Florida Bankruptcy Law Blog

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. 

Lending Your Credit Can Lead to Bankruptcy

Sunday’s Washington Post included an article by syndicated columnist Michelle Singletary in which I was quoted as an expert on bankruptcy law and consequences of bankruptcy. http://www.washingtonpost.com/wp-dyn/content/article/2006/07/22/AR2006072200106.html?sub=new. I post the article primarily because the article’s lessons address a frequent financial planning mistake that can lead to ruined credit and bankruptcy. The article warns about risks you take when you let someone else become an authorized user on your credit card. The most frequent problems I see are parents who lend their credit card, or their signature, to children to help the children buy something a lower interest rates. If the child fails financially the well-intentioned parents bear the financial burden, often leading to their own bankruptcy. You should read the article and pay attention to what Ms. Singletary’s grandmother, "Big Mama" , had to say about this subject.

Bankruptcy's Moral Issues

The Christian Science Monitor ran an article on July 3, 2006, on moral issues involved in bankruptcy filing. I was interviewed for the article, and my picture and several quotes were included in the article.

I find the morality of bankruptcy, or of asset protection, to be a very interesting topic which most bankruptcy clients struggle with before filing. Very few people feel good about filing bankruptcy. Most bankruptcy debtors file as a last resort, and in many cases, they spend exempt assets which they could keep in bankruptcy trying to pay creditors. In my opinion, the morality of bankruptcy, as in most other moral issues, involves weighing competing moral considerations. As I told the reporter, people feel a moral obligation to repay debts but also a moral obligation to provide a home and support for their family. Different people will resolve that issued differently.

Another issue I discussed at length with the CSM reporter, but which was not included in the article, was a distinction between a moral obligation to repay a debt to a bank and an obligation to repay a debt to a friend or family member. A bank loans money to people for high interest rates in order to make a profit. A friend or family member loans money, usually with no or little interest, because they feel a moral obligation to help someone. In my opinion , there is a stronger moral obligation to repay a loan based on moral obligation than to repay a loan made at high interest to earn money. I recognize that other’s disagree.

Hopefully, articles like the CSM article will begin discussions through which people recognize that most bankruptcy debtors are moral and decent people.

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

Bankruptcy Filings Remain Low

My experience is that inquiries about filing bankruptcy are gradually increasing. Activity in my office is at least double the level of the December through February period. Yet, I find that number of prospective bankruptcy debtors still is significantly below levels prior to 2006 which had unusually high filing rates due to the new bankruptcy law. Over the past few years a large amount of bankruptcy debtors in central Florida attributed their financial problems to economic disruption over their businesses or employment caused by the 2005 hurricanes. Some people still blamed 9/11 for their problems. It may be several more years before people in central Florida find causes for their financial woes other than the hurricanes and the terrorist attack.

About 25% of phone inquiries about bankruptcy inquire whether people can still file bankruptcy under the new bankruptcy law. I have heard other attorneys report similar questions from prospective clients. The new law seems to have changed people’s inclination look at bankruptcy as the easy solution to financial woes. The unemployment rate in central Florida is far below the national average. People who want work in our area can find a job. Absent deterioration in Florida’s economy or some other unexpected external interruption it appears that bankruptcy filings will remain low compared to the decade prior to the new law.

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

How Debtors Were Treated Before Bankruptcy Laws

The Wall Street Journal had an interesting story on January 30, 2006, about the history of bankruptcy laws in the United States. Interesting facts about bankruptcy included the following:

In England before the revolutionary war debtors were imprisoned for failure to pay creditor, and the debtors were made responsible for the cost of their imprisonment. Imprisonment could last a lifetime.

There were debtors prison in America after the Revolutionary War.

Some American colonies bound debtors in service to their creditors for up to seven years as repayment of debt.

Robert Morris, a signer of the Declaration of Independence, was imprisoned in Philadelphia in 1798 for failure to pay debts.

Congress passed the first bankruptcy law in 1800, but then repealed it three years later.

York did not abolish debtors prisons until 1831, and Pennsylvania kept debtors prisons open until 1842.

Filing Fees To Increase

The new Budget bill approved by the U.S. Senate and House of Representatives raised bankruptcy filing fees. The cost of filing a Chapter 7 bankruptcy will rise from $220 to $245, and the cost of filing for Chapter 13 bankruptcy will rise from $150 to $235. Including other fees imposed by the Bankruptcy Act the total cost of filing a Chapter 7 bankruptcy will be $299 and the cost of filing a Chapter 13 bankruptcy will be 274. The new fees do not go into effect until 60 days after the bill was passed, and it still must pass the House one more time, due to edits made by the Senate to avoid violating Senate budget reconciliation rules. Therefore, the exact effective date is not yet certain.

Prior to October 17, 2005, under the old bankruptcy law, the filing fee for Chapter 7 was only $209. Congress has imposed close to a 50% increase in filing fees in one year. The new law’s complexity has caused a substantial increase in fees charged by bankruptcy attorneys.

Protection Time

Forbes online has an article about the effect of the new bankruptcy law on consumers. Link: Protection Time - Forbes.com.