Will Bankruptcy Stop Foreclosure?

This is a question that is asked frequently, and the short answer is, yes, filing bankruptcy will stop foreclosure, at least temporarily. The more important questions are, for how long, and will I be able to keep my house. The answers to those questions are maybe.

If you file Chapter 7, the bankruptcy will stop foreclosure only until the creditor gets relief from the automatic stay, which is a court order saying it can continue the foreclosure process. If you have equity in the house, the trustee will likely sell the house and use the equity to pay your creditors. Either way, unless you redeem the house (pay the equity to the trustee) or work out a repayment with the bank, you will lose the house.

If you file Chapter 13, you can keep your house as long as (1) you can make all the house payments in the future; and (2) you make up the past due payments in your Chapter 13 plan. For example, let's say you file on September 5, at which time you owe six past due payments, April through September, of $1,000 each. In your plan you must pay that $6,000 back and you must make each payment of $1,000 going forward, beginning with October.

Estate Tax "Patch" Likely

The estate tax is scheduled to disappear in 2010, to be revived in 2011 at 2001 levels, which means a $1 million exemption instead of the 2009 exemption of $3.5 million, along with an increase to 55% tax from the current 45% bracket. However, recent news indicates that it is likely that Congress will extend the 2009 level through 2010, while it seeks a more permanent overhaul of the estate and gift tax code. It's almost a given that Congress will have to re-implement the estate and gift tax for 2010, because its disappearance, even for only a year, is a huge blow to tax revenue. Hopefully, though, when it is made "permanent" (whatever that means), it will not be at the low 2001 level of $1 million.

The 910-day Rule in Bankruptcy

One of the most weird rules to come out of the 2005 amendments to the Bankruptcy Code is what is known as the 910-day rule. This is a rule for confirmation of a Chapter 13 plan. Essentially it says that if a debtor purchased a motor vehicle and financed it by giving the bank title within 910 days of filing bankruptcy, the debtor must pay the debt in full. The usual method of paying a car loan is to look at what the car is worth on the filing date and pay that to the creditor. The balance becomes an unsecured claim that is paid with all other unsecured claims, such as credit cards, doctors' bills, etc., at a few cents on the dollar.

The 910-day rule is a response to what Congress perceived as abuse of the bankruptcy system by a few debtors. Some unscrupulous debtors would buy a new, expensive car for $30,000 or more and then, in a year or two, after the car had depreciated to maybe half of its original value, file bankruptcy and pay only the current value. This practice is known as lien stripping. How Congress came up with 910 days is anybody's guess, but that is the law.

401k or Roth IRA

Traditional wisdom is that you should max out your 401k before contributing to anything else. That depends on whether you believe taxes will go up or down in the future. In a 401k or traditional IRA, the contributions go in tax free (are deducted from your income) but come out and are taxed at whatever rate you are then subject to. In a Roth IRA, contributions are taxed at your normal rate, but withdrawals are tax free. The arguments for tax free contributions are (1) you're probably at a higher rate now than you will be after retirement; and (2) you'll be paying with future dollars that will likely be devalued due to inflation.

But think of this. Suppose you contribute $150,000 over your lifetime, $500 a month for 25 years. That $150,000 is deductible from your income taxes. When you retire, that $150,000 may have grown to $500,000 or more, depending on the success of your investments. Now instead of taxing only the $150,000 you contributed, Uncle Sam will collect taxes on the full $500,000. And you can't do anything about how much you withdraw, because the tax code requires certain minimum withdrawals beginning at age 70-1/2, regardless of how much you actually need.

Contributing to a 401k still makes sense in order to get your employer's match, assuming your employer still matches contributions. A match doubles your money up to the amount of the match. So be sure to contribute enough to get the full matching employer contribution. Beyond that, it might make sense to contribute the rest to a Roth IRA if you think taxes will go up in the future.

The King's Estate

Now that Michael Jackson's funeral is over, speculation is rising over what kind of estate he left and who will get it. Both questions may take years to answer.

A figure widely bandied about is that the King of Pop owed upwards of $400 million at the time of his death. Add to that estate and inheritance taxes that will likely be due, and there might not be much left for his heirs, whoever they may be. On the other hand, he supposedly had some lucrative interests in record labels that could spin off money for years to come. One thing is certain: There will be litigation that could last for years. Jimi Hendrix, who died in 1970, left an estate that was in court for 35 years.

There was an interesting post on www.taxgirl.com asking the question whether Michael Jackson's funeral expenses are deductible to his estate. Rather than answer the question outright, the Taxgirl referred readers to another estate planning blog by David Shulman, a Florida attorney www.sofloridaestateplanning.com. Mr. Shulman's answer, in a nutshell, is "maybe".

America Leads the World in Bankruptcies

In 2005, Congress revamped the Bankruptcy Code, the most significant overhaul in nearly 30 years, since the last big revision in 1979. One of the main purposes was to make filing more difficult. The number of filings dropped dramatically -- for two years. By 2007, Americans were filing at a rate nearly twice as great as that in Great Britain, the United States' closest competitor among industrialized nations.

America's public attitude toward bankruptcy, especially in this economic environment, is not as lenient as its laws, however. Most people still resent the fact that some debtors, most of whom were just plain irresponsible by taking on more debt than they could handle, get a free walk. "It isn't fair," people claim. And it isn't. But by the time people have reached the stage of bankruptcy, the time for fairness is past. Bankruptcy is a recognition that a company's or an individual's controls and ability to manage its affairs are beyond repair. Our system sets aside notions of fairness in these extreme circumstances for the benefit of all of us, by attempting to minimze the costs and maximize the potential recovery.

Don't Forget the Passwords

Every estate plan should include a list of critical information that is easily accessible in the event of death or incapacity. This list should have on it a list of bank accounts, safe deposit boxes (and the location of the keys), other financial accounts (stocks and bonds, online accounts, etc.), the location of your estate planning documents and the like. While you're making it up, don't forget to include the passwords to your online presence, be that eBay, Amazon, Yahoo, LinkedIn, Facebook, everywhere you visit in cyberspace.