Answers from an Experienced Lawyer
At the Law Offices of R. Morgan Holland, L.C. we offer case evaluations where you can meet with our attorney to discuss your individual case. The law's application may be different from case to case, and it is not recommended that you apply the information contained in this page without first consulting with a qualified bankruptcy attorney.
Q:My credit card report shows my credit cards as a write-off, am I in the clear?
A:No. Many folks are under the misconception that if a debt is written off on their credit report, they don't owe the money anymore. A write-off and a forgiveness of debt are two different things. A write-off is done for the purpose of negative credit reporting and has no legal connection as to whether the creditor is going to turn you over collections and/or sue you.
Q:I have been sued, what can I do?
A:You have received a summons and complaint from one of your creditors because you have been sued. The question becomes: What can I do? That depends upon many factors, including whether you believe that you owe the money that you are being sued for and how much debt you have. If you know that you really owe it, the court will hold you liable in most cases. At the same time, even though you may have a very good defense, it may cost more to defend your case than what you can afford. Either way, if you do not defend the suit, then the creditor will most likely obtain a judgment against you. With the judgment, the creditor will be able to take a large chunk of your paycheck or take all of the funds from your bank account. At the Law Offices of R. Morgan Holland, L.C. the earlier that we know your situation, the more that we can often do to help you. The filing of a bankruptcy will immediately stop a creditor's lawsuit (excepting a child or spousal support action) when it is filed. However, that does not mean that you are safe to wait until one of these things happens to you before you take action. With the advent of the means test, pre-bankruptcy planning may be necessary for you. While the bankruptcy laws do not require that you have any particular level of income, the income that you do have will used in the calculation to determine your qualification to file. Most types of income are considered, but there are some that are not. Many of the bankruptcy laws have a look-back period when determining whether your filing will be successful. Frank and candid discussions with a bankruptcy attorney regarding your current and past situation is essential in nearly every case.
Q:My wages are being garnished or my bank account has been levied upon. Can I stop it?
A:Yes. The automatic stay is a federal injunction imposed with the filing of a bankruptcy (there are exceptions to this for two or more dismissed filings in the past 12 months.) Bankruptcy will immediately stop a wage garnishment (subject to a few limited exceptions.) With the advent of electronic filing, we can oftentimes obtain that stay immediately. In most cases where there is a garnishment or levy, your money will go to the sheriff before it goes to the judgment creditor. As a result, even if the money has left your paycheck or bank account, we can oftentimes have the money returned to you with a properly timed bankruptcy filing.
Q:What is the means test and how does it apply?
A:The means test is an evaluation that must be done in any bankruptcy filed after October 1, 2005. It examines your gross household income and compares it to the average income of other households of the same size as yours in your state. If you have too great of income at the first level, then it contains a second level that is much more comprehensive in its application than we can cover here. If you are a disabled veteran, then the means test does not apply to you at all. Likewise, your Security Income does not count. There are many other exceptions and nuances that you may qualify to use that are not general knowledge. At the Law Offices of R. Morgan Holland, L.C. we work with these exceptions and nuances every day. We can help you understand what you qualify for.
Q:Will the bankruptcy stop the garnishment against my wages for child or spousal support?
Q:Should I work out a settlement with my credit card companies instead of filing bankruptcy?
A:Here is how it works: The forgiveness of debt is considered to be income by the Internal Revenue Service. For example: You have a credit card to which you owe $10,000.00. The credit card company approached you and is willing to accept $3,000.00 and write off the rest if you can pay them. You consider this to be a deal. At the end of the year, you will get a form1099 from that credit card company for $7,000.00 — that is the amount of forgiven debt. Unfortunately, the credit card company has no choice and must issue a form 1099 to you. You will owe taxes to the IRS at whatever your normal tax rate is on the $7,000.00, just as if it were cash income that you received. An exception to this rule exists if you are able to demonstrate insolvency to the IRS under its own procedures. Assuming that you cannot demonstrate insolvency to the IRS, you are actually in a worse position than you were before you settled the debt. The tax owed is now so recent from the transaction you will not be able to immediately file a bankruptcy to discharge your obligation to the federal government. Should you have chosen to file bankruptcy on the credit card debt instead of settling it, you could ordinarily have discharged the entire amount, with no tax to you. This is because a discharge in bankruptcy is not a taxable event. The law does not require the creditor to issue a form 1099 to you for the discharge of that $10,000.00 credit card debt in bankruptcy. You will owe no tax on the transaction.
Q:Should I short sell my home?
A:The same general rule as to the taxability of forgiveness of a credit card debt applies also to mortgages that are forgiven. When a lender/ bank elects to sell your home, a "deficiency balance" is usually created. The "deficiency balance" is the amount of the unpaid loan remaining once the foreclosure sale proceeds have been applied to your loan balance. This is the amount of the sales proceeds that have been applied to your loan balance and the amount of the sales proceeds after the bank has already deducted the costs of sale. This deficiency balance can be substantial in today's real estate market. Deficiency balances of $100,000 - $150,000 are common. Except under limited exceptions in California, the bank may sue you for this deficiency, then attach your wages or levy bank accounts. Regarding short sales in California, Senate Bill 458 was passed, indicating that if a bank consents in writing to a short sale of a dwelling after July 15 th, 2011, it may not pursue you for the remaining deficient balance (i.e. it must forgive you of the excess debt over and above the sales price as long as the bank gets all of the money). However, if there is a first and a second, it would appear that you need to secure the written consent of the second as well to claim this protection. If either the first or second do not agree to release their lien, then a short sale probably will not consent in writing to the transaction. For short sales of non-dwellings and other real estate in California, dwellings of more than 4 units in California, and short sales of homes in many other states, there still remains two types of short sales. In the first type of short sale, the bank simply states that it will release its interest in the property to the buyer of the property. However, they retain their rights to pursue you for nay defiance balance. Until recently, those were the types of short sales that were generally accomplished. The second type of short sale is one where they will agree to release you of any deficiency balance after the short sale. Many people and their real estate agents believe that they are doing a good thing. In reality, the forgiveness of a deficiency balance can create a worse problem for you than what you would have had if you would have simply let the bank foreclose on your home. Just like the credit card company, the deficiency balance owed would ordinarily be discharged in the bankruptcy. However, the tax obligation that is created by the forgiveness of debt will not be discharged in a Chapter 7 bankruptcy filed any time in the following 3-4 years. Even the tax on a forgiven deficiency balance from a mortgage can be disabling.
Q:Didn't the Mortgage Debt Relief Act of 2007 make it so that I don't owe tax on any forgiveness of my mortgage debt?
A:Sometime in December of 2007, the President signed the Mortgage Debt Relief Act in an attempt to address this concern. Generally, the Act states that if a bank does choose to forgive you of a deficiency balance on your home, then the forgiveness of that deficiency will not be considered income to you. Unfortunately, this general rule is filled with many exceptions and exclusions. Among those exclusions are:
1. The home involved has to be your principal residence. If it is a rental property, the Mortgage Debt Relief Act gives you no relief.
2. You must have lived the house for at least two years.
3. The debt involved cannot exceed your basis in the home. For example, you paid $250,000.00 for a home in 2001. In 2005 when the market was strong, you refinanced your home and pulled our $100,000.00 of equity and put it into another house or investment or spent it. Now, you owe $350,000 on a home that you only paid $250,000 for. Even if the bank chooses to forgive your debt and you lived in the home for two years, you may still be subject to taxation on that other $100.000.00 of forgiven debt that represented the money you took out of the home.
Q:What happens to the homeowners' association dues on my property when it stays in my name because the bank hasn't completed its foreclosure?
A:A. There is a point of law which can present a difficulty for those who own or owned real estate which is part of homeowners' association. As you are aware, unless you reaffirmed your mortgages/deeds of trust in the bankruptcy, they have been discharged. If the mortgage has been discharged, there is no potential liability. However, when there is a homeowners' association, the legislature has carved out a specific exclusion when the property can continue to be held in your name after bankruptcy filing. You continued to be liable for homeowners' association monthly dues assessed post-filing, so long as the property remains in your name. Now, this may present a problem if you were waiting for the lender to complete a foreclosure when the lender is slow to move. The homeowners' association has three options:
1. They can file a lien against the property and hope to be paid;
2. They can accept a deed from you, transferring the property to their name;
3. They can sue you.
What does this mean for you? Let's say, for example, the homeowners' associated dues for the property you plan on surrendering in your bankruptcy are $200 a month. At the time of filing your bankruptcy, you have $5,000 association dues outstanding. Your bankruptcy is filed. Your mortgage lender takes a full 12 months to complete the foreclosure of the property. The association dues of $200 of a month have ben accruing for the past twelve months, meaning the HOA could pursue and obtain a judgment against you for $2,400 following the successful discharge of your bankruptcy. This would represent the homeowners' association dues accruing post-filing while the property remained in your name. On the other hand, the $5,000 in homeowners' association dues owed at time of filing would be discharged and could not be pursued by the HOA. You may ask, "what can I do?" There are four options:
1. You can pursue a deed in lieu of foreclosure with the lender. One problem is that it can be time consuming, and the lender may not accept the deed. In the meantime, while you're waiting for the lender to decide, the HOA dues continue to accrue in your name. The other problem with this approach is that the lender may be unlikely to accept the deed in lieu when there is a junior lien holder, such as a second mortgage or any other type of junior lien, because by accepting the deed in lieu, they will have to pay the junior lien holder out of the proceeds from the eventual sale of the home.
2. You can attempt a short sale of the home and request the homeowners' association to file a lien against the property so that it gets paid during the course of the short sale. If they do not, you would insist that as party of the sale transaction, the HOA dues get paid through the close escrow.
3. You can live in the property and pay the homeowners' association fees until there is a foreclosure.
4. You can the rent the property out, if the HOA restrictions permit it, and use the rental income to pay past due and current HOA fees. You have the complete legal right to rent the property so long as it remains titled in your name. In addition, disclose in the rental contract that the property is in foreclosure and that the rental proceeds are being used to pay the HOA dues. Furthermore, you should not agree to any longer term than a month-to-month lease. This should help to avoid any claims of wrongdoing or fraud against you by any opportunistic tenants. If you pursue this option, then the property needs to have been in your name for at least a year. Please keep in mind, in order to select option four, it is important that the deed of trust did not have an Assignment of Rents attached. If it did and you do not use the rent to pay the lender, you could be liable in the future for those amounts received. If this your situation, call us, because some planning may be appropriate for you. If the home was financed as principal residence, it is very unusual to have an Assignment of Rents on the Deed of Trust. As you can see, this area of law is fraught with pitfalls. We would like to extend our continued availability to you in order to assist you in resolving this issue.