proceed for to get a judgment against the borrower for the full amount of the note plus interest and usually attorneys fees. In a declining real estate market some lender may elect not to take back the real estate and sue directly for a judgment against the borrower individually, especially if the lender believes the individual debtor is vulnerable to collection. By suing on the note the lender does not have to prove the value of the property in order to get a judgment against the borrower.

Bankruptcy can discharge individual liability to the lender regardless of whether the lender sues for a deficiency judgment or sues directly for default of the promissory note.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Bankruptcy Code Revision to Fight Foreclosure in the Works? : The Bankruptcy Lawyers Blog

I saw an interesting article about political pressure to liberalize bankruptcy laws to help homeowners facing forclosure. Kevin Chern, a Chicago based bankruptcy attorney and nationally recognized expert in consumer bankruptcy, edits a very good bankruptcy blog on current bankruptcy issues. Kevin states that a U.S. Senator may introduce new legislation to make it easier to save primary residences using Chapter 13 bankruptcy. In my opinion, the press and economic statistics do not accurately portray how bad the real estate market is and how many families are on the brink of losing their homes. Link: Bankruptcy Code Revision to Fight Foreclosure in the Works? : The Bankruptcy Lawyers Blog.

Which State's Exemptions Apply To Bankruptcy

I recently read about a court decisions which illustrates the difficulty in determining what exemption laws apply when a debtor files bankruptcy under the new bankruptcy law. In this case, the debtor filed for bankruptcy in Florida after moving from Colorado.. The debtor properly filed in Florida because he was a Florida resident on filing date. The debtor initially claimed exemptions under Colorado law because he had not resided in Florida for two years. However, according the Colorado’s state constitution only Colorado residents are eligible to claim that states’ bankruptcy exemptions. Florida has no similar constitutional provision.

The court held that this debtor could not claim bankruptcy exemptions of either Florida nor Colorado. He was unable to claim Florida exemptions because he had not lived in Florida for two years, and he could not claim Colorado exemptions because of the constitutional rule. The court decided that by default the Bankruptcy Code’s federal exemptions would apply. See, In re Underwood from Northern District of Florida decided in 2006.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida