Modifying a Mortgage in Chapter 13

Lots of clients ask, "Can I modify my mortgage if I file Chapter 13?"  Unfortunately the answer is usually "no".  While automobile and other secured loans can be modified in Chapter 13, so far the mortgage industry lobbyists have convinced Congress that borrowers should be held to whatever bargain they made when they got their loan, even if their house is worth less than what they owe or if interest rates have dropped way below the rate they got.  In most cases all a borrower can do is gain time to catch up any delinquent payments.  However, the borrower must make all future payments (those coming due after she filed) when and as they are scheduled.

There are two cases where mortgages can be modified in Chapter 13.  The first case is where there are more than one mortgage.  The first mortgage cannot be modified, but if the house is worth so little that all or part of the second and subsequent mortgages are more than the value left after the first, those mortgages can be modified or "stripped down", meaning the unsecured portions get treated as unsecured debt.

The second case where a mortgage can be modified is if the bank has other collateral besides the house.  For example, suppose the bank took not only a mortgage but also a security interest in a car, or some stock.  In that case the mortgage can be modified even if the value of the house exceeds the amount of the mortgage.

If It's Good Enough for Steve Jobs, It's Good Enough for You

We don't know for sure, and we probably never will, but it appears Steve Jobs has protected his estate, to the extent he can, through living trusts.  A living trust is a trust established and funded during one's lifetime.  Lots of trusts are established during the maker's life, but lots remain unfunded, meaning nothing was ever put into the trust.  When that happens, the trust is like an empty basket -- good for nothing.

Forbes magazine reported on October 7 that real estate records from 2009 show that Jobs and his wife transferred three pieces of real estate into two separate trusts.  This doesn't mean that he transferred all of his assets, such as his Disney stock, with an estimated value of $4.4 billion, because transfers of property other than real estate do not need to be recorded in public records.  But it's likely he did.  Someone as smart and as private as Steve Jobs probably took the proper steps to minimize his potential estate tax and protect his heirs from the publicity that would surround probate of his estate.

There is a long list of celebrities who failed to properly plan their estates.  As a result, they unnecessarily lost a good part of their estates to the IRS.  Some of these are Jimi Hendrix, James Brown, Steig Larsson (author of The Girl With the Dragon Tattoo), Gary Coleman, Sonny Bono and Michael Jackson.

Mortgage Rescue Scams

With the mortgage foreclosure crisis hitting more people, scammers are out in force.  One of the newer scams involves fraudulently attaching a mortgage to someone else's bankruptcy.  Here's how it works.

Scammers know that one of the most powerful tools in the bankruptcy tool box is the automatic stay that prevents a creditor from taking any action against the debtor or property of the debtor's bankruptcy estate.  The scammer approaches a borrower facing foreclosure and gives them the pitch that for a small fee, say $300-$500 per month, they scammer will "work with" the lender to prevent bankruptcy.  The scammer tells the borrower that she needs to convey a small percentage, even 1%, of her house to another person.  This other person is someone in bankruptcy, usually in another state, and has nothing to do with the scammer or the borrwer.  In fact, this person is completely unaware of the scammer.  But by transferring a small portion of the borrower's property to the bankrupt debtor, the borrower's property is now "property of the estate" of the innocent debtor.  The scammer uses this to claim the protection of the automatic stay against the bank trying to foreclose on the borrower.

Sometimes the debtor becomes aware of this sudden new interest in real property that he never had before when the bankruptcy trustee accuses him of failing to disclose all his property.  This usually happens when the bank asks for relief from the automatic stay so it can commence foreclosure against the borrower.  If this happens, the scammer tells the borrower she needs to convey another fractional interest to another unknowing debtor somewhere else and the process starts again.

The bottom line is this for borrowers:  It's unlikely that any of these so-called "rescue firms" can really legitimately help you.  Beware of anyone who tells you that for a monthly fee they can stave off foreclosure.

Surrendering Real Property

A question that has come up a few times recently is a variation of "how do I surrender my house in bankruptcy?"  When someone files bankruptcy, she can surrender any property that secures a debt.  To "surrender" means to turn the property over to the secured creditor and walk away, receiving a discharge for whatever is owed above the value of the property surrendered.  This often happens when the debtor owes more on the loan that the property is worth (a condition known as being "under water").  With personal property, such as cars, boats, home furnishings, electronics, etc., surrender is usually a matter of giving the items to the bank.

A house or any real estate is more difficult.  You can't just drop it off at the bank.  Even sending the bank the keys to the house isn't good enough because title to the real estate is still in your name in the county recorder's office.  If you're still the owner, you could be liable if someone slips and falls on the property.  You will be liable for unpaid property taxes and assessments, and you could be fined for not maintaining the property, such as by shoveling the snow in winter or mowing the lawn in the summer.

Some people have tried signing a quitclaim deed and recording it.  That might work, but there is a concept in real estate law that requires a deed to be accepted to be valid.  Acceptance means the grantee (the bank in this case) willingly takes the deed.  Simply recording the deed may not be valid acceptance.

As banks become overwhelmed with properties that are under water, many of them simply don't know what to do.  As a result, they might not start and complete foreclosure in a timely manner.  This leaves the surrendering borrower in limbo.  She has said she doesn't want the property, but she can't get rid of it.  The only solution might be to file a motion with the bankruptcy court to force the creditor to accept a deed, thereby getting it out of the debtor's name.  The worst thing to do is ignore the situation.

Bankruptcy Exemptions

I was faced with an interesting question from a client this week.  Up until recently ago he lived in California.  For six years he has owned a condo in Utah.  Four months ago he moved to Utah and now lives in the condo.  He needs to file bankruptcy and wants to know which state's exemptions, Utah or California, he can use.  He wants to use California because their homestead exemption is $75,000 whereas Utah's is $20,000.

Section 522 of the Bankruptcy Code says that a person uses the exemptions in the state where he has had his domicile for the past 730 days (two years), unless the person hasn't lived in a single state for that time.  If, like this person, a debtor has lived in two or more states in the past two years, then he uses the exemptions in the state where he lived the longest portion of the 180 days immediately preceding the two year period.  This convoluted and confusing statute is part of the BAPCPA enacted in 2005 and its purpose is to prevent debtors from moving to states with more liberal exemption laws and then filing bankruptcy.

In this case, section 522 helps my potential client because he lived in California for the full 180 days prior to the two year period back to August 2009.  So he will get to claim the California exemption even on his condo in Utah.

Bankruptcy Preparers

I recently joined an online forum dedicated to answering questions about bankruptcy.  One of the more common questions is along the lines of "Can I do a bankruptcy myself?"  Underlying this question is the concern that a person already strapped for money is being asked to pay $1,000 - $3,000 or more to have a lawyer handle the bankruptcy.  What clients often see is only the finished product, a stack of papers about 1/2" thick, that constitutes their petition and supporting schedules.  How hard can it be to fill out some papers, they ask?

Some want to go even farther and get someone, called a bankruptcy preparer, to fill out the papers for them.  Bankruptcy preparers are expressly permitted by the Bankruptcy Code, but there are a number of things preparers can't do, if they're following the rules.  First, they can't give legal advice.  In other words, they can't tell you what to put down.  They can only put down what you tell them.  Secondly, they can't go with you to court.  You're on your own there.  Third, once they finish preparing your schedules, they are done.  They have no further interest in you or your case because they can't have an interest.  All they can do is fill out paperwork.

Bankruptcy is one of the most complicated legal processes there are.  It is far more complex than a divorce, a will, a DUI or most litigation.  The 2005 Bankruptcy "Reform" Act made it even more complex.  If you don't know what you are doing, you can fail to claim exemptions you're entitled to, meaning you can lose property you are able to keep; you can incorrectly fill out the Means Test, meaning you might think you don't qualify for Chapter 7 when you really do; you can fail to respond to a motion, resulting in something bad happening, such as having your discharge denied; and you can even be guilty of bankruptcy fraud, meaning you can lose your right to a discharge and even go to prison.

Think of it this way.  You're trying to get rid of maybe hundreds of thousands of dollars of debt and gain a chance at starting your life over, a chance that comes along only once every eight years at best.  Isn't it worth $2,000 to get it done right?

Living Reality?

I follow a number of bankruptcy blogs and today read a great post by a bankruptcy attorney in Kansas City, Missouri, about reality and bankruptcy.  Rachel Foley makes the point that the so-called "reality" shows have twisted our view of the world.  Many of us try to emulate any number of people in these shows and end up both spiritually and financially bankrupt.  You can read Rachel's entire post here:

http://www.bankruptcylawnetwork.com/trying-to-live-like-a-reality-star-may-lead-to-bankruptcy/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BankruptcyLawNetwork+%28Bankruptcy+Law+Network%29

One of the key points in her post is that bankruptcy is designed to give people a fresh start, and you can't make a fresh start by continuing to spend more than you make.  You can get rid of your debt, but if you continue to live beyond your means, in five years you'll be in debt again.  Bankruptcy requires some hard decisions and may involve some pain as you give up a lifestyle that you can't support.  The client who says, "I want to get out of debt but I don't want to give up my boat" won't make a fresh start because he hasn't realized that owning a boat just isn't in the cards for him right now.

If you're not willing to engage in some soul-searching and make some hard choices, bankruptcy isn't a fresh start.  That might sound harsh, but that is reality.

Common Estate Planning Mistakes

When it comes to estate planning, people make mistakes most commonly in one of two areas:  First, they fail to have any kind of estate plan at all.  Secondly, once they have a plan, they forget about it.

An estate plan is not a static document because life isn't static.  Circumstances change.  Asset values go up or, as is more common in recent years, down.  Divorces, remarriages, new children, deaths, selling assets, buying new assets -- all of these things can make the best estate plan meaningless.  An outdated estate plan can leave your family vulnerable, unable to pay estate taxes, for example, or even unable to pay funeral expenses because of lack of liquidity.

Any time you have a change in your life you should review your estate plan.  If this is done periodically, the changes will be minimal, but the savings, not only in dollars but in hurt feelings and even breaking up of a family, can be huge.

Surrendering a House

In bankruptcy a debtor has three options when it comes to secured debt (debt where the creditor has collateral that can be repossessed): Surrender (give the collateral back), reaffirm (renew the contract, essentially excepting the debt from the bankruptcy), or redeem (paying the creditor a lump sum equal to the value of the collateral -- not a realistic option for obvious reasons).  To surrender means you give back the collateral and walk away from the debt, not owing any deficiency that may exist after the creditor sells the collateral.  With a car or any other personal property, surrender is fairly easy.  Drive the car to the bank, drop the keys on the manager's desk and walk away.  It's a bit more tricky with a house.  How do you give a house back?

The issue is becoming more and more important because of the backlog of foreclosures.  In years past, as soon as a person filed bankruptcy the bank filed a motion for relief from the automatic stay to get permissioin to foreclose.  Now, banks are waiting several months to act, if they act at all.  While this might seem like a great deal for the debtor because she gets to live in the house rent-free until the bank acts. there are some big downsides. If your bankruptcy schedules say you're going to surrender something, you are required to surrender within 45 days of the meeting of creditors.  For a house, this means, at the very least, to leave and notify the bank that the property is vacant. But this doesn't solve everything. As long as the debtor still has legal title, she is considered the owner.  That means if someone is hurt on the property (such as by slipping and falling on the ice), the debtor could be responsible.  If there are dues, such as condominium fees, the debtor could be personally responsible.  Same goes for assessments made by the city. If these things happen after you have filed (post-petition), the debts are not discharged by the bankruptcy. 

If you plan to surrender your house in bankruptcy. talk to your attorney about how you actually accomplish that.

Taxes in Bankruptcy

Will my tax debt be wiped out in a bankruptcy?  For many, that's a huge question.  It's also a question that a lot of professionals, bankruptcy attorneys included, don't have the answer to.  In most cases, the answer is "No."  Taxes are not discharged in a bankruptcy.  That's because the same people who wrote the Bankruptcy Code, Congress, are the same people who wrote the Internal Revenue Code and the government takes care of itself.  Letting people discharge taxes in bankruptcy would seriously hamper the government's ability to do business.

Tax debt CAN be discharged if all these conditions are met:
1.  The taxes are income taxes. Other types of tax, such as payroll taxes or the "personal liability assessment" for officers and directors of a company that didn't pay over payroll taxes, tax penalties and the like are not dischargeable, ever.
2.  You filed a return for the period in question.  If you've been delaying filing a return, the taxes can't be discharged regardless of how old they are.
3.  The taxes are at least three years past due.  Since income taxes are not due until April 15 of the year following the calendar year for which the tax applies, this means three years after April 15 for the prior year.
4.  You didn't commit fraud, such as wilfully evading paying, using a false social security number, etc.
5.  You pass the "240-day" rule, which says the IRS must have assessed the tax more than 240 days before you file, or it hasn't yet assessed the tax.  If you fall between those two deadlines, they can't be discharged.

WARNING:  Even if you are able to discharge the taxes, if the IRS filed a tax lien against any property you own, that lien, just like other liens, such as mortgages or judgments, passes through bankruptcy unaffected and can still be enforced against the property.

If you are filing bankruptcy because of tax debt (this includes state taxes as well as federal), be sure you talk to a knowledgeable tax and bankruptcy professional before filing.

Court Asked to Exclude Busty Woman from Trial

A Chicago lawyer has filed a novel motion in a small claims action involving a car dealership and a married couple.  Thomas Gooch, who represents the dealership, filed a motion to exclude "a large-breasted woman" from sitting at the plaintiff's counsel table with the plaintiffs and their attorney, Dmitri Feofanov.  According to CBS News, Gooch claims that the sole purpose of having this woman, who Feofanov identified as a paralegal, at counsel table is to distract the jury from the merits of the case.  Although the motion described the woman as "large-breasted," Gooch reportedly told a local newspaper that he doesn't object to the fact that she's buxom ("Personally, I like big breasts" Gooch is quoted to have said) but he objects because she isn't a lawyer and has no business at counsel table "dressed in such a fashion as to call attention to herself."

This raises all sorts of interesting possibilities.  Perhaps jurors who are deemed too attractive will be asked to be excused because their appearance may detract the other jurors from considering the case.

Incentive Trusts

I've been following an interesting string of comments on "incentive trusts."  These are trusts that tie distribution of the trust corpus (money) to the beneficiaries to the beneficiaries' achieving some benchmark, such as graduating from college, kicking a habit or otherwise conforming to some standard the donor wants.  The discussion has centered around whether attorneys should get involved in these trusts.  The biggest objection, from a drafting standpoint, is that such trusts have a great potential for litigation, especially where the standard to be achieved is somewhat nebulous.  For example, what does it mean to kick a habit?  Graduating from college is more concrete but even then there is wiggle room.  A particular college?  A particular major?  A minimum GPA?

Perhaps the best comment was by someone who said, ask the client, "If your child won't do this for YOU, what makes you think she'll do it for your MONEY?"  To that I would add, if your relationship with your child is so shallow that she will do it for your money but not for you, why would you want to leave her anything with strings attached in any case?

You Can't Escape a Good Constable

I've been trying to serve a defendant (Mr. X) on behalf of a local bank for about six weeks.  He's been lying to the constable about his whereabouts (strange, but true -- defendants sometimes lie to avoid being sued).  His last story was that he was out of state for an extended period.  A few days ago this constable went to an address to serve Mr. and Mrs. Y on behalf of a completely different law firm.  The man who answered said that Mr. Y didn't live there, that this was his, Mr. X's home.  The constable said "Hold on a minute," went to his car, retrieved my summons and served Mr. X at his new address, in a completely different city from his former address.

You just can't escape from a good constable.

Hiding Assets After Bankruptcy

A few days ago I received a call from a credit union about one of my clients.  Apparently my client is hiding his motorcycle, which was security for a loan from the credit union.  The credit union asked for my help in getting it back.

Now there's not a lot I can do for the credit union.  For one thing, my client and it are in an adversarial situation and my client comes first.  I did agree to send my client a letter telling him that he needed to either pay for the motorcycle or give it back.  That's the rule with secured debt.  The personal liability for the debt goes away, meaning the credit union can't sue my client and try to collect money from him.  But the security interest the credit union had in the collateral, in this case the motorcycle, is unaffected by the bankruptcy.  It just passes through the case without being harmed.

The bottom line is, if you want to keep your stuff, whatever that stuff is, and that stuff is collateral for a loan, you are still going to have to pay the loan after the bankruptcy.  If you aren't willing to or can't pay, you have to give it back.  Hiding it is not an option.

Of Baseball, Divorce and Lawyers

Major League Baseball's commissioner Bud Selig has announced that MLB will take over day to day control of the Los Angeles Dodgers because the team's owners, Frank and Jamie McCourt, are locked in a nasty divorce where ownership of the team is up for grabs.  Frank McCourt is threatening to sue Bud Selig and MLB for this move that is, to use an overworked word, unprecedented.

Frank McCourt bought the Dodgers in 2004 in a deal that was described as "highly leveraged" (read, McCourt bet the ranch and then some).  The Washington Post referred to McCourt as "McBankrupt" after he shelled out $430 million just so he could sit in the owners' box at Dodger Stadium.  But, hey, the San Gabriel Mountains, Elysian Hills, sunny weather, 80 degrees?  Who could resist?  And the Dodgers have a storied history, going back to the days when they were the Yankees' cross town rivals as the Brooklyn Dodgers.  Beginning with Sandy Koufax and Don Drysdale, who silenced the Yanks' bats in the '63 World Series, shutting them out 1-0 in Game Four for the sweep, and continuing with Steve Garvey and Ron Cey in the 1970s and 80s, the Dodgers were one of MLB's premier franchises.

But the Dodgers haven't won a series since 1988 and are reported to be in the position of having to borrow money to make payroll.  With ownership on the block, the owners squabbling themselves, and now MLB stepping in, you can bet the ones really licking their chops are the lawyers.  They're going to come out as the only real winners.

Gift Card from Blockbuster? Fuhgetabboudit

Did you get a gift card to Blockbuster that you haven't used completely? If so, throw it away.

Blockbuster filed Chapter 11 bankruptcy last year, as was widely expected. Up until last week, it looked like Blockbuster might be destined to become one of those companies that just quietly fade away until one day you suddenly notice they aren't there anymore. But last week Dish Network offered $320 million for Blockbuster, a higher number than the liquidation value of the entire chain. So it looks like Blockbuster might live on.

If so, its gift cards are no longer accepted. Gift cards are a form of "executory contract" under the Bankruptcy Code. An executory contract is one that still has to be performed by one or both parties. In this case, Blockbuster still had to perform by renting movies to holders of the cards. In Chapter 11 a debtor can "reject" executory contracts, meaning the debtor simply says, "I'm not going to perform my obligation under the contract." And that's exactly what Blockbuster has done. Go into any of their retail outlets and you'll see signs posted that say that after April 6, 2011, gift cards are no longer accepted.

The other parties to rejected executory contracts, in this case holders of gift cards, become general unsecured creditors in the Chapter 11 case. General unsecured creditors are the lowest form of creditor life in a bankruptcy, entitled to be paid after virtually everyone else gets something, and then only if there is any money left. In reorganizations, general unsecured creditors sometimes get a few cents on the dollar. But in order to get paid, they have to file a proof of claim. In the case of Blockbuster gift cards, the potential return to holders probably isn't worth the price of a stamp to mail the claim in.

What Should a Bankruptcy Cost?

Whenever I speak with a potential client, one of the questions always asked, often one of the first, is "how much will it cost?" This is a legitimate question, but, upon hearing my estimate (which varies from case to case) some potential clients never become clients. I am sure that in many cases they find someone willing to do the work cheaper.

Consumer bankruptcy attorneys all seem to compete on price. It's understandable that someone facing bankruptcy needs the lowest cost possible, but what clients often don't understand is that bankruptcies aren't like potatoes. In most cases, a pound of potatoes from one grocer is as good as a pound from another, so it makes sense to find the grocer with the lowest cost. But everybody's financial situation is different. It doesn't make sense to shop for a bankruptcy attorney solely on the basis of cost.

Many large-volume bankruptcy attorneys (or bankruptcy mills) churn out dozens of cases a week. In a consumer bankruptcy, about the only thing an attorney can't delegate to a paralegal is appearing in court, so those high volume attorneys spend their time in court and leave the rest to secretaries and paralegals. That means except for the few minutes when the client is actually in court or at the meeting of creditors, he or she doesn't speak directly to the attorney. Secretaries and paralegals can't give legal advice, which means they can't answer a client's questions in many cases. Is that what clients want, to pay the lowest fee and be run through a processor?

Bankruptcy is a serious step. It's a confusing process that goes on for months and, in Chapter 13, years. Clients should be willing to pay enough to get the attention they deserve.

Barry Bonds Goes on Trial

The trial of Barry Bonds, major league baseball's home run king, for lying to a grand jury about whether he used steroids during his career, began today. But as Tom Verducci, columnist for Sports Illustrated, points out in his article on SI.com, this trial isn't about Bonds' legacy, which, according to Verducci (and whose opinion I share) is non-existent. The ones who have something at stake are the lawyers on both sides. The prosecutors have to gain a conviction to prove they haven't wasted eight years and countless thousands, if not millions, of taxpayer dollars chasing someone whose conviction or acquittal has little social importance. Society doesn't need protection from Barry Bonds and the Balco steroid shop was shut down years ago, so Bonds' conviction, if it comes, is a ho-hum deal legally. The defense attorneys need an acquittal because in the world of criminal defense, a high profile loss can end a lawyer's career almost as quickly as using steroids can end an athlete's career.

So Barry Bonds is all-time home run king and Mark McGwire, whose image is as tainted as Bonds', is the single season home run king. In a lot of people's eyes, Hank Aaron and Roger Maris are still the kings. And some die-hards even question Maris, because he hit his 61 season homers in 162 games instead of the 154 that Babe Ruth had. That debate will continue like it has for nearly 50 years, but no one ever accused any of those guys of playing juiced.

Facebook and Bankruptcy

We've all heard of legal problems created by Facebook, such as employees who got fired for posting derogatory comments about bosses, customers and co-workers. Facebook could present legal problems in other ways as well.

In Pennsylvania last fall, a court ordered the plaintiff in a personal injury action to allow the defense attorney free access to all his Facebook pages. The purpose was to examine what the plaintiff might have said about his injuries and his life to attack his credibility that his injuries had affected his quality of life. For example, if the plaintiff had posted pictures of himself helping his girlfriend move, his claims that the accident had partially incapacitated him would be somewhat eroded.

It doesn't take a lot of imagination to make the next leap to a bankruptcy trustee wanting to examine a Facebook page. Is that a picture of the debtor on a new motorcycle? Wait, the motorcycle wasn't listed in his schedules and statement of financial affairs. Maybe there's some bankruptcy fraud going on. Or, is the debtor telling friends she's taking a cruise? Where did the money for that come from? Even if your privacy settings only allow Facebook friends to see what you post, if a trustee gets a court order, all bets are off.

The point of this is, be totally honest with your attorney about what you own. Don't try to game the system. It could come back to haunt you. At best your bankruptcy discharge might be denied. At worst, you could be facing prison for bankruptcy fraud.

Exemptions in Bankruptcy

When you file bankruptcy, almost everything you own becomes part of your bankruptcy estate. The estate is the pile of stuff from which the trustee can sell or liquidate to raise money. With that money, he pays creditors on a pro-rata basis. Some of the property in the estate is exempt, meaning the trustee can't touch it.

Exemptions can be full or partial. Full exemptions are things like household furnishings (subject to their being included in the list of exemptions). These include things like washers, dryers, refrigerators, beds, personal clothing, most furniture and the like. Also included in a full exemption are IRAs and 401Ks and other qualified retirement accounts. In Utah contributions made to such accounts in the past year are not exempt, but under federal law, all contributions are exempt. Make sure your attorney claims the federal exemption as well as the state exemption or you could lose contributions made in the last 12 months.

Partial exemptions are exemptions based on dollar values. For example, Utah law exempts $2,500 for a vehicle, per person. It also exempts $20,000 for a homestead exemption. Both of these dollar amounts have been on the books for over 20 years and are woefully outdated. Who can get a reliable car for $2,500? Yet that's all Utah law allows a debtor to acquire a vehicle to get to and from work. And $20,000 ($40,000 if married and filing jointly) for a house? While that's a more generous amount due to the recent downturn in the housing market, truly what does $20,000 do to protect your home, which is the purpose of a homestead exemption.

Don't count on the Utah legislature to update exemptions any time soon, though. Utah is one of the most creditor-friendly states in the nation, which is one reason it has one of the highest percentages of bankruptcy filings.

Is the Sacred Cow of Home Mortgages About to be Slaughtered?

For years, despite all the amendments to the Bankruptcy Code, one thing has remained untouchable: A debtor cannot modify the terms of her first mortgage that secures a debt on her primary residence. Debtors have been able to modify car loans, second mortgages, mortgages on vacation properties and a host of other loans for years, but first mortgage loans remained sacrosanct. All a debtor can do is catch up any arrearage through her plan, but she has to make all future payments (beginning with the payment that is next due after filing) on time and in the amount originally agreed.

The process of modifying a secured debt in bankruptcy is often called "cram down," from the graphic notion that the debtor crams the terms of the new loan down the creditor's throat with the help of the Bankruptcy Code. What happens is the debtor proposes a plan that repays the creditor only the value of its collateral. With cars, this is almost always less than what is owed. Since the housing crisis began three years ago, more and more homes are underwater and debtors want to be able to "refinance" their loans for lower principal amounts through the bankruptcy courts.

Senator Jeff Merkeley of Oregon is renewing the idea of allowing cram down for mortgages. The last attempt in 2009 failed, but this time there may be added ammunition: The housing market is still in the toilet, the job market stinks, the much-touted HAMP and other government programs to provide mortgage relief are dismal failures, and voluntary modifications by banks just don't happen. Stories of people sending the same documents a half dozen or more times and getting the runaround for months are legion. All of these things together might mean the economic and political climate are right to permit mortgage cram downs.

Donor's Remorse

Now that 2010 finally ended and Congress finally acted with respect to the estate and gift tax, a lot of gift and estate tax lawyers and their clients are trying to figure out how to reverse taxable gifts they made in 2010. It's a classic case of "it seemed like a good idea at the time." And it did.

This was the situation: In 2010 there was no estate tax. It was scheduled to return in 2011, but with only a $1 million exemption, as opposed to the $3.5 million exemption that existed in 2009, and at a 55% tax rate. To avoid a 55% tax on estates over the $1 million exemption, many estate and gift tax lawyers advised their clients to make taxable gifts in 2010. The reasoning was, the gift tax is only 35%. Better to save 20% in taxes by making a gift now than risking dying in 2011 or after.

But in January, Congress amended the tax code to provide for a $5 million exemption ($10 million for couples) and imposed only a 35% tax rate. Now, many of those people who made taxable gifts last year are realizing that they could have avoided any tax simply by waiting. For those with estates between $1 million and $5 million, this is certainly true. So they and their attorneys are scrambling to see if there is a way to undo the gifts they made last year.

This is a classic case of people ignoring the sage advice my tax professor gave in law school: Never do anything solely for the tax consequences. Do something that makes sense from a business standpoint and deal with the tax issue at that time. The people who made taxable gifts in 2010 did so solely in hopes of avoiding a possible estate tax.

Beware of Short Sales

I've addressed this topic before, but a client's situation brings it to the fore again. If you are upside down in your mortgage and thinking about a short sale, BEWARE! My clients had a real estate agent negotiate a short sale with their lender, who holds both a first and a second mortgage on their property. The combined mortgages are about $185,000 and, according to the agent, the property is worth about $90,000. The agent has presented a buyer for $90,000 and the lender has agreed to a short sale. So everything is great, right?

Not really, because the short sale agreement (written by the lender, of course) starts out by saying that the lender reserves its right to seek a deficiency against the borrowers (my clients). My clients are expected to contribute $8,000 in cash at closing (above the sales price, so this comes out of their pockets) and must give the lender a promissory note for another $7,000, payable at zero per cent interest for five years. At a minimum the short sale is costing my clients $15,000.

What my clients, and what most people doing a short sale, thought they were getting is a release from all liability to the lender upon sale for $90,000, plus the promissory note. They didn't realize they had to pony up cash, nor did they realize that all the lender is agreeing to do is to release its mortgages. The lender can still seek a deficiency against my clients for $95,000, the difference between the two mortgages ($185,000) and the sales price ($90,000).

And here's one last kick in the head. If the lender agrees to release my clients from the deficiency, the lender will undoubtedly file a form 1099 with the IRS, miscellaneous income, and my clients will get a hefty tax bill for the forgiven debt. Debt that is forgiven is income and you can be taxed on it.

Before you agree to a short sale, make sure you understand all of the ramifications of the deal.