We've only had the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) for three and one-half years, since fall, 2005, and already Congress is starting to think about tinkering with it. As well they should. It should never have been enacted in the first place.
BAPCPA (fondly known as Bappa-Crappa) took nearly eight years to become law. Beginning in 1996, when bankruptcy filings took off, credit card companies moaned to Congress that too many people were filing bankruptcy willy-nilly, discharging billions of dollars of debt owed to those companies. Never mind that those same companies inundate people with three, four, five or more offers for pre-approved credit cards every week. They (the credit card companies) whined that something had to be done, that bankruptcy was out of control. After being derailed by President Clinton's impeachment, George Bush's election, 9-11, the dotcom bust and a few other items, in 2005, bankruptcy reform came at last. The economy was saved.
It took about three years, until the mortgage meltdown in 2008, for Congress to start looking at the billions of dollars the credit card companies were earning, and decide that maybe something needed to be done about "excess profits". Then everyone jumped on the bankruptcy reform bandwagon. Now the mortgage lenders are the bad guys and bankruptcy needs to be reformed yet again to let borrowers modify their mortgage loans. It seems Congress will never learn. Before Bappa-Crappa was enacted, dozens of law and economics professors signed a petition urging Congress not to play with the Bankruptcy Code. After three-plus years, the almost unanimous consensus is, Bappa-Crappa has lived up to its nickname. It is a poorly drafted law that is draconian in its scope.
The pendulum swung too far in favor of creditors and now, less than four years later, we are looking at another overhaul. Once again, many are urging Congress not to allow modification of mortgages in bankruptcy because of the damage it might do to the already fragile mortgage market. Will Congress listen this time?
Monday, March 23, 2009
Wednesday, March 4, 2009
Obama's Budget Proposal
We got a first look at President Obama's proposed budget this past weekend. There are good and bad things in it. And a couple of really bad things.
An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.
Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.
Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.
Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.
It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.
An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.
Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.
Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.
Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.
It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.
Friday, February 20, 2009
Bankruptcy Law Changes
There's a sense of inevitability that Congress will amend the Bankruptcy Code to allow judges to modify home mortgages. Currently, in a Chapter 13, all a debtor can do is catch up on his or her back payments. In the meantime, he has to keep his ongoing payments current. Under proposals in both theHouse and Senate, Chapter 13 would be amended to permit a judge to write down the amount of a loan to the value of the house, if the house is now worth less than what's owed on it. This is a process called "cram down", from the phrase "cram it down the throat of the creditor", that is, force the creditor (who usually objects) to accept the lower value.
There's a good deal of debate about the wisdom of such a proposal. Those opposed say it will raise the lending costs to everyone. Banks will never be sure that they will get paid in full or that they won't have a lower value crammed down on them. As a result, they will raise lending rates to everyone to spread the risk of the relatively few bankruptcies over all borrowers. Thus, we'll all end up paying for those people who can't pay for themselves. But that's what we're all doing with the bailout anyway. Those people who were responsible are going to pay for the $835 billion in new assistance that was just signed into law by President Obama.
There's a good deal of debate about the wisdom of such a proposal. Those opposed say it will raise the lending costs to everyone. Banks will never be sure that they will get paid in full or that they won't have a lower value crammed down on them. As a result, they will raise lending rates to everyone to spread the risk of the relatively few bankruptcies over all borrowers. Thus, we'll all end up paying for those people who can't pay for themselves. But that's what we're all doing with the bailout anyway. Those people who were responsible are going to pay for the $835 billion in new assistance that was just signed into law by President Obama.
Tuesday, February 10, 2009
Bankruptcy
Today it's time for a change in topics. With the economy the way it is, bankruptcies are soaring in the United States. So we'll look at the different types of bankruptcy relief.
There are two types of bankruptcies avaialbe for individuals. The first is Chapter 7. This is also called a straight bankruptcy. In a Chapter 7, a trustee is appointed to take over all of the person's assets, sell them, and use the money to pay creditors. In reality, most Chapter 7s are what are called "no asset" cases, meaning there are no unencumbered assets for the trustee to sell. The trustee won't sell a house, for example, if it is worth less than the mortgage that is owed. Before a trustee can take any of the money he gets from selling assets, he first has to pay any secured creditors, those creditors, such as banks that hold mortgages, or credit unions that hold the title to a car, who have taken a pledge of property from the borrower. Only after secured creditors are paid can the trustee use any excess funds to pay other creditors. In most Chapter 7s, the trustee concludes that he can't get any funds to pay creditors other than those secured by the property, so he abandons the property and doesn't sell it.
In a Chapter 13, also called a wage earner plan, the debtor (person filing bankruptcy) pays his or her disposable income (that portion of income left after paying housing costs such as rent, food, utilities and other normal living expenses) to the Chapter 13 trustee, who then doles the money out to the creditors. A Chapter 13 plan goes on for as long as five years. At the end, the debtor gets a discharge from any debts that haven't been paid through the Chapter 13 (with some exceptions).
There are two types of bankruptcies avaialbe for individuals. The first is Chapter 7. This is also called a straight bankruptcy. In a Chapter 7, a trustee is appointed to take over all of the person's assets, sell them, and use the money to pay creditors. In reality, most Chapter 7s are what are called "no asset" cases, meaning there are no unencumbered assets for the trustee to sell. The trustee won't sell a house, for example, if it is worth less than the mortgage that is owed. Before a trustee can take any of the money he gets from selling assets, he first has to pay any secured creditors, those creditors, such as banks that hold mortgages, or credit unions that hold the title to a car, who have taken a pledge of property from the borrower. Only after secured creditors are paid can the trustee use any excess funds to pay other creditors. In most Chapter 7s, the trustee concludes that he can't get any funds to pay creditors other than those secured by the property, so he abandons the property and doesn't sell it.
In a Chapter 13, also called a wage earner plan, the debtor (person filing bankruptcy) pays his or her disposable income (that portion of income left after paying housing costs such as rent, food, utilities and other normal living expenses) to the Chapter 13 trustee, who then doles the money out to the creditors. A Chapter 13 plan goes on for as long as five years. At the end, the debtor gets a discharge from any debts that haven't been paid through the Chapter 13 (with some exceptions).
Friday, January 16, 2009
What's Happening with 401(k)s?
Starbucks has announced that it is no longer matching employee contributions to their 401k plan. Fed Ex and Motorola have said they'll do the same. Smaller companies have or will follow suit. The reason, of course, is the economy. Employers are no different from individuals; in lean times they have to cut costs and cutting contributions to the 401(k) retirement plan is an easy call.
So what should you do? For starters, you SHOULD be contributing to a 401(k). If your employer is matching, contribute at least up to what the employer will match. You're doubling your money instantly. If you don't have a 401(k), shame on you. Start NOW. True, the market is down and the value of your 401(k) is also down, but unless you expect the end of the world, the market will rebound eventually. It always has. Contributions now mean you're buying cheap stock.
Secondly, watch how your employer matches your contribution. Remember Enron? Enron matched employees' contributions with Enron stock. When Enron tanked and the stock became worthless, so did thousands of 401(k) accounts. Diversify your investments. Most 401(k) sponsors have a menu of different investment options that mix what your contributions purchase based on your tolerance for risk. A simple 10-minute quiz created by the sponsor often points you to the right option.
Finally, watch out for vesting. At some employers, you must be employed a certain time, a year, five years, before their matching contributions "vest" (in other words, before you become entitled to them).
So what should you do? For starters, you SHOULD be contributing to a 401(k). If your employer is matching, contribute at least up to what the employer will match. You're doubling your money instantly. If you don't have a 401(k), shame on you. Start NOW. True, the market is down and the value of your 401(k) is also down, but unless you expect the end of the world, the market will rebound eventually. It always has. Contributions now mean you're buying cheap stock.
Secondly, watch how your employer matches your contribution. Remember Enron? Enron matched employees' contributions with Enron stock. When Enron tanked and the stock became worthless, so did thousands of 401(k) accounts. Diversify your investments. Most 401(k) sponsors have a menu of different investment options that mix what your contributions purchase based on your tolerance for risk. A simple 10-minute quiz created by the sponsor often points you to the right option.
Finally, watch out for vesting. At some employers, you must be employed a certain time, a year, five years, before their matching contributions "vest" (in other words, before you become entitled to them).
Tuesday, January 13, 2009
Estate Tax to Continue
President-elect Barack Obama announced recently that he intends to continue the estate tax (dubbed the "Death Tax" by opponents) instead of letting it expire in 2010 as originally planned by the new Bush administration in 2001. Under the current provisions of the estate tax, estates over $3.5 million are taxed at 45%. Estates under $3.5 million ($7 million for married couples) are exempt from the tax. However, there is no guarantee the Obama administration will maintain the estate tax at this level. During President Clinton's administration, estates over $1 million were taxed at a 55% rate; President Bush increased the exemption gradually, with a proposed phase out completely next year.
The estate tax has been criticized as restricting a business owner's ability to pass on the fruits of a lifetime. The most common example given is of a family farmer who is "land rich and cash poor". Imposing a 45% tax on the value of the farm likely means the farm will have to be sold to pay Uncle Sam.
While most people will not have to worry about the estate tax in their estate planning, everyone should be aware of its existence and now of its permanence.
The estate tax has been criticized as restricting a business owner's ability to pass on the fruits of a lifetime. The most common example given is of a family farmer who is "land rich and cash poor". Imposing a 45% tax on the value of the farm likely means the farm will have to be sold to pay Uncle Sam.
While most people will not have to worry about the estate tax in their estate planning, everyone should be aware of its existence and now of its permanence.
Friday, December 5, 2008
Elder Law
What is Elder Law and how does it differ from estate planning? Elder law is a field of law that deals with legal issues unique to the elderly, such as Medicare and Medicaid, powers of attorney, living wills, medical directives and "end of life" issues that no one wants to talk about. It can include estate planning, but often it does not.
We all have family or friends who are affected by elder law issues, whether they be parents, aunts, uncles, neighbors, or, as we grow older, ourselves. It's a rewarding but difficult area of the law. We often deal with people who are used to being in charge, but find themselves incapable of caring for themselves, let alone others they've nurtured for years. Just last week I took my father, who is 91, to visit his brother, who is 95 and in a nursing home in Idaho. It was sad because my uncle is now to the point of not recognizing me, my father or even his own daughter. Elder law helps people like my uncle.
We all have family or friends who are affected by elder law issues, whether they be parents, aunts, uncles, neighbors, or, as we grow older, ourselves. It's a rewarding but difficult area of the law. We often deal with people who are used to being in charge, but find themselves incapable of caring for themselves, let alone others they've nurtured for years. Just last week I took my father, who is 91, to visit his brother, who is 95 and in a nursing home in Idaho. It was sad because my uncle is now to the point of not recognizing me, my father or even his own daughter. Elder law helps people like my uncle.
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