When should I file bankruptcy? Before the end of 2013 if you are in foreclosure, because the Mortgage Forgiveness Debt Relief Act and Debt Cancellation law expires December 31st, 2013.
Originally scheduled to expire at the end of 2012, Congress extended the act for one more year as part of the “Fiscal Cliff” agreement. So now we have until the end of 2013 to enjoy debt forgiveness in the form of short sales and loan modifications without the tax implications that report debt forgiveness as miscellaneous taxable income.
Example: if the bank forecloses on their loan which falls in the category of a refi, or second trust deed, you will be held accountable for any unpaid portion. The bank will issue a tax form 1099 debt forgiveness income which is added to taxable income. Now you owe taxes on the debt written off by the bank, and taxes cannot be discharged in a bankruptcy!
For many, bankruptcy is a powerful strategic tool that when used appropriately, provides a second financial chance. It can strip a second mortgage lien that is unsecured by your home’s fair market value. It can cram down the balance of your automobile loan, it can discharge credit card debts, and in some instances, even income taxes. In short, it can change your life for the better.
Worried about your credit rating? Well one thing is certain, if you need a bankruptcy, your credit is probably a lot less than pristine anyway, so you have nothing to lose, and everything to gain. Creditors may not continue to report on debts that have been discharged in bankruptcy.
A bankruptcy filing stays on your credit record for up to 10 years, but it need not be a permanent problem. In fact, there are laws that forbid discrimination against you if you have filed bankruptcy. If you show consistent employment history and financial responsibility, you can rebuild your credit relatively fast.
Last week, a client told me that for the past year and a half, he had been out of work, due to an injury. He was concerned about his credit card debt, had slowly cashed out all of his IRA’s and spent all of his savings to keep up his monthly obligations. Now there was nothing left, so he had decided to file a bankruptcy. Don’t make the same mistake. If you lose your job, stop paying your bills immediately. Never use up your last reserves.
This client thought, that as long as he had some savings, he couldn’t file a bankruptcy, but that’s not true. A bankruptcy is a liquidation of debts and nonexempt assets, but many assets are in fact exempt. This client could have filed a bankruptcy, kept all of his tax deferred savings, and up to $15,000.00 in cash or savings accounts. Instead he had used the money to pay off some of the debts, but not enough to keep him out of bankruptcy, so when he filed, he had nothing left.
Clearly, life is all about choices and priorities. When you lose a major source of income, preserving cash flow has to be the number one priority. If you know, that it will be some time before you can get a job, as this man did, then paying the bills is not the first priority, but putting food on the table is!
A recent client told me about her house in foreclosure. The husband had lost his job, and she was also unemployed. With two young children to worry about, the couple had to make some tough decisions.
We determined that the house had no equity, the mortgage loans were at least $150,000 more than the value of the property, and the monthly payments were $3700.00 a month.
The couple decided to focus on cash flow. To let the house go, and move into a rental which would cost half of the current mortgage. They chose to arrange a “short sale” of the property, since this would have lesser implications on their credit report, and possibly help pay their move, with money from the Harp 2 program.
They decided to file a bankruptcy, eliminate all debts, and focus on the family. The short sale process will prolong the time she can stay in the house.
This brings me to a very common question: “How much time do I have left?” . People who have just received a foreclosure notice from their mortgage company want to know because they can no longer afford to pay the loan. If you do nothing, you can expect the following: 90 to 180 days, before they start a foreclosure process. Of course their collection department will harass you a bit. The foreclosure notice has to run for 90 days, followed by a 21 day notice of Trust deed sale. We can usually extend that period either through a bankruptcy filing, or an approved short sale agreement with the lender.
For solutions to all of your financial problems, and rebuilding your credit, contact the law offices of Paul M. Allen. We promise that help is just a phone call away. Consultations are free, but by appointment only. Call today. Glendale 818-334-5445, 818-552-4500 or Cerritos 562-356-9931, or 562-865-4480.
(This article is for information purposes only, and does not necessary reflect the company’s opinions and views on general issues. We make no warranty, prediction nor representation, nor do we assume any legal liability for the completeness of any information and its effect on any case. Each case is different and results depend on the facts of each case. Consult with and retain counsel of your own choice if you need legal advice.)