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.
Thursday, February 24, 2011
Thursday, February 10, 2011
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.
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.
Wednesday, February 2, 2011
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.
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.
Wednesday, January 26, 2011
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.
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.
Thursday, January 20, 2011
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.
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.
Monday, December 27, 2010
Use of Trusts in Estate Planning, 2011
The new tax law signed by President Obama prompted a sigh of relief from a lot of people because it increased the estate tax deduction to $5 million, instead of lowering it to $1 million as many feared, which is where it would have gone had Congress not acted before December 31. Now many people are predicting the end of testamentary trusts because there is no need to create a Family Trust to take advantage of marital deductions. Some are going so far as to say that testamentary trusts will disappear altogether.
This is probably a short-sighted view. While testamentary trusts may no longer be useful as estate TAX planning tools, they remain invaluable estate planning devices, especially where minor children or incapacitated individuals are involved. Where such individuals are among those to whom bequests would be left, use of a trust provides flexibility, professional management and peace of mind to the maker of the trust.
Don't assume that a trust has no place in your estate planning toolbox simply because the estate is under $5 million and no tax consequences will attach.
This is probably a short-sighted view. While testamentary trusts may no longer be useful as estate TAX planning tools, they remain invaluable estate planning devices, especially where minor children or incapacitated individuals are involved. Where such individuals are among those to whom bequests would be left, use of a trust provides flexibility, professional management and peace of mind to the maker of the trust.
Don't assume that a trust has no place in your estate planning toolbox simply because the estate is under $5 million and no tax consequences will attach.
Wednesday, December 22, 2010
Credit Scores and Bankruptcy
When you file bankruptcy of any kind, your credit score (sometimes called a FICO score) will immediately take a nosedive. Even if it was low to begin with, it will go lower. A credit score is supposed to be a prediction of whether or not you will pay back debt in the future. However, since no one, not even the big three credit reporting agencies, can predict the future, what a credit score really measures is the likelihood you will pay back existing debts. Since, once you file bankruptcy, you will most likely NEVER repay any existing debt, your credit score drops to reflect that.
If you think about it, someone filing bankruptcy is probably a better credit risk than another person with the same income and the same amount of debt, but who didn't file. That's because the person who filed has (1) gotten rid of a bunch of debt; and (2) now cannot file bankruptcy for several years (eight years if you filed Chapter 7 and receive a discharge). Car loan companies know this. That's why they have people who do nothing but see who has filed bankruptcy and then send them offers of credit if they buy a new car. The lenders are so sophisticated that they tailor their solicitations based on your ZIP code. If you live in an affluent ZIP code, you might get offers for a Lexus or a Corvette. If you live in a lower-income ZIP code, the offers might be for lower-end Fords or Hyundais. But one thing you can count on, besides the hit your credit score will take, is that you will get solicited to buy a new car. Three words about that: DON'T DO IT. More on that topic later.
If you think about it, someone filing bankruptcy is probably a better credit risk than another person with the same income and the same amount of debt, but who didn't file. That's because the person who filed has (1) gotten rid of a bunch of debt; and (2) now cannot file bankruptcy for several years (eight years if you filed Chapter 7 and receive a discharge). Car loan companies know this. That's why they have people who do nothing but see who has filed bankruptcy and then send them offers of credit if they buy a new car. The lenders are so sophisticated that they tailor their solicitations based on your ZIP code. If you live in an affluent ZIP code, you might get offers for a Lexus or a Corvette. If you live in a lower-income ZIP code, the offers might be for lower-end Fords or Hyundais. But one thing you can count on, besides the hit your credit score will take, is that you will get solicited to buy a new car. Three words about that: DON'T DO IT. More on that topic later.
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