Let’s first talk about this Debt Cancellation or Phantom Income and how this would normally be treated. To add insult to injury when a person has debt that he/she cannot pay, sometimes what will happen is that the lender will agree to “cancel” this debt and deem it not-collectible, but then will issue a form 1099-C to the unsuspecting debtor that will make this broke debtor liable for income taxes.

(Note, that this is different from a simple debt write-off, which is an accounting term and merits a different discussion, but let’s just say that the write-off the debt for purpose of bookkeeping, but can still try to attempt to collect this debt. This is usually done with 1099-A.)

When a lender issues a 1099-C form, they are no longer allowed to continue collecting and it is usually a result of a negotiated cancellation of debt.

What in the heck do you mean I’ll be responsible for income when I just lost my house? I certainly made no money off this transaction?

You are absolutely right and it sucks, but that’s not how the IRS will see it.

In a short-sale, you have found a buyer who is willing to pay less than what you owe your lender(s) and if the lender(s) agree to this sale for less money, you will not be liable for the remaining amount of the loan. Example: your house is sold to the new buyer for $300k. You owe the lender $400k. The lender agrees to the sale and agrees not to go after you for the remainder of the balance ($100k). You later get a 1099-C form with $100k indicated as income to you. That’s what I call “Phantom Income.” While you didn’t make any money off this transaction, because $100k was “forgiven,” it is deemed income as far as IRS is concerned. However, because the law has been extended, you will now not have to pay any additional taxes.

So I don’t have to do anything with this 1099-C form issued by the bank, right?

Wrong. You still have to file a Form-982, basically explaining to the IRS why this shouldn’t add to your tax liability. You should contact a qualified CPA to help you complete the tax form properly.
Here is a link to the form: http://www.irs.gov/pub/irs-pdf/f982.pdf.
While the form is not too complicated, it is important to get it right and unless you feel super confident, I would hire someone who can help you do it.

Are there exceptions to this law?

Yes, you may still be liable for debt-forgiveness if the property was an investment property or if the mortgage forgiven exceeds $2,000,000 or $1,000,000 for married couples filing separately.

Note, while this Act only deals with debt forgiveness related to mortgages (debt secured by real property), there is similar phantom income that results when someone settles other debts (credit card, medical, etc.) for less than they owe outside of bankruptcy. However, there is no similar law that applies. One can still use Form 982, however, in that situation to avoid having to pay extra taxes for this “income” the person will have to show that he/she were insolvent at the time of this settlement.

If debts are Discharged in Bankruptcy there is no Phantom Income.

However, if debts are excused in bankruptcy, there will be no phantom income, therefore people who are using bankruptcy instead of a short-sale, deed in lieu, foreclosure or debt settlement to settle their debts, will not have to worry about being liable for this phantom income and additional taxes they weren’t expecting. Sometimes, the lenders will erroneously send Form 1099-C anyway, and in those cases, debtors that went through bankruptcy can just mark 1a on Form 982 and attach it to their returns and that’s it.

See my previous post: http://goreliklaw.com/the-magic-of-form-982-and-cancellation-of-debt-income
Note, however, that someone who chooses to do a short-sale or a deed-in-lieu when this law is no longer applicable, and then files for bankruptcy, the bankruptcy filing after the phantom income was incurred will not protect the person (absent an applicable law, or if this is income for an investment property), therefore tax implication should be considered prior to proceeding with this type of transaction instead of bankruptcy.

While, there still may be an insolvency exception to the transaction outside of bankruptcy, note that to show insolvency to the IRS you will have to count your retirement accounts towards the calculations and as such may not be able to qualify.

Final words of advice, from the above lengthy explanation, you have learned that there is a lot to consider and a competent attorney and/or CPA should be contacted prior to making decisions that could have large tax costs. Feel free to contact my office at (310) 481-5098 to discuss your case.

Should I reaffirm my car loan after I file for bankruptcy in Los Angeles, CA?

If you file for Chapter 7 Bankruptcy and you have a vehicle that you are financing, you will face a decision on whether to reaffirm the car loan.

What happens when you reaffirm your loan? Well, when you file for bankruptcy, the bankruptcy in essence “tears-up” the contract you have for the car loan. As such, if you do nothing, and later decide for whatever reason that you no longer want to honor the contract by paying as agreed, you will not have any additional PERSONAL LIABILITY. Does it mean that you can stop paying and still get to keep the car? NO! The company can repossess the vehicle, after taking the proper steps. What it does mean is that after they repossess the vehicle, if they sell it for less than what you owe (which always happens, go figure), they cannot collect the deficiency amount from you. Without the bankruptcy, if you stopped paying and they repossessed the vehicle, you would be liable for the deficiency.

By signing a Reaffirmation Agreement after you file for Chapter 7 bankruptcy you are losing your free pass to not have PERSONAL LIABILITY under the loan. So why would you sign, if it’s an option. Well, because after the changes in bankruptcy law in 2005 and subsequent case law that came out, it appears that just retaining the vehicle and continuing to pay is no longer an option. Does it mean that if you don’t sign and continue paying, that they will still repossess the car for sure. The answer is it depends. It depends on the lender. It depends on whether you are on time with your payments. It depends on whether there is equity in your vehicle. Ultimately though, I cannot say with 100% certainty that you will get to retain the vehicle by paying regularly, when you don’t sign the Reaffirmation Agreement. Some attorneys disagree and discourage their clients from signing, but I actually had a client who was a little late on her car payments, she DID sign the reaffirmation agreement, and she got her car repossessed. She called me frantically and the first thing they wanted proof of to return the vehicle was proof that she signed her Reaffirmation agreement. Could she have gotten her vehicle back without it? Maybe. Are there State laws there to protect her rights? Yes. But from a practical standpoint, here is what I look at and why more often than not I help my clients complete their Reaffirmation Agreements.

We live in California, more specifically, in LA. Call me snobby, but it is very hard to get around without a car. Most of my clients could not get to their job without a car. They couldn’t pick up their kids from school or look for new jobs. Life without a car would be very difficult for most. Having the car repossessed even for a little while would bring in a lot of stress and additional costs into their lives.

When we talk about Reaffirmation Agreements, we look at several things to determine if they make sense:

1. How much is a car worth and how much they would have left to pay under the Reaffirmation Agreement. If the car is worth SIGNIFICANTLY less and has problems than what they will have to repay under the Agreement, it obviously makes no sense to sign the Agreement.
2. Can Debtor afford the payment? Have they been late a lot, will it create a financial strain in the future? If that’s the case, there is no point in signing an agreement that will cause additional financial strain after the bankruptcy. Better to just take a chance.
3. Can it make sense to get a cheaper car before bankruptcy through financing, and return the one the debtor is currently driving. If that happens, obviously reaffirming the loan on the car to be returned will not make sense. The decision to do that would then have to be made prior to the filing of the bankruptcy, because obtaining financing for a new car that debtor intends to keep will be easier prior to bankruptcy, than during or quickly after. It is not bad faith to obtain new financing right before the bankruptcy as long as you intend to pay the loan as agreed.
4. What are the terms of the Reaffirmation? Some lenders are willing to provide better terms than the original loan, if the client Reaffirms. They also may provide additional perks, like forgiving missed payments, or working with the client in the future if they run into trouble. Something to think about as well.

Making the right decision regarding Reaffirming your car loan is another reason to hire a qualified bankruptcy attorney to help you with your bankruptcy filing. If you have any questions feel free to call me at (310)481-5098 or email at goreliklaw@gmail.com

Image by brizzle born and bred via Flickr.

I get that question on the phone a lot. It is perfectly understandable. In fact I am planning a wedding right now and it would be really helpful to know how much it costs for flowers and music and photographer and the rest and very rarely am I able to get the price from the vendor’s website, so trust me when I say that I understand your frustration. It is frustrating and I completely understand that before you waste your time coming in to meet with a bankruptcy attorney in Los Angeles, you want to know if you can even afford it.

However, just like with wedding flowers, my guess is you are not finding prices on the attorney’s website, just like mine. Why? Well, just like the florist will need to know if I want carnations or orchids and whether it’s a small 3 table wedding or if it will be a ballroom for 300, she can’t give a quote until she knows what she is looking at. Similarly, even with a Ch. 7, it is impossible for me to give a quote until I know what your bankruptcy case will entail.

Here is what I can tell you about my bankruptcy fees. They are very reasonable for what you are getting. And I am not just saying that. They really are. From start to finish you are meeting with just me, an experienced attorney. You are NOT meeting with a secretary who handles your case and just gets an attorney to sign off. While I do need your help gathering your documents, I don’t make you fill out lengthy, incomprehensible questionnaires. We sit down and I fill out all the documents for you while interviewing you in my office. I explain the questions and we review your answers together. You are not left wondering if you are doing things properly.

<

How can I offer such reasonable fees without compromising quality?

I keep my overhead low. Your fees shouldn’t be going to pay for my fancy office, therefore my office is not fancy. A lot of attorneys have a large staff and cannot afford to charge less. I think it is not optimal for the client and because I prefer to be able to control everything about your case (yes, a little OCD, but kind of a good thing in a lawyer), I don’t have those constraints. Because I don’t have a big office bill and a bunch of salaries to pay every month, I can focus on my clients and provide quality legal services without outrageous legal fees.

Just to give you an insight into how I determine your bankruptcy fee, here are some questions I would ask to determine what the fee will be. Typically, my Chapter 7 legal fee is anywhere from $950 to $2,500. Most people’s chapter 7 legal fees turn out to be around $1,300 plus the filing fee of $306.

So how do I know what the legal fee for bankruptcy will be?

1. I look at your income, and it’s important because if you are over the median additional work will need to be done.
2. I look at the amount of debt, and it’s important because additional work will need to be done if you have a lot of creditors and additional questions may be presented by the Trustee.
3. I look at your assets to review if additional exemption planning may be necessary and that usually costs extra.
4. I look at whether you have a house and a car and what the situation is with those assets as well.

Having answered those questions, I am usually able to give my bankruptcy attorney fee to you pretty quickly and you will not be surprised by additional costs.

Chapter 13 Bankruptcy Lawyer Fee in Los Angeles, CA

For Chapter 13 bankruptcies in Los Angeles you will find a pretty standardized fee structure, just because one is recommended by the Central District of California Bankruptcy Court. While, attorneys are allowed to charge less, because of the extensive amount of work it takes to properly handle a Chapter 13 bankruptcy, most attorneys stick to the fee schedule and here is mine.

Chapter 13 bankruptcy for a person who receives a W-2 and doesn’t own a business, my attorney fee is $4,000 (with 50% paid upfront and the rest through the plan). If the Chapter 13 debtor does not want to strip their second mortgage or they don’t have a second mortgage, my legal fee is generally $3,500 (with 50% paid upfront and the rest through the plan).

For a business owner who wants to file Chapter 13 Bankruptcy in Los Angeles, mylegal fee is $4,500 (with 50% paid upfront and the rest through the plan). There is a higher fee for business owners because there are additional documents that must be prepared.

Be careful of “Bargains” when looking for a Bankruptcy Lawyer in Los Angeles

The old “you get what you pay for” is commonly used, but I don’t agree 100% with that either. Look, I love bargains. I love discounts and I believe that if you are smart and do your research good deals are out there. Having said that, you also have to be reasonable. Bankruptcy is an important legal decision that shouldn’t be taken lightly. You will find all these bankruptcy petition preparers, unlicensed “lawyers” and the like advertising ridiculously low fees and promising the sky. I would not go to a dental assistant to get my root canal (and hopefully neither would you). Similarly, I wouldn’t go to a big fancy place where a scary looking surgeon came in and talked to me for a second, didn’t remember my name or review my file, and then charged a bundle as he hustled me out of the office and had his intern handle the surgery. I would go to someone who knows what they are doing. Who will take the time to listen and who will handle my case from start to finish. Yes, I would go to the equivalent of myself with a medical degree. All joking aside, though, I hope this will be helpful and provide you with some guidance as to what to expect as far as legal fees in bankruptcy in Los Angeles.

If you would like a specific quote for your case, please feel free to call my office at (310) 481-5098.

- Potential Client: “I know bankruptcy would really make my life easier, but I want to avoid it at all costs, because I really want to protect my credit.”
- Me: “Oh, how is your credit right now?”
- Potential Client: “It’s not …great, but I heard that after bankruptcy…that’s it, you can’t buy a car, you can’t buy a house, you can’t get a credit card. Your credit is ruined for the next ten years. That just won’t work for me.”
- Me: “It is clearly a very common misconception, and therefore I am not surprised you believe it, but after helping people file for bankruptcy for over 6 years, I can tell you with certainty, it is completely false. Here is why and how I know…”

I wish I could record the following portion and just play it for all my clients so that I don’t have to repeat it as often as I do.

Here it goes…

Most people who are considering filing for bankruptcy already have bad credit or credit that is tittering on the brink of being bad and one more opened credit card with outstanding balance will make this credit score crash. The truth is that mostly filled up credit cards, missed payments, lots of inquiries for new credit look very suspicious to creditors and at the very least obtaining new credit will be very hard for the simple reason that given your income and the outstanding balances on your current cards, it doesn’t appear that you can handle any more debt. In fact, when obtaining an FHA mortgage loan, they will take a look at your current obligations and take those into account when they determine your eligibility. On the other hand, 2 years after bankruptcy you will be able to apply for the FHA loan, but because your other debts will be discharged, it will be easy to qualify for these loans that are optimal for low/middle income home buyers.

If your credit is already bad, bankruptcy will likely improve it.

What? Was that a typo? Did I mean to say that bankruptcy will improve your credit score. Yes. Yes, I did. I have seen it over and over. People come in and their credit is in the high 500s or low 600s and within a year of their bankruptcy filing, credit score goes up by 85-120 points.

How is that possible? Well, let’s think about this. When you have $40,000 in outstanding debt, and you want to buy a new car, do you think you are a great risk? Risk is basically what determines your credit score. The lower of a risk you are as a borrower, the higher your credit score will be and the lower interest you can generally obtain. If you are a highly risky borrower, the credit score will be low and the cost of borrowing will be higher. So someone with outstanding debt will have to use that same sum of money to repay the car loan and other creditors. Whereas a client who filed for bankruptcy and had all his debts discharged, is a less risky borrower, for 2 reasons. A bankruptcy client is a less risky borrower because they can’t file for Chapter 7 bankruptcy for another 8 years, whereas a person with lots of outstanding debt and no bankruptcy might very well file and discharge this obligation as well. A bankruptcy client is also a less risky borrower because they don’t have other creditors and therefore can use all the remaining money to repay the new creditor, rather than having to split the same available pie into more pieces.

I repeatedly hear stories from my clients who were able to refinance for a better interest rate, who got a 0% interest loan on their vehicle, as well as clients who got new credit cards with better interest rates than before. I have clients who purchased a house and obtained a favorable loan only a few years after bankruptcy. That’s how I know that what I am discussing here is not just what I hope the truth is, but is a fact. When I just started practicing bankruptcy law, I was a lot more hesitant to answer the question about credit, because I didn’t have actual facts from my own clients who filed. I heard from other attorneys, but just didn’t know if it was hype or truth. Now I do and I have no problem making these statements, because I know them to be true.

It’s not all great news. The reality is that if your credit is great before you file for bankruptcy, it will certainly go down for a period. Also, finding an apartment to rent may be harder after you file for bankruptcy and for those people that need to move, I usually recommend that they complete the move before we file. At the same time, it may be impossible to predict the future. There are so many people who are going through foreclosures, short-sales, and bankruptcies these days that I don’t think landlords have the option of being as picky as they once were, but I want my clients to be aware that their ability to obtain a rental may be hindered by the bankruptcy filing without obtaining a co-signor, etc.

If you have questions about your credit, I am able to pull up your credit report that will give us your current credit score as well as estimate what your credit will be a year after bankruptcy.

Feel free to call my office for a free initial consultation at (310) 481-5098.

A. How big will my Plan payment be?

The Plan payment must at least cover the necessary debts.

“Necessary Debts”

Mortgage arrearages, car payment arrearages, Trustee fees, remaining attorney fees, priority taxes. These need to be paid in entirety through your proposed plan. As such, the plan payments have to be large enough to at least cover those payments. Let’s say that your proposed Plan payment equals X for 36-60 months. This X payment times 36 or 60 months of payments, should cover all the “necessary” debts – the smallest pot.

Example: if you propose a 60 months plan and your mortgage arrearage on your first mortgage is $36,000, Trustee fees are $4,000, Attorney fees are $2,000 and Priority taxes are $12,000. The minimum your X times 60 months should be is $54,000. Therefore the minimum Plan payment you can propose to allow for a feasible plan is $900/month for the next 60 months. While there could be some step up proposals if you adhere to certain rules, pay attention to the size of the pot and make sure that the plan you propose covers the “necessary debts.”

Therefore, from this example you have to be able to make a plan payment of $900 every month in order to have a successful chapter 13 plan. Keep that in mind when reading the following section.

Note, in the Central District of California, regular monthly mortgage payments as well as car payments that become due after the case is filed are paid directly to the lender. As such, they do not go into the small pot calculations, just the arrearages for the same.

B. How little can my Plan payment be?

The rule is that if you propose to pay less than 100% to your creditors, your plan has to commit your “entire disposable income” to the payments. You have to make best efforts to repay all your creditors.

Length of Plan

The length of you plan will usually depend on whether you are over the median or under the median on Form 22C. If you are over, then the plan will definitely be 60 months. If under, then plan duration will be 36-60 months.

Form 22C may also dictate in part what the plan payment will be. At times, it will give a figure of disposable income that will have to be balanced with the figure you receive from reviewing your current income and expense schedules (Schedule I and Schedule J). However, most of the time Form 22C will have a negative or small figure if filled out correctly in a Chapter 13 and Schedule I minus Schedule J will govern the Plan payment amount.

Schedule I is the Schedule of your income and for most people that receive a paycheck that figure will be fixed and you won’t be able to manipulate it by much. However, Schedule J, is a schedule of your expenses. While some expenses are a must and are fixed, certain things like cable and socializing as well as a third car can be reviewed and adjusted. Further, the expenses must be reasonable and an experienced bankruptcy attorney will be able to easily spot expenses the Trustee or Judge will take issue with and adjust Schedule J accordingly to prevent future issues.

Note, because of that minimum payment discussed in Part A, your Schedule I minus Schedule J, have to leave at least that amount allowing you to propose a successful plan. In the above example, your regular monthly income minus your expenses should still leave $900 for you to propose a feasible plan.

If Schedule I minus Schedule J figure is less, your situation is not hopeless if you can do the following:

- Increase income by getting a tenant.
- Have your family contribute money to assist you in proposing a feasible plan.
- Obtain an additional job.
- Reduce your expenses, by removing a car payment, cable expenses, etc.

Be honest with yourself – can you really make that Plan payment?

I fully understand that by the time people consider bankruptcy, they have already reduced their expenses to the max. As such, when I review a case for a potential Chapter 13, I want to make sure that the client can propose a plan they can live with. If the payment is beyond what you can realistically pay, in most situations, proposing a Chapter 13 Plan is a waste of time and money and other options should be considered. Having said that, sometimes people file a Chapter 13 to buy some time, but in that situation the Client should weigh the benefits of added time with the money they will spend on attorney and court fees.

This is complicated and is provided on the blog mainly to illustrate that the question requires a set of complicated calculations as well as knowledge of various rules. As such, it is important to contact a bankruptcy attorney thoroughly familiar with the workings of Chapter 13 bankruptcies. I would say that under most circumstances it is virtually impossible to have a successful Chapter 13 without the help of an experienced bankruptcy attorney. I have worked with several clients trying to help them after their case has been dismissed or messed up by a petition preparer. They wasted time, money and incurred unnecessary stress. Please don’t try to save a little and risk losing a lot.

Feel free to contact my office for a free consultation so that we may discuss your options at (310)481-5098.