Florida Bankruptcy Law Blog

Availability of Credit Cards After Bankruptcy

A common concern of people considering Chapter 7 bankruptcy is whether they should keep and reaffirm one or more credit cards during bankruptcy. Many Chapter 7 bankruptcy clients believe they need at least one credit card after filing bankruptcy to pay normal  daily expenses, and in some cases, business and travel expenses. I tell most of my clients that they will be able to get  new credit cards immediately after bankruptcy so that they should not reaffirm existing debt just to preserve credit cards for their convenience. Today's New York Times published an article about an individual bankruptcy debtor which confirms credit card availability to bankruptcy debtors. Link: The Debt Trap - Banks Mine Data and Pitch to Troubled Borrowers - NYTimes.com.

The New York Times article states that Chapter 7 debtors receive each week  several unsolicited credit card offers after they file bankruptcy. The article criticizes the credit card industry for making credit too easily available to people who have demonstrated financial difficulty by their bankruptcy filing. It suggest that bankruptcy debtors are targeted by credit card companies. Anyone who files bankruptcy must be conservative in their use of credit after bankruptcy because they are unable to repeat bankruptcy for eight years. However, those bankruptcy debtors who feel they can borrow responsibly and conservatively the credit card industry quickly will make available to you new credit cards which you can use for convenience of payment. If you must file bankruptcy you should be very careful about reaffirming existing credit card debt because you believe you cannot live without a credit card. You will, as the Times report, have numerous offers of new credit cards with zero balances after you file bankruptcy.

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

Mortgage Foreclosure Mitigation in Final Rescue Bill

I have previously posted on this Blog information about  homeowner mortgage benefits in the initial bailout bill that was rejected by the House on September 29, 2008. I have reviewed the final, revised bill signed into law on October 3, 2008. The final bill contains essentially the same mortgage modification provisions. The bill directs the Treasury to encourage mortgage service companies to mitigate foreclosure by adjusting the interest rate, payment terms, as well as the mortgage balance of certain home mortgages. The law is written generally and without details. The Treasury Department likely will issue federal regulations which state whom is entitled to benefits and the procedures to request mortgage modification.

Draft of Financial Recovery Act Promises Foreclosure Relief

The current draft of the governments’ financial recovery act, formally the "Emergency Economic Stabilization Act of 2008", being referred to in the media as "the bailout bill," contains several provisions designed to help homeowner prevent foreclosure. The terms of the Act are drafted in general, unspecific terms, and certainly there will be many government regulations needed to implement the new law before any agency can actually provide foreclosure relief. The foreclosure relief provisions are found in Sections 109 and 110 of the recovery package.

Section 109 of the bailout plan states that the Secretary of Treasury shall implement a plan that seeks to maximize assistance for homeowners and to encourage mortgage servicers to take advantage of the HOPE Program under the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. The new law directs the Treasury Department to coordinate with out government agencies to identify opportunities for the acquisition of classes of troubled assets that will improve the ability of the Secretary to improve the loan modification and restructuring process and to permit bona fide tenants to remain in their homes under the terms of their leases.

Section 110 of the bailout bill states that Federal managers of mortgages on residential real estate, including multi-family housing, shall implement a plan that seeks to maximize assistance for homeowners and to encourage mortgage services to minimize foreclosures.

The financial recovery law leaves the details of implementation to be worked out in future federal regulations. Considering the time it normally takes to implement federal regulations, the new law does not deliver immediate relief to people facing foreclosure today. The mortgage lending industry will see relief long before benefits reach homeowners. It will be difficult to find regulations that fairly provide foreclosure relief to deserving homeowners without creating new avenues for abuse through manipulation of benefits provided by this law.

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

Insuring Your Bank Deposits

In the past few days following the failure of IndyMac Bank in California I received a few email questions from people concerned about the safety of their bank accounts. Most people know that the FDIC incures bank accounts up to $100,000. However, a person can increase insurance coverage by dividing deposits at any one bank into different accounts opened under different names or owned by different entities. The FDIC has a webiste Link: FDIC: Insuring Your Deposits which clearly provides a full description of all available insurance. It is probably easier to open additional insured accounts at your existing bank than it is to spread deposits among different financial institutions.

New Law Eliminates Income Tax Liablity For Some Short Sales

Previous posts on this blog have discussed income tax risk associated with giving banks a deed in lieu of foreclosure or arrangements for a short sale. The general rule is that foregiveness of debt, including a bank's waiving mortgage deficiency liability, is taxable income. Last month, December, 2007, Congress passed a bill to relieve many homeowners from income tax liability associated with deeds in lieu, short sales, or foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgages used to buy or improve their primary residence. Link: GovTrack: H.R. 3648: Text of Legislation.

The Act exempts up to $2,000,000 of debt forgiveness for married couples. Yet, not everyone is eligible for this income tax shelter. There are time limits on this legislation. The Act applies to debt forgiveness from residential mortgages from January, 2008 through December, 2009.

Only relief from mortgages on primary residences is tax protected. A debtor can still be taxed from a deed in lieu, short sale, or a foreclosure on an investment property, second home, or a business mortgage. Also, many debtors took second mortgages on their homes during the housing bubble to pay off and consolidate credit card debts. Mortgage companies often required borrowers to pay off all credit card debt with finance proceeds in order to increase their ability to pay their home mortgages. Any portion of forgiven mortgage debt used to pay credit card debts will still be subject to taxation.

Debtors whose mortgages do not qualify for this legislative relief may still escape debt forgiveness taxation by filing bankruptcy prior to the foreclosure or by filing IRS forms declaring their insolvency at the time of foreclosure.

Another interesting comment on this new law was posted by Oregon attorney Kent Anderson on the Bankruptcy Law Network Blog Link: Home Loan Foreclosure No Longer a Tax Trap? : Bankruptcy Law Network.

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

Wall Street Journal: Some Creditors Abuse Bankruptcy System

Saturday’s Wall Street Journal had a short article about debt collectors who try to circumvent bankruptcy of borrowers. These debt collectors do not actively pursue debt collection after people filing bankruptcy as that would be a serious violation of federal bankruptcy law. The article states that some debt collectors intentionally do not remove the debt for credit reports. They find that some debtors eventually pay the debt on their credit reports when they recover financially in order to qualify for large loans, or some debtors pay out of a moral obligation to repay debts. In any event, the article says that creditors can sell debts incurred by their debtors even after the debtors filed bankruptcy because of the significant chance that the debtors will eventually repay the debt voluntarily.

Technically, failure to remove a discharged debt from a credit report is violation of federal law, specifically, the federal fair debt collection laws. The practical problem for debtors is that they have to hire an attorney to bring an action against these debt collectors. The legal action is in federal court and most attorneys are inexperienced in this area of the law. Also, few qualified attorneys will take such work on a contingency fee basis. Debtors probably find it easier to pay the debt when they are able financially. The Journal says that these debt collectors are "gaming the system" by not taking active steps to properly handle discharged bankruptcy debt on credit reports.

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

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.

Florida Increases Personal Property Exemption

The Florida legislature passed a law increasing the personal property exemption in bankruptcy. Under Florida Statute 222.25 as written Florida debtors can claim a $1,000 exemption for miscellaneous personal property. Most bankruptcy debtors have applied this exemption to furniture, cloths, cash and other personal property. Effective July 1, 2007, the exemption is increased to $4,000 for those debtors not claiming or benefitting from a homestead exemption. Many Florida debtors not exempting a homestead can use the increased general property exemption to protect equity in automobiles not otherwise protected by the $1,000 exemption specifically allowed for automobiles.

People who could benefit from the increased personal property exemption may want to defer bankruptcy filing until the July 1 effective date. The wording of the statute appears to leave open issues for further court interpretation, such as the meaning of benefits of homestead exemption. For instance, I wonder if a debtor with a homestead owned jointly with a non-debtor spouse qualifies for the $4,000 property exemption if he exempts the residence as tenants by entireties property instead of claiming the exemption under homestead protection. As is the case in all new statutes, judicial clarification will ensue.

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

Article About Partnerships and LLCs in Bankruptcy

I read an interesting and important article in this months Florida Bar Journal about limited partnerships and limited liability companies in bankruptcy. The article was, "Asset protection Proofing Your Limited Partnership or LLC for the Bankruptcy of a Partner or Member", by Thomas O Wels and Jordi Guso. The LP and LLC have effective asset protection features outside of bankruptcy. If a debtor files bankruptcy, the bankruptcy trustee has greater powers to attack and liquidate the interest of the debtor partner or member, to the detriment of both the bankruptcy debtor and his other business associates. The Bar Journal article cited a bankruptcy decision in the case of In re Ehmann and certain sections of the bankruptcy code which provide powers to the trustees to attach partnerships and LLCs which powers are not available to normal judgment creditors.

The authors suggested several provisions be added to LLC and partnership agreements to help protect the debtor's interests in bankruptcy. The most important changes to the agreements are imposing obligations on members and partners to make future capital calls and to be involved in management. The agreement should state that its intent to be an "executory contract." As a side note, mandating partners' involvement in management does not expose limited partners to general liability given changes in Florida's limited partnership statute.

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

Bankruptcy Attorneys Wanted

I get calls or emails about  bankruptcy from people all over Florida. I practice  in the Orlando Division and  cannot serve clients in many parts of the State. I find that I have to turn away many people looking for legal help. I would rather refer them to someone whom I think can help them.  In particular,  I would like to find a bankruptcy attorney on the west coast to whom I can refer potential clients.  So, if you are a west coast Florida bankruptcy attorney  please contact me by email or phone if you want occasional referrals.